Athletic Footwear Industry Analysis
...hat it depends on whether or not you want to seriously compete in the industry. It is relatively easy to get into the market if you have a product that people want to buy. You show your product and when you get orders you use independent manufacturers to produce your product. However, it may be very difficult to stay in the industry. If you do, there are barriers mostly in the form of the amount of capital that it would require to manufacture, promote, and distribute your product. And with the number of domestic shoes produced declining dramatically every year since 1978 when shoe production totaled 418 million units versus 2002’s total of 59 million, more and more firms of building production facilities overseas where labor is much cheaper (Wagle, 2004). And along with money being a major obstacle you also would have to overcome the brand loyalty that many companies have taken decades to generate. Technological change has had a dramatic effect on the way that shoes are made. Not only are we mass producing shoes overseas, but with the internet customers are now able to customize their orders to fit their needs and sense of style. Each of the major players in the industry allows their consumers to go to their website and literally build their own shoe. You can pick distinctive colors and even have custom writing stitched into the shoe. These are all ways that this industry has adapted to changing technology. The products in this industry are relatively similar according to quality and function. However the buyer’s perception of that quality varies dramatically from brand to brand. This is the reason one brand can sell a shoe for $175 while another sells a similar shoe for $75. It is the perception of quality along with the image that companies sell their customers. All these reasons also add to the barriers to entry and barriers to profitability that the major competitors share. Economies of scale in the industry are moderate. It takes a great deal of capital to construct a facility capable of producing vast amounts of shoes. But once those factories are constructed it is easy to maintain production. We feel that learning and experience has little effects on this industry because this is not an industry built upon the skill of the workforce. It is an industry that sells and image, or even a dream. That fact centers around the reason the major players spend millions to have famous athletes endorse their products. They aren’t selling knowledge like a marketing firm where experience and learning would play a major role in the profitability of the firm. They are simply selling a product. The profitability of the footwear industry is probably average. Once again you are selling product so there will always be high costs associated with production and marketing. This is quite the opposite of an industry that sells knowledge such as the marketing agency example that was used earlier. The numbers in our industry ranged from around 2.5% to 12% in 2003 (Wagle, 2004). This analysis of the industries dominant economic features helps us to gauge not only the size of the market, but also how profitable and difficult or easy it is to break into that market. Evaluation of Porter’s Five-Forces Model Michael Porter is credited with creating an effective model used for industry analysis. The five-forces model of competition is a key analytical tool used to help identify several different factors affecting the competitive environment of an industry. The five competitive forces within an industry are rivalry, threat of substitutes, buyer power, supplier power, and barriers to entry/threat of entry. Each of these forces is extremely significant when analyzing an industry; however, depending on the industry, some forces might have a greater impact on the industry than other forces. The following is an evaluation of Porter’s five-forces model and its’ impact on the footwear industry: I. Rivalry “The strongest of the five competitive forces is usually the jockeying for position and buyer favor that goes on among rival sellers of a product or service” (McGraw-Hill, 81). The footwear industry is known to be a very competitive industry. However, the competition in this industry is separated between the few firms with a significant market share, and then the rest of the lower level firms within the industry. Nike, Adidas, and Reebok have created a significant rivalry by competing against each other in the athletic footwear industry. One of the most important factors for these companies, and any other company in the industry, is to gain a competitive advantage over its’ competitors. There are several competitive moves that can give a firm a distinct advantage over its’ competition. Product differentiation and constant innovation are significant forces in the footwear industry. The intensity of the rivalry among these competitors in the footwear industry is great because of the constant innovation and number of people who buy shoes. Standard and Poor’s acknowledges this by stating, “The footwear industry faces a highly competitive environment… Footwear manufacturers and retailers will likely seek to attract customers through new product introductions and brand differentiation” (Wagle, 2004). II. Threat of Substitutes The threat of substitutes is very low in the footwear industry. The footwear industry is very unique and distinct. I don’t believe that there are any outside industries with substitutes for footwear. III. Buyer Power Buyer power is the impact that a consumer of a product has on that industry. Buying power within the footwear industry is relatively weak. Since most consumers don’t purchase shoes in mass quantities, their ability to influence price change is insignificant. However, there are some situations in which the buyer power is strong in the industry. I believe that athletes would have a strong buyer power among the companies Nike, Adidas, and Reebok because they tend to purchase shoes more frequently. Also, one who is “well-informed about sellers’ products, prices, and costs” might cause them to be in a better bargaining position (McGraw-Hill, 91). Furthermore, retailers such as Foot Locker and Academy Sports have increased their bargaining power over the past few years. “Foot Locker Inc., the nation’s largest athletic footwear retailer, snapped up Footstar’s 350-store Footaction chain in April 2004. This acquisition significantly consolidates specialty footwear retailing in the hands of one retailer, increasing its bargaining power versus footwear manufacturers” (Wagle, 2004). IV. Supplier Power “Whether supplier—seller relationships represent a weak or strong competitive force depends on (1) whether suppliers can exercise sufficient bargaining power to influence the terms and conditions of supply in their favor, and (2) the extent of supplier-seller collaboration in the industry” (McGraw-Hill 88). In the footwear industry, suppliers exercise very little power of shoe companies because most of the materials and basic commodities can be easily obtained from a large number of suppliers. V. Barriers to Entry/Threat of Entry The barriers of entry into the footwear industry are very minimal. According to Standard and Poor’s industry analysis, “…all one needs are good designs that attract department store and/or specialty store buyers. If a designer gets or...