How a Startup Is Putting the Running Shoe Industry Back On Track Custom Case Solution & Analysis

1. Evidence Brief: Case Researcher

Financial Metrics

• Revenue Growth: On maintained a compound annual growth rate of approximately 70 percent from 2010 through 2020.
• IPO Valuation: The company went public on the New York Stock Exchange in September 2021 with an initial valuation exceeding 7.3 billion dollars.
• Gross Margins: Reported gross margins consistently stay above 50 percent, significantly higher than traditional industry averages which often hover between 40 and 45 percent.
• Marketing Spend: Investment is heavily weighted toward grassroots events and community building rather than traditional mass-media advertising.

Operational Facts

• Technology: The core product differentiator is CloudTec, a patented cushioning system consisting of hollow pods that provide horizontal and vertical cushioning.
• Product Lifecycle: Introduction of Cyclon, a fully recyclable running shoe made from over 50 percent bio-based materials (castor beans).
• Business Model: Cyclon operates on a subscription-only basis (approximately 30 dollars per month), where users must return old shoes to receive new ones.
• Manufacturing: Production is primarily outsourced to specialized partners in Vietnam, with high-tech automated production trials (Speedboard assembly) explored in Europe and the United States.
• Distribution: Multi-channel approach includes 8,000 plus retail doors globally alongside a rapidly expanding Direct-to-Consumer (DTC) digital platform.

Stakeholder Positions

• Olivier Bernhard (Co-founder): Focuses on the athlete experience and technical integrity of the CloudTec system.
• David Allemann (Co-founder): Drives brand identity and the intersection of performance and design.
• Caspar Coppetti (Co-founder): Oversees operational scaling and the strategic shift toward circularity.
• The Consumer: Primarily high-income urban professionals who value both technical performance and aesthetic versatility.

Information Gaps

• Unit Economics of Subscription: Specific churn rates and logistics costs for the Cyclon return-and-recycle loop are not detailed.
• Competitor Response: Data on the R&D spend of incumbents (Nike, Adidas) specifically targeting the hollow-sole patent space is absent.
• Sustainability Impact: The net carbon footprint reduction of the subscription model versus traditional sales, accounting for shipping emissions of returns, is not quantified.

2. Strategic Analysis: Market Strategy Consultant

Core Strategic Question

• Can On scale into a mass-market lifestyle brand to justify its 7 billion dollar valuation without eroding the technical performance exclusivity that allowed it to disrupt the industry?

Structural Analysis

Applying the Value Chain Lens reveals that On has shifted the industry's competitive basis from marketing-driven demand to R&D-driven utility. While incumbents focus on celebrity endorsements, On focuses on the mechanical engineering of the strike phase. However, Porter’s Five Forces indicates high threat from substitutes as incumbents now mimic the aesthetic of hollow-pod soles. The Jobs-to-be-Done framework shows customers hire On not just for running, but for a status-signaling transition from the office to the gym.

Strategic Options

Preliminary Recommendation

On must pursue Circular Economy Leadership. The subscription model creates a recurring revenue stream that decouples growth from raw material consumption. It builds a defensive moat that is harder for Nike or Adidas to replicate due to their reliance on traditional retail wholesale volume. This path preserves premium positioning while addressing the existential regulatory risks facing the footwear industry regarding waste.

3. Implementation Roadmap: Operations Specialist

Critical Path

The transition to a circular model requires three immediate workstreams:

• Reverse Logistics Infrastructure (Months 1-6): Establish regional collection hubs to aggregate returned Cyclon products. Partner with specialized chemical recyclers to process PA11 polymers back into raw pellets.
• Subscription Management Engine (Months 1-4): Build a digital platform capable of tracking individual shoe mileage to trigger replacement shipments before performance degradation occurs.
• Material Science Scaling (Months 6-12): Transition the Speedboard and upper components of all non-Cyclon models to the same mono-material family to simplify future recycling.

Key Constraints

• Recycling Yield: The current technology for separating adhesives from bio-polymers is inefficient. If yield stays below 80 percent, the circularity claim becomes a marketing expense rather than a cost-saving measure.
• Global Regulatory Variance: Moving used footwear across borders for recycling is often classified as waste transport, which is highly regulated and slow.

Risk-Adjusted Implementation Strategy

The plan assumes a 15 percent subscription churn. To mitigate this, On should implement a Tiered Loyalty Circularity program. Instead of an all-or-nothing subscription, allow traditional buyers to trade in old shoes for a credit toward the next pair. This builds the recycling habit in the consumer base without the friction of a monthly commitment.

4. Executive Review: Senior Partner

BLUF

On must pivot immediately to a circular, subscription-first model. The current growth trajectory, while impressive, relies on a technical differentiator (CloudTec) that is increasingly easy to commoditize. By owning the entire product lifecycle through the Cyclon initiative, On transforms from a shoe manufacturer into a performance-service company. This shift secures customer lifetime value and creates a structural barrier to entry that incumbents, locked in traditional wholesale incentives, cannot easily match. Success requires prioritizing logistics over aesthetics.

Dangerous Assumption

The analysis assumes that the high-income urban demographic is willing to rent their footwear indefinitely. There is a significant risk that the psychological benefit of ownership outweighs the convenience of a subscription, especially in the premium segment where products are often viewed as personal investments.

Unaddressed Risks

• Supply Chain Concentration: Relying on castor-bean derived PA11 creates a single point of failure. A crop failure or geopolitical instability in key growing regions would halt the entire Cyclon line. (Probability: Medium; Consequence: High).
• Counterfeit Erosion: As On moves into the lifestyle space, the brand becomes a target for high-quality counterfeits. If the visual identity is decoupled from the technical performance pods, the brand value will collapse. (Probability: High; Consequence: High).

Unconsidered Alternative

The team failed to consider a B2B Corporate Wellness play. On could partner with global insurance providers or large corporations to provide the subscription shoe as part of a subsidized health benefit. This would provide massive, low-acquisition-cost volume and cement the brand as a health-essential rather than a fashion-choice.

Verdict

APPROVED FOR LEADERSHIP REVIEW