Nike’s innovation DNA began with Bill Bowerman's persistent drive to make shoes lighter and faster for his elite athletes all the way back in the 50s. As stated in Nike’s first annual report in 1981,

“Our goal is to continually produce new and better shoes which will aid performance and reduce or eliminate injury. Today, Nike shoes have a reputation as being among the most technically innovative shoes on the market; a reputation that has been earned through an ongoing commitment to product research, development, and evaluation.”

To achieve this goal that same year they opened up the Nike Sports Research Laboratory in Exeter, New Hampshire. From the 1981 annual report,

“Backed by more than 100 employees working in research and development, the Exeter facility was instrumental in the development of a complete individualized line of running shoes, designed for different foot types, body weights, running speeds, training schedules, and sexes.

Today, our product development activities involve research and testing in biomechanics, exercise physiology, and wear testing…Through the use of high-speed photographic analyses of the body in motion, the study of athletes on force plates and treadmills, plus continual testing of new shoes and materials, the researchers at Exeter can accurately identify the basic characteristic patterns of various foot types during activity. This data is then passed on to the company’s product development personnel, to be used in the development of prototype shoes. Input is also received from select research committees and advisory boards of athletes, coaches, trainers, equipment managers, podiatrists, and orthopedists during the conception and review of new designs.”

Today, the Nike Sports Research Lab is in a 16,000-square-foot facility in Beaverton. Nike's research teams have been instrumental in the long lineage of innovations Nike has brought to the market from the waffle shoe to Nike Air, to more recently Nike Free, Flyknit, and Fuelband. Innovation permeates almost every aspect of Nike. It is in their mission statement, “Nike’s Mission is to bring inspiration and innovation to every athlete in the world. If you have a body, you are an athlete.” It is in their culture, marketing, and design. In 2013, Fast Company magazine ranked Nike as the most innovative company.

Continuous innovation has always been a cornerstone of Phil Knight's competitive game plan. As Phil stated in Nike's 1986 annual shareholder letter, the year before Reebok would overtake Nike in revenues:

“The industry is extremely competitive. The customer is placing great emphasis on “what’s new?” which puts extreme pressure on all facets of innovation – technology, styling, and marketing.

But for all its negatives, especially the competitive factors, if a company can be innovative, the market responds positively… The sum-up of the industry is that it is one in which the rewards and risks are huge.

The thing I like about Nike, whose position I would not trade for any other in the industry, is that…in virtually any long-run scenario, it is a significant player…The final question is ‘Can we compete’…

Compete, I promise you, we can do it.”

A strong brand consistently delivers on its customer promise. Nike has always delivered on their customer promise of “bringing inspiration and innovation” to athletes around the world. While other athletic brands have come and gone, Nike has persevered and prospered. Over 100 publications and brand rankings have ranked Nike as a top 50 brand.

While Nike is known for being the global pacesetter in marketing and advertising, branding always starts with a great product. With Nike, many of the world’s best athletes and teams use their products. Though, Nike takes it a step further and collaborates with many of their signed athletes on product design and innovation.

This deep athlete partnership concept goes all the way back to Nike's beginning when they signed their first athlete, Steve Prefontaine, who held the American records in seven distances from 2000m to 10,000m at the time of his tragic death in a car accident at the age of 24. Phil Knight has often said Steve is the “soul of Nike,” because he was instrumental in pushing and collaborating with Phil and Bowerman on shoe design and innovation to make athletes faster and safer.

Nike took the first athlete partnership with Steve Prefontaine and utilized it as a blueprint to incubate and amplify new products into huge brands, like Nike’s multi-billion dollar Jordan and Tiger brands, along with many others.

Nike has always understood the power of billions of impressions of the world’s best athletes wearing Nike. If Nike shoes are good enough for Olympic, professional, and collegiate athletes they are most likely good enough for the billions of average athletes and the millions of kids dreaming of reaching the top.

Typically with locked-up supply, companies come to mind like DeBeers, which had a virtual monopoly owning ~90% of the diamond market from the early 1900s all the way until 1980. In Nike’s case, they focus on locking up the supply of the next up-and-coming global athletes with endorsement deals.

Even before Tiger left Stanford (a little-acknowledged fact is he never graduated), he had a $40+ million Nike contract ready to sign at any moment he decided to go pro. LeBron James signed a $90 million Nike deal at the age of 18, and Michelle Wei signed at the age of 16. Nike has 6 of the top 9 paid athletes according to Forbes, and the only three females on the list.

While Nike pioneered locking up great athletes, there is now a war with Adidas, Under Armour, and others to sign top athletes and tomorrow's prodigies. Over the past few decades, the business of sports has exploded, along with the sporting goods and athletic apparel markets. The battlefield has shifted a bit to identifying and locking up tomorrow's athletic prodigies. Nike has invested in their own network of scouts and partners who assess the global supply pipeline of up-and-coming athletes across almost every sport, which they are quick to sign as the prodigies mature to the professional ranks.

A great example of the Nike scouting and recruiting machine is their SPARQ combine program. They invest millions to annually grade the physical attributes and skills of the top 14,000 junior high and high school football prospects in the U.S. through an NFL-like combine. If an athlete performs well in the SPARQ combine, they could be invited to Nike Football Training Camp and then even the television show “The Opening” which takes place at Nike Headquarters. They have similar programs for almost every competitive sport.

Nike sells over 1 million shoes per day, along with countless other millions of units in apparel, socks, equipment, and accessories. The scale of Nike’s manufacturing operations is impressive with over 700 factories, in over 40 countries, employing over 1 million people.

To leverage the economies of scale, Nike utilizes contract manufacturers, continually finding new sources and factories that will drive higher quality and consistency at lower costs. Their economies of scale have allowed them to grow their gross margin from 28% in 1981 to 45% in 2017 and drive continuously increasing leverage on product development, selling, administrative and marketing costs.

On the flip side, Nike also uses its scale with its retail partners. In the early 2000s, there was an ugly dispute between Nike and Footlocker, as Footlocker wanted to become the “Walmart” of shoes with constant promotions and BOGOs (Buy one and Get one half off). Nike has always been a proponent of keeping retail pricing intact and non-promotional, and so the war began. The story goes that the CEO of Footlocker canceled a few hundred million in orders in protest of Nike’s rigid pricing guidelines and their high wholesale pricing. Nike responded by massively reducing the number of shoes they would ship to Footlocker, restricting some of the most popular styles from Footlocker, and increasing distribution to competitive retailers. While Footlocker hurt, Nike prospered, and within about a year they reconciled their differences. Today, you see Nike leveraging its power and scale walking into almost every retailer that carries Nike. Go to Footlocker, Dicks, and Macy’s and look at Nike's prominence, typically in the front of the store with massive displays, fixtures, and inspiring imagery.

Location as a source of competitive differentiation is one of the oldest levers. In the 1700s and 1800s, establishing the first general store, with the right location, in a new town would often frighten off other competitors from coming in. Even today, location is a highly sought-after competitive differentiator, especially for retailers, restaurants, and many service businesses.

In 1990, Nike took a gamble in opening its first flagship NikeTown store in downtown Portland. The flagship concept, part retail, part theater, and all brand, needed the best locations in the biggest cities. Nike made sure to capitalize on location as a competitive advantage, locking up premier retail real estate on Michigan Avenue in Chicago, Union Square in San Francisco, and about every other prime location in the top 50 cities in the world. Nike now has over 750 stores, with an average of over $8 million in sales per store.

The digital enablement of almost everything has driven a massive proliferation of information. Companies that learn how to turn this proprietary information into knowledge, insight, and action help differentiate themselves.

Over the past decade, Nike has accelerated its ability to create and harness proprietary information, with big data strategies at the heart of many of its recent innovations, patents, and products. In 2010, Nike launched their Digital Sports Division which helped launch Nike+ which pairs sensors in Nike shoes with mobile apps, and FuelBand, which tracks your rate of activity and health statistics. The Nike+ RunClub community now numbers 140+ million, creating one of the world’s largest datasets on health and activity. Nike has doubled down on apps with their SNKRS app for sneaker junkies and the Nike shopping app. They’ve utilized proprietary data to design and stock a new concept store in Los Angeles.

Nike is a leader in digital advertising, social and ecommerce with 30+ million Facebook fans and over $2 billion in online sales. A few years ago, Nike shifted the majority of their advertising spend into digital and social to drive demand and the purchase of Nike products through the massive long-tail ecosystem of the web. Now, with NikeiD, anyone can go online and design shoes with personalized colors, graphics, and monograms, which is all the rage with teens. The ability of Nike, leveraging the massive amounts of big data generated from its digital and ecommerce strategy, to come up with new insights, products, and sticky and engaging apps and services is almost endless and a competitive advantage practically impossible to surpass.

Over the next few years, we’ll be seeing a full-out battle of innovations from Nike and others in creating and harnessing data sets of the body to help us understand and make better decisions about our health, activity, nutrition, sleep, and behavior.

One of the most potent sustainable competitive differentiators is a network effect, where value grows as more users or nodes join a network. The more people join and post on Facebook, the more value users get out of Facebook. The more sellers on Amazon.com, the more buyers are attracted to it, which in turn drives more sellers to become part of the market. One of the reasons why social business models are so valuable, sticky, and fast-growing is because they often tap into the power of network effects.

With Nike, the network effect is arguably Nike's weakest source of competitive advantage. They'll figure it out over time. They keep on coming out with new social features on the Nike+ RunClub app. With NikeiD, you can share your designs with friends. They'll continue to experiment with different models, apps, and features to tap into the power of network effects.

Developing a sustainable competitive advantage is a long-term strategy. The more you can create a compelling vision and plant the seeds on the crucial sources of competitive advantage for your business and industry, the better off your company will be in 5-10 years.

If you want to talk about your competitive advantage strategy with an experienced strategy coach, set up some time with Joe Newsum, a Mckinsey Alum, and the author of this content and website.

If you want to begin thinking through a competitive advantage strategy, utilize the free PowerPoint download below to evaluate which sources of sustainable competitive advantage you currently have, prioritize those important to your industry or that you think you can drive, and then brainstorm various ways to improve the different sources of sustainable competitive advantage.

If you want a more complete template, check out our 114-page Market & Competitive Analysis Example Template.