Corporate Strategy Essay: Nike Porters Five Forces Analysis

Corporate Strategy Essay: Nike Porters Five Forces Analysis

 

PORTERS FIVE FORCES ANALYSIS

 

 

 

Nike Brief History

Nike has one mission statement: To carry out the legacy of innovative thinking left by the founding members by developing products that enable athletes of all abilities to maximize their potential while beating competition and creating value for shareholders. Nikes headquarters are located in Beaverton, Oregon in Portland and the company operates in more than 160 countries all over the world with more than 30,000 employees across all six continents (Nike 2011).

Nike Today

Nike today is the largest manufacturer of athletic footwear, clothing and equipment globally by sales with 2011 revenues of more than US $23billion ahead of closest rivals Adidas, Puma, K-Swiss and Under Armour which it competes with in the sportswear market. Nike has been steadily increasing its market share of the sportswear market from an initial 3.7% in 2006 to 4.6% in 2011, even though this declined in 2009. Many analysts expect this market share to reach about 6.3% by 2017. The company also expects to make big gains from the London 2012 Olympics for its footwear division (MSN money 2012)

Figure 1: Nike Apparel Market Share

Nike apparel market shar

 

Figure 2: Nike Footwear Market Share

Nike footwear market share

 

However even though Nike is expected to attain big gains from the London 2012 Olympics, its competitors are not sitting still and letting Nike take any such gains. Adidas, which is one of main rivals of Nike, has invested more than £100million in the Olympics to not only boost its profile, but also close the market share gap with Nike. Adidas has already posted better sales and profit results in 2012 compared to Nike. In fact, Adidas, also the second largest apparel manufacturer in the world after Nike, has been outperforming Nike since 2006 (Torry 2012).

Below, we will do an industry analysis using Porters 5 Forces of Competition Framework to help us understand the various variables influencing competition and profitability for Nike within the sectors in which it is competing.

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Porter’s Five Forces of Competition Framework

According to Grant (2005), there are many features of an industry in which a company competes that determines the level of competition it will face and the profits it will get. The most famous classification was done by Michael Porter, known as Porters Five Forces framework which can help a company determine its potential profits by looking at five sources of competitive pressure. The five sources of competition are 1) competition from entrants 2) competition from substitutes 3) competition from established rivals 4) bargaining power of suppliers and 5) bargaining power of buyers.

Threat of entry/Barriers to entry

The threat of entry is highest in the apparel market due to the relatively lower costs of manufacturing apparel compared to the footwear market where the biggest threat posed is basically from current rivals already established in the market e.g Adidas and Puma, who although behind in market share, are currently implementing strategies that are helping them close the gap on Nike. Adidas has especially been gaining ground on Nike boosted by its strong presence in sponsoring the European soccer tournament where it sponsored eventual winners Spain (Torry 2012).

According to Marketing Weekly News (2012), Adidas is also planning on moving into the more fashion-aligned market of teenagers which could see it improve global market share. NEO, a fast fashion adidas sub-brand aimed at teenagers is Adidas’ attempts to enter new apparel segments that will even pit it against the likes of H&M and Zara in an effort to gain market share and squeeze more profits out of mature industries.

Another threat of entry is posed by Under Armour Inc. an established company in the athletic sportswear in the USA which in 2009 decided to enter the U.S athletic footwear market creating competition in a market which had been dominated by a few players like Nike and Adidas. Recently the US sports brand has started entering markets which have been traditionally fought over by Nike and Adidas. For example, Under Armour is using its sponsorship of Tottenham Hotspur in an "aggressive" digital marketing drive which it views as part of a wider strategy to steal market share from Nike and Adidas in the apparel category in Europe. This is the firms first foray into professional football, which have been areas where Nike and Adidas traditionally dominated and performed well in but are now having to brace for new competition from Under Armour (Sebastian 2012).

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Threat of substitutes

Substitutes in the footwear category can include any other types of shoes that consumers can choose to serve similar purposes. Substitutes here therefore include the likes of sandals, which can act as substitutes, even though they may not fulfill exact same purpose.  It is difficult to think of other substitutes that can fulfill the same purpose as athletic shoes from the footwear industry since this an industry that has something very specific to offer to a targeted market. This means that it is not meant to appeal to the general population and everybody. Thus consumers who are looking for shoes to run in will not look for boots as substitutes simply because boots are cheaper substitutes. This is due to the specialization of running shoes that makes substitutes hard to come by.

But while athletic footwear has little substitutes, sportswear apparel can have substitutes that include normal everyday clothing which can be used for athletic purposes if necessary. For example, some consumers may choose to wear tight fitting t shirts to exercise in instead of using Nikes sportswear, making normal clothing from high street brands substitutes.

Rivalry between firms (Industry structure)

Adidas:  Although Adidas is currently not able to outcompete Nike in terms of sales and market share, it has been outperforming Nike and gaining market share since 2006 while Nike has been losing market share since 1998 when it still had more than 47 percent of the market, which has been cut back to 32 percent (MSN money 2011). Adidas is also still the second biggest competitor to Nike competing for market share and has plans in the pipeline that it is trying to implement in order to grow. One of them is heavy sponsorship of football tournaments all over the globe since football has the highest fan support with more than 2billion people who follow it, with Basketball behind it with 1.2 billion followers. One such plan has been paying off when Spain, the team it sponsored at the 2012 Euro championships, won the tournament in style (Torry 2012).

Puma: Puma is another rival to Nike that has been having a bad time with financial figures not going according to expectation. Although the firm has been sponsoring some very famous names (it sponsored the Italian football team who reached the final of Euro 2012), while Usain Bolt wore the firm’s kit when he competed in the 100m at the London 2012 Olympic Games, Puma has served up a profit warning. It said that net earnings for the first quarter of 2012 were expected to be 13 percent below the 115m Euros reported during the same period last year. Puma is also expect to take a EURO 100m restructuring charge showing that the firm is doing not as well as expected so Nike has little worry from this rival. According to the Financial Times (2012), the main problem with Puma does not lie on the sporting field but in the stands. Puma's recovery over the past decade was driven mainly by its popularity with fashion-conscious youngsters. So it is not helping Puma that many youth are unemployed in the Eurozone. Puma generates more than 45 per cent of sales from Europe, the Middle East and Africa, so the fall in spending power has been hurting it badly, as does rising competition in the sports lifestyle market. The company is also hurt by its dependence on shoes, which account for about half of sales.

Under Armour: As stated previously, Under Armour has been the one company that has gained the most from any slip ups from both Nike, Adidas and Puma as it has been going strong for the last few years.

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Power of Suppliers

The footwear market is one of those industry categories where the demand is always there. Retailers have to buy whatever the big brands like Nike make whether they like it or not therefore this also means that suppliers like Nike and Adidas have a lot of power compared to other industries. One of the biggest factors that contribute to this is the fact shoes such as Nikes are made very cheaply but sold at very expensive prices making them very desirable for retailers, which gives suppliers like Nike power. It is one of reasons why Nike has always been famous for sweatshop prices (Forbes 2012)

Power of Buyers

Highly Competitive market due to market saturation and slowdown in the sales industry worldwide, buyers more intellectual, have specific wants and needs and know where to get discounts and deals. As seen with the problems in the Eurozone experiencing high rates of unemployment as seen with the problems with Puma, many consumers have more discretion to choose what to buy and what not to buy as the world economies suffer.

Conclusion

Now that we have looked at Nike and the competitive pressures it faces in the industry as it tries to make profits and stay competitive, it is upto the company to find ways around some of these pressures, fully analysing what is driving the industry in general. Michael Porter did offer some suggestions to companies trying to sustain a competitive advantage with three strategies which were focus, cost leadership or differentiation (Grant 2005). So depending on which strategy Nike chooses, it could choose to innovate better shoes by investing in R&D, focus on marketing or simply reduce prices to become the lost cost leader in its industry like Walmart.

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Bibliography

1.    Financial Times 2012, Puma, London (UK), United Kingdom, London (UK).

2.    Forbes Magazine (2012) Is Nike a Buy, Sell or Hold? Available [Online] at http://finapps.forbes.com/finapps/BuyHoldSellAnalysis.do?tkr=NKE

3.    Grant M.R (2005) Contemporary Strategy Analysis, 5th Edition, Blackwell Publishing

4.    Marketing Weekly News, 2012 Research and Markets; adidas AG in Apparel World - Latest Move Into a More Fashion-Aligned Position Could See It Improve Its Global Share", 2012, pp. 313

5.    MSN Money (2012) Olympics, global sporting events to drive Nike growth,Available [Online] at http://money.msn.com/top-stocks/post.aspx?post=97db0114-9603-4065-88b4-3bd2991ffdec

6.    Nike (2011) About Nike INC, Available [Online] at http://nikeinc.com/pages/about-nike-inc

7.    Sebastian, J. 2012, Under Armour readies 'aggressive' bid to take on Nike, Marketing Week, London, United Kingdom

8.    Torry, H. 2012, Olympics Boost Adidas Earnings, New York, N.Y., United States, New York

 

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