The Article that Explains the Nike Ouster
Kim Bhasin & Lily Meier
With the news that Nike CEO John Donahoe is out, it's worth reading this Businessweek feature from just a week ago. While the title is perhaps a bit unfair, the story would seem to paint a good picture of what happened here. And while it's unlikely the story itself brought down Donahoe – as they note in the piece, his contract was up in January and the calls for a change have been building for a while – it certainly didn't help matters.
At a high level, it seems like a case of a bad fit mixed with a poor long-term strategic decision – one which actually looked brilliant at first: shifting from a retail strategy with partners, to push more direct with e-commerce (leveraging Donahoe's eBay experience). The short-term boost in revenues was impressive, but it ended up being a bit of an anagnorisis situation – with Donahoe and Nike realizing they had actually done perhaps the exact wrong thing, too late. But that's also easier to say in hindsight, as Donahoe was also just handed the worst possible timing, taking over as CEO immediately before the pandemic started and threw the whole world into a tumble dryer.
All that said, the fact that he's being replaced by Elliot Hill is interesting. While all the press this week notes that he "retired" from Nike in 2020, Bhasin and Meier state rather matter-of-factly in their article that he quit right after Donahoe was made CEO. He has a great company backstory, having started as an intern at Nike and finding his way there after having written a paper about the company in grad school. While Donahoe had been on the board for six years before his elevation, Hill had been working at every level of the company for 32 years. If nothing else, there shouldn't be an issue with cultural fit this time around...
A few other bits worth calling out from the piece:
Donahoe was a dramatic departure from Mark Parker, his predecessor and the company’s current executive chairman, a revered sneaker designer who’d risen through Nike’s ranks for decades. “He finishes my thoughts before I even know I’m having them sometimes,” Knight once told the Portland Business Journal. Under Parker, a soft-spoken, cerebral man who seemed more comfortable spending hours testing sneaker cushioning in a research and development lab than delivering a speech, Nike produced some of its biggest advances, including the Flyknit manufacturing technology and HyperAdapt 1.0 self-lacing shoes.
As an outsider (again, beyond being on the board), it would have been hard for Donahoe to fill any... yes. But it was especially hard to fill Parker's who was a Nike guy through-and-through (and remains the Executive Chairman). The only thing harder would have been replacing Phil Knight himself – which is what William Perez had to do, coming from chemicals company S.C. Johnson & Sons Inc, no less. He was the last outsider brought on to lead Nike before Donahoe. He lasted barely a year.
Like Apple Inc., Nike was masterful at making product breakthroughs and engineering cultural movements along with them. Nike hired Donahoe to transform its selling machinery for the modern age, cutting out middlemen so it could get better margins from each sale. He led a corporate culling on a global scale, ending relationships with more than half of his retail partners, terminating hundreds of agreements and downsizing sales teams in markets around the world. As Nike directed customers to its own stores and websites, it halted the flow of sneakers to retailers including Amazon, Zappos, Dillard’s and Urban Outfitters, and even curtailed goods at its closest partner in the US, Foot Locker.
Donahoe’s strategy seemed to be working, until it didn’t. That recently abandoned shelf space was quickly filled by all of Nike’s top competitors: Adidas, New Balance, Puma, even Ugg. A flurry of running shoe brands, many of them upstarts such as Brooks, Hoka, On and Salomon, suddenly found themselves with more exposure, and they ate away at Nike’s market share in one of its most important categories. Meanwhile, at the company’s headquarters, the pace of product development slowed as Donahoe took fewer risks on performance-oriented shoe lines across sports.
These two paragraphs get at the heart of the strategic error that was made – and again, at first it looked like the right moves – the stock peaked in 2021. And it was the moves Donahoe was brought on board to execute. The internal dynamics that stemmed from these changes just exacerbated the problems once the numbers turned. Success can mask anything, but when that stops, all the warts (and knives) come out.
It's worth specifically calling out the Apple element above as well. Everyone likely knows that Tim Cook is on the Nike board and has been since 2005 – but he also was elevated to the lead independent director role in 2016, when Knight formally stepped in an emeritus role (and when Parker became chairman as well as being president and CEO at the time). And he's very close to Donahoe:
Apple CEO Tim Cook also became one of his valuable confidants, counseling him when eBay came under pressure from corporate raider Carl Icahn in 2014. Icahn wanted the company to spin off its payments business, PayPal. Cook, who was dealing with his own activist headaches at Apple, advised Donahoe on navigating around Icahn as well as members of the so-called PayPal Mafia—including Elon Musk—who sided with the activists. But Donahoe eventually capitulated and left eBay following the spinoff. He kept busy with his board roles, which also included PayPal and Intel Corp., and later rejoined the CEO ranks with a less glamorous job at enterprise cloud computing company ServiceNow Inc.
As an aside, serving on Intel's board during a time when all of their current headaches were brewing (he served from 2009 - 2017) also isn't a great look. And he seemed to have some attendance issues on that board...
Back to Cook, when Nike president Trevor Edwards, the presumed heir-apparent to Parker, resigned in 2018 amidst a #MeToo scandal at Nike, the company suddenly needed to figure out a new replacement for Parker:
For years, Parker had tried to boost sales on Nike.com and get products to market faster. But it had become evident that Nike would need someone with deeper expertise if it wanted to expand its business 28% and reach its sky-high annual revenue goal of $50 billion. The board decided to search for a new leader, since its top internal candidate was gone. Donahoe, with his tech bona fides and a decades-long relationship with Knight, came highly recommended by his peers on the board—especially lead independent director Cook, according to a person familiar with the discussions. Knight and Parker called and asked Donahoe if he would consider the job. Parker said he was especially “delighted” with Donahoe’s “expertise in digital commerce, technology, global strategy and leadership.”
In other words, Cook was pretty instrumental in putting Donahoe in place as CEO! And again, for a while that looked like a good move given the strategy and yes, he sailed past that $50 billion revenue goal.
Also note the push to "streamline" operations for an e-commerce world which led to constant fears (rightfully so) of layoffs, thus giving Donahoe an internal reputation more from his Bain consultant days rather than from his tech days. And yes, the truly bad strategic decision to screw over Foot Locker, long one of Nike's main partners. And just the general move away from the R&D and athletic culture that had worked so well for Nike from the early days.
The whole thing is well worth the read for the context here. And it culminates in the quarterly results last quarter (and really, the guidance) that saw the company's stock fall 20% in a single day, wiping out $28B in market value, their worst day ever. It's worth noting that Nike's next earnings are in just 11 days. One presumes those aren't looking too great either or perhaps Donahoe at least plays out his contract. Or maybe they're fine and he can officially exit on a bit of a swoosh before Hill takes over on October 14.