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net, 2006). The power of buyers is the impact that customers have on an industry. In general, when buyer power is strong, there exists a market in which there are many suppliers and one buyer. Under such market conditions, the buyer sets the price. Buyers are strong if there are a few buyers that take up the entire market share, and are weak if the product producer can take over his own distribution and retailing. The "bargaining power of suppliers" is the strength of the position of sellers, and whether there are many or a few. A producing industry requires raw materials such as labor, components, and other supplies, leading to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products. In other words if suppliers have an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry's profits, they are strong. Finally, "rivalry among existing players" examines whether there is strong competition among the players (Value-based Management, 2006). The following sections examine each of these five categories of competitive forces in relation to Nike and New Balance.
Entry of Competitors
Nike and New Balance are long-time competitors in the same industry, although New Balance differs from Nike in that they specialize in running shoes. Nike is facing competition from shoe manufacturers worldwide, which was not always the case. Over the years, the demand for different athletic shoes based on age, maturity and cultural standards changed, and Nike was able to adapt to fit the consumer demands. For example, in the U.S., Nike's Air Jordan basketball shoes were considered for their performance characteristics, their association with a popular U.S. sport, and the endorsement from the pre-eminent star of that sport (Kimerling & Sood, 1998). However, in Europe, although awareness of basketball exists, the identification and technical aspects of the shoe are lost. As a result, the Air Jordan shoe, as well as other shoes associated with or promoted by popular American athletes, became popular in Europe because overseas Europeans desire products with a Western culture association and like fashion with trend associations. Since other athletic shoe companies are designing performance athletic shoes with a fashion twist, Nike has to deal with these new competitors. Nike also has to deal with New Balance as a new competitor, because New Balance is turning away from its traditional premier running shoe towards other types of athletic shoes.
Threat of Substitutes
The athletic shoe industry is also very easy to enter, as many companies are able to manufacture cheap shoes overseas. In other words, all existing markets (local, regional, and global) are accessible to the competitors and opportunities for growth may be exploited (Kimerling & Sood, 1998). New Balance retains a majority of their manufacturing in the U.S., but is also beginning to follow the footsteps of other competitors by outsourcing and moving manufacturing overseas where labor and product costs are cheaper. Both companies face a significant threat of substitutes, as there are many other shoe companies that can manufacture a comparable shoe at a lower cost. Nike and New Balance also face counterfeiting, which is the manufacture of imitation products with the brand label on the shoe. These imitations are passed off as if they are the real shoe, and many copies are very hard to catch by customs officials. These products are cheaply made overseas and shipped to the U.S., where many go undetected as infringements of the brand of the actual shoe. Both companies have lost revenues to these companies, which can be set up and taken down overnight.
Bargaining Power of Buyers and Suppliers
The bargaining power of buyers and suppliers for both of these companies is basically identical. In this industry, the buyer has some of the power because of the similar product design nature of athletic and performance shoes. This requires manufacturers to scan the world for the best labor productivity in terms of cost and maximize economies of scale in order to compete globally (Simerling & Sood, 1998). As for distribution scale, there also exists a global level need, and as a result, the global level demand determined under the customer perspective. This is because both the competitive nature of the industry and customers require continual availability of product (Simerling & Sood, 1998). In this industry, the supplier's weakness is that constant delivery in a reliable manner is a key success factor and achieving a cost advantage that adds to one's competitive advantage. Finally, the supplier relationship achieves a relative balance between being global vs. local, or big vs. small, which can influence customers in terms of marketing and sales Simerling & Sood, 1998). The rivalry, or competition among Nike and New Balance is the most important factor in Porter's analysis, and is discussed in the section below.
Cost Leadership Strategies and Differentiation Strategies as Competitors
An organization pursuing a cost-leadership strategy attempts to gain a competitive advantage primarily by reducing its economic costs below its competitors. If cost-leadership strategies can be implemented by numerous organizations in an industry, or if no organizations face a cost disadvantage in imitating a cost-leadership strategy, then being a cost leader does not generate a sustained competitive advantage for an organization (Jaquier, 2003). The ability of a valuable cost-leadership competitive strategy to generate a sustained competitive advantage depends on that strategy being rare and costly to imitate (Jaquier, 2003). One of the main cost advantages for a company is its size, because of the key relationship between company size in terms of volume production. Companies of larger size with high levels of production are able to purchase and use specialized manufacturing tools that smaller companies cannot. Additionally, a higher volume of production may allow a company to build larger manufacturing operations (Jaquier, 2003). As a result, larger companies are able to manufacture products at a lower cost per unit with lower average costs of production. However, as a company increases in size, the difficulty to control and operate it efficiently also increases.
In the past few years, in the athletic shoe industry, a worldwide and large presence is almost a requirement for success. Nike is an example of a very large company that is capable of competing as a global company because it meets the size needed in one or more activities is required to sustain and allow growth, as well as profits. Two key factors for success in this industry center around global scale distribution and economies of scale, because availability of product is a significant competitive factor, as lack of product can inhibit market penetration and dominance (Simerling & Sood, 1998). In this area New Balance is unable to compete on a global scale with Nike in multiple categories because they can not achieve the scale economies needed and is thus restricted to the niche market of running shoes. However, the problems that Nike faced regarding poor working conditions in overseas factories and numerous complaints involving the same types of issues is an example of large Nike has grown that it is difficult to control and manage operations efficiently. New Balance, on the other hand, does not have these kinds of problems because the company is smaller and the majority of their operations are in the U.S., close to their corporate headquarters.
Differentiation Strategy differentiation strategy involves creating a product that is perceived as unique; the unique features or benefits should provide superior value for the customer if this strategy is to be successful. A differentiation strategy works best when the buyer's needs and uses of the item are diverse, and there are not many rivals following a similar type of differentiation approach. Additionally, differentiation strategies are most powerful when buyer needs and preferences are too diverse to be satisfied by one product. New Balance appears to have a better differentiation strategy than Nike because they succeed in a niche market where they are known for manufacturing the best running shoe. There are not a lot of rivals that operate in the niche running shoe market, so New Balance easily dominates in an analysis of differentiation strategy.
A low cost producer strategy works the best when there is price competition among rival sellers. Between Nike and New Balance, price can be considered a competitive force because both companies are trying to manufacture quality shoes at lower prices. The production of shoes is a cost that both companies are trying to drive down by outsourcing to factories overseas. Although New Balance does not have nearly as many overseas factories as Nike, they do use outsourcing to manufacture the technical pieces of the products. In addition, New Balance is moving toward the trend of all manufacturing industries in the U.S., which is to outsource production to factories overseas. A low cost strategy also works well when the industry's…[continue]
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Therefore, it is important to use external sources of innovation. In addition to this, companies must take into consideration the fact that some of the best solution can be found in their external environment. The costs associated with the company's activity are significantly affected by its open innovation strategy (OPINET, 2010). This is because this strategy leads to reduced costs of the research and development process. By collaborating with other
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