Phil Knight, former chair and CEO of Nike, tells the story of starting the sports apparel and equipment giant after taking an entrepreneurship class at Stanford and teaming up with his former track coach, Bill Bowerman. Together (and with the help of a waffle iron) they changed how running shoes are designed and made. Knight discusses the company’s enduring culture of innovation, as well as the succession process that led to former runner and Nike insider Mark Parker becoming CEO.

SARAH GREEN CARMICHAEL: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Sarah Green Carmichael.

Every company has an origin story – some enduring narrative that informs the company’s culture. For Nike, it’s the one about the waffle iron.

One morning, co-founder Bill Bowerman had waffles for breakfast. He started looking at their blocky texture, and realized the same shape would give a running shoe better traction. He used his own waffle iron and some rubber to create a prototype. It ruined the waffle iron, but everything else worked out pretty well.

Today, that waffle iron is at company headquarters, and the sports apparel and equipment maker has more than seventy thousand employees and brings in tens of billions of dollars in annual revenue.

Given that company narrative, it shouldn’t surprise you to learn that current CEO Mark Parker started out at Nike as a shoe designer.

Nike’s long, successful race from startup to global enterprise is chronicled in the recent book, Shoe Dog. The other company co-founder, Phil Knight, wrote it. HBR senior editor Dan McGinn talked with Knight about partnering with Bowerman, his former track coach, to launch the company.

PHIL KNIGHT: The shoe is the one piece of equipment that really matters to a runner. There’s no ball involved, there’s no racket, there’s no helmet. Bowerman was obsessed with it, that he believed, you know, an ounce in a pair of shoes was the same as a thousand pounds in the last five yards of a 1,500 meter [race]. So, he was obsessed with it and it got me quite interested in it.

DAN MCGINN: Sounds like as far back as the 1950s, he was sort of tinkering and experimenting with all kinds of weird shoes. You had to wear some of these, as one of his runners?

PHIL KNIGHT: Yes, in about my senior year, he had begun to believe that shoes should be lighter than the shoes that were coming in from Adidas and Puma, the two main suppliers in running. And so he began to, you know, make some shoes in his home workshop and he didn’t want to try them out on his Olympic athletes, he tried them out on me and so it got me quite focused on the shoes.

DAN MCGINN: What was the weirdest pair of shoes he ever had you wear?

PHIL KNIGHT: Well, it was probably a pair of goat-skin shoes with a very thin plate, that you could feel the spikes through the thin plate, but it was very lightweight and it was very odd-looking, but it was light and it worked OK.

DAN MCGINN: Some of this must have cost you some time, I would think, in races. Did it —was there ever tension in the fact that he’s making you wear these things and it might be hurting your performance?

PHIL KNIGHT: He had me convinced it wasn’t hurting my performance and that came home to register very strongly when Otis Davis won the conference championship wearing a pair Bowerman’s homemade shoes. And he began to believe in them.

DAN MCGINN: Now your fascination with shoes and the idea that there might be a business there, that’s something you thought about at Stanford during business school?

PHIL KNIGHT: That’s right, that I took a class in entrepreneurship and took the running shoe idea with the thought that: why are shoes, why are the quality of running shoes made in Germany? That’s not a place to make shoes, and why aren’t they made in Japan which was, you know, very much more economic as far as the stitching which is the most expensive part of a shoe. So I used that as sort of the thesis of the paper and the professor liked it and that’s the way it began.

DAN MCGINN: And it seems like when you began, the idea was mostly about importing as opposed to putting your own design ideas into it. Is that true?

PHIL KNIGHT: Yeah, it was, yes, it was mainly focused on economics and manufacturing.

DAN MCGINN: So after Stanford, you went on a, sort of a whirlwind tour and ended up talking sneakers in Japan. How did that come about?

PHIL KNIGHT: Well, I had written the paper, the Japanese ought to be able to make inroads into the German shoe market just as the Japanese had made inroads into the camera market. I picked out a sequence of factories that I was going to call on. And the first one was Onitsuka Company Limited in Kobe, and I called on them and got a great response, and I ordered some samples, and away we go.

DAN MCGINN: So eventually you sent a couple of them to your old coach. He was one of the first people you shared them with. Why did you do that?

PHIL KNIGHT: Well, obviously, he was by that time really recognized as one of the best distance coaches in the world. And so I thought if I could get him to approve the shoes, to buy a few pair of shoes, that would be ultimate endorsement and that, see if I can get Bowerman to buy a few pair.

DAN MCGINN: So celebrity endorsements had become, you know, a driving factor in athletic shoes and athletic gear of all sorts. You didn’t really think of him as more than that at the beginning, this was just about getting him to sign on and say these were the right kind of shoes?

PHIL KNIGHT: Well, the endorsements, they were already out there long before I ever got in the game, but I thought of it more as basically an approval of the quality of the product more than the endorsement. Endorsement, I was more interested and then if we get Bowerman to sign off on it, could we ever get Burleson to wear a pair. That’s kind of the way I thought about it.

DAN MCGINN: How did it evolve to be an actual deal, like a partnership?

PHIL KNIGHT: Well, when I sent the shoes down to him, he said, let’s get together for lunch and I said, by all means, and went to lunch still hoping that I’d get an order.

DAN MCGINN: And it turned out to be more than that?

PHIL KNIGHT: Much more than that, he said, how about letting your old coach in on this which pretty near floored me, but I thought about it for about 30 seconds and I said, what better partner to have?

DAN MCGINN: So there’s no downside to this, in your mind.

PHIL KNIGHT: No, absolutely not.

DAN MCGINN: Of the various ideas he had when the shoes were still coming over from Japan, what were the most important things he added to the design and the innovation?

PHIL KNIGHT: Well, in the early years, the factory had what they called the high-jump shoe which had a unique cushion in it. It was, they called it the spring-up which gave the, it was supposed to give the jumper more spring. It was, it really didn’t do much of that but when we looked at it, he said, you know, that is an innovation for a running shoe to give a layer of cushion between the outer sole and the upper. And so, he tore it apart and rebuilt it as a running shoe and sent it off and said, make it like this, and that’s the shoe we call the Cortez, it was really kind of the first major breakthrough in running shoes in 50 years. And it’s still an important shoe in the line.

DAN MCGINN: And much of the idea for it came from him?

PHIL KNIGHT: Basically all of it.

DAN MCGINN: Where did the waffle iron come into play?

PHIL KNIGHT: Almost 10 years later, we were a distributor for Tiger Shoes and then we sold it for online Nike after we had a breakup with the original manufacturer. And he had come up, he had done some other innovative things with Tiger including, you know, picking a nylon for the upper rather than just the leather. And so we said what we really need in this new company, in this new brand is really another breakthrough in shoes, something good. So we had a meeting up in Portland, Bob Woodell and I and Bill Bowerman, and that we said, you know, there hasn’t been an outer-sole innovation. We had a mid-sole innovation but we never had an outer-sole innovation in running shoes, forever. And so driving home to Eugene, he got to thinking about it and he couldn’t come up with anything, but, and his wife had waffles the next day he said: maybe.

DAN MCGINN: And it worked.

PHIL KNIGHT: Ultimately it worked, the original waffle iron, which is now in a trophy case here, stuck because he didn’t have a catalyst in it and he couldn’t release the, and it got stuck and his wife was really mad because it cost her $12.95 to get a new waffle iron.

DAN MCGINN: In the sixties and then the seventies you faced a ton of financial issues, you were constantly dealing with banks that wouldn’t lend you money. You had very complex negotiations and even lawsuits with Japanese suppliers. How involved was Bowerman with those aspects of the company?

PHIL KNIGHT: He wasn’t personally involved, but he was quite aware of it and he was always there for support. He was obviously in the major lawsuit against Onitsuka. He was a key witness. He was always totally supportive and always fully informed, but I was the one getting us into trouble.

DAN MCGINN: What did you two disagree on?

PHIL KNIGHT: Oh, almost nothing. He basically left the day to day and the operations to me, so I didn’t have any trouble with him that way, and so his role was mostly to work on innovation. And he was good at it and I was quite happy with that arrangement.

DAN MCGINN: So by the mid-1970s, the company was now Nike and you’d built a facility up in New Hampshire. So that’s where Mark Parker was first hired into the company. Tell me about the first recollection of him you have.

PHIL KNIGHT: Well, he’s a, he was very likeable that, you know, and we were always looking for promising young talent. Ultimately the company is going to be what its people are, and he was completely dedicated to getting better shoes and, and we were glad to have him on board.

DAN MCGINN: How important was it that he’d been a collegiate runner?

PHIL KNIGHT: Very, I think in the early days almost all the employees were ex-runners or still runners or hoped for to be even better runners, but they all had a touch of that. And I think that what made them so absolutely dedicated to building a better shoe because they knew how important it was.

DAN MCGINN: Some businesses think that a good businessperson can work in any company. You think of Procter and Gamble, where it doesn’t matter if you’re marketing cake batter one day or potato chips the next day, the theory is you don’t need to have any particular passion for the product. Do you disagree with that?

PHIL KNIGHT: Pretty much. You know, I do believe there is such a thing as a good general manager that can go across industries and categories. But for the most part, I think you really have to have a passion for the business you’re in. I consider myself a pretty good businessman, but I’d get fired at Microsoft.

DAN MCGINN: You just don’t get interested in the technology?

PHIL KNIGHT: I, it’s completely above me.

DAN MCGINN: Now obviously they were on different coasts in those early years, but did Bowerman and Parker develop much of a relationship in the early days?

PHIL KNIGHT: When you’re presenting shoes to Bowerman, there was always a certain amount of tension in the air. And Bowerman’s attitude was that Nike makes the worst shoes in the world except for everybody else’s. And so they could always be better, so it was never really kind of good enough and so it was always the student presenting to the professor sort of relationship even for me.

DAN MCGINN: That sounds like it must’ve been frustrating.

PHIL KNIGHT: It was for some people, that’s a true statement. It was not for Mark Parker and it was not for me.

DAN MCGINN: Do you recall a moment when you first said to yourself: gosh, this guy might be more than a designer, he could have the potential to be more broadly involved with running the business?

PHIL KNIGHT: Yeah, I don’t remember the exact time but he came back with some shoe ideas and it was quite clear that he was thinking broader, more broadly than just in terms of the shoe. He was also thinking of the marketing aspects and the general management aspects of it, and he said this could be a rising superstar.

DAN MCGINN: You know, your own background, having an MBA, having spent years as an accountant, you have sort of a very foundation grounding in business, was it a concern that: hey, this guy’s a designer, he doesn’t have that kind of business training, maybe there is a limit to how much responsibility he could assume.

PHIL KNIGHT: It wasn’t a concern but it was the way we thought of them originally. That’s absolutely a fair assessment of how he was looked at in his early stardom, I guess. He was on his way up but we thought it was sort of, there were sort of a limitation that could be head of design or something like that. And it was only after we got to know him a little bit, hey, this guy’s half businessman, half designer. Those combinations are few and far between.

DAN MCGINN: So it sounds like it was a process where you sort of recognized a natural talent that you didn’t know he had, but was there any sort of cultivation or training, or did you do anything intentional to try to develop that side of him?

PHIL KNIGHT: Well, our training program was: we got a problem, go fix it. We were growing really fast in those early days. And we had, really, demands for people that kind of outran what we saw as our capability so we were always pushing people beyond their limits. And so we didn’t really have a training program per se, but we had to throw him into general management problems and general management responsibility and he always handled them well. So that was basically his training program. It was, you know, on-the-job training by crisis.

DAN MCGINN: Now I want to jump back to Bowerman. He died in 1999. Was he active in Nike right up until his death?

PHIL KNIGHT: He had backed off quite a bit about I would say about three or four years before that. He would literally, six months before he died, he came out and we had an all-hands meeting where all the company employees got together and we had an interview with Bowerman on stage. So he was still involved, absolutely. And he seemed to be in good shape, and he seemed to enjoy the meeting. He always had this sort of quirky sense of humor, and he got a few of those jokes in and told about his role in the company and what he saw in the future. And gave us a blast on how bad our shoes were and it was sort of typical Bowerman that everybody enjoyed.

DAN MCGINN: So even in 1999 he though Nike Shoes were terrible.

PHIL KNIGHT: Absolutely.

DAN MCGINN: By 1999 when Bowerman died, you’d been running the company that was now Nike for 37-38 years or so, pushing close to 40. At what point in all of this did you start to think about succession and a time when you might not be the CEO?

PHIL KNIGHT: We’ve always, since we’ve been a public company, we’ve always had what I considered a really good board of directors so that they’ve always pushed me on succession plan, what would happen if something happened to you, etc., etc. I really didn’t really start thinking about it till I was right around 65 years old, and it wasn’t the number after my age but it was the fact that I was beginning to lose energy. And that I thought the company really needed, you know, a more active CEO than what I was able to give and that’s when I began to think about it seriously.

DAN MCGINN: So your first move at succession was with Bill Perez from Rigley, in 2004. Tell me about that.

KNIGHT: Well, we thought the company would benefit from a look from the outside. Whatever my idiosyncrasies were, the company worked around them and didn’t even know they were idiosyncrasies anymore. And we thought that we could benefit from somebody from the outside. So we interviewed several high-profile people and ultimately picked Bill Perez.

DAN MCGINN: What happened.

PHIL KNIGHT: It didn’t work, it didn’t work. Bill Perez and I had had long talks and one of the things that I warned about is that Nike is a unique culture. And it’s not for everybody and some people adapt to that culture and some people don’t. And he didn’t.

DAN MCGINN: You know, we talked earlier about whether somebody really needs to love athletic footwear to succeed at a company like Nike. Was that part of the issue, that he came from outside the industry and, you know, doesn’t—doesn’t seem any evidence that he particularly likes sneakers?

PHIL KNIGHT: That was something that didn’t help. Yes, I think that’s true, but I do think over and apart that Nike is a unique culture, and that he really, it was so different from his culture. When we’re working really well, that it’s a very collaborative atmosphere, a very kind of team-oriented like from the athletic field. He was more used to strict boundaries between positions, and strict responsibility for that little box on the organization chart. And that was just different on who we were, and we didn’t want to be like that other company.

DAN MCGINN: So how did Bill come to leave the job and what was the process that led to Mark becoming CEO?

PHIL KNIGHT: Well, I made the decision that this was not working and was not going to work and if allowed to continue for another six months, it was going to be detrimental. So I recommended to the board that we make a change, that we terminate Bill Perez and put Mark Parker in the CEO’s job.

DAN MCGINN: Did you resolve to be more hands-on in this period than you might have been, did you think that instead of a chairman who shows up every once in a while that you needed to be a more active chairman in those first years?

PHIL KNIGHT: Kind of just the reverse. With Mark, I had a few meetings and realized that we were sort of on the same wavelength and could kind of, after all these years together, finish each other’s sentences. So I didn’t have to meet with him very often.

DAN MCGINN: I read somewhere that it’s not unusual for you to go a month without talking to Parker, that seems really extraordinary for a founder chairman to go a month without talking to the CEO of the company. How do you manage that and why do you do that?

PHIL KNIGHT: There may have been a time or two when it’s been a month, but I talk to him whenever I want or he calls me at the same time. So I don’t know. There isn’t such a thing as a regular scheduled meeting. There wasn’t back 10 years ago, and there isn’t now. It’s just kind of as necessary and, I wander, I walk around the company with access to anybody I want. So I know what’s going on.

DAN MCGINN: When you look at Parker’s track record as the CEO, from a financial standpoint it’s been fairly extraordinary, from a brand, strength of brand standpoint it’s been extraordinary. At the same time, he’s noted for being able to admit a mistake when he makes one, whether it’s an acquisition that doesn’t work out, whether it’s the foray into golf that you’ve undone. What is it like when he tells you that a project that Nike has spent, in some cases, probably billions of dollars on, was a mistake and he’s going to undo it. How do you respond to that?

PHIL KNIGHT: Favorably. There’s no such thing as a perfect manager and nobody bats a thousand, and that one of the real nice things about him and what I like to think is the culture of the company, it’s open and honest. As a general rule, not just Mark Parker, but anybody in the company, you don’t get in trouble for making mistakes. You get in trouble for covering up mistakes. So I’m quite comfortable with that process.

DAN MCGINN: Mark is now in his sixties, you’re, I think, in your late seventies. Is it hard for two gentlemen of your age to run a brand that’s so youth-oriented?

PHIL KNIGHT: Better not be. As I’ve said, Nike is young and irreverent and I’m neither, but we both have a lot of respect for the consumer, and I think we know who he or she is and we better have that consumer in mind at all times. And I think we have, I think the average age of an employee at Nike is still right around 30 years. So I think we’re OK there.

DAN MCGINN: Do you continue to believe that the Nike culture is so unique that the next CEO has to be coming from inside?

PHIL KNIGHT: I think the next CEO from Nike will come from the inside.

DAN MCGINN: As you think back on the way your products have evolved over 40, 50 years now, what do you think Bill Bowerman would say if he saw a self-lacing pair of shoes that cost $720?

PHIL KNIGHT: First thing he’d say is “humpf, a gimmick,” and then he’d pick them up and look at them and try them on and say, “hmm, I want to take these home and think about them.” And he’d come back with an improvement.

DAN MCGINN: Do you think he’d still hate Nikes and say they’re terrible?

PHIL KNIGHT: I didn’t say he hated Nike, I just said he thought they were the worst shoes in the world except for everybody else’s, and I think he’d still think the same, yes.

DAN MCGINN: Good. Thank you for the time.

PHIL KNIGHT: Thank you.

SARAH GREEN CARMICHAEL: That’s Phil Knight. He’s the co-founder and chairman emeritus of Nike, and the author of the book Shoe Dog. He was interviewed by HBR senior editor Dan McGinn.

You can follow HBR on Twitter @HarvardBiz, and also connect with us on Facebook, LinkedIn, and Instagram.

Thanks for listening to the HBR IdeaCast. I’m Sarah Green Carmichael.