The Analysis of Nike in Athletic Footwear Market Based on Porter’s Five Forces Model

Given the demands of today’s competitive and dynamic environment, it is quite challenging to understand strategic issues facing organizations and develop the capability for long term organizational success. Introduction in today’s dynamic and competitive business environment, survival, growth and profitability are the essence goals of all industries. Nowadays, Porter’s Five Forces is currently being adopted as the powerful management tool of choice by many organizations.

The essence of Porter’s Five Forces is that it can help senior managers to make right decision and build and sustain competitive advantages in the organization level. This report aim to present an analysis of Nike by applying Porter’s five forces model . Porter’s five forces model Porters five forces, as a powerful analysis tool, enables managers in corporations to analyze the current situation of their industry in a structured, easy-to-understand way.

From a strategic management perspective it is useful for managers in any organization in the same industry or sectors to understand the five competitive forces acting on and between organizations in the same industry and or sector since this will determine the attractiveness of that industry and the way in which individual organizations might choose to compete (Johnson and Scholes, P. 116). Claimed benefits First of all, Porter’s five forces framework provides one simple approach to analyze industry structure.

The five forces analysis helps in identifying and determining the attractiveness of an industry, the source of competition. And because Porter’s five forces reveal insights on profitability, it can inform important decision decisions about whether to leave or enter industries or sectors. Moreover, the model can be used to compare the impact of competitive forces on the own organization with their impact on competitors. Competitors may have different options to react to changes in competitive forces from their different resources and competences (Pearce and Robinson, P. 2). This may influence the structure of the whole industry. The five forces framework can be used to gain insight into the forces at the work in the business environment of a strategic business unit which need particular attention in the development of strategy. Porter’s five forces framework is of great importance in developing strategic options to improve relative performance in the industry or influence relative position in industry. (Johnson and Scholes,P. 119).

Because strategic choices need to take account of the external environment especially pay attention on Porter’s Five Forces in which the organization operates: competitive advantage may be eroded as substitute products due to technology changes or as new competitors enter market. ( Porter, 2001) For example: a leading manufacturer of vacuum tube with strong position in the electronic product industry unthreatened by potential entrants will gain low returns if it competes with silicon chip or new semiconductor.

In this circumstance, how to compete with the substitute product becomes the first strategic priority for the leading manufacturer of vacuum tube to maintain competitive advantage. And another value of five forces is as a thought provoking theory to help strategic managers arrive at a shared understanding of the threats and opportunities facing the firm to gain competitive advantage (Porter, 2001). Within Porter’s framework, a strong competitive force can be viewed as a threat since it depresses profits. And a weak competitive force can be regarded as an opportunity for organizations to earn great profits.

The strength of the five forces may change through time because of factors beyond a company’s direct control. In such circumstances, it is crucial managers to recognize opportunities and threats when they arise and formulate appropriate strategy to alter the strength of one or more of the five forces to its advantage (Hill and Jones, 1995). The Porter Five Forces Analysis offers a good explanation for the profitability of an industry, and the firms within it. That’s why the framework becomes the useful analysis tool to analyze a company is able, or unable, to make a decent profit.

The collective strength of the five forces determines the ultimate profit potential of an industry (Pearce and Robinson, P. 92) It arrange from intense in industry like steel metal cans, where no company gain considerable returns on investment, to mild in industries like oil-field services and equipment, soft drinks, and toiletries, where large spacious room exists for quite high return. What’s more, this model also overemphasizes the importance of industry structure as a determinant of company performance and underemphasizes the importance of differences between companies within an industry (Hill and Jones, 1995).

The model focuses on an industry as a whole not on individual firms. Actually there can be vast variance in the profit rate of individual companies within an industry. Recent research shows that industry structure explain only about 10 percent of the variance in profit rates across companies, suggest that individual resources and capabilities of a company are far more important determinants of its profitability than is the industry. A company will not be profitable just because it is based in an attractive industry. (Hill and Jones, 1995) 2. Implementation issues within organizations some issues during the implementation of these five forces are crucially important for organizations to build long-term business strategy and sustaining competitive advantages rather than simply list the forces. Successful use of the Porter Model Analysis includes identifying the sources of competition, the strength and likelihood of that competition existing, and strategic recommendations for the action a company should take to develop barriers to the various forms of competition (Prahalad and Gary, 1990).

With the realization about intensity and power of competitive forces, organizations can develop options to influence them in a way that improves their own competitive position. The result could be a new strategic option, e. g. a new positioning; differentiation for competitive products of strategic partnerships. Porter’s Five Forces can be applied to particular companies, market segments and industries with the step-by-step analysis of market structure and competitive situation.

First of all, when implementing this module in organizations, it is necessary to determine the scope of the market to be analyzed. Following, all relevant forces for this market analyzed and key forces are identified (Gerry and Kevan, P. 117). Actually some organizational strategy and the longer-term goals are mainly based on or consistent with the key forces. Hence, it is not necessary to analyze all elements of all competitive forces with the same depth. Moreover, the key forces in the competitive environment will vary in different industry.

Different forces take on prominence in shaping competition in each industry (Porter, 1980). In the oceangoing tanker industry, the key forces is the buyer, while in the steel industry the key forces are foreign competitors and substitute materials. That is also an important consideration when applying Porter’s Five Force into organizations. Nike According to( wikinvest website,n. d. ), NIKE designs, develops and markets high quality footwear, apparel, equipment and accessory products worldwide.

Nike is the largest seller of athletic footwear and apparel in the world and sell its products primarily through a combination of retail accounts, NIKE-owned retail, including stores and e-commerce, independent distributors, franchisees and licensees worldwide. Its goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment and accessories businesses. The strategy is to achieve long-term revenue growth by creating innovative, “must have” products; building deep personal consumer connections with our brands; and delivering compelling retail presentation and experiences.

Nike strives to convert revenue growth to shareholder value by driving operating excellence in several key areas: • Making our supply chain a competitive advantage, through operational discipline • Reducing product costs through a continued focus on lean manufacturing and product design that strives to eliminate waste • Improving selling and administrative expense productivity by focusing on investments that drive economic returns in the form of incremental revenue and gross margin, and leveraging existing infrastructure across our portfolio of brands to eliminate duplicative costs • Improving working capital efficiency Deploying capital effectively to create value for our shareholders Through execution of this strategy, the long-term financial goal is to achieve: • High single-digit revenue growth • Mid-teens earnings per share growth • Increased return on invested capital and accelerated cash flows, and • Consistent results through effective management of our diversified portfolio of businesses This report try to analyze if Nike can achieve the targets by applying 5 forces model. Quantitative and Qualitative methods.

In Miles and Huberman’s 1994 book Qualitative Data Analysis, quantitative researcher Fred Kerlinger is quoted as saying, “There’s no such thing as qualitative data. Everything is either 1 or 0” (p. 40). To this another researcher, D. T. Campbell, asserts, “All research ultimately has a qualitative grounding” (p. 40). This back and forth banter among qualitative and quantitative researchers is “essentially unproductive,” according to Miles and Huberman. They and many other researchers agree that these two research methods need each other more often than not.

But, because qualitative data typically involves words and quantitative data involves numbers, there are some researchers who feel that one is better (or more scientific) than the other. Another major difference between the two is that qualitative research is inductive and quantitative research is deductive. In qualitative research, a hypothesis is not needed to begin research. However, all quantitative research requires a hypothesis before research can begin.

Another major difference between qualitative and quantitative research deals with the underlying assumptions about the role of the researcher. In quantitative research, the researcher is ideally an objective observer who neither participates in nor influences what is being studied. In qualitative research, however, it is thought that the researcher can learn the most by participating and/or being immersed in a research situation. These basic underlying assumptions of both methodologies guide and sequence the types of data collection methods employed.

Although there are clear differences between qualitative and quantitative approaches, some researchers maintain that the choice between using qualitative or quantitative approaches actually has less to do with methodologies than it does with positioning oneself within a particular discipline or research tradition. The difficulty in choosing a method is compounded by the fact that research is often affiliated with universities and other institutions. The findings of research projects often guide important decisions about specific practices and policies.

Choices about which approach to use may reflect the interests of those conducting or benefiting from the research and the purposes for which the findings will be applied. Decisions about which kind of research method to use may also be based on the researcher’s own experience and preference, the population being researched, the proposed audience for findings, time, money and other resources available (Hathaway, 1995). To a certain extent, researchers on all sides of the debate are correct; each approach has its drawbacks. Quantitative research often “forces” responses or people into categories that might not “fit” in order to make meaning.

Qualitative research, on the other hand, sometimes focuses too closely on individual results and fails to make connections to larger situations or possible causes of the results. Rather than discounting either approach for its drawbacks, researchers should find the most effective ways to incorporate elements of both to ensure that their studies are as accurate and thorough as possible. All in all , this report will adopt mixed way to do research. Primary and secondary Data Data, or facts, may be derived from several sources. Data can be classified as primary data and secondary data.

Primary data is data gathered for the first time by the researcher; secondary data is data taken by the researcher from secondary sources, internal or external. The researcher must thoroughly search secondary data sources before commissioning any efforts for collecting primary data. There are many advantages in searching for and analyzing data before attempting the collection of primary data. In some cases, the secondary data itself may be sufficient to solve the problem. Usually the cost of gathering secondary data is much lower than the cost of organizing primary data.

Moreover, secondary data has several supplementary uses. It also helps to plan the collection of primary data, in case, it becomes necessary. Therefore , in order to carry out this research , two types of date will be collected. Analysis 1. The pressure from external It is a piece of fatty meat for many merchants due to the high yield of the athletic footwear market. Take Nike as an example, its Rate of Return on Sales = net income/revenue = 1486. 7 divided by 19176. 1 = 0. 07752. This ratio shows that Nike earns 7 cents for every dollar in sales (Annual Report of Nike, Fiscal 2009, p21).

Yet is it really that easy for other investors to make profits ? To recognize the prospect of the athletic footwear market, the headmost four forces should be considered. At the first place, the threat of substitute products or services seldom exists so that it can hardly threaten the existing footwear market. The footwear is part of the daily necessities, and athletic ones are also obligatory and inevitable for sports. Even more important, diverse sports are in various needs of sneakers, which results in the unshakable large amount of demand in athletic footwear market.

Then, the bargaining power of the suppliers and customers should be thought over. For Nike, the bargaining power of suppliers is limited as it has vast raw material sources around the world. In fiscal 2009, the contract suppliers of Nike in China, Vietnam, Indonesia and Thailand manufactured 36%, 36%, 22% and 6% of total NIKE brand footwear, respectively(Annual Report of Nike, Fiscal 2009, p4). Each one takes on a small proportion of the whole manufacturing, so that suppliers have limited bargaining powers. Similarly, due to the astronomical figure of customers, the customers of Nike also only have limited bargaining powers.

Though Nike cannot wantonly raise the price of their products under stress of other competitors, the earning yield and its market position can hardly be influenced by the minority group of suppliers and customers. Another threat is coming from the potential new entrants. However, the high barrier to entry, as well as the limited remaining market share and market growth, gives rise to the flinch of other manufactories. With the lowest market share and lowest market growth, new entrants are just to keep the dogs as the BCG matrix shows(BCG Matrix, 1968).

A brief intimateness can be drawn up that the destructive power outside the footwear industry hardly exists and can seldom influence the market share and profitability of Nike. 2. The rivalry among existing competitors According to the Commerzbank Equity Research(28th Feb,2008), NIKE was the clear market leader, with 31% of the global athletic footwear market in 2007, followed by ADIDAS and PUMA, occupying 16% and 7% of the market respectively. It is true that NIKE is still the leader in the athletic footwear market though the challenges are enormous.

According to the Black Book-Nike & Reebok (Sanford C. Bernstein & Co. LLC, 2001), “one of the company’s biggest competitive advantages is the focus, dedication and relative homogeneity of the manager team, though it is occasionally a weakness as well. ” Yet the truly crucial factors of NIKE’s competitive may be its edge. NIKE initiates and consistently executes the outsourced manufacturing strategy, which helps it to decline its factory cost and expand the scale of production. This is the main advantage of NIKE comparing with some local production facilities.

In terms of sales, the ordering and distribution strategy induces the fluent goods flow and few warehouse stocks of NIKE. And it will also lead to higher service levels, satisfied customers and efficient workforce (Werner Wagener, 2009). Meanwhile, the large amounts of adverting and promotion expense were as much as $2351. 3 million, $2308. 3 million, and $1912. 4 million in 2009, 2008, and 2007 respectively(Annual Report of NIKE, fiscal 2009), which helped NIKE to build a fantastic brand image and earn the support among the public.

As contenders, other brands also have some incomparable advantages. For example, Adidas has implanted the brand image of local culture in the USA, and controlled the largest soccer sportswear market, which is far ahead of Nike. To maintain the role of market leader, Nike should not only hold its existing advantages, but also seed for breaks in advanced science and technology and formulate immediate and flexible strategies according to the changeable market. Conclusion

To sum up, Nike has control the highest market share while the market growth is low, which means Nike is now at a position as a cash cow (BCG Matrix, 1968). Comparing with the internal rivalry among the existing competitors, Nike faces less stress from external. The threat of new entrants can hardly hurt the fundamental interests of Nike, as well as the suppliers and customers with limited bargaining power. However, it is also not easy for Nike to maintain the lead position in the athletic footwear market, as there exits lots of envious and powerful competitors.