Porters five competitive forces model helps in accessing where the power lies in a business situation which also known as the framework for industry analysis and business strategy development. Porter’s Model is actually a business strategy tool that helps in analyzing the attractiveness in an industry structure. Attractiveness in this context refers to the overall industry profitability. For an unattractive industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching pure competition, in which available profits for all firms are driven to normal profit. It also access to the current strength of the company competitive position and the strength of the position that the company are planning to attain.
Besides, Porters Model is also considered to be an important part of planning, where the company should be vibrant about where the power of the company lies, and take full advantage of their strengths and improve the weaknesses so that it can compete with other competitor in a more efficient and effective way. Three of Porter’s five forces refer to competition from external source, and the remaining factors are considered as internal threats of the company. All of these forces are being referred to the micro environment of the company as it was used to contrast it with the more general term of the macro environment that also involve other forces of a company that mark its capability to serve its customers and gain income.
An overall changes in any of the forces in the in industry information requires a business unit to re-assess the given marketplace. The overall industry attractiveness does not indicate that every firm in the industry will return the same profitability. As an industry profitability is low and yet individual companies, by applying exclusive business models, have been known to make a return in the industry average. Porter’s five forces include threat of substitute products, the threat of established rivals, and the threat of new entrants; and two forces which are the bargaining power of suppliers and the bargaining power of customers. For this assignment, Nike are chosen to be the subject company as our group will analysis this company and discuss about the impact of Porter’s Five Competitive Forces model on Nike company.
For the first force of Nike company- the internal rivalry is high. The meaning of internal rivalry is the measures the degree of competition between existing firms. The higher the degree of rivalry the more difficult it is for existing firms to generate high profits. Rivalry are told to be higher if there are a humongous amount of similar sized firms rather than a few dominant firms are all contending with each other for customers, and also the market is shrinking so firms are struggling for their share of the deteriorating sales. Based on the above factor, competition is targeted towards attaining more market share. Therefore, Nike introduced products at abundant price levels in order to compete and reach all areas of the market because if they fail to do so, their market share will be easily taken over by their competitors.
In this case, there are only a few companies who are able to compete in all of the sectors: Nike, Adidas-Reebok, and New Balance and all of these companies are found throughout the globe. Smaller firms will target different type of sub-markets by emphasizing on producing specific type of shoes. Rivalry among the big companies such as Nike is ferocious; this is because they cannot compete on price, they need to turn their direction into differentiating their product through a constant innovation and also continuous efforts in strengthening their brands.
In order to stay ahead in the competitive market and have presence in all sectors, many mergers and acquisitions, i.e. Adidas and Reebok, are taking place and the market is going towards merging. As a result, maintaining a single brand image for companies like Nike becomes really a tough task and because of this factor, Nike faced a downfall in the sales of its product and loosing most of its market share to its competitors. Besides that, the above factors also push Nike to lower its product’s price as the company struggles to maintain its sales and loyal customers. Many competitors like Adidas and Puma are developing alternative brands to take away NIKE’s market share. They compete with Nike in many sectors such as the product design, quality, technology, advertising and even competitive price. In order to become customers’ first choice of brand, Nike invested heavily on Research and Development to offer more innovated products and services to its customers.
The second force that our group going to discuss will be the bargaining power of the buyer which is relatively high for Nike Company. The meaning of the bargaining power of buyer will be the ability of customers to put the company under pressure, which also affects the customer’s sensitivity to price changes. Buyer power will increase if the buyers can switch to other providers without any difficulties, and causing the company to provide a higher quality service at a good price in order to retained the customers.
As for Nike, the buyers for this industry are dealers and end users. In U.S, the footwear dealers i.e. Footlocker, Wal-Mart, ranges in size while in Malaysia, many new dealers are entering the market nowadays, such as “Al Ikhsan” and vendors that open their own stores. Due to the factor of deficient concentration among buyers, it brings down the margins and also giving the power to the vendors which caused dealers loosing their power. Therefore, the big footwear manufacturers generally order the price of their shoes. Moreover, this merging also involves transferring some of the power from the big companies because in order to be industry leaders, they will need these well-recognized dealers as well.
Growing margins suggested that buyer power has been increasing the end user of the industry and they have unlimited power. Since the bargaining power of buyer is relatively high in footwear industry, every company is struggling for the trustworthiness of the end user through constant innovations and brand management including Nike. However, if the user is unhappy, they can effortlessly switch the brand to another one. As the price for a Nike product is relatively high compared to other brands and the customers are highly price sensitive, it forced Nike Company to lower the price of their newly released products to improve the sales and producing new products that are higher in quality (Grant 2010) than other competitor can offer. Furthermore, Nike also organized a lot of promotion such as year-end stock clearance in order to retain and attract customers.
Next, the third force would be the threat of new entrance which considered low or moderate for Nike Company. The definition of this force will be explained as the possibility of any new company that may enter the market and affects the competition within. Theoretically vise, any market should be able to enter and exit a market and profit should be nominal, but in reality, company retain the characteristic that protect the high profit levels of company in the market and restrict competitors from entering which also known as barriers to entry. The probability of entering a market would be lower if the existing brands have a high level of customer loyalty and the existing company may react aggressively to any new entrant such as having a price war. Besides that, the existing company could have a good control of the supplies.
As for Nike Company, since footwear industry is quite new and considered unexplored, every big company in the world is looking forward to enter into this market. The market now is less sophisticated and customers will get satisfied with basic level products. Hence, less capital is needed to produce basic level goods. Since there is no major brand following, it is not capital intensive for a new entrant to enter into a regional market. Even though companies can have a low cost in production, the marketing and other expenses grew higher and they are competing with smaller companies here unlike in developed countries. As a result, overall threat of a new entrant is considered moderate or low.
As mentioned, Nike is a globally recognized brand and has a large population of loyal customers. Even though Nike target on producing sports products, the company not only attracts the athlete but also non-athlete as well due to striking product designs. One of the reasons why Nike was so successful in popularizing its products is because Nike Company used sports celebrities as their spokesperson therefore reducing the numbers of new company that might threaten them. As the influence of this force is relatively low, it doesn’t bring much impact to Nike’s company. Hence, Nike only focused on hiring sports celebrities to boost up customer’s confidence towards their product and trying to build a better product image by ensuring that all products produced are in high quality. Nike Company bought in superior production facilities to reduce the possibility of producing defective products.
The fourth Porter’s force that our group analyzed is the threat of substitute. For Nike Company, the threat of substitute is low. This force measures the ease with which buyers can switch to another supplier/company that offer the similar product. The ease of switching depends on what costs would be involved and how similar customers see the alternatives to be. Substitute products are produced in a different industry but able to satisfy the same customers’ needs. If there are many reliable substitutes to a company’s product, they will limit the price that can be charged and hence reduce their profits.
Since the threat of substitute is low for Nike Company, theoretically vise there are some substitutes for athletic products. However, since all of the companies including Nike have their unique functions firstly in the sports industry, other types of clothing could also be seen as a substitute in terms of building image and style. Secondly, in the same product category, other types of shoes are also substitutes, such as slippers, heels, boots, flip-flops, etc. Even though sneakers are still the most popular type of footwear in the world, there is substantial threat coming from the number of other types of shoes. For instance, Lifestyle athletic shoes sales are growing at the fastest annual rate and Puma is undeniably the leader of this segment with more than 50% sales growth.
However, all of these can’t be used to substitute sports products or any sporty events. For example, a footballer will not wear a slipper in a match. Therefore there are no real substitutes for athletic shoes and this also applies to the athletic outfits. Since the threat of substitute product is low for Nike, it does not have any major impact on the company. However, in order to reduce the possibility of losing any potential customers, Nike come out with new innovated products to keep its market leadership up. Since everyone is chasing for new trends nowadays, an obsolete product is incompetent to increase the sales. Therefore, coming out new innovated products will assist in retaining and attracting customers. Moreover, Nike also adopted differentiation strategy by producing striking and unique goods to assist consumers in distinguishing Nike’s product from substitute product. Nike Company is trying their best to offering goods where competitors unable to compete with to reduce the threat.
Lastly, the bargaining power of supplier will be view as a low force to Nike Company. For supplier’s power, it is known to means how strong the position of a seller is and how much the supplier has gain control over increasing the price of supplies. Suppliers are more powerful when suppliers are concentrated and well organize, few substitutes available to supplies, switching cost, from one supplier to another, is high. When suppliers overpower supplies and its prices that segment is known to be less attractive, but as for Nike Company, the athletic shoes are produced using three major raw materials- cotton, rubber, and foam. The rubber passes through a simple chemical process that improves it durability and stability. However, all of these materials are product goods. The suppliers do not have the power to bargain on the price of their product, since there are plentiful of suppliers, therefore causing the supplier power to be low.
Yet, there has been some adjustment of production in the industry due to growing concerns of labor practices of the suppliers and manufacturers and these practices are detrimental to Nike’s image. Therefore, the big companies like Nike only choose to work with approved manufacturers and suppliers that follow these labor standards. Nike has created a system to ensure the high-quality of the product, the working conditions, and the distributions are at high standards. If the supplier fails to meet these standards, contracts are discontinued.
Therefore, suppliers are trying to establish themselves as reliable and take Nike as a customer that will demand enormous volumes of raw materials from them. Thus, Nike has an advantage over its suppliers and causing them to have a low bargaining power as these suppliers rely Nike as their means of income. Due to the low bargaining power of suppliers, it doesn’t cause any great impact on Nike. However, in order to avoid any uncertainty that might delay the production process and as to overcome suppliers’ shortage for times in need, Nike maintain relationships with some trustworthy alternatives suppliers by giving them some advantage for a win-win situation.
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