Sustainably Defined Idea Paper

Nike: Sustainability as a Strategy for Innovation and Competitive Differentiation

Nike is the world’s leading brand of athletic footwear and one of the top brands of athletic apparel and
equipment. The company has prided itself on its approach to design and experience marketing, but
always has been pursued by critics for its labor and environmental practices. One of Nike’s challenges is
that it almost exclusively uses contract manufacturers in the developing world to produce its products—
reducing the company’s direct costs and providing flexibility, but removing manufacturing practices
from its direct control and requiring diligent auditing of suppliers. Nike now perceives sustainability as a
path to leadership, competitive differentiation and most importantly, to evidence a positive framework
and actions on social and environmental issues.

Starting From the Defensive

Although Nike now is considered by many to be a sustainability leader, its history began as the subject
of criticism by nonprofit groups and the media. In the early 1990s, the New York Times and other
publications reported on Nike suppliers’ troubling labor practices in Indonesia (Porter & Kramer, 2006).
Porter and Kramer point to Nike as one of the companies that was forced to address sustainability or
corporate social responsibility (CSR) issues “only after being surprised by public responses to issues
they had not previously thought were part of their business responsibilities” (Porter & Kramer, 2006).
Nike quickly realized it had to define itself on sustainability.

As a result, a small group of Nike designers and managers began investigating the idea of sustainable
development. The newly formed Nike Environmental Action Team (NEAT) focused on Nike’s
operations and began asking questions that would ultimately transform the company’s understanding
of itself and its mission: What are the long-term environmental and social impacts of the athletic
footwear industry? How does a company with annual revenues in the billions and with hundreds of
contract factories worldwide profitably integrate ecology and social equity into the way it does
business? (Larson & York, 2007)

Nike quickly turned to auditing its contract manufacturers and other suppliers against criteria for
workplace health and safety, primarily working with external nonprofit organizations that manage such
standards and monitor companies’ performance against them. For example, Nike joined the Fair Labor
Association (FLA)—“a multi-stakeholder initiative to end sweatshop labor and improve working
conditions in factories worldwide”—and had FLA review its suppliers’ performance against the
organization’s standards (Nike, 2005; Fair Labor Association, 2010). Nike has since established a Code
of Conduct for contract manufacturers and continually audits their performance using multiple tools
(Nike, 2010: “Workers & Factories”).

Moving Toward Sustainability

Over the next two decades, Nike changed its focus from measuring only traditional business metrics
such as product performance, profits, return on investment (ROI) and shareholder value, to adding
metrics such as suppliers providing safe working conditions, paying living wages, manufacturing

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Sustainably Defined Idea Paper
Nike: Sustainability as a Strategy for Innovation and Competitive Differentiation

products without harming human health or the environment, and collaborating with stakeholder
groups. Due to pressure from interest groups and its own internal drive to deliver, Nike perceived the
need to not just be consistent with its competitors, but to lead its industry on such important
challenges by developing robust objectives and harnessing the internal creativity of its product
designers and other employees to achieve those objectives over time.

Improving Design
As part of this transformation, Nike established new design guidelines for its products and elevated
those guidelines from applying to a small group of “eco-
chic” offerings to applying them to shoes across multiple
key categories: basketball, running, soccer, women's
training, men's training and sportswear, tennis and ACG
(All Conditions Gear) (Newberry, 2009). Nike first
introduced its “Considered” line of shoes incorporating
natural fibers, connections among components to permit
easy disassembly for composting or recycling following
use, and less toxic ingredients. Unfortunately, the $110
shoes were derided by critics, did not live up to the
performance expectations for Nike products, and were
removed from store shelves within one year (Jana, 2009).
However, Nike returned to its performance roots and
redeveloped “Considered Design” into a moniker for a One of the original Nike
broader system of design collaboration among internal Considered shoes.
personnel and suppliers to minimize environmental impact
by: (Newberry, 2009)
1. Reducing waste using the product design and development process
2. Using environmentally preferred materials
3. Eliminating toxic ingredients

Nike is working to have all footwear meet the stringent criteria by 2011 and believes implementing
these product criteria will help further differentiate itself from its competitors (Casey, 2008).

Closed-Loop Material Flows

Nike’s designers applied their creativity to reformulate shoe production and reduce the waste of raw
materials during footwear assembly. To recycle used materials, Nike’s Reuse-A-Shoe distributes
containers to footwear retailers for customers to drop-off their used shoes and have them recycled by
Nike. The recycled material is used in playground surfaces and athletic fields, especially in lower-
income urban areas, and even into footwear, such as the Trash Talk basketball shoe introduced in 2008
(Casey, 2008). The program also has proven to be a valuable tool for consumer engagement—bringing
them back into the retail store to return their used shoes for recycling and buy another pair of shoes on
their way out—as well as making consumers feel better about their purchase. Nike designers also are
creating footwear can be more easily disassembled following its use, to help further facilitate
biodegradation or recycling of component materials (Henderson, et al., 2009).

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Sustainably Defined Idea Paper
Nike: Sustainability as a Strategy for Innovation and Competitive Differentiation

Nike continues to expand this design framework of closed-loop material flows into all its activities.
According to its most recent Corporate Responsibility report: “We think the future will demand closed-
loop business models that move closer to achieving zero waste by completely reusing, recycling or
composting all materials. Our vision of a closed-loop business model includes up-front design of
products that can be manufactured using materials reclaimed throughout the manufacturing process
and at the end of a product's life” (Nike, 2010: “Corporate Responsibility Report FY07-09”). Nike joins
many other companies from various other industries who are pursuing the vision of “closed-loop”
material flows (also termed “industrial ecology”), both within their own walls and among their
customers, retailers and other manufacturers.

Toxic Ingredients
Reducing the amount of toxic ingredients in footwear has
proven challenging, especially for specific material types, but
has provided Nike a platform to demonstrate its
sustainability leadership. For example, the Air Jordan XX3
was designed to minimize “the use of chemical glues” by
having the outsole, midsole and upper sections “fit together
like a jigsaw puzzle, reinforcing their fit” to make the shoe
more easily recyclable, and using water-based glues
wherever possible (Casey, 2008). As another example, Nike
participated in an industry collaborative effort to eliminate
toxic heavy metals from the leather tanning process, which
creates hazardous waste during tanning and also destroys the
leather’s inherent compostability. This inter-organizational
Leather Working Group identified preferred chemistry that Collecting shoes for the
could tan the leather, while not yielding these problematic Reuse-A-Shoe program.
outcomes as well.

To help suppliers transition toward the “Considered Design”

guidelines for toxic ingredients, Nike has combined two
approaches: a Restricted Substances List (RSL) and full ingredient
review. Nike developed the RSL to inform footwear material
suppliers of the substances the company did not want in its
product, at specific concentration levels, including zero. This list is
based on various government regulations, as well as Nike’s own
internal goals for eliminating chemicals such as PVC. At the same
time, Nike asked suppliers to provide full formulation data, which
the company could assess for the potential presence of hazardous
ingredients, including those that are not yet regulated. In this way,
Nike could provide minimum requirements for all suppliers, as well
as stretch or proactive goals that some suppliers might meet now Nike Air Jordan XX3.
and become preferred suppliers, or work toward for future
achievement. In this way, Nike’s goals for material and product
innovation could be pushed through the supply chain and lead to
suppliers’ own material innovations.

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Sustainably Defined Idea Paper
Nike: Sustainability as a Strategy for Innovation and Competitive Differentiation

Sustainability as an Innovation Opportunity

Through this process of change, Nike realized the innovation opportunity inherent in sustainability—
designing for a broader concept of quality beyond simply product cost, performance and aesthetics—
and the reputational opportunity of tangible action. At the same time, Nike transitioned from labeling
these functions as “corporate social responsibility” to an office of “Sustainable Business and Innovation
(SB&I),” to help Nike excel in a sustainable economy through the following activities (Nike, 2010: “Nike
Outlines Global Strategy…”):
1. Innovate to deliver enterprise-level sustainability solutions.
2. Integrate sustainability into the heart of the NIKE, Inc. business model.
3. Mobilize key constituents (civil society, employees, consumers, government and industry)
to partner in scaling solutions.

In the words of CEO Mark Parker: “It took us a while, but we finally figured out that we could apply
these two core competencies—design and innovation—to bring about environmental, labor and social
change. We opened the aperture of our lens and discovered our potential to have a positive influence
on waste reduction, climate change, managing natural resources, renewable energy and factory
conditions. We saw that doing the right thing was good for business today—and would be an engine for
our growth in the near future” (Nike, 2010: “Corporate Responsibility Report FY07-09”).

Spreading Innovation Throughout Industry

Nike also is seeking to spread innovation and its learnings across other companies and organizations, as
it also seeks to learn more from others. In partnering with other companies, Nike helped established
the GreenXchange (GX), a web-based marketplace through which organizations can “share intellectual
property which can lead to new sustainability business models and innovation” (Nike, 2010: “Nike
Outlines Global Strategy…”). Nike also is working with other organizations, such as The Natural Step
and the Society for Organizational Learning (SoL), to expand and pursue inter-industry efforts to
enable closed-loop material flows and sustainability optimization.

Successes in Sustainability and Business Value

Nike’s successes demonstrate the breadth and depth of the company’s efforts:
 Shrank the carbon footprint of contract manufacturers by 6%, despite a 9% increase in
production (Nike, 2010: “Nike Outlines Global Strategy…”).
 Increased factory waste recycled through in-house programs “from 8% of solid waste per
pair in FY07 to 10% in FY09 (Environmental Leader, 2010).
 Recycled 11% of manufacturing waste back into closed-loop materials during FY09
(Environmental Leader, 2010).
 Introduced a complete line of apparel for athletes in Beijing made from 100%-recycled
polyester (Newberry, 2009).
 Expanded footwear closed-loop materials and take-back programs by 51%, to “more than
4.6 million kilograms” between FY06 and FY09 (Environmental Leader, 2010).

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Nike: Sustainability as a Strategy for Innovation and Competitive Differentiation

 Developed a “greener” formulation of rubber and implemented it across the product line
(Herrera, 2009).
 Redesigned shoeboxes to make them 10% lighter, saving 4,000 tons of raw materials, and
$1.6 million annually (Larson & York, 2007).
 Substituted water-based cements into 90% of shoes, eliminating 1.6 million gallons of
solvents per year, as well as reducing costs for water disposal and hazardous material
handling (Larson & York, 2007).
 Established a goal of eliminating toxic PVC (polyvinyl chloride, or “vinyl”) from its products
and making significant progress toward that goal (Larson & York, 2007).
 Moving beyond regulation to proactively remove ingredients that should be labeled as
toxic, but have not yet been identified as such by government agencies (Larson & York,
2007).
 Increased the use of “environmentally preferred materials (EPMs)” in footwear by 77%
between FY06 and FY09, as well as establishing a goal of using 20% EPMs in apparel by
FY15 (Environmental Leader, 2010).
 Expanding the Considered Design guidelines to all footwear by 2011, which is expected to
lower footwear production waste by 17%, and expanding the guidelines to all apparel in
2015 and all equipment in 2020 (Herrera, 2009).

Next Steps and Lessons Learned

Nike still is reluctant to fully promote its sustainability efforts, due to a combination of historically being
the target of interest group and consumer boycotts, wanting to avoid over-representing its
achievement, and because sustainability only attracts a limited portion of consumers (Jana, 2009).
However, Nike always has been about product performance and design, which it continues to achieve
while having a more positive impact on society and the environment.

Although Nike realizes it has much work ahead to completely harmonize its product life cycles and
operations with the principles of sustainability, it is progressing toward that goal. Nike’s leadership
already has provided the following lessons from which others can learn:
 Starting from a reactive position by being attacked can provide the greatest source of
sustainability inspiration and innovation.
 Pursuing a joint approach for improving material chemistry with suppliers can be
successful—through both current minimum RSL requirements and future optimized design
goals for R&D collaboration.
 Innovate better products by combining the expertise of product design from an industrial
design (physical design) perspective for design for recyclability, as well as from an
ingredient chemistry design perspective for preventing hazards to human health and the
environment through material selection.
 Establishing both a long-term vision or ethic and short-term actions permits every member
of a company to understand and actualize a sustainability initiative, as well as tangibly
define the objectives to external stakeholders.

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Sustainably Defined Idea Paper
Nike: Sustainability as a Strategy for Innovation and Competitive Differentiation

Nike is signaling its intentions for the future and embodying sustainability innovation and performance.
No matter whether the future advantages include top-line sales of environmentally-preferable
products, bottom-line savings from avoiding costs of hazardous materials management or other
regulations, hiring and retaining more valuable employees, maintaining the support from stakeholder
groups, securing brand enhancement and/or innovating within life cycle design, Nike is poised to arrive
sooner and more completely than its competitors and define what is achievable as the standard for its
industry.

References

Casey, N. (Feb 15, 2008). New Nike Sneaker Targets Jocks, Greens, Wall Street. Wall Street Journal.
http://online.wsj.com/article/SB120303911940170393.html (accessed March 17, 2010).

Environmental Leader. (Jan 25, 2010). Nike Cuts CO2 Emissions by 4%.
http://www.environmentalleader.com/2010/01/25/nike-cuts-co2-emissions-by-4 (accessed March 28,
2010).

Fair Labor Association website. http://www.fairlabor.org (accessed April 25, 2010).

Henderson, R., et al. (Jan 21, 2009). Nike Considered: Getting Traction on Sustainability. MIT Sloan
Management (Case # 08-077).

Herrera, T. (Oct. 19, 2009). Nike: From Considered Design to Closing the Loop. Greenbiz.com blog.
http://www.greenbiz.com/blog/2009/10/19/considered-design-closing-loop (accessed April 5, 2010).

Jana, R. (June 11, 2009). Nike Quietly Goes Green. Bloomberg BusinessWeek.
http://www.businessweek.com/magazine/content/09_25/b4136056155092.htm (accessed March 8,
2010).

Larson, A., & York, J. (2007). Nike: Moving Down the Sustainability Track Through Chemical
Substitution and Waste Reduction. Darden Business Publishing (Case # UVA-ENT-0098).

Newberry, M. (2009). Product Development (Chapter 9), in: Global Market Review of Active Sportswear
and Athletic Footwear-Forecasts to 2016. Bromsgrove.

Nike, Inc. (May 12, 2005). Fair Labor Association Accredits Nike Compliance Program (press release).
http://www.nikebiz.com/media/pr/2005/05/12_Compliance.html

Nike, Inc. (2010). Corporate Responsibility Report FY07-09. http://www.nikebiz.com/crreport (accessed

April 15, 2010).

Nike, Inc. (January 22, 2010). Nike Outlines Global Strategy for Creating a More Sustainable Business
(press release). http://www.nikebiz.com/media/pr/2010/01/22_FY070809CRReport.html (accessed April
12, 2010).

Nike, Inc. Workers & Factories: Improving Conditions in Our Contract Factories.
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Porter, M.E., & Kramer, M.R. (Dec 2006). Making a Real Difference: The Link Between Competitive
Advantage and Corporate Social Responsibility. Harvard Business Review.

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