What Is Nike Worried About, and Where Does It See the Future?

So far the company hasn't put a foot wrong, but that doesn't mean it feels sure of its future.

We don't know what Nike CEO Mark Parker makes of Apple's new iPhone SE, but the two companies may share one thing: compared with their anxious pursuers, the companies at the top of an industry face more choices about what to do next, and perhaps more pain.

On the afternoon of March 16, U.S. time, Mark Parker took the stage at Nike's 2016 Innovation Summit for a 15-minute speech. He talked about a shoe that tightens itself, an upgraded Nike+ that promises to help consumers personalize what they get, and nine other product updates.

"Connection" and "relevance" were the words he used most, in that speech and in the interview he gave us afterward. For the two-day event, Nike brought in hundreds of media outlets from more than 170 countries and laid on a stand-up set by comedian Kevin Hart, a product show staged like an Olympic opening ceremony (with its own small symphony orchestra), and more than a dozen small exhibition booths, one of them featuring a Flyknit knitting machine.

Nike wants to prove to consumers that it is still the best choice in athletic gear. Its answer is a "personalization" strategy, centered on the HyperAdapt 1.0, a "shoe of the future."

The HyperAdapt 1.0 has a built-in sensor chip. Once you step in, the shoe tightens from both sides, and buttons let you adjust the fit. Its designer, Tinker Hatfield, said: "If it can really be fully automatic, the relationship between people and their shoes will change completely." That may be premature. For now, at least, Nike seems to need the idea more than consumers do.

When Nike posted the shoe on Instagram, it drew nearly 390,000 likes. The Nike Air VaporMax Flyknit, unveiled at the same time, did better: with its rubber midsole stripped away and the slogan "Run on the air," it drew nearly 440,000.

Consumers care about what they can get now; Nike wants to know what it can capture in the future. The upgraded Nike+ app, due in June, shows how badly the company wants to hold the attention of tomorrow's consumers.

The new Nike+ merges two training apps, NRC and NTC, with the shopping app Nike+ SNKRS. It recommends products based on the sports you like (a full kit, from scarves to shoes), which you can buy with one tap; new releases can be reserved on the spot. In short, it fuses online shopping with a sports community. "Personalization" is more a touching turn of phrase than a fact: everything still comes off an industrial production line, and nothing has been changed for you.

Because Nike+ SNKRS had been tested only on a small scale, Nike could not give figures on how many recommendations turn into purchases.

In essence, Nike has given itself a new channel to reach customers. In the past it relied on store displays and social networks to announce new products, and on sales staff to suggest outfits. Now all of that can be tied to workout data, with recommendations used to build consumers' trust.

This puts Nike in unfamiliar territory. As a maker and seller of athletic products, it now has to read what the data are saying: daily active users, the share of visitors who move from product pages to checkout, the final conversion rate, and one more crucial question: how to keep people downloading and opening the app. It will face the cost of acquiring new users, a problem as complicated as running a physical store.

Competition in sportswear has never been fiercer. Uniqlo, Zara and a crowd of small companies with distinctive products are all moving in. Staying connected with consumers has become Nike's chief concern. Nike may be the biggest company in the industry, but the target customers of every one of its product lines have a huge range of choices. Holding on to the relationship between brand and user, and the anxiety that comes with it, is probably the main reason Nike has launched its "personalization" strategy.

Yet even with athletic wear in full fashion, Nike won't say a word about "style" or "trends." This is a long-standing strategy: always tie itself to "athletes," stressing that the word covers "both professional athletes and ordinary people who love sports." Then it talks about "improving athletic performance." Before Flyknit produced a basketball shoe, for instance, Nike spent a full year refining it with Kobe Bryant. Nike believes athletes demand far more from a product than ordinary consumers do. Satisfy them, and in theory you satisfy everyone.

Even when style comes up, Nike's answer keeps returning to athletes. John Hoke, Nike's vice president of design, told QDaily: "Our technology ensures that everything we make can pass the toughest tests, by professional athletes' standards, and the artistry ensures that our products are embraced by the public and resonate with society and consumers at large. People feel confident wearing them, and for athletes, confidence naturally means better performance on the field."

Does Nike make the best running gear? Not really; many runners, at least, would disagree. But so far the company has kept up remarkable growth. In its fiscal 2016 third-quarter results, released on March 22, U.S. time, revenue rose 8% to $8 billion, which Mark Parker called "strong growth."

From 2006 to 2015, Nike's share price rose 600% and its annual revenue doubled. It kept its lead in basketball and, in the 2009-2010 season, overtook Adidas to become number one in soccer. Had you had the foresight to buy its shares years ago, it would likely have been one of your best investments (Starbucks is a similar case).

CEO Mark Parker describes Nike as a collection of "startups." You may have heard similar talk about keeping a big company acting like a startup at Apple in the Steve Jobs era. According to Harvard Business School professor Clayton Christensen's writing on disruptive innovation, it is one of the hardest things to pull off in business.

When Parker took over in 2006, he reorganized the company's business units around individual sports. He replaced a structure built on sub-brands and products with seven "consumer-focused" categories: running, basketball, women's training and so on. "That's how we make sure the company has real expertise in every segment," he said. "The organization doesn't get bloated, and the company doesn't grow aimlessly."

In many interviews he has stressed how important it is for management to "edit and amplify" innovative ideas from the bottom of the company. "190 countries, 13 sports categories. Add those up and we're talking about thousands of product teams. This is a complex, fast-moving business. You have to step back and think about what really comes first. Thinking about what matters most to consumers helps us do the 'editing.'"

He also redrew the company's regions, making China and Japan new growth priorities; simplified reporting lines; cut regional middle management; and oversaw one of the few rounds of layoffs in the company's history. In 2008, after the overhaul, sales rose 70%.

In retail, this approach works the way we described in an earlier piece on Nike's retail strategy: a store in Beijing's Sanlitun and one near a university in Shanghai may focus on completely different products. The tastes of the people nearby decide what each store sells, and a flagship store must also balance its relationships with distributors and other Nike stores.

Flyknit, the technology that now earns Nike so much, began as a pile of foam-plastic socks sitting on a designer's desk. Mark Parker asked, "What is this?" Once he learned that knitting might be used in athletic gear, he saw a huge opportunity.

He later called it "intuition," but Parker had a deep store of experience in design and in "how to make a design real." He sketches sneakers at every opportunity. John Hoke, who has worked with him for years, says the CEO is always sending over sketches drawn on his iPhone, and those sketches then become the subject of meetings.

The Flyknit team at Nike now has more than 100 people. It doesn't make its own products; it works with other departments. Building that unit from nothing is what Parker means by "amplifying." When the CEO is deeply involved in a project, the project gets the support it needs.

Look at how Flyknit came about and you'll find that, like Apple's breakthroughs, or any company's disruptive innovation, it was at heart the invention of a manufacturing process, not just a product. Once Nike decided to develop Flyknit, it went looking for manufacturers willing to take on the technology. Together they worked out not only the production process but, before that, the machines needed to make the product.

Over the past three years, Nike's strong financial results have come mainly from high-margin products: the Flyknit line, launched in 2012, and star shoes such as the Jordan and Kobe lines. So far the company hasn't put a foot wrong, but that doesn't mean it feels sure of its future. The "personalization" strategy looks like a bet whose outcome no one can know. At its heart is the question every company wants to answer: how to win the consumers of the future.

Q: QDaily

MP: Mark Parker

Q: You say each division is a startup. How do you keep every team disciplined without creating bureaucracy?

MP: It's a balancing act. As the company grows, the scale you operate at changes. What matters is staying nimble and keeping people talking. Here, we make sure the creative environment is rich, and that our creative communities talk to each other and are free to run, experiment and try new ideas. A lot of that is tied to a specific strategy and agenda, and we have to execute at a very high level, especially on large-scale and innovation projects.

Take Flyknit. We were at the corner of a table somewhere, I was looking around, and I asked, "What's this?" They explained it, and I said, this is a big idea. So the important thing was to nurture and support it. Eventually the company's resources shifted toward them, and it became a much larger team effort. Ideas can come from unexpected corners, and sometimes they aren't on the regular agenda. I think the best thing is to let them exist, let them happen, and then give them the support they need to thrive.

Q: How did you know from the start that Flyknit was a great idea?

MP: Intuition. Well, sometimes it's just intuition. You could see in the engineers what this kind of knitted shoe might become. It was something we had never done. We had to rebuild the production machines and reprogram them. From that simple, rough idea, if we could pull it off, it would be a game changer, transforming how we design and make our shoes. And it isn't limited to one area. We started with running, but we're exploring its potential in every sport.

So sometimes you have to judge an idea by category: Can it scale? Does it matter to consumers? Can it truly improve athletic performance? Does it even help with sustainability? We want designers and engineers to apply these criteria creatively. When they come up with a new idea, they already have these in mind. That puts us in a better position to "edit."

Q: When you see a good idea, what specific questions do you usually ask?

MP: How will it change things for the person, the athlete, using the product? Why will it appeal to them? It has to be authentic, meaningful and purposeful. It can make an impact in performance, comfort, aesthetics or looks, but it has to be a truly "meaningful impact."

Q: What does Nike see as its opportunities today?

MP: How do we create products? How do we make them? How do we use materials? How do we design? How do we work with engineers from other industries to reach our goals? How do we talk to consumers in new ways? How do we serve our customers better? How do we make Nike easier and more seamless for them to reach? It's all about the individual consumer and giving them real value. That's what drives us.

Q: Looking ten years ahead, where do you think innovation will come from?

MP: I think from more personalized products, changed and customized for you in real time. I can't give everything away. But say you want a shoe that changes color? You might be able to do that in real time. These changes and innovations, in function and in looks, made just for you, along with entirely new ways of making things that we can't manage today, will arrive very soon.

3D printing is an amazing technology. Whether for function or for looks, it is above all a tool for creating. Investing in it lets us make things most people can't imagine.

Q: How do you communicate effectively with consumers?

MP: I think it still comes down to understanding what's authentic, what's valuable, and what has purpose. Every sport has its own needs and culture, so the athletes in each sport are the people with the most insight and the most authority. That works, and the rule applies not just to product innovation but to communication too. Talk to people locally, because every culture has its nuances. Sometimes a product idea that works in the East can be very interesting when you bring it to the West. That's the value of a global company: you find inspiration in one place, and you deliver the idea to everyone around the world.

Q: In your position, where do you still go to learn?

MP: Everywhere. I was very close to my grandmother. She taught me to soak things up like a sponge, to observe everything around me, life, nature, and to look for inspiration in things most people don't notice. That ability lets me see things more deeply, whether visually, as a problem to solve, or as something to communicate.

I love how connected the world is now. We can share influences, mix ideas and cross cultural boundaries with ease. You see it in music, fashion and food. The chance to put different elements together and create something new is incredibly inspiring to me.

Q: Is that what you call intuition?

MP: Intuition... I think it's just observation, curiosity. That's the most important quality: wanting to learn more, being a sponge, broadening your view, seeing things deeply. Then you find your inspiration.