Five Forces Analysis of Puma
Puma is one of the most famous brands of shoes, apparel, and accessories that enjoys strong popularity in most corners of the world. Apart from its large range of products and a creative marketing strategy, the company is also known for excellent product quality. Puma is also one of the leading competitors of Nike and Adidas in various parts of the globe. However, it has built a very different brand image and identity for itself. Its consistent focus on product quality and customer experience has led to growth in overall influence in the global market. Puma is a German brand, founded in 1948. The company enjoyed impressive growth in 2018 compared to the previous year when its consolidated sales rose by 12.4% and reached €4.65 billion.
The shoe industry has grown highly competitive and apart from focusing on product innovation and customer experience, companies are also investing a lot in marketing and sustainability to maintain a strong social image and grow their customer base. Read a five forces analysis of Puma to understand its competitive position in the industry. Porter’s five forces are a part of every market and industry and apart from affecting the competitiveness of the business and industry, they also affect profitability. These five forces are dealt with in detail below.
There are several forces in the industry that affect the market position of businesses and their competitive strength. One of the simplest tools used industry wide and in academic circles to analyze the competitive position of firms and the level of competition in any particular industry is the Porter’s five forces analysis. It was named after Michael E Porter.
“Michael Porter is the founder of the modern strategy field and one of the world’s most influential thinkers on management and competitiveness. The author of 19 books and over 130 articles, he is the Bishop William Lawrence University Professor at Harvard Business School and the director of the school’s Institute for Strategy and Competitiveness, which was founded in 2001 to further his work and research.”
In a 1979 article titled How Competitive Forces Shape Strategy, published in the Harvard Business Review, Michael E Porter noted regarding his five forces model that it is the collective strength of these forces that ultimately determines the profit potential of any industry and it can range from intense to mild. The profit potential grows with the weakening of these forces. In each and every industry, a different force may be more prominent than the others. Porter offers three examples in his article. In the ocean-going tankers industry, it is the buyers who are the most important force whereas, in the tires industry, it is the powerful OEM buyers coupled with tough competitors. On the other hand, in the steel industry, foreign competitors and substitutes are the most prominent forces.
In Porter’s words,
“Every industry has an underlying structure, or a set of fundamental economic and technical characteristics, that gives rise to these competitive forces. The strategist, wanting to position his or her company to cope best with its industry environment or to influence that environment in the company’s favor, must learn what makes the environment tick.”
Michael E Porter in his HBR article, How Competitive Forces Shape Strategy.
Let us look at how these five forces affect Puma's business and competitive position and how it can best cope with these pressures.
Bargaining power of suppliers:
The bargaining power of suppliers in the shoe industry is low. Their low bargaining power can be attributed to several factors including small business size, fragmentation and lack of forward integration. A large number of these businesses are small businesses that supply raw materials to larger brands like Puma. Moreover, these businesses are fragmented and located in various corners of the world. They do not have the capability for forward-integration either and all these factors limit the bargaining power of suppliers. Moreover, a large number of these businesses depend heavily on brands like Puma for their revenue. So, Puma exercises higher bargaining power over its suppliers.
There are some more factors also that limit the bargaining power of suppliers. Larger suppliers may enjoy a little higher bargaining power but most raw materials that shoe companies like Puma need can be sourced from multiple suppliers. The suppliers also need to follow ethical business practices and supply chain best practices since large businesses are focusing on making their supply chains future proof and do not want to engage in business with suppliers that have a poor record in terms of business ethics or human resources.
Bargaining power of buyers:
The bargaining power of individual buyers may be small in the shoe industry. However, the overall buying power of consumers has kept increasing over time and is moderately high due to several factors including the level of competition in the industry as well as the increased focus on customer experience. Apart from that increased availability of information as well as the availability of a higher number of substitutes has also led to growth in the bargaining power of customers. Apart from popular brands like Nike, Adidas, and New Balance, there are several more brands including local brands that compete with Puma. Together, these factors have led to a higher focus on product quality and customer experience since the satisfaction of the customer is important for growth and success. Overall, the bargaining power of customers is moderately high. Some of the factors that limit the bargaining power of customers include product quality, marketing, brand image, and popularity.
The Threat of substitutes:
The threat of substitutes in the shoe industry mainly arises from rival brands. Apart from the larger brands with higher market share, there are also several smaller local brands with limited market share and presence that compete with Puma. Nike, Adidas and New Balance are among the main competitors of Puma but several other smaller local brands also make and sell shoes, apparel and accessories at lower prices. The overall threat of substitutes is moderate. Some of the leading factors that moderate the threat from the substitute products include product quality, brand image, market presence and marketing strategy of the company. Puma is a well-established brand that enjoys high brand awareness in most corners of the world and this is a leading factor that helped it manage the competitive pressure and grow its market influence. So, the overall threat from substitute products is moderate for Puma.
Threat of new entrants:
The threat of new entrants is moderate. It is mainly because the barriers to entry are not so high and anyone with capital and know-how can enter the market and start a shoe business. However, for the well-established brands like Puma that have a strong product portfolio as well as financial strength and other sources of competitive advantage, new entrants are not a significant threat to their market share. For a new entrant to grow into a major and market-leading business like Puma or any of its leading rivals Nike or Adidas, it will not simply take a lot of capital and excellent expertise but global expansion is difficult for a new player for multiple reasons. Some of these barriers are political and legal in nature. However, there are operational challenges also like establishing large manufacturing, sales, supply, and distribution network that would be complex for a new entrant. Incumbent brands aggressively work to protect their market share and grow influence in the market.
The Intensity of competitive rivalry:
The intensity of competitive rivalry in the shoe industry is high and it is why the level of focus on product quality, marketing, and operational efficiency is also high. Nike has several leading rivals including Nike, Adidas, New Balance, Reebok and many more, some of which are local brands operating in regional markets. While products by the leading brands including Puma enjoy high demand and popularity, competition is still one of the biggest barriers to faster growth globally. It is why Puma focuses on sourcing good quality raw materials, excellent product design, and marketing to attract customers. Retaining market share in a highly competitive industry environment also requires a very heavy focus on customer engagement and customer experience. The overall intensity of competitive rivalry in the shoes and apparel industry is high and the factors that work in the favor of Puma include its strong brand image, the popularity of individual products as well as marketing.