dbmaltby

Daily thoughts, observations, and speculations

Chapter 3–Porter’s 5 Forces

Despite the idea that Under Armour did not invent the “performance apparel” market, they were the first to master the compression undergarment and focus on the team concept. These two idiosyncrasies carved out their company’s strategy. They touted their quality, wherein CEO & founder Kevin Plank convinced customers that his product’s considerably higher price was worth the expense because it saved money in the long run. Their garments had durability and longevity. This was clothing that removed the need to change multiple times during one practice, additionally it lasted through many team practices. Eventually, Under Armour further differentiated its product by applying its patented technology to the likes of shoes and outer garments. Mr. Barney tells us that a company’s strategy centers on differentiating itself in cost or quality, and UA sells on quality. It offers a more effective product to help the entire team. They have aggressive marketing campaigns, which make it harder for potential entrants to differentiate their products in the mind of the consumer. The aforementioned can be summarized by Porter’s Five Forces. These forces give a sense of what a company like UA faces within its industry. A closer look at the three most threatening forces (threat of substitutes, entry, & rivalry) shed light on UA’s strategy and competitive advantage.

In UA’s industry, the threat of substitutes exists when other forms of sports apparel compete with UA’s product form. This threat is very high. In performance apparel, a garment goes beyond its most basic utility of providing coverage. There is a performance feature which can have several forms and function. This enables firms to create many substitutes by altering small features on each particular garment to give the athlete different perceived results. The likes of Nike and Reebok have designed multiple underlying technologies to improve an athlete during different performance conditions and ultimately persuade him/her to purchase that product instead.

The second largest threat to UA is the threat of competitive rivalry, which are issues associated with many or equivalent rivalries.  UA faces a lot of different players: Reebok, Adidas, Puma, Nike, Champion, etc. And because of this, the prices on much of their clothing have come down over the years. The sports performance industry is heavily reliant upon aggressive marketing, wherein the firm creates a perceived benefit from their article of clothing. Nike has a large amount of revenue created in sales, and a very large percentage of that goes to marketing (think endorsements with Michael Jordan, etc.) Unfortunately UA does not have that kind of firepower. A good metric to look at is the firm’s operating margin, wherein it reduced from 12.4% to 10.6% from 2004 to 2008. Meanwhile, Nike’s climbed from 12.6% to 13.1% in that same time (Motley Fool). So in this industry, UA has trended a decrease to 10.6 cents for every dollar of sale while Nike has increased to 13.1 cents for every dollar of sale.

Their next threat to their competitive advantage is from the threat of entry from new competitors. This is a moderate threat. There are many existing sport’s apparel firms that have the working capital to penetrate the performance apparel market. On the contrary, it is hard for a new firm to enter the market because a large portion of their operating budget must be committed to marketing and promotion in order to win over the customer. All of this makes it a moderate threat to UA, and indeed UA was able to enter because of their unique take on the market (marketing to the team) and their indispensible technology (the compression undergarment).

To review once more: threat of substitutes is very high, threat of rivalry is very high, and the threat of entry is moderate. These forces help you better understand UA’s state within the performance apparel market. They speak to UA’s strategy—a firm operating by offering high quality garments and accordingly receiving profits by asking a premium price. UA has their work cut out for them to overcome the threats within their market and sustain their profits. Both quantitative and qualitative factors considered, they continue to attract customers willing to pay extra for their product.  They are going to have to be flexible (which they are) with their strategy and continue to innovate new products to stay ahead of the competition. These new products keep their loyal customer base returning for more purchases. Perhaps once they start making more sales revenue, they can contribute more to their marketing campaigns. All of this will help Mr. Plank successfully navigate his company.

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This entry was posted on February 3, 2013 by .
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