Michael Porter’s Industry Forces Model
Reebok International, Ltd. (1995): The Nike Challenge
Case Authored By:
Thomas L. Wheelen, Moustafa H. Abdelsamad, Shirley E. Fieber, and Judith D. Smith
Threat of New Entrants
Barriers to Entry
The athletic shoe industry is slowly becoming a global oligopoly. There are many barriers to entry preventing new entrants from capturing significant market share. Large athletic shoe manufacturers enjoy economies of scale that create cost advantages over any new rival. Today’s athletic shoes are highly technical. An extremely large capital investment is required for new firms to open athletic shoe factories and conduct research and design to create a popular athletic shoe. Recently, Nike has incorporated forward vertical integration into their corporate level strategy. Nike opened discount factory outlet stores in rural areas and retail stores in urban shopping meccas. Monolithic athletic manufacturing companies utilize economies of scale by spending millions on product endorsements and advertisements by spreading the high cost over their entire yearly sales. The aggressive marketing campaigns turn their products into household names making it arduous for new firms to compete. Athletic shoe manufacturers greatly attempt to differentiate their products from all shoe manufacturers. For example, Nike aggressively markets their shoes with a visible air chamber in the sole. Reebok pushes their “Pump” feature to increase product differentiation. The capital requirements can be a high entry barrier to a new firm to the industry. However, an existing dress shoe manufacturer may enter the athletic shoe industry simply by re-tooling their manufacturing plant. Access to athletic shoe distribution channels is a moderate barrier to entry. This all depends on the status of the entering firm. If they are a startup firm, it is extremely difficult to get shelf space at major shoe retailers. If the firm is currently in the dress shoe industry, and is entering the athletic shoe industry, they may use their existing connections to easily access athletic shoe distribution channels. Switching costs are very low for the athletic shoe industry. Shoes are relatively inexpensive personal goods that are frequently replaced. Cost disadvantages independent of scale are moderate. Many athletic shoe customers are brand loyal and are reluctant to try a new athletic shoe. Additionally, previous aggressive marketing campaigns have increased not only brand and individual product name recognition. Government policy is a low entry barrier, as all manufacturers in every industry are subject to factory safety laws.
Threat of Retaliation
The threat of retaliation is high in the athletic shoe industry. For example, if a small new competitor attempts to gain market share by dumping their products, the much larger computer firms are more capable of absorbing losses associated with driving the new competitor out of business. The threat of new entrants to the profit potential of athletic shoe manufacturers is minimized through high entry barriers, but incumbent manufacturers must stay aware of other shoe manufactures attempting to enter the athletic shoe industry.
Rivalry Among Existing Firms
In the athletic shoe industry, corporations are mutually dependent. A competitive move by one firm directly effects competitors, forcing retaliation or counterefforts. For example, Reebok’s expansion of the women’s walking shoe, inspired other firms to follow. The number of competitors is stable, partially due to high entry barriers. This adds to the rivalry among existing firms. Manufacturers watch each other carefully and make appropriate countermoves to match a competitors move. The rate of industry growth is stable, but the quest for global market share is...
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