Nike Porter’s Five Forces and SWOT Analyses

Topic: Nike Words: 2942 Pages: 10

Nike is an international leader in sportswear retail. It is a flagship brand responsible for developing many technologies in the footwear industry nowadays. While its primary market is North America, where Nike is an absolute leader, it is also present in the Western European market, where the UK holds the largest share of 15%. However, the UK market’s share of Nike is inferior to that of Adidas. While this gap is being narrowed, there is insufficient progress in obtaining a sustainable competitive advantage.

The following report aims to analyze the key microeconomic factors of the footwear market in the UK and suggest a strategy that would allow Nike to create a sustainable competitive advantage over other brands in the segment. The Nike five forces analysis and a SWOT analysis of Nike were conducted to assess the athletic footwear market in the UK. As a result, we could see the key factors under each force and conclude the state of competition within this sector. Besides Nike Porter’s Five Forces and SWOT analyses, it was necessary to conduct an audit of the company’s competencies and assets. The whole study refers to reputable sources on relevant topics.

Table of Contents

📍 Introduction
📊 Nike Five Forces Analysis
💰 Nike Audit: Competencies & Assets
📋 Nike SWOT Analysis
🚀 Nike Competitive Advantage
↪️ Porter’s 5 Forces Footwear Industry – Conclusion
🔗 Reference List

📍 Introduction

To develop and implement a successful business strategy, the company management must have an understanding of the factors that influence its performance. One of the most common tools used to gain insight into the conditions of the industry is Porter’s Five Forces model. The offers an overview of potential barriers and risks which will likely be faced by the company and therefore need to be acknowledged (Wordington & Britton 2015).

📊 Nike Five Forces Analysis

Bargaining Power of Suppliers

Nike’s main product line is athletic footwear and sportswear, with athletic apparel and accessories occupying a small share of operations (Nike 2016). Importantly, the production of both sportswear and accessories is performed by third-party contractors in developing countries such as Indonesia, China, and Vietnam (Sicat 2013). These contractors usually deal with a cheap labor force which is widely available in the mentioned locations. Therefore, suppliers of the workforce are numerous and diverse, and, therefore, constitute weak bargaining power. Next, the production is diversified to the degree where none of the factories involved in the cycle is responsible for more than 8% of the total production amount (Nike 2016). This allows us to qualify the size of individual suppliers as small, which also suggests weak bargaining power. Finally, the major share of raw materials required for footwear production consists of a variety of synthetic materials and industrial chemicals widely available on the market (Sicat 2013). Since the availability of materials is high, the bargaining power of the overall supply is weak. Therefore, suppliers have the least influential role in Nike’s position on the market.

Bargaining Power of Buyers

Nike is one of the few major athletic footwear brands in the UK, along with Adidas, Converse, Reebok, Asics, and Puma (Statista 2016). Most of them offer products of comparable quality with similar prices. As a result, customers have an opportunity to switch to other products. This fact suggests moderate to the strong power of suppliers. In addition, the average price of Nike’s product is relatively high, which further strengthens the power of buyers. However, a recent report issued by Nike’s management suggests that such a conclusion is not universally applicable. According to it, an insignificant rise in the price of Nike’s footwear resulted in an almost equal rise in revenues (Nike 2016). Such a result suggests that buyers are not very price-sensitive, which undermines our previous assumption and brings the power of buyers down to moderate. This conclusion can be further strengthened by the recent analysis of the sportswear market in the UK, which indicates a rise in popularity of both athletic footwear and athleisure products that are directed at less professional athletes (Euromonitor International 2016). The trend is predicted to continue for at least five more years, which correlates with the assumption that buyers are a moderate force.

Threat of New Entrants

The production of footwear of quality comparable to Nike’s requires significant capital investments. These include the purchase of equipment, acquisition of property, and funding of research and development operations. This means that few companies have sufficient resources to enter Nike’s market segment. The threat of new entrants is further weakened by the factor of economies of scale. For instance, the high-profit margin characteristic for the current footwear market is possible largely due to the use of labor from developing countries, which is hard to obtain without a developed infrastructure and global-scale partnerships. Next, Nike, similarly to its closest competitors, is a well-established and recognized brand (Dougherty 2016). Creating and sustaining a brand of equal scale would require significant resources. Finally, Nike’s marketing campaign created a powerful message of a lifestyle associated with the brand. Most customers choose Nike despite the fact that the competing products are almost identical in physical characteristics (Dougherty 2016). This fact indicates high product differentiation. The combination of these factors suggests that the threat of new entrants is moderate to low.

Threat of Substitutes

The sportswear market in the UK has a number of products that can serve as substitutes for Nike. These can be broken down into two broad categories: products that are oriented on performance and athleisure goods – sportswear for occasional athletes and for casual use (Euromonitor International 2016). The former is offered by Nike’s competitors (most prominently, Adidas), and has near-identical relative price and performance characteristics. Besides, the switching cost related to this category is low. Therefore, the threat of substitutes is moderate to high. The performance category also includes less recognizable brands, brands that do not emphasize appearance, and copycat businesses. The latter two create a real threat since their quality is considered sufficient for the majority of users while their price is considerably lower. Therefore, the availability, performance, and switching cost of substitutes create a strong threat for Nike.

Competitive Rivalry

The UK market is densely populated with brands offering athletic sportswear. However, the industry is dominated by few large brands. The latest report by Euromonitor International (2016) indicates that Nike and Adidas are two leaders, accounting for 29 and 24 percent share of the market, respectively. The next closest competitor, Converse, occupies a significantly smaller share of 8%, followed by Reebok, Puma, and Asics (Euromonitor International 2016). Therefore, while two major players exist in the market, their collective share does not allow us to categorize the situation as a duopoly. However, it is consistent with oligopoly, with a four-firm concentration ratio of 67% (Statista 2016). This conclusion is consistent with other features of the UK market, such as high barriers to entry, comparatively similar pricing decisions, the prominent role of branding in consumer behavior, and product differentiation discussed above (Wordington & Britton 2015). It should also be mentioned that the industry has a high ratio of variable to fixed costs, mainly due to the dependence on raw materials. Finally, the steady growth of the UK sportswear market which is expected to continue through 2021 suggests high market penetration and saturation by the leading brands. Considering all of the above, the competitive rivalry in the UK sportswear market is a strong force.

Reflective Account

While completing my report on five forces, I was able to make several observations. First, I noticed that the five forces model gives a good overview of the macro-environment which allows forming a strategy with regard to potential threats and expected barriers. However, I also noticed that Porter’s model does not cover the entire picture and several aspects of the market that need to be acknowledged can be left outside its scope. The most prominent example of this is the role of product differentiation which, in the case of Nike, decreases price elasticity to the point where the overall increase in price does not cause the decline in revenues despite the availability of substitutes. Another observation is related to the dynamics of business. I noticed that despite the low threat of new entrants there is at least one example of the successful entry (Under Armour) which seems to defy the results of the analysis. Therefore, it is possible that the five forces model does not offer means of assessing the weight of the factors – only their presence.

💰 Nike Audit: Competencies & Assets

The analysis of the firm’s assets and competencies is crucial for obtaining information on its strengths and incorporating them in the development of business strategy (Wordington & Britton 2015). The resource-based audit tool which gives an overview of tangible and intangible resources, accompanied by value chain analysis, is the most comprehensive way of assessment.

Nike Assets: Tangible Resources

Nike is an international company that currently operates primarily in North America, Western Europe, China, Japan, and Eastern Europe. Its physical assets include land, buildings (e.g. stores, factories, research centers), machinery, production equipment, dedicated software, and construction (Stock Analysis on Net 2016). The analysis of the assets indicates a steady growth in all of the said fields, with notable exceptions in machinery, equipment, construction, and leasehold improvements. These areas displayed a brief decline in 2015 compared to 2014, but all four increased the following year, exceeding the 2014 level (Stock Analysis on Net 2016).

The financial assets display the same tendency, with the steady rise in revenues for the last five years and an increase of return of investment by 4% in 2015 (Nike 2016). To successfully operate on an international scale, the company also employs an efficient distribution network, as well as a supply chain to minimize labor expenses and gain access to inexpensive materials from developing countries. Finally, Nike holds rights for a number of patents on materials, patterns, footwear components, and training methods and programs (Nike 2016). In addition, the company holds a number of contracts for cooperation with renowned athletes and publicity persons who promote their brand. To conclude, Nike demonstrates a robust tangible resource base which increases relatively steadily over the years.

Nike Competencies: Intangible Resources

The two biggest areas of Nike’s competencies in the field of intangible resources are innovation and reputation. The company employs a prominent research and development department which constantly works on the design and development of know-how to improve the characteristics of its footwear. Nike also establishes reliable communication channels to ensure the reception of positive feedback and timely detection of design flaws. The main product lines are updated on an annual basis to guarantee the best athletic performance. The latest addition to the innovative practices is the introduction of the customization option on their direct-to-customer distribution channel (Nike 2016). The improvements in manufacturing efficiency are also possible due to the implementation of hi-end manufacturing equipment and the increasing role of automatization.

The company’s reputation is maintained primarily through close collaboration with sports stars and celebrities. In addition, Nike remains a certified partner of many official sports events, which establishes trustworthiness and professionalism and contributes to the recognition of the brand. Besides, Nike makes a visible effort in reaching out to the customer, which is a highly valued trait in the contemporary information-rich business environment. Finally, the competencies of human resources employed by Nike must be considered as an important component of the firm’s intangible resources. In addition to the employees directly involved in the production, marketing, and distribution, human resources include skilled trainers, designers, physicians, and psychologists, which contribute to the resulting quality of the final product. The company constantly reviews the level of employee proficiency and provides opportunities for training and development to maintain a high degree of competence.

Nike’s value chain presents the greatest opportunity for value creation on operations and marketing stages. The former involves the development of innovative designs which combine excellent characteristics with prominent and recognizable appearance. The latter secures a broad customer base that consists primarily of non-professional athletes who occasionally engage in sports and view it as a lifestyle. The weight of the marketing stage is so significant that its influence can be traced among non-athletic brands such as Next who modify their product lines to meet the demand (Euromonitor International 2016). This allows Nike to greatly diversify their target audience, which can be confirmed by the growing popularity of athleisure products among women (Euromonitor International 2016). Inbound logistics play a somewhat lesser role, but still present opportunities for increasing profit margin, mostly due to heavy reliance on developing countries. Outbound logistics, sales, and service stages possess fairly moderate value creation capacity.

Reflective Account

In the process of preparing the analysis of competencies, I was able to detect one important point. While marketing is commonly referred to as the reason for the company’s success, the role of innovation can be traced throughout the value chain. If not backed by a decent level of product quality and sustainable business practices, marketing effort will be eventually rendered useless. Therefore, I can conclude that value in the case of Nike is sustained (rather than generated) by exceptional marketing decisions.

📋 Nike SWOT Analysis

Before any recommendations can be formulated on the preferred strategy, it is necessary to identify the strengths, opportunities, weaknesses, and threats in a clear and concise way (Wordington & Britton 2015). SWOT analysis is a technique that can be used for gaining an overview of these factors.

Nike Strengths

Reliable physical resource base evenly distributed across the world;
Closely maintained and updated quality of products;
Established and up-to-date R&D department;
Long history on the market resulting in strong brand recognition;
Use of innovative technologies throughout the value chain;
Versatile marketing strategies;
Partnerships with celebrities, athletes, and publicity persons;
Robust distribution chain;
Established communication channels with retailers and end-users.

Nike Weaknesses

Strong dependence on retail distribution channels;
Highly competitive market with one formidable opponent (Adidas);
Relatively high price;
An increasing number of international operations regulations;
Dependence on the income of the target audience.

Nike Opportunities

Possibility to expand into untapped markets (e.g. India);
The increasing popularity of active sports as an essential component of well-being and lifestyle;
The growing role of the direct-to-customer model;
Production and distribution chain’s capacity for improvement via automatization and optimization of the processes;
Predicted expansion of the sportswear market in the UK.

Nike Threats

The emergence of highly flexible new entrants who leverage opportunities of the contemporary market undetected by the Five Forces model (e.g. Under Armour);
Impact of large-scale economic crises;
Currency fluctuations;
Further improvements of counterfeit products and copycat businesses.

🚀 Nike Competitive Advantage Strategy

Considering the information above, Nike needs to sustain and increase its profit margin by investing in developing countries. The investment must cover the company’s existing assets and new market coverage. The former can be achieved in a number of ways. First, it is necessary to improve the working conditions of the labor force by providing fair compensation practices. Simultaneously, the target country’s infrastructure should be enhanced by appropriate corporate social responsibility policies. Such a move will stabilize Nike’s existing position on the global scale and eliminate unexpected setbacks. More importantly, it will increase employee satisfaction, which will lead to improved organizational performance. The improvements should be communicated to stakeholders, which is expected to contribute to Nike’s corporate image and win the loyalty of customers in the UK and other major markets. The said CSR policies are to address environmental issues, which are currently under rigorous control and can backfire if left unaddressed. Another area which can be improved is the modernization of production accompanied by proper staff training. While initially expensive, it will lead to improved cost-efficiency in the long run, and secure sustainable competitive advantage.

The proposed strategy will result in the elimination of threats associated with the involvement of developing countries and lead to a decrease in production costs. The latter is especially important for the UK market where Nike closely competes with Adidas. The said improvements will eventually allow price adjustments without the decline of profit margin and create a sustainable competitive advantage. In addition, the emphasis on environmentally-friendly and ethical practices aligns well with the interests of the current target audience, especially those who choose Nike products as a way to communicate their preferred lifestyle. Therefore, the strategy will result in greater market coverage and a long-term increase in customer loyalty.

Reflective Account

In the course of conducting the SWOT analysis, I initially noticed that the current strategy employed by Nike already takes advantage of its biggest strengths. At the same time, the direction made by the company did not mitigate most of the indicated risks. Admittedly, the suggested strategy requires considerable resource allocation and does not lead to short-term improvements. On the other hand, it holds great capacity for increasing competitive advantage in the long run and therefore is recommended for reaching a sustainable result.

↪️ Porter’s 5 Forces Footwear Industry – Conclusion

By conducting the analysis of the footwear market in the UK, I was able to identify the strengths of Nike which can be used to leverage its competitive advantage. By employing the suggested strategy, the company is expected to achieve an advantage over Adidas in the long run and outperform it in sales and market coverage. More importantly, the strategy will allow it to eliminate at least some of the threats identified in the SWOT analysis and contribute to the well-being of the involved stakeholders, further boosting its reputation, and match its supply with the expected demand created by the predicted growth of the footwear market.