Nike Business Growth Analysis by Porter Five Forces - Case study

Does your business pass the porter’s five forces framework business analysis?

Porter’s five forces is a business analysis model that helps reasoning out the about various industries sustaining different levels of profitability.

The five forces are Competition, Potential of new entrants, Suppliers, Customers and finally substitute produsts.

That's awesome.

Today we will see how to analyse your business industry with the example of global sportswear industry with the five forces.

So, let’s get started, the sportswear industry is a mature market that shows no signs of decline.

People need clothing and love wearing sports apparel in their free time both outside and at home.

In the last few years, the industry has experienced a steady growth and the total market is expected to reach 180 billion dollars by 2020 globalization economic growth.

Favorable fashion and style trends play a positive role for the current growth the market is experiencing.

So, if we have to imagine the industry life cycle graph, we saw earlier that the industry is in this phase right here where the market is still increasing but the companies in it are profitable and generate stable cash flows.

The pie is still growing and most companies are happy right.

Let's take off our rosy glasses now and look at the first force that is competitive environment in the sportswear industry.

These are the companies competing in the industry.

There are a few names recognizable at a global level Nike, Adidas, Asics, and Under Armour.

Puma and Lululemon are some of the bigger firms out there.

Nike and Adidas owned several other notable brands that you've probably heard of.

Nike owns converse while adidas owns the Reebok brand.

There are probably thousands of other smaller firms competing at a local level proof that the industry is not concentrated.

In its concentration ratio, previously, we saw that a concentration ratio of the first four players in an industry of over eighty percent means the industry is highly concentrated well.

This is not the case for the sportswear market.

The combined share of the top four players in this chart accounts for 38% of the total industry turnover.

The two global Giants in this industry are Nike and Adidas with a market share of twenty point one and twelve point four percent respectively.

Asics and Under Armour complete the top four list but have a significantly lower amount of sales 2.7 percent and 2.6 percent of the total market.

The fragmentation of this market and the presence of a few global Giants mean the other competitors can compete with established global brands at a local level only as with any mature market.

Brand names and marketing efforts play an important role here.

And smaller companies cannot keep up with the level of investments Nike and Adidas can afford.

There isn't a price for in the industry as the two top players offer differentiated products sold at a premium compared to the goods sold by local producers.

The driving force in this competition is brand recognition and quality perception.

The second force that is threat of new entrants is relatively low.

A new competitor isn't likely to intimidate established players Nike and Adidas.

Asics and Under Armour have invested billions of dollars in marketing communication.

Their brands are global therefore a new entrant with significant ambitions must spend a lot of money to compete in the market.

In addition, the new company must invest in human capital in terms of designer team's production personnel and other employees who have the necessary know-how for the creation of sports apparel sold worldwide.

Not an easy task, right so the barriers to entry are significant if we consider the global market.

However, new companies will have a much easier task if they want to compete at a local level local competition which requires a limited amount of resources.

And usually it is much easier to access existing distribution channels at a local level.

If a company aspires to be a global player, perhaps the way to do it is by entering a smaller niche of the market.

This requires a smaller investment and allows targeting a specific need of customers.

But it makes sense from a strategic perspective - right do not try to be similar like a large and establish companies because this is too difficult to organize and finance.

Instead as a new competitor target a particular market segment of customers and try to win significant market share there. ok great

 Alternative or substitute products, are they a big threat to the sportswear industry?

Let us now check about substitute product and it’s potential in the sportswear industry.

Yes, there will always be demand for casual sportswear attire.

However, changing customer tastes and styles may influence this demand in a negative way.

Sportswear is trendy who knows if 10 years from now this will continue to be the case.

Obviously, other clothing items are a valid substitute for sportswear clothing but for now there isn't significant pressure coming up from this force right the remaining two forces.

 We must now examine are the bargaining power of suppliers and buyers.

Let's start with suppliers the main raw materials purchased by sportswear producers which are mainly cotton.

Other types of fabric are ethylene synthetic materials and rubber.

Larger companies like Nike and Adidas can obtain cheaper prices from suppliers which translates into a better cost structure compared to other similar businesses.

So, smaller companies may have a harder time sourcing raw materials at a price that is competitive one way to circumvent.

This issue can be solved by using alternative fabrics which means also coming up with an innovative product.

The number of suppliers in the industry is relatively high.

Therefore, we can conclude this force isn't creating too much pressure for companies operating in the industry.

Now, what about the bargaining power of customers?

Given this is a business to consumers market where end customers are millions of people.

We can say customers cannot negotiate prices.

However, it is also true that there are thousands of firms operating in the market.

 Customers know they have plenty of choice, so right now the brands establishes global players have differentiated their products to create products of high quality and invest heavily in brand recognition.

This is a market in which the connection between sports fans and sports stars is strong.

Recently Nike signed a 500 million dollar lifetime contract with LeBron James.

Okay, so in summary we can say the sportswear industry looks very good at

the moment.

Established brands like Nike and Adidas do not face too much competition in a global level.

They have a good relationship with both suppliers and clients and are not threatened by substitute products and new entrants in the near term.

This will do for now as we provided a holistic analysis of the sportswear industry.

This is how we apply Porter's five forces framework in practice. an awesome exercise wasn't it

Apply this porter five forces In your industry and check out how your business can grow from it.