Industry Attractiveness the Athletic Footwear

Industry Attractiveness

The athletic footwear industry is unattractive and will continue be so for the foreseeable future. Porter's five forces model can be used to illustrate this industry's lack of attractiveness.

For manufacturers, this industry is characterized by low supplier power. Most firms in this industry are larger than their suppliers, and among suppliers there is little differentiation. For example, Nike uses almost 700 suppliers, reducing supplier power dramatically. The industry is also characterized by low buyer power. Buyer volumes are insignificant and they are bound by brand identity and concentration within the athletic footwear industry. This manifests itself in high margins, as firms in the industry are able to command pricing.

However, there are high barriers to entry. There are significant volume cost advantages and economies of scale. There are low switching costs of the customers, and a newcomer may have reasonable access to inputs. Yet, there is a high level of expected retaliation and significant capital requirements, which are both formidable barriers. This manifests itself in limited access to inputs and distribution channels as the industry's main players shut down access.

There is low threat of substitutes, as there is a certain degree of performance expected of athletic shoes that cannot easily be replicated by other products. This manifests itself in a low buyer inclination to substitute. They may switch within brands, but are unlikely to substitute any other type of footwear.

The degree of rivalry, however, is high. The industry is concentrated, with a small handful of firms (Nike, Reebok, Adidas) owning most of the world's market share. There are significant exit costs for these firms, since they seldom operate in any other significant businesses. There is limited diversity between the rivals, either, which also increases rivalry. This manifests itself in intensive advertising campaigns, and costly endorsement deals.

Therefore, while the athletic footwear industry is an attractive industry in which to operate, it is not an attractive industry to enter. For firms such as Nike that have established economies of scale, it is a profitable business but slow growth has forced even Nike to focus on skate wear and casual wear for future growth. Athletic footwear is showing signs of maturity, and is heavily concentrated among a small group of top firms. Those firms are liable to be extremely hostile to newcomers, and there are high costs associated with entering the industry.

The industry has a couple of key opportunities. The first is expansion internationally. While athletic footwear is maturing in the core U.S. market, overseas markets are still growing. Nike, for example, operates in approximately 150 countries around the world. Also, there is room for brand and line extension. This leverages core brands and competencies to move into similar business. In recent years, Nike has built its Hurley and Cole Haan lines in recent years using their manufacturing and distribution competencies, and Reebok has expanded its core brand into ice hockey.

There are many threats to the industry, however. First, the slowing in the U.S. market has resulted in an increase in competition as growth prospects slow for the key firms. The industry is also subject to economic slowdown, especially the top firms, who generally operate with a premium pricing strategy. As most firms in the industry operate with a model featuring global procurement, they are at risk to increases in transportation costs, which cut into their margins.

Another risk is intellectual property rights violations. Two of the key global growth markets for athletic footwear are China and Russia, and both have terrible records with regards to protecting intellectual property. The result is a substantial threat to growth and profit prospects for major athletic footwear firms.