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Five competitive forces in sport business environments

This is an excerpt from Applied Sport Management Skills, by Robert N. Lussier and David C. Kimball.

Industries vary widely in their business makeup, competitive situation, and growth potential. There is need for different sport management strategies in different areas. To determine whether an industry is worth entering requires answers to such questions as "How large is the market? What is the growth rate? How many competitors are there?" Callaway Golf Company, for example, faces strong competition from Acushnet (Titleist brand), Adams Golf (Tight Lies Fairway Woods), TaylorMade, and Orlimar (TriMetal Fairway Woods).

Michael Porter uses the idea of five competitive forces to analyze the competitive environment.

1. Rivalry among competing firms: Porter calls this "the scrambling and jockeying for position." Businesses compete for customers by price, quality, and speed (responding to new styles and models and getting these products quickly to retailers). Nike, Adidas-Reebok, Puma, and Fila are rivals in the athletic footwear industry. All four of these companies need to anticipate the moves of their competitors. They also need to be aware of newer competitors such as Under Armour.

2. Potential development of substitute products and services: This occurs when companies from other industries try to move into the market. For example, Crocs are slip-on shoes that have become popular in water sports and as a fashion item. Crocs normally come in bright colors and are easily recognizable. Crocs recently formed an alliance with the NFL to sell Crocs shoes in professional team colors.

Clothing manufacturers such as Tommy Hilfiger have attempted to enter the sneaker market using their fashion brand to their advantage. Also, "brown shoe" companies, such as Doc Martens, persuaded many younger buyers to buy hiking-style sneakers instead of the traditional sport sneakers. The brown shoe companies were quite successful in stealing away sales in the mid- to late 1990s.

3. Potential entry of new competitors: How difficult and costly is it for new businesses to enter the industry? Does the company need to defend itself against new competition? Under Armour, founded in 1996, has successfully entered the high-performance apparel industry.

4. Bargaining power of suppliers: How dependent is the business on its suppliers? If the business has only one major supplier and no available alternatives, the supplier has great bargaining power. Conversely, a business can have bargaining power over the supplier. For example, Nike doesn’t manufacture its own sneakers; it uses private contractors in Vietnam to produce the sneakers. Workers are paid very low wages, which indirectly gives Nike a great deal of power over these oftentimes helpless factory workers. In effect, because Nike can easily switch factories, it controls the suppliers.

5. Bargaining power of consumers: Satisfied customers are the key to long-term success.23 How much does the business depend on the consumer? Consumers of footwear have power because they can shift to other manufacturers on a mere whim or because of a new style, better price, higher quality, greater convenience, and a host of other reasons. However, consumers lose power when they are loyal to a business like Nike and want to buy only Nike footwear. Because there are many consumers who want Nike products, Nike is in a strong position as long as it continues to offer appealing products.

Companies use analyses of the industry and their competitors primarily at the corporate level when they are deciding which lines of business they should consider entering (or exiting) and how to allocate resources among their product lines.



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