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A study of 1,850 companies by Zook and Allen revealed
two conclusions:
First, the most sustained profitable growth occurs when
a corporation pushes out of the boundary around its
core business into adjacent businesses.
Second, corporations that consistently outgrow their
rivals do so by developing a formula for expanding
those boundaries in a predicable, repeatable manner.
Nike is a classic example of this process. Despite its success in
athletic shoes, no one expected Nike to be successful when it
diversified in 1995 from shoes into golf apparel, balls, and
equipment.
Only a few years later, it was acknowledged to be a major
player in the new business. According to researchers Zook
and Allen, the key to Nike’s success was a formula for growth
that the company had applied and adapted successfully in a
series of entries into sports markets, from jogging to
volleyball to tennis to basketball to soccer and, most
recently, to golf. First, Nike established a leading position in
athletic shoes in the target market, in this case, golf shoes.
Second, Nike launched a clothing line endorsed by the sports’
top athletes—in this case, Tiger Woods.
Third, the company formed new distribution channels and
contracts with key suppliers in the new business. Nike’s
reputation as a strong marketer of new products gave it
credibility.
Fourth, the company introduced higher-margin equipment
into the new market. In the case of golf clubs, it started
with irons and then moved to drivers. Once it had captured
a significant share in the U.S. market, Nike’s next step was
global distribution.
Zook and Allen propose that this formula was the
reason Nike moved past Reebok in the sporting goods
industry. In 1987, Nike’s operating profits were only
$164 million compared toReebok’s much larger $309
million. Fifteen years later, Nike’s operating profits
had grown to $1.1 billion while Reebok’s had declined
to $247 million.2 Reebok was subsequently acquired
by Adidas in 2005 while Nike went on to generate
operating profits of $2.4 billion in 2008.