Under Armour Case: Porter’s Five Forces Analysis
In the year 1979, Micheal Porter came up with a five forces of the competitive position model which provides a simple perspective or analyzing the competitive strength of a business organization or industry in general. According to Porter (1979) there are five forces that shape the competition in any industry, viz. threat of new entrants, bargaining power of buyers, threat of substitute products, bargaining power of suppliers, and rivalry among the existing competitors. Below is the analysis of the sportswear industry with evidence from the case study:
Threat of New Entrants
According to Porter (1979), it is not just the incumbent players which can pose a threat to the firms in an industry. The possibility of new firms entering the market can also impact the competitive environment in an industry. But as there are there are strong players who are well entrenched in the market, new players may face some barriers in the form of economies of scale, government created barriers, patents and other intellectual property held by the incumbent players, etc. The sports industry in general and the athletic apparel segment in particular is highly competitive with several leading jostling for space. In contrast to some industries like aviation where are entry barriers are very high, the entry barriers for new players in the sports industry are relatively less. As a result, both bigger and smaller players have a presence in the market. Even though targeted mostly at sports enthusiasts, the industry is quite assorted as the products needed of one sport differ from that of the other. Apparel, shoes, and other accessories used for one sport (E.g. Soccer) can’t be used for another sport. Companies which can come up with some innovative product meant for a specific sport or a breakthrough technological innovation can easily make their presence felt in the industry. Kevin Plank of Under Armour came with up with an innovative technology to make sports apparel which can control the temperature of the athlete’s body during a workout. Similarly, Jim Hill of SportHill came up with a new athletic apparel design which can be used in any climate and for any sport. These new products appealed to the athletes and university teams to an extent that they could easily carve out a niche for themselves quickly and start expanding into other areas faster. Many more players too can enter the sports industry with innovative technologies similar to Under Armour and SportHill and pose a threat to the existing players of the industry. Given the ease with which new players can enter the industry, the threat of new entrants is high for the sector. But the possibility of innovative being well received by customers despite the presence of strong competitors in the industry makes it attractive.
Threat of Substitute Products
Products produced by firms in another industry can impact the incumbent firms in an industry. For E.g. the watch making industry is now suddenly impacted by the emergence of smart phones as time keeping tools. Even though the products produced by firms in the sports industry belong to a niche category, they too can face threats from substitute products from other industries. As mentioned in the case study, 80 percent of the users of products made by sports industry are used by nonathletic consumers for different uses. Firms in the sports industry too are aware of this reality and focus on producing trending looking apparel and shoes for general purpose use. Many people use running shoes and T-Shirts made by firms like Adidas and Nike during picnics and weekend outings due to the comfort. Any substitute product from other industries can easily impact the sales of products made by sports industry. During the 1990s, sales of Nike’s running shoes were affected when many consumers started using suede based shoes made by generic shoe makers as casual wear. Similarly, the emergence of smart watches can impact the sales of some accessories like Nike’s FuelBand in future. The threat of substitute products for the industry can be termed as medium and the industry as attractive as these substitutes can’t replace the products made by sports industry completely.
Bargaining Power of Buyers
A higher bargaining power from the buyers of products made by an industry can impact the price which can be charged by the firms and the kind of products they will be required to make. A significant component of the sales made by the sports industry to targeted at university sports teams, recreational teams, and other commercial teams.As a result these teams can bargain for a cheaper price quote for the bulk purchases made by them. Sports teams can also have a say on the type of products made and the customizations needed for them. As mentioned in the case some companies used to get requests from university teams for products like full-sleeved T-Shirts which it had to produce and supply on demand. Since the switching costs for buyers are very low or nil, buyers can choose the products of another seller and make a switch faster. Firms in the sports industry have recognized that the need for keeping its products fresh in order to keep its customers satisfied and started taking more fashion risks by recruiting more people from fashion schools. All the businesses in the sports industry can easily adapt their products depending upon the requirements of the customers. Hence, the threat due to the bargaining power of buyers can be said to be medium and the industry remains attractive to new entrants.
Rivalry among the Existing Players
Irrespective of the threat posed by any new entrants into the market, rivalry between the firms which are currently operating in an industry can also impact the prices charged by firms and the innovations they need to come up with. The sports industry is highly competitive with well-established players dominating the market. Dominant players in the industry like Nike and Adidas have established their brands, marketing channels, and other marketing agreements after long periods of advertising and marketing programs. As given in the case, firms like Nike advertises its products through multi-million dollar endorsement deals, advertising on major networks, and alliances. As most of the players in the industry like Nike and Under Armour are dominant in a particular segment of sports related products, they try to grow further by entering the turf of other companies leading to price wars and cutting edge innovations. The threat due to rivalry among existing players is low as each firm can differentiate from others easily and the industry remains highly attractive for innovative new players.
Bargaining Power of Suppliers
Bargaining power of suppliers depends on the producing industry’s requirements for raw materials and other supplies for producing their products. Powerful suppliers can influence the industry by charging more price and capturing a part of the industry’s profits. As the number of players in the sports industry is less and the raw materials they need are not scarce, suppliers exert very limited influence on the firms in the sports industry. Threat due to the bargaining power of suppliers is low or even nonexistent and the sports industry remains attractive on this front.
New entrants into the sports industry should be particularly concerned about the threats posed by new entrants into the industry, new substitutes which are being innovated for the products of sports industry, and bargaining power of buyers. As the industry is dynamic with highly demanding customers, firms which can’t keep constantly innovating themselves may end up losing to the competitors.
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