Nike, Inc.

An Oregon Natural Step Network Case Study

Updated January 2001
Overview
Nike, Inc. is the world's leading sports and fitness company, with 2000 sales of $9 billion. The
company has made a strong commitment to sustainability in both word and deed over the past
several years, formalizing its position in an official environmental mission and policy issued in
September 1998 that clearly commits the company to a leadership role in sustainable commerce.
The Natural Step formed the backbone of this vision. This case will cover the genesis of the Nike
path to sustainability, as well as the company's initial actions.

Background
Three core values of the company are honesty, competitiveness, and teamwork. Despite its size,
Nike operates with a minimum of hierarchy. As a result, there is a lot of collaboration and
consensus decision-making. Commonly held values are imperative in such a matrix
organization.

An environmental ethic has been implicit in the company's value system since its founding in
1972. "This company was founded largely by runners," notes Sarah Severn, director of Corporate
Responsibility Development. "Runners have a natural affinity for the environment because they
spend a lot of time outdoors. They are the first to sense changes."

The company has a tradition of honoring nature in its physical surroundings. Nike headquarters
campus in Beaverton, Oregon was built in the 1980s with considerable green space, and was
designed around resident trees. "The ethic was always there," notes Severn, "but we didn't see
early-on how it applied systematically to the business."

Like most companies in the 1970s and 1980s, Nike had treated its relationship to the
environment as primarily a compliance issue. The company integrated all environmental staff
and functions into NEAT (the Nike Environmental Action Team) in February 1993, reporting to
Head of Production, Dave Taylor. The team's mission was to develop answers to the problems
that Nike's business--and the sports industry as a whole--pose to the environment, and to
integrate the solutions into the company's business practices. This organizational realignment set
the stage for a revisioning of the company's environmental policy, led by Corporate
Responsibility Director Sarah Severn.

Introduction to The Natural Step

Severn had joined Nike in Europe during 1993 in a marketing strategy role, coming from an
advertising agency in London. She expressed a personal interest in the company's environmental
programs and was in turn asked to come to the US and help build NEAT in early 1995. Severn
had first heard of The Natural Step (TNS) framework in Europe in 1994 before moving to the
United States. She read Paul Hawken's Ecology of Commerce in August 1995 and subsequently

Copyright 2003 - Oregon Natural Step Network Nike, Inc. Page 1

took the NEAT team to see Hawken speak in Portland during October 1995. The more Severn
and her team learned of TNS framework, the more they came to see it as the essential structure
of a comprehensive plan for achieving sustainability. Aside from meeting financial goals, the
four system conditions were the 'real rules' Nike had to operate within, according to Severn.

Severn began to see her challenge as helping the senior management of Nike change its view of
the environment as a peripheral and tactical issue to a perspective where sustainability is seen as
a strategic opportunity central to the company's business. Making a case that sustainability
should be a core tenet of the company's mission proved to be an easy link; "after all, how can
you have a company that's about health and fitness and yet be degrading the environment in your
operations?" asks Severn.

External events at this time were also helping make a case for sustainability. The "walls of the
funnel" first became visible to Nike management around the company's labor issues of 1996-97.
These upheavals in the social marketplace gave it an expanded sense of its business, convincing
it that Nike had grown to be more than a narrowly focused maker of shoes and apparel. As one
of the most visible brands in the world, and the dominant player in its market, Nike was expected
to be a leader in social responsibility as well.

Getting Started
The NEAT group determined that the best place to introduce TNS framework was in the
company's product design. The group arranged a meeting between the footwear R&D group and
sustainable design architect William McDonough in April 1997. McDonough had helped design
the Nike European headquarters and had approached NEAT with his ideas on sustainable design
for its products. McDonough's assertion that "You have no idea what's in your product" hit very
close to the company's recent experience with labor activists claiming, "You have no idea how
your product is being made." "It galvanized us," recalls Severn.

Nike moved quickly to engage McDonough Braungart Design Chemistry (MBDC) to develop
with Nike a sustainable design protocol. The company began working with suppliers and MBDC
to analyze the chemical content of its shoes and their upstream and downstream effects on the
environment. The ultimate goal is to create "eco-effective products," as MBDC has termed them,
that contain only chemicals that have a place in the natural world or can be recycled back into
themselves without loss of value.

The Environmental Policy

In late 1997, NEAT began rewriting the Nike environmental policy to reflect the company's
emerging focus on sustainability. Formally approved by Nike senior management in June 1998,
the policy committed the company to the following far-reaching initiatives:

ƒ Integrate principles of sustainability into all major business decisions.

ƒ Scrutinize environmental impacts in day-to-day operations and throughout every stage of the
product life cycle.
ƒ Design and develop product, materials, and technologies according to the fundamental
principles of sustainability.

Copyright 2003 - Oregon Natural Step Network Nike, Inc. Page 2

ƒ Promote sustainable practices throughout the supply chain and seek business partnerships
with suppliers who operate in a similar manner.
ƒ Educate employees, customers, and business partners to support the goal of achieving
sustainability.

On September 9, 1998, CEO Phil Knight, President Tom Clarke, vice President of Corporate
Responsibility Maria Eitel, Nike athletes Brent Bishop and Gabrielle Reece, and Paul Hawken
introduced the policy to Nike employees at the Beaverton world headquarters. A full copy of the
policy was distributed to every Nike employee. Two thousand employees attended a morning
rally of inspirational speeches, and 1200 participated in afternoon local clean-up activities.

Employee Learning Initiatives

NEAT began educating employees in the principles of sustainability and The Natural Step as
early as 1995 and began taking advantage of the local Network workshops and breakfast
seminars in 1997. After returning from a five-day TNS US workshop in Chicago, Laila Kaiser,
with the help of SEED Systems and Nike’s design groups, developed education programs for
700 employees in product design. The Nike Product Creation Team for footwear participated in
a two-day program, and the Apparel Group, a one-and-one-half day program in February 1999

Realizing that it needed to integrate the system conditions into the fabric of the business, Nike
launched the Sustainability Initiative in 2000. The primary objective of the Sustainability
Initiative was to build internal skills and knowledge about sustainable business development
through a nine-month action-learning program for 100 of Nike's leaders worldwide. By creating
a critical mass of change agents within the organization, Nike believed it would create a force for
innovation that would surpass all previous training efforts.

The Sustainability Initiative convened participants four times over a nine-month period in off-
site retreat intensives. There were three key focus areas for these events: leadership, business
integration, and sustainability. Each team of participants was to bring a project or project idea to
which they could apply the principles presented. This approach assured that the principles would
be integrated into each participant's normal work responsibilities. At the final offsite meeting in
April of 2000, over 400 project ideas and plans were presented by the participating teams. The
resulting short-term gains in eco-efficiencies have more than paid for the cost of the meetings,
according to Corporate Responsibility Director Sarah Severn.

In addition to the specific project achievements (some of which are listed below), the effort also
produced several important qualitative results:

ƒ Built a critical mass of formal and informal leaders

ƒ Shared learning and "best practices" company-wide
ƒ Created a common language, framework, and vision for sustainable business practices
ƒ Improved employee morale, resulting in increased employee retention, job satisfaction, and
productivity
ƒ Created a base for metrics to be used in Nike's Corporate Responsibility Report
ƒ Enhanced the company’s strategic advantage through sustainable designs and innovations
ƒ Contributed to improving Nike's global image as a responsible 21st-century citizen

Copyright 2003 - Oregon Natural Step Network Nike, Inc. Page 3

Early Results
Nike has undertaken several initiatives addressing the environmental life cycle of its products:
the path a Nike shoe runs--from design to manufacturing to marketing to post consumer use--and
it's impact on living systems at each step. Toward this end, Nike announced in August 1999 that
it would phase out PVC compounds from its products. Given that this compound can comprise
up to 30 percent of a shoe, the decision was a major blow to the plastics industry and an
important step in Nike's path to sustainability.

Hazardous chemical use reduction: In an industry that has been traditionally dependent on
large amounts of petrochemical-based solvents, nine out of ten Nike shoes are now put together
using water-based cements. Extrapolating from 1998 usage figures, the company is annually
eliminating 1.3 million gallons of solvent, the equivalent of more than 30,000 barrels of oil.
Many cleaning processes that utilized similar solvents have also been successfully replaced with
aqueous solutions, and reductions in solvent usage are as dramatic. The hazardous chemical
reduction program has contributed to safer working conditions, reduced environmental impact,
and substantial cost savings for Nike factories. Estimates of overall raw-material cost savings are
about $4.5 million, and this does not include savings related to labor, storage, or shipping.

Corporate boxes: While the boxes used to package Nike shoes were already 100 percent post-
consumer recycled material made in a closed loop system, in May 1998 new machine technology
was applied in the manufacturing of all Nike corporate boxes. This includes the shoe box, skate,
eyewear, and timing boxes. These boxes are now ten percent lighter but still deliver the same
strength. This means a reduction of 4,000 tons of raw material fiber used to make Nike's boxes.
In addition, the bottom line impact is a cost saving of $1.6 million annually.

Customer catalogs: NEAT worked with Image Design to look for ways in which the paper
content of collateral material could contain a greater percentage of post-consumer recycled
material. The first successful project was the 1999 Soccer Catalog, which has 100 percent
recycled, 50-percent post-consumer, paper. The next goal is to switch all catalogs to this paper
type.

Reuse-A-Shoe: A long standing program at Nike, Reuse-A-Shoe grinds used Nike shoes into
surfaces for basketball courts, athletic tracks, artificial soccer fields, playground fall protection,
and other recycled products. This program has successfully kept more than 7.5 million post-
consumer and defective shoes out of landfills. Nike Grind is now licensed to three vendors who
will use it to build performance-oriented sport surfaces. The licensing agreement will generate
income that will enable funding of future sports surfaces projects.

Organic cotton: Nike is now incorporating three percent organic cotton into all T-shirts and
knit products produced in the United States and Europe and will expand the program to Asia in
the coming year. There is currently not enough organic cotton grown to meet all Nike's cotton
needs as well as those of other companies who rely on organic cotton. The company plans to
expand the program as supplies increase.

Copyright 2003 - Oregon Natural Step Network Nike, Inc. Page 4

Water quality: One of the largest potential environmental impacts of the textile industry is the
contamination of water from dyeing and finishing processes. Nike joined the Business for Social
Responsibility Apparel Industry Working Group and contributed to the development of water
quality guidelines for garment laundries and textile mills. These guidelines, together with
comprehensive training on how to meet the standards, have been rolled out to Nike's major
textile suppliers worldwide.

Tank top from recycled plastic: One of the first products to reflect Nike's design for the
environment efforts is a tank top for long-distance runners first showcased at the “green”
Olympic Games in Sydney, Australia. Seventy-five percent of the fabric in the top is made from
recycled plastic soda bottles. It is designed to perform better than a conventional top in keeping
runners cool, yet use 43 percent less energy in manufacturing. The shirt is left in the natural
color of the fiber (white), which totally eliminates the need for dyeing and finishing.

Lessons Learned
Nike has learned several important lessons along its road to sustainability. Perhaps the most
important one being that TNS systems conditions are most effective when translated into real
business needs and expressed in terms that make sense to the work people are doing. Many of
the project teams involved in the Sustainability Initiative in 2000 created their own tools and
design criteria which were influenced by the system conditions.

Building on this key learning, Nike is embedding the concepts and principles of sustainability
into its existing training efforts rather than to holding special Natural Step workshops. "Getting
the ideas in by stealth," as Sarah Severn describes it, not only enhances the relevance of the
concepts, but also conveys the sense that sustainability is not a special or separate issue; it is
integral to everything Nike does. It also allows an organization to "come along where people
are" and to help them apply sustainability to what's in front of them at the moment.

As with many organizations, Nike's initial efforts have been on the first three system conditions.
Nike, however, recognizes its responsibility relating to system condition four. The four system
conditions take their power from their interdependence. In recognition, Nike has recently
reorganized its corporate responsibility efforts, bringing the separate departments of Labor
Practices (which dealt largely with overseas labor issues) together with the Nike Environmental
Action Team and its environmental sustainability efforts. This will enable Nike to blend
consideration for all four system conditions into its policies and practices, taking a truly systems
approach to its sustainability efforts.

Next Steps

Having generated considerable excitement through their learning programs, Nike development
staff now find themselves busy responding to requests for assistance from teams and departments
ready to integrate sustainability into their business units. The Corporate Responsibility team is
working currently, for example, with a cross-functional leadership team from the equipment
business unit. The team is assisting them identify where the concepts of sustainability can help
them meet their product goals and save them money as well.

Copyright 2003 - Oregon Natural Step Network Nike, Inc. Page 5

With the foundation laid, Nike is also preparing to produce its first corporate responsibility
report using the Global Reporting Initiative as its framework. Nike chose GRI as the framework
because it is the standard for reporting internationally. An immediate challenge is integrating the
system conditions into this reporting structure.

The reorganization of the Corporate Responsibility departments will also enable Nike to expand
its outreach efforts with key stakeholder groups outside the organization. Its goal is to establish
dialogue with suppliers, unions, colleges, NGO's and other impacted groups to facilitate not only
its own internal efforts but to foster cooperation and support among all these groups.

Nike's challenge for the future therefore goes beyond merely reducing our impact on the
environment. The notion of sustainability must be incorporated into all our business
practices, leading the way to an economy which is ecologically sound as a whole.
Emulating natural cycles necessitates creating product life cycles that are cyclical in
nature rather than linear, create zero waste and are closed loop systems which reuse
precious natural resources. This means scrutinizing all aspects of our products and daily
operations for ways to more closely adopt a closed loop model. The future of our
business--and the future of the earth--depends upon it.
Nike Web Site

Sources

1. Interview with Sarah Severn, Director, Nike Environmental Action Team, December 2, 1998

2. Interview with Laila Kaiser, Sustainability, Learning and Communications Manager and Jill
Peterson, Sustainability, Learning and Communications Specialist, Nike, January 29, 1999

3. Interview with Sarah Severn, Director of Corporate Responsibility Development and Jill
Zanger, Business Integration and Marketing Specialist for Corporate Responsibility
Development, December 19, 2000

This case study was prepared originally in February 1999 by Brian Lanahan and updated in
January 2001 by Marsha Willard for the Oregon Natural Step Network. For more information,
visit Nike's Environmental Action web site at www.nikebiz.com or call Sarah Severn at 503-671-
6453.

Copyright 2003 - Oregon Natural Step Network Nike, Inc. Page 6