“With few exceptions, the only instances in which mainstream firms have successfully established a timely position in a disruptive technology were those in which the firms’ managers set up an autonomous organization charged with building a new and independent business around the disruptive technology." - Clayton M. Christensen
A common question that emerges as we explore the topic of business transformation is why some companies can be successful over the long run, while others run the risk of losing relevance over time. In many cases, the answer revolves around how those companies view innovation, with the most successful long-term businesses adopting a “disrupt or be disrupted” mentality.
We see this phenomenon across many industries and even in some categories, like athletic apparel and restaurants, that might not usually be considered at the forefront of technological innovation.
Nike and Starbucks are two companies that stand out in this regard, as each has rewritten the rules of its industry and used innovation to turn a struggling business around and put themselves on a trajectory of long-term growth.
How Nike built stronger relationships with its customers
As recently as 2016, Nike was losing market share to rivals like Adidas in the United States. Operating a predominately wholesale operation, Nike’s business was under pressure as large retail partners like The Sports Authority filed for bankruptcy.
The following year, Nike embarked on a multi-year transformational effort to become more consumer-centric. First, the company reduced the number of its wholesale partners from 30,000 to 40 because most were unable to provide the experience Nike believed its customers wanted and expected.
Nike also invested in company-owned stores and created a digital ecosystem that sat at the intersection of fitness apps and e-commerce. It further augmented its e-commerce capabilities by launching SNKRs, a complementary app that appealed to the “sneakerhead” community.
During this time, Nike also became more acquisitive in non-core areas to improve its technological capabilities. For instance, it bought the technology behind Nike Fit, a scanning technology that allows customers to measure shoe size through a smartphone camera. It also brought on a 12-person team from Richard Branson's Virgin Group that rebuilt the SNKRs app to make it more interactive and community-oriented. Last but not least, Nike acquired Celect and Zodiac to improve data analytics, which its CFO said accelerated its analytics capabilities by at least three years.
By accelerating its direct-to-consumer (DTC) strategy and investing in analytics, Nike has 170 million consumers whose data it is now measuring, analyzing, and acting upon to build more direct relationships with its customers.
Nike’s growth over the past several years and its ability to navigate the pandemic better than competitors suggests its business is built to last. In 2018, Nike set a goal of reaching 30 percent of its sales through e-commerce by 2023. It has surpassed that goal a full two years ahead of schedule and now expects its overall digital business to account for 50 percent of sales in the not-too-distant future.
With digital properties like nike.com and its SNKRs app now generating more than $1 billion in revenue, Nike is in control of its own destiny. As a result, Nike is now in the enviable position of being able to pull out of Amazon’s marketplace and control its brand, distribution, and customer relationships.
By crafting authentic connections and pushing to integrate online and offline operations by opening 150-200 small-format, digitally enabled stores, Nike today is better positioned to deliver meaningful experiences to consumers than it was in 2016, and is among the best examples of a mass brand that has transformed its business to be more consumer-centric.
How Starbucks became a tech-enabled powerhouse
In 2007, Starbucks founder Howard Shultz sent a public memo to CEO Jim Donald and 11 top executives. The title of the memo? The Commoditization of the Starbucks Experience.
In the memo, Schulz noted that “Over the past ten years in order to achieve the growth, development, and scale necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of decisions that, in retrospect, have led to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand.”
To reverse these issues Shultz returned as CEO from 2008-2017, and over the course of that tenure transformed Starbucks into a tech-enabled global powerhouse.
Shultz’s strategy was rooted in the belief that Starbucks was in the business of selling experiences and community, not just coffee. As such, the company invested to turn its stores into community centers, which proved to be a winning strategy around the world.
Starbucks repurchased Japan operations for $1 billion to better control service levels, re-franchised European operations to local players so it could deliver country-specific experiences, and controversially paid $3 billion to break its contract with consumer packaged goods (CPG) giant Kraft, whose handling of retail distribution was believed to be killing the company’s brand.
Starbucks was able to overhaul multiple parts of its business without losing its “soul” by maintaining a commitment to ethically sourced coffee and continuing to be an industry pioneer in offering healthcare, retirement benefits, and a college achievement plan for its associates.
The biggest differentiator, however, was the company’s commitment to adopting technology that removed friction during the customer journey. Starbucks created a digital ecosystem of payments, mobile orders, and a loyalty program that improved the consumer experience, increased revenue growth, and allowed it to sidestep credit card fees from Visa and Mastercard.
The Starbucks mobile app now has ~20 million active U.S. users and is estimated to drive 17 percent of all sales. While Starbucks isn’t commonly viewed as a technology company, its app once commanded an impressive 40 percent market share of all mobile payments until Apple became the market leader in 2019.
As a testament to the company’s commitment to its digital transformation, Starbucks appointed Kevin Johnson, former CEO of Juniper Networks, to succeed Howard Shultz as CEO in 2017.
If we deconstruct the business transformations of Nike and Starbucks, it becomes clear they share common elements of other mass brands undergoing similar transformations. These companies saw shifts in consumer behavior and technological advancements as opportunities to become more consumer-centric by building deeper relationships with their customers and enhancing both physical and digital touchpoints.
Both companies were also willing to adjust their business models to leverage emerging trends as a tailwind, which is the sign of a forward-thinking innovator pushing for change. Finally, these companies were willing to disrupt themselves and change the way they had done business for decades in order to rebuild their business and thrive in a future that is still 5-10 years away.