Sole Survivor

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Davis, who played football at Middlebury College, concedes that he could probably make more money by shipping all his production overseas. He has increased his domestic payroll by 65% since 1995, adding some 500 blue collar jobs, but the percentage of New Balance shoes assembled in the U.S. has fallen by half as Davis has ramped up production in Asia and at a plant in England to keep up with sales.

At the same time, New Balance has proved that it's possible to manufacture in the U.S. and compete. The company's plant in Brighton, Mass., for instance, features robotics and a high-tech molding process that can produce an outsole in 12 seconds — allowing New Balance to make a sneaker from scratch and fill orders rapidly as they come in. Another advantage Davis sees: better relationships with retailers. New Balance's domestic factories play a key role in filling special orders for hard-to-find sizes and widths and give the company more flexibility to help out independent retailers — a lucrative niche. The firm has a reputation "as the easiest company to do business with," according to the trade publication Sporting Goods Investor. As for the wage gap, Davis says it's overblown. All his U.S. plants are highly automated, with bar-coded parts and computerized stitching and embroidery machines, resulting in about 25 minutes of manual labor to produce a pair of shoes versus more than four hours in a less automated Asian plant.

To make his operations more efficient, Davis is borrowing a page from Toyota. Last summer, managers re-engineered a factory in Norridgewock, Maine, following Toyota's famously flexible production system. Isolated departments for cutting, stitching and embroidery were replaced by cells of workers clustered in a line, saving 40% of floor space. Smaller batches of sneakers are now assembled rapidly, down the line, and if anyone identifies a faulty stitch, for instance, the problem is fixed before a large batch of defective shoes can pile up. Factory workers, who aren't unionized, are encouraged to point out mistakes, and they help one another finish jobs instead of standing around. Overall, the changes have cut the production cycle from eight days to eight hours, slashing inventories and yielding big savings.

None of this will matter, of course, if Davis can't sell a hot product. New Balance sneakers are still basically known for their technical aspects, comfort, stability — and dowdiness. One model, the 991, has barely changed styles since its launch in 1981. New Balance calls it a "heritage" shoe, which means middle-aged joggers still like it. Recent models such as the 900 running shoe have more color pop, and Davis is trying to lure young shoppers with a marketing program aimed at high school teams and Division III college athletes Nike hasn't picked off. "If we hit on fashion, that's fine," he says. "But our shoes are really designed to run up hills."

Ultimately, keeping the company in the family is the key to Davis' plan. Davis wants to maintain as much of his operations as close to his New England home as possible, and without Wall Street pressure to eke out maximum profits, he can invest where he pleases and patiently wait for the returns. His wife Anne sits next door to him at work, running the human-resources department, and most of his senior executives have been with him for a decade or longer. Turnover rate at his plants: just 5%. Innovation, meet tradition.