German multinational fashion company Adidas is the second largest sportswear manufacturer in the world. However, Nike still dominates the landscape in terms of market share and revenues. It is still a strong competitor within the specific sportswear market and a relevant player in the broader clothing market or textile and apparel industry. This article analyzes the industry and competitive positions of Adidas using the Five Forces model of Michael E. Porter.
Analyzing Adidas Using Porter’s Five Forces Model: A Look Into Its Industry and Competitive Positions
1. Industry or Competitive Rivalry
Competitive rivalry is a strong force for Adidas. It competes with several sportswear brands such as Nike, Under Armour, and Reebok, and even with substitute brands from fast-fashion companies and other casualwear and formalwear brands to create an intensely competitive environment.
This force compels the company to be as aggressive as its major competitors while also preventing it from making drastic decisions that can turn off its target market and existing customers. Take note of the specific factors:
• Moderate Number of Firms Relative to Market Size: The firm-to-buyer concentration ratio has a moderate level. There are several alternative sportswear brands in the market and there is a slew of other clothing and apparel brands or substitute brands with multinational and localized market presence.
• Low Rate of Market Growth and Market Saturation: Note that the broader clothing and apparel market is still saturated due to the overabundance of brands. The specific sportswear market has notable participants that provide consumers with more options. This market saturation creates a lower prospect for market growth.
• High Level of Marketing Activities and Expenditures: Sportswear brands such as Nike and Under Armour, as well as other substitute clothing and apparel brands H&M and Gucci intensify further the competition through their aggressive marketing activities and big expenditures for promotion and specific advertising.
• High Level of Competitive Advantage from Competitors: Alternative brands and substitute ones also have unique competitive advantages that allow them to promote differentiation or cost leadership. These include developing proprietary production inputs or optimizing their supply chain to cut down production costs.
2. Threat of Substitutes
Other clothing and apparel products are substitutes for Adidas products. Remember that this company focuses on sportswear and sports accessories. However, sports-related products are still considered non-essential compared with casualwear products.
The company addresses this force similarly to how Nike promotes the relevance of its products. Both companies have communicated the importance of an active lifestyle and normalizing sportswear. The threat of substitutes is a strong force. Below are the factors:
• High Level of Substitutes and High Level of Differentiation: Remember that there are different substitutes for sportswear. These include casualwear and formalwear products. Several brands or companies have also made unique selling propositions. Examples include the affordability of fast-fashion clothing items or the quality and stature-related images of high-end or luxury fashion brands.
• Low Switching Cost and Relative Price Advantages: Adidas products are more expensive than substitute products from several casualwear brands and even unknown brands. A pair of casual shoes is around 50 percent less expensive than Adidas running shoes. Some of these brands even bank on a penetration pricing strategy.
• High Ease of Substitution and Moderate Need For Substitution: It is easy for a consumer to substitute sportswear for casualwear or even formalwear because of the abundance of substitute brands and products in the market. The need for substitution comes into play either when this particular consumer has lower purchasing power or if his or her needs are not aligned with the value proposition of sportswear.
3. Threat of New Entrants
Another force that affects the industry and competitive positions of Adidas is the threat of new entrants. This has a moderate impact. Entering the sportswear market has become easier through manufacturing outsourcing but doing so also requires brand development.
The company keeps this threat at bay by maintaining its brand presence and substantial market share. This force compels the company to remain as aggressive as possible and to be on top of its supply chain. The following are the factors:
• High Level of Brand Equity from Established Brands: Prominent brands such as Nike and Adidas have high levels of brand equity and even brand loyalty because of their established presence and aggressive marketing activities. New entrants need to have the same level of marketing activities to compete against these two.
• High Dependence on Having Solid Business Networks: Established sportswear brands have established relationships with their suppliers. They also have a solid distribution network across the world that comprises third-party and authorized retailers. These companies also have access to capital and other resources needed to expand their operations or invest in value-adding initiatives.
• Low Cost of Manufacturing But High Overall Costs: Manufacturing sportswear products has become more affordable thanks to outsourcing. Counterfeits attest to this fact. However, the overall cost of running a sportswear company is high because of the demanding and expensive marketing requirements.
4. Bargaining Power of Buyers
The bargaining power of buyers is a strong force for Adidas due to the existence of alternative products and substitute products from other brands. There is Nike, as well as cheaper sportswear brands such as New Balance. There are also casualwear and formalwear brands.
Nevertheless, because of the impact of this force, it prevents the company from setting its prices too high and limits it from experimenting with disruptive business models while compelling them to spend on product development and marketing. Below are the specific factors:
• High Availability of Options from Alternatives and Substitutes: Nike dominates the sportswear market. However, there are more affordable alternatives from New Balance and Reebok. Counterfeits can also be considered as alternatives. Adding to these is the presence of substitutes that give consumers more options to choose from.
• Low Buyer Switching Cost and High Sensitivity to Price: Sportswear products, unlike casualwear products, are not essential goods. There are cheaper alternatives and substitutes as well. A segment of the market can also be sensitive to price and are more prone to finding more affordable alternatives or substitutes. These factors mean that the switching cost from Adidas to another brand is low.
• High Differentiation of Alternative and Substitute Products: Reebok and New Balance have been positioned as affordable alternatives to bigger brands. Other brands such as Lacoste and Ralph Lauren focus on specific sports and target markets. Substitutes also have their selling points.
5. Bargaining Power of Suppliers
Modern clothing and apparel brands are dependent on suppliers for production inputs and manufacturing capabilities. Adidas is a large firm with a global market reach and a prominent brand name. The bargaining power of suppliers is a weak force.
The company has enough reputation to make it attractive to suppliers. Smaller and lesser-known companies do not have the same privilege as bigger and more established brands. Below are the specific factors that influence its relationship with its suppliers:
• High Number of Suppliers or Supplier Concentration: There is an abundance of suppliers of raw materials to choose from. There is also an abundance of manufacturers across different countries that can be outsourced. These facts or the high supplier-to-firm concentration ratio lower the bargaining power of suppliers.
• Low Degree of Differentiation Across Major Raw Materials: Adidas uses the same major raw materials as other sportswear and other clothing and apparel brands. Examples include cotton and the different types of fabric, rubber and leather, textile and fabric dyes, and packaging materials, among others.
• Presence of Dominant Business Customers in the Market: Remember that bigger and more established brands are more attractive to suppliers due to their higher income potential. These companies also have the resources and reach that allow them to order a high volume of supplies or enter into service contracts with longer terms.
• Low Possibility for Forward Integration and Vertical Integration: Suppliers still maintain a considerable level of bargaining power through a cost-efficient selling proposition that compels brands to outsource inputs and production from them instead of building and maintaining in-house capabilities.