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

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1 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 2010, Steve Bolton Page 1 of 6

2 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 ecochic 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 broader system of design collaboration among internal 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 One of the original Nike Considered shoes. 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 lowerincome 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). 2010, Steve Bolton Page 2 of 6

3 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 closedloop 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 could tan the leather, while not yielding these problematic 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 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. Collecting shoes for the Reuse-A-Shoe program. Nike Air Jordan XX , Steve Bolton Page 3 of 6

4 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). 2010, Steve Bolton Page 4 of 6

5 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. 2010, Steve Bolton Page 5 of 6

6 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. (accessed March 17, 2010). Environmental Leader. (Jan 25, 2010). Nike Cuts CO2 Emissions by 4%. (accessed March 28, 2010). Fair Labor Association website. (accessed April 25, 2010). Henderson, R., et al. (Jan 21, 2009). Nike Considered: Getting Traction on Sustainability. MIT Sloan Management (Case # ). Herrera, T. (Oct. 19, 2009). Nike: From Considered Design to Closing the Loop. Greenbiz.com blog. (accessed April 5, 2010). Jana, R. (June 11, 2009). Nike Quietly Goes Green. Bloomberg BusinessWeek. (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 Bromsgrove. Nike, Inc. (May 12, 2005). Fair Labor Association Accredits Nike Compliance Program (press release). Nike, Inc. (2010). Corporate Responsibility Report FY (accessed April 15, 2010). Nike, Inc. (January 22, 2010). Nike Outlines Global Strategy for Creating a More Sustainable Business (press release). (accessed April 12, 2010). Nike, Inc. Workers & Factories: Improving Conditions in Our Contract Factories. (accessed April 22, 2010). Porter, M.E., & Kramer, M.R. (Dec 2006). Making a Real Difference: The Link Between Competitive Advantage and Corporate Social Responsibility. Harvard Business Review. 2010, Steve Bolton Page 6 of 6