Nike Footwear 5 Forces Analysis

Nike has been able to outperform any competitor and exert a total domination over their industry: the sports footwear and apparel industry. Nike had a return on Capital Investment of 17% in Fiscal year 2005 that ended in May. To make sense of this performance, strategy class has taught me to apply these figures within an industry. By applying the 5 force analysis template, I have come to a better grasp of Nike’s fortune in the sports footwear and apparel industry in the US market, and why it is a good industry to be in for now.

Internal Rivalry: Low threat

The sports footwear and apparel industry is pretty young: Adidas was only started in 1949 in Germany. The Dassler family who gave its name to Adidas spun off Puma as well. Nike was born in 1972 and Reebok emerged as a solid competitor in the early 80s under the lead of Paul Fireman. Yet, this industry is very concentrated and keeps consolidating: Nike bought Converse in 2003; Adidas bought Reebok in August 2005. Nike owns 36% of the US market while the new Adidas-Reebok owns 22%, which equates to a combination of 60% for the two top players. The US Market, with $14.75 billion last year, accounts for half the sales of athletic footwear in the world and drives most of the product trends. Other notable companies are New Balance, Puma, and K-Swiss. Japanese Mizuno and Asics have never really succeeded entering the US market.

Entry: Moderate Threat

Market leaders Nike and Adidas established a series of barriers to prevent new entrants from threatening them.

First barrier would be the outsize marketing budgets spent in advertising and the endorsements of athletes: Nike spent $90 million on a contract for LeBron James alone in 2003, and they paid the prestigious Manchester United club an unprecedented $450 million over 14 years to run its merchandising and uniform operation. Nike had 50 sponsored Athletes win a gold medal in Athens 2004. Adidas spent $80 million for the Official Sportswear partner title in Beijing 2008.

The Nike brand is ranked 30th overall in the world, with a value of $10.1 billion while No. 71 Adidas is at $4 billion.

Innovation is another way to keep a lead on would be competitors. Adidas has developed the Adidas One, a $250 shoe that has a computer chip that automatically adjusts the fit as the wearer runs. Nike followed by releasing the Nike Free, a shoe that feels barefoot to the runner.

Despite the cost involved in catching up to the leaders, a new variable is coming into play and might shuffle the worldwide market in the favor of new entrants: China.

Next Olympics games are staged in Beijing, the Chinese and their 2.6 billion feet, get richer, and their market is already valued at $3 billion, expected to hit $6.2 billion by 2008. Nike and Adidas are leading the market, but the third player is local: Li-Ning has a vice-president for footwear hired from Nike, has access to the same factories, and sponsors 4 Chinese teams for the Olympics. Its products are about half as expensive as those of its foreign rivals, and its network of stores dwarfs that of any other player.

Substitute: Moderate Threat

Most sneakers and apparel are now made in China by subcontracting companies. These companies get a production