Five Forces Analysis of Adidas
Adidas is one of the leading names in the sports shoes and apparel industry. Apart from making sports shoes and apparel, it makes sports accessories too. During recent years, the brand has seen somewhat faster growth which has mainly resulted from its renewed focus on marketing. Despite stiff competition from Nike, the brand has found faster growth in recent years. Reebok, another brand that Adidas acquired has also posted double-digit sales growth across key markets. Apart from growth in revenue, the brand has also registered an improvement in operating margin.
This is a five forces analysis of Adidas that evaluates how the brand is impacted by the five forces that are a part of every industry and every market. It was Michael E Porter who developed these five forces model. It is an effective model that helps businesses and business managers judge the attractiveness and competitiveness of any industry. This five forces analysis highlights the forces that are favorable and unfavorable for Adidas and how that affects its ability to overcome competitive forces in the industry.
Bargaining power of the suppliers:
Despite the important role of suppliers in Adidas’s business, their bargaining power is very low which is because of the large number of suppliers in Adidas’s supply chain. It is because of their high number and smaller size that the suppliers cannot yield enough bargaining power. While some of the suppliers are large in terms of size and hold some clout, most suppliers do not. Moreover, it is easier for the brand to switch to new suppliers. However, if a supplier risks losing business from Adidas then it can mean a major loss for the supplier.
Its suppliers are distributed globally and singly none of them can exert any pressure on Adidas. Most of the production at Adidas is outsourced and it works with more than 1000 independent factories in 63 countries. It has a global and multilayered supply chain with several types of suppliers in the chain, some of which are direct contractors and many are not. As a result, Adidas gets to set the rules of the game including labor and product quality standards, and the suppliers are required to comply with them. To ensure that the suppliers comply with the standards, Adidas has maintained a multilevel monitoring and enforcement process in place. In this way, it is visible that Adidas has a high level of control over its suppliers.
Bargaining power of buyers:
The bargaining power of buyers in the case of Adidas is low to moderate. While the individual buyers do not hold any significant clout, as a group they exercise somewhat significant influence. It has a significant competitor in Nike and apart from it, there are other big and small competitors like Under Armor and Puma. There are several local and international brands competing for market share in this industry. The switching costs are low for the customers. However, this factor to a large extent gets moderated by the product quality and marketing of Adidas. Adidas has focused on product quality, design, and performance and it is why the brand has been able to build an impressive level of customer loyalty. It is why the bargaining power of the customers gets reduced and becomes low to moderate.
Threat of substitutes:
The threat of substitute products before Adidas is moderate. Its number of competitors is not very large and yet not so small either. There are small and large; local and international competitors which offer products under a wide range of prices. Some of them cater to the needs of the high-end customer whereas the local competitors offer substitutes at lower prices. The threat from the substitute products is moderated by the quality of products and marketing efforts of Adidas. In order to further moderate the threat, Adidas has focused on marketing in the metropolitan markets since a large part of its customer base lives there. Apart from Nike and Puma, there are more brands in the industry that compete with Adidas. However, factors like quality, marketing, technological innovation, and product innovation have helped the company moderate the threat from substitute products offered by rival brands.
Threat of new entrants:
The threat of new entrants for Adidas is low to moderate. While a brand can enter with a small capital on a local scale, to grow a brand to the size of Adidas at a global scale requires a very large investment which can be understood from the size of its production and supply chain. There are several factors requiring large investment like technology, skilled human resources, marketing, advertising, etc. So, unless someone has enough capital to spend entering the industry would be difficult. Moreover, one cannot build as much brand equity overnight. It also takes time as well as efforts to build as much brand equity. All these factors moderate the threat arising from any new player trying to enter the industry. Entry is not impossible but the entry barriers are still high. Moreover, the economies of scale that the incumbent players like Nike or Adidas have achieved are difficult to achieve for new players. The new players would have to stay satisfied with smaller profit margins compared to the leading and established players. Competing against established players like Nike, Adidas, Puma, and others would require a significant competitive edge that may be very difficult to achieve for a new player.
Level of competitive rivalry in sports fashion industry:
The level of competitive rivalry in the industry is high. Apart from the main competitors like Nike, Puma, and Under Armour there are several other competitors too like New Balance, Converse, and Fila which add to the level of competition in the industry. While the level of saturation in the industry has grown, the existing players are also engaged in an intense battle for market share. All the brands are investing heavily in marketing and spending billions on advertising and sponsorships. While the number of top brands is limited, still the level of competition in the industry is intense. In recent years, the leading players have increased their investment in digital technology to maintain their market share and provide their customers with an outstanding shopping experience.