The Sports Equipment Industry - Essay Example

?The Sports Equipment Industry Introduction The sports equipment industry has undergone tremendous changes for the recent decades mainly due to the technological developments in telecommunication sector. The sports equipment industry or simply sports industry manufactures and sells equipments which are essentially required in sports items. Nike, Inc. is a US based publicly traded company headquartered at Beaverton, and it supplies sportswear and sport equipments worldwide. The company was founded by Bill Bowerman and Philip Knight on 25th January 1964 in the name Blue Ribbon Sports. The company is one of the world’s leading players which mainly focuses on athletic shoes and apparel. The company acquired annual revenue in excess of US$ 18.6 billion for the fiscal year 2008 despite the adverse impacts of the 2008 global financial crisis. Although Nike markets many of its products under its own brand, it also markets some additional brands including Nike Golf, Nike Pro, and Nike Skateboarding to effectively market its sports equipments across the globe. This paper will analyse micro as well as macro business environments of Nike, Inc. using appropriate analytical tools and a strategic fit analysis. TASK A - Market Environment Analysis In the section, different market analytical tools are used to evaluate the business environment of the Nike. Here, Porter’s five forces model is applied to analyse the sports equipment industry (micro environment) and PEST analysis is deployed to evaluate the market potentiality of the Nike, Inc. (macro environment). Porter’s five forces analysis Currently, the sports equipment industry constitutes a larger number of companies dealing with production and distribution of numerous and different sporting and athletic equipments. The total market capitalisation has reached nearly $8 billion and it is still growing. Most of the players in the sports equipment industry are grand corporate structures such as Nike, Easton, and Wilson; they offer equipments to a variety of sports items. In contrast, other companies like Callaway and Schwinn own noticeable market share and prominence in their specific area of focus. Sports equipment manufacturing companies mainly make use of two means of distribution. Wholesalers and retailers constitute the most common avenue of distribution whereas the company-owned and contracted specialty shops shape the second mode of distribution. In order to popularise their products and dominate the market, most of the sports equipment companies tend to sponsor high profile or top-rated sportsmen and athletes. In addition, such companies are also willing to undertake the sponsorship of major sporting events like World Cup Football as part of promoting their products. Threat of substitute products and services In general, sports can be easily substituted with a variety of different other activities, and therefore the threat of substitutes is very high in sports industry. To illustrate, people may easily turn their interest from physically demanding athletic or other sports activities to video/computer games. However, higher prevalence rate of obesity in the United States influences people to turn to healthy and fitness activities (U. S. Department of Health and Human Services). This situation relieves the sports industry from the threat of substitutes to some extent. At the same time, the substitution threat exists even in the sports industry itself. For instance, people may choose to play basketball rather than golf. Intensity of rivalry among competitors The intensity of competitive rivalry is very high in the sports industry and many sports equipment companies have been thrown out of the market due to this higher degree of competition. While analysing present trends in the sports industry, it is obvious that companies are striving for their market competency and searching for industry consolidation. It seems that most of the sports equipment companies adopt mergers and acquisitions strategy in order to broaden their product lines, to increase economies of scale, and thereby to stay competitive in the industry. For instance, the K2 acquired seven different firms and smaller sectors of other organisations in 2004 while Russell Corporation successfully completed six acquisitions. Threat of new entrants While evaluating the current landscape of the sport industry, the threat of new entrants varies from country to country. To illustrate, there are a number of highly established sports goods manufactures in economically developed countries. Therefore, the threat of modern entrants is relatively low in such countries as new entrants need to make a huge initial capital investment in those markets to effectively vie with the existing large players. However, the situation is different in a global context. Lower production costs in overseas firms assist new entrants to economically develop generic product lines and market them globally. Hence, it can be stated the threat of new entrants is moderate in the sports industry. Bargaining power of buyers As Duncan (2005, p. 43) points out, majority of the sports equipment companies do not sell their products directly to ultimate consumers but they sell to retailers. Retailers may bargain on product prices, delivery time, and degree of responsibility for inventory management. The bargaining power of buyers has increased over the past few years in respect to these demands. In addition, retailers have the legal right to impose penalties on sports goods manufactures if the timing, packaging, and coding of product deliveries seem to violate the terms of “compliance rules”. It is also seen that retailers are currently reluctant to devote their shelf space to low profit items as they give first priority to profitability. Bargaining power of suppliers Suppliers of sports industry are mainly located in countries like Canada, China, Taiwan, and Mexico. The bargaining power of suppliers is relatively low since sports equipment manufacturers can easily switch their demand from country to country depending on the cost of products and services delivered by the suppliers. Most of the labour-intensive jobs are distributed among these foreign suppliers on the ground of their cost structure. Generally, it seems that sports equipment companies play the role of a middleman who receives goods from suppliers and sells to retailers. Hence, the weaker bargaining power of suppliers seems to be a potential strength of sport equipment companies. Evidently, Porter’s five forces model analysis reveals that the current trends in the sports industry can contribute to the long term sustainability of the Nike. Sport industry includes well reputed brand names and immense opportunities to develop further with the expanding product categories and improving technological innovations within all areas of sports. PEST analysis The PEST analysis will explore different aspects of the macro environment in which the Nike operates. Political factors The US political spectrum largely helps the growth of Nike as the governmental polices greatly assist the company to effectively advance with its products. In addition, the macroeconomic stability, stable currency, low interest rates, and the higher competitiveness of the tax system are some the significant strengths of the US economy that aided Nike to expand its business territories globally. Economical factors While analysing the economic landscape of the country, it is clear that US economy is still experiencing the adverse effects of 2008 global financial crisis and associated recession. Since the consumer purchases are progressively diminishing, the Nike is struggling to retain its global market position (Nike Inc). Since most of the Nike products are manufactured in Asia, the Asian economic crisis also adversely affected the company. Recent market reports show that labour costs and material prices are going sky heights. These worse economic conditions affect the sales volume of the Nike as purchasing power of consumers has declined. Social factors The growing concerns over health and body fitness have increased the demand for sports materials such as exercise apparatuses, shoes, and other equipments. Nike is identified to be the first option for the US people since the company’s brands have been well established in the country. However, the company has failed to deal with the worksite issues at its production locations in Asia. Obviously, the situation has adversely affected the firm’s market reputation since modern societies tend to welcome more socially responsible organisations. Technical factors Nike effectively applies information technology in its marketing information systems for the purpose of innovation, segmentation, and differentiation in most of its business areas. Since the US is one of the most technologically developed country in the world, the firm possesses highly improved technologies. Hence, the company applies this competitiveness to each and every aspect of the product from development to distribution. In short, the robust sales of Nike’s products across the globe can be attributed to the technological effectiveness of the company to a great extent. Critical success factors Undoubtedly, the ability to adapt with technology is the most critical success factor for the sports industry. In this industry, products are being frequently developed and timely redesigned so as to cop up with the changing requirements of the sports sector. For instance, the inability to adapt with technology caused troubles to Louisville Slugger (a manufacturer of wooden bats) when Easton introduced aluminium bats as this innovation took the bat making sector in a new direction. Similarly, diversified product lines will serve the sport equipment companies better as this strategy may assist firms to reach consumers and athletes in different segments. Normally, small players cannot quickly diversify its product lines as they (firms) may not have enough funds to expand their business. Under such circumstances, mergers and acquisitions would be the most cost effective strategies for small sports equipment companies to diversify their product lines. Finally, brand strength will also contribute to the rapid development of sports equipment sector. In the same way, in sports industry, sponsorship will highly contribute to the brand promotion. Task B - Sports equipment company strategic analysis In order to evaluate the resource capability and core competencies of the Nike, the SWOT is the most effective analytical tool. This technique would assist the Nike management to match its resources and capabilities to the competitive environment in which the company operates. Strengths The globally recognised brand names seem to be the most potential strength of the company as they assist the company to increase sales volume. The company maintains healthy relationship with its competitors and it relieves the firm from immense market pressure. As part of its promotional strategy, the company sponsors top rated athletes which in turn helped the Nike to gain wider market coverage. The Nike does not have its own production plants; rather the company seeks the services of contract factories to get the finished goods. This business policy makes the company free from the risk elements associated with production process. Currently, the company has contracted with over 700 firms worldwide in about 45 different countries. In addition, the company possesses potential strengths in terms of its research and development operations and innovative product range. Nike takes maximum efforts to deliver high quality goods to its customers at the lowest possible price; and in times of price hike, the firm tries to trim down its cost of production by changing the production point. The company employs over 30,000 people globally and it belongs to the Fortune 500 companies. Finally, the firm uses high quality raw materials to make its products attractive and easily recognisable to people. Weaknesses Although Nike has a diverse range of product lines, the company’s revenues are still largely dependent on its footwear market operations. Such a condition can make the company heavily vulnerable to market failure if the share value of the footwear market erodes for any reason. Since the retail sector is very price sensitive, retailers tend to market cheaper products as this strategy is more beneficial for them to easily exploit market opportunities. Such practices of retailers may pass some level of low price competition pressure on to the Nike. It seems that the company is reluctant to disclose its all information and hence stakeholders including general public do not get the opportunity to make a comprehensive evaluation on the company performance. Previously, the company was charged with breach of overtime policies, minimum wage rates, and exploitation of cheap workforce overseas. Hence, most of the people hold the view that the company provides poor working conditions to its employees. In addition, the company is alleged to have deployed child labour in Pakistan and Cambodia in the production of soccer balls. In addition, Nike is being widely criticised by anti-globalisation groups for its unruly approach. Opportunities Although the management strongly holds the view that Nike is not a fashion brand, market researches indicate that a large portion of consumers use Nike products as a fashion trend rather than participating in a sports event. The young generation considers Nike as a fashion brand and therefore they buy Nike products as part of adapting to modern market trends (Squidoo.com 2011). However, there are a large number of regions that still need to be targeted. Since the company has strong global brand recognition, it can easily enter new market segments which have surplus income to spend on sports materials. For instance, emerging markets like India and China have a potential group of rich consumers. Corporate brand promotion programmes and sponsorship agreements provide the company extensive opportunity for corporate marketing, which is the concept determining the level of market growth of a company. In addition, the company may enter new areas of business on the strength of its globally recognised brand names. Threats Operations in different currencies may destabilise the costs and profit margins of a company over a long period of time, and sometimes it may lead the company to net losses. Although Nike is currently dominating the global sports market, its competitors are constantly trying to develop stronger brands and improved technologies to take away the company’s market share in the industry. Since price is paramount in the modern world, consumers will switch their demand from Nike to another sports equipment company if the new company offers same value products at a more affordable rate. Hence, price sensitivity among modern consumers is identified as one of the most potential threats to Nike. The company’s market operations raise challenges to the environment once the environmental sustainability has become an important matter of concern. Economists anticipate that a recession may cause the Nike to face job shortages in its worldwide branches and such a situation would threaten even the existence of the company. Moreover, the company has received many negative public feedbacks as a result of its excessive advertising practices. TASK C- Strategic fit analysis Strategic fit analysis or strategic match analysis is used to evaluate the extent to which a company is matching its resources and capabilities with the opportunities identified in the micro as well as microenvironment. This tool is potential for assessing the current strategic situation of an organisation and market opportunities such as mergers and acquisitions and divestitures. A strategic match analysis can identify a unique combination of resources and capabilities that can be progressively developed into a competitive advantage. While analysing the leverage factor of the company, it seems that the Nike’s current strengths are adequate enough to exploit the identified opportunities. Globally recognised brand names and effective market practices are the competitive strengths of the company. Likewise, recovering international economies offer potential opportunities for the company. The highly established profile of the Nike assists its management to easily take advantages of recovering global economies. At the same time, the declining profitability can be a constraint to the operational efficiency of the Nike as the company cannot form expansion strategies when it is struggling with fund deficiency. Therefore, it is advisable for the company to make business alliances with foreign firms in order to expand its business territory. The above market analyses (Porter’s five forces model, PEST, and SWOT) point to the fact that company can use its competitive strengths to overcome its external market threats. If the company effectively applies its larger market share, it can easily confront with developing brands and other techniques. To illustrate, currently the Nike dominates the US market segment; and if the company thoughtfully continues its operations in the country, for new competitors, the process of market entry would be a difficult task. From the Porter’s five forces model analysis, it is evident that the company has high level of bargaining power. Therefore, the company can acquire sports equipments at cheaper costs from its suppliers and this cost effectiveness can be effectively used to defend the price sensitive nature of consumers as well. However, some severe market threats including changing demographics raise challenges to the company as Nike operates with a poor competitive strategy. In total, the company has adequate product lines to keep its competitiveness, whereas it lacks effective operational strategies to manage the competition. Hence, the management must specifically focus on strategic management as its competitors are growing vehemently. Conclusion In total, sports industry offers a range of potential opportunities to Nike despite the impacts of stiff market competition in the industry. Similarly, the broadened macro environment of the company also adds value to the market operations of the company. Well established brand names and larger market share are the major strengths of Nike. The strategic fit analysis indicates that the company’s available resources and capabilities are potential enough to exploit the emerging sports market opportunities provided that the company redesigns its operational strategies. References Duncan, T 2005, Principles of Advertising and IMC, Tata McGraw-Hill Publishing Company Limited, India. Nike, Inc: Corporate Responsibility Report n.d,’ Overview’, Workers and Factories, Viewed 08 December 2011, Squidoo.com 2011, ‘Fashionable air Jordan sneakers for sports fans’, Viewed 08 December 2011, Read More