You’re Remembered for the Rules You Break.

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Kidami, Onitsuka’s export manager, wasn’t satisfied with Blue Ribbon. He visited Phil in Portland. Phil discovered that Onitsuka was looking for new US distributors. Phil’s bank cancelled him. Phil made a deal with a Japanese trading company named Nissho Iwai. He gave away no equity. Phil found a factory in Guadalajara to import a new brand of athletic shoe. He hired Carolyn Davidson, a graphic design student at Portland State University. She designed the “swoosh” that would become recognizable. Jeff Johnson came up with the Nike name. Not depending on only Nissho for funding, Blue Ribbon raised capital through debentures. The shoes manufactured in Guadalajara fell apart. Phil found a more reliable manufacturer in Tokyo. While visiting Japan, he paid a visit to Onitsuka, who didn’t know about his deal with Nissho. It was the beginning of the Nike brand.

Part 70. Phil Knight (continued)

You can find this week’s TL;DR here.

Key Lessons:

• Don’t wait for perfection to launch your product.

• Tell the truth (more often than you lie).

• Only fight a war you can win.

• Have ample cash reserves.

• Create big problems.

• Hedge your bets.

Now there’s a collectible version of this newsletter! Methods of Prosperity newsletter number 33 is available to collect as of October 11, 2024. If you’re so inclined you can permanently own it!

In 1969, his wife gave birth to their son. Phil had quit his teaching job and went all-in on Blue Ribbon. Now he second guessed his decision to quit his day job. His wife worked for Blue Ribbon, fulfilling orders even while pregnant.

Paranoid of Kidami, Onitsuka’s export manager, Phil hired a Japanese spy to keep an eye on Onitsuka. His name was Fujimoto. Fujimoto uncovered Onitsuka’s plan to cut off Blue Ribbon. By 1971, Kidami approached Phil with the threat of a hostile takeover. Nissho Iwai, the Japanese trading company was funding Blue Ribbon unbeknownst to Onitsuka.

It was 1972. At the Chicago trade show, Blue Ribbon Sports introduced their new Nike shoe. Phil’s crew, Johnson and Woodell, stacked them in pyramids of orange shoe boxes. The swoosh logo wasn’t exactly perfect. Flaws were visible. The guys panicked.

“This is the worse the shoes will ever be,” Phil reassured his team, “they’ll get better.”

By the end of the day at that convention, sales exceeded their expectations. Why did these imperfect shoes sell so well? The guys at Blue Ribbon Sports had a reputation for telling the truth.

Nike was a hedge against Blue Ribbon’s bet that Onitsuka was going to pull the rug out from under them. Two weeks after the convention, Kidami showed up at Blue Ribbon headquarters. He demanded to know what this Nike shoe is that Onitsuka never approved. Who manufactured them? How many pairs of Nikes did Blue Ribbon produce? Kidami wanted to know if they were selling in stores. Phil lied to Kidami about the Nikes. He told them they weren’t selling them in stores. Kidami wanted to know if Phil talked to Bowerman about Onitsuka buying out Blue Ribbon. No, they hadn’t decided to let that happen.

Phil made a call to his manager at their retail store to hide the Nikes from Kidami, who was on his way. Kidami showed up and found the Nikes in the stock room. That store manager ended up working for Kidami.

Later, Kidami revoked Onitsuka’s contract with Blue Ribbon, claiming $16,000 in damages. He accused Blue Ribbon of breaking their contract by launching Nike shoes. Onitsuka still wanted to use Bowerman as a consultant. He refused. Now Onitsuka became their enemy.

Phil knew this was a turning point. He told his team what was going to happen. Blue Ribbon had to put the pressure on their former supplier. If Onitsuka filed a lawsuit in Japan, Blue Ribbon would sue them first in the USA. He knew an American company couldn’t win against a Japanese company in Japanese court.

This was in the 1970s. The US economy was in trouble. War with Vietnam was escalating. This was no time to launch a new shoe brand. It was difficult to pay expenses. Let alone make a profit. Onitsuka betrayed them. They had nothing left but these new Nikes. Which is exactly why this was the right time to launch a new shoe brand.

“We’ve got them right where we want them.”

Phil informed his team,

“This is the moment we’ve been waiting for. Our moment. No more selling someone else’s brand. No more working for someone else. Onitsuka has been holding us down for years. Their late deliveries. Their mixed up orders. Their refusal to implement our design ideas. Who among us isn’t sick of dealing with all that?”

He continued,

“It’s time to face facts. If we’re going to succeed or fail, we should do so on our own terms. Our own ideas. Our own brand. We posted $2, million in sales last year. None of which had to do with Onitsuka.”

That was significant. He reframed their situation to be an opportunity. It was their liberation and independence day. They were going to war, but it was a war they could win.

From that point on, cash reserves would not only be empty. They would be overdrawn. Operating on the float was temporary. That’s what Phil thought. Nissho provided $1 million in credit. The bank of California provided $1 million in credit. Before paying back the bank, Blue Ribbon needed to pay Nissho back first. They acted as Blue Ribbon’s equity. Nissho was is second position to the bank.

Blue Ribbon was growing fast, and it caused problems. The thing is, you want problems like that. Grow or die. That was Phil Knight’s philosophy. If demand is for $5 million, and your order is for $3 million, it doesn’t make sense to cut it back to $2 million in inventory. Not if your company is growing. The money will come in. But that’s risky for the bankers. At the end of every month, Blue Ribbon started from $0 again.

By 1975, operations at Nissho restructured. They appointed a replacement west coast credit manager to oversee Blue Ribbon. His name was Suzuki. His direct report from the Portland office, Uki Ido, was cold as ice. Phil called him the ice man.

Then one rainy Wednesday afternoon, during the Spring of 1975, Blue Ribbon was in trouble. They owed Nissho $1 million and couldn’t pay. They were $75,000 short. The only way to cover that check was to drain all other accounts dry. Several retail stores had their own bank account. They’d have to empty them all. All accounts payable from retail sales had to go towards payment to Nissho. They needed every cent from each factory. Still they might not be able to cover it. If they could get past this one payment, money would come in again in six months. After moving all the money around, paychecks bounced.

A local box company depended on Blue Ribbon for its survival. If Blue Ribbon went out of business, so would the box company. This presented an opportunity for some creative financing. The box company loaned Blue Ribbon $5,000 to cover payroll.

That’s when the Bank of California decided not to do business with Blue Ribbon any longer. Phil went to Nissho and told them, not only could they not pay the $1 million, they needed to borrow another $1 million. Otherwise, Blue Ribbon would be out of business that day. To that, the ice man informed Phil that he would need to examine their books. Phil was in a tough spot. Nissho wouldn’t let Blue Ribbon go out of business, right?

The next day Phil’s former bank manager called with serious news. Bank of California notified the FBI. “We had no choice,” the bank manager warned Phil, “it looks to us like fraud.”

To be continued…

I like you,

– Sean Allen Fenn

Methods of Prosperity newsletter is intended to share ideas and build relationships. To become a billionaire, one must first be conditioned to think like a billionaire. To that agenda, this newsletter studies remarkable people in history who demonstrated what to do (and what not to do). Your feedback is welcome. For more information about the author, please visit seanallenfenn.com/faq.