Under Armour Inc.’s Porter’s Five Forces Analysis

Under Armour, Inc. is a sports clothing company started by Kevin Plank in 1996. The firm has its headquarters in Baltimore, Maryland in the United States of America, and corporate offices in many other states across the country. The company has expanded its operations to South America, Asia-Pacific, and Europe. In the past, the focus of this firm was to provide t-shirts for football players in the United States. However, the business operations of this firm have changed. Currently, the firm offers a wide range of sportswear and apparel meant for athletes in different fields.

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Mission Statement

The management of this company have developed the following mission statement meant to guide its strategic direction in the market: ‘To make all athletes better through passion, design and the relentless pursuit of innovation’ (Rumelt, 2011, p. 17).

As shown in the above mission statement, the firm has adopted innovative strategies to develop products to meet needs in different markets. Its sportswear targets athletes in a wide range of fields and seek to provide them with unique products. The management’s grand strategy of manufacturing sports clothing for different weather conditions has earned it a great success in the market. This has helped in opening up the scope of operations of this firm, a move that is responsible for its success in the market. Currently, this firm is emerging as one of the major market players in sportswear companies in the United States and Europe. In this case analysis, the researcher will look at the strategic issues and external environmental forces that are affecting operations of Under Armour, Inc.

Strategic Issue

Strategic Profile and Prospects

Under Armour, Inc. has expanded its market operations beyond the borders of the United States and has started offering other sportswear such as shoes and accessories. This was a strategic move meant to increase the firm’s revenue in the market. However, the firm is experiencing greater market competition than it did before when it only focused on t-shirts within the American market. The firm now faces stiff competition from top industry players such as Nike, Puma, Adidas, and Umbro, among others. The firm is highly competitive in its field. The problem of competition is not unique to this firm but poses a serious threat to its success in the global market. The prospects for strategic success for this firm are good because of its innovative nature. However, it will need more than innovative strategies to manage the reality of stiff global market competition.

Strategic Issue

The top management of this company has been keen on using innovation as a way of managing most of the challenges that this firm faces in the market. The time has come when the firm must realize that success largely depends on its ability to withstand both short-term challenges and broader strategic issues to achieve success. The top managers must find a way to provide value to shareholders, grow sales and profitability and provide a sustained competitive advantage in the market. The following question highlights a clear strategic issue that shall form the basis of the report’s recommendations.

What are the short-term and broader strategic factors that management should consider to offer shareholders the best value, increase sales and profitability of the firm and create sustained competitive advantage for Under Amor, Inc.?

External Analysis

According to Hall and Yip (2016), the success of a firm in a given market is often affected by the external environment. Under Armour, Inc. seeks to achieve a competitive advantage in the market, it must understand these external environmental forces and learn how to approach each one of them to achieve the desired success.

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Porter’s Five Forces Analysis

Using Porter’s Five Forces model, it is possible to understand the climate in the market where the firm will be operating. The threat of new entries into the market where Under Armour, Inc. is operating is moderate. Time and cost of entering the market are relatively low, but the specialised knowledge needed, based on what this company currently offers, is relatively high. The market has few barriers to entry but the technology needed for production may be prohibitive for new firms. These new firms may enter the market, but the process may pose several challenges. Competitive rivalry is another critical factor that must be analyzed in this market. The current number of competitors in the industry is high and quality differences in some of the products involved are low. Customer loyalty, especially towards some of the dominant brands such as Adidas, Nike, and Puma, is very high. These factors make competitive rivalry in the market for Under Armour, Inc. quite intense. Thus, the firm has the difficult task of convincing new customers to trust its brand.

The power of buyers is another issue in the market that the management must understand. The number of customers in the market is high, but the most attractive segment of the market comprises organizational buyers. These buyers are price sensitive and have high bargaining power in a market that also offers several alternatives. However, quality is a factor that most of these buyers cannot compromise on. It is right to say, therefore, that the power of buyers is strong. The power of suppliers is another issue of concern. According to Terpstra, Sarathy, and Foley (2012), customers value consistency in terms of product delivery. However, that consistency can only be achieved if supplies are made available in a reliable manner.

The number of suppliers of the raw materials used by this company is relatively high. The cost of accessing some of these raw materials has gone down, according to a study by Thompson (2016). However, some of the suppliers are relatively large entities with strong bargaining power. Based on these factors, it is apparent that the power of suppliers in this industry is moderate. The last factor in this model that the management of Under Armour, Inc. will need to understand is the threat of substitutes. According to Wallusch (2016), the threat of a substitute is primarily determined by the ease with which substitute products can be used instead of a given product, along with the cost of the substitutes. Sportswear is almost irreplaceable. From sports shoes to the sports jersey, sportspeople need to find the right clothing and accessories to undertake their activities to the best of their ability. As such, the threat of substitutes in this industry is very low.

Key Success Factors

Successful firms have learnt how to come up with ways of managing market forces and gaining a competitive edge over market rivals. According to Williams (2016), understanding key success factors is very important because it will help a firm to grasp what it needs to do in the market to achieve the desired success. It helps a firm to know how it can survive in the market despite negative environmental market forces. In the industry where Under Armour, Inc. operates, one of the most important key success factors is the ability to drive efficiency through e-commerce, as technology is redefining market operations for firms in modern society. Using e-commerce, Under Armour will be able to reach a wider market without necessarily opening up brick-and-mortar stores. The strategic implication of this factor is that the firm will incur lower operations costs by focusing on reaching customers through an online platform.

Utilizing employees strategically is another key success factor that the management must embrace. As Wallusch (2016) says, in an industry that is highly competitive, one of the ways through which a firm can achieve success is by embracing innovative strategies. Innovation should be used to develop new and better products and to come up with better strategies for delivering products to customers in the market. When the management engages the firm’s employees in a way that promotes innovation, then the firm will not only be able to embrace change but it will be a change driver. The strategic implication of this factor is that this company will be flexible to change and capable of embracing emerging technologies in its production and marketing strategies.

Strategic market segmentation is the third factor that the management of Under Armour, Inc. should be very keen on in the market. Sports clothing has a very specific market segment, with each component varying in attractiveness based primarily on the size of the segment. As Thompson (2016) says, instead of offering a wide variety of sportswear, a firm may need to identify the most attractive segments of the market and come up with the most unique ways of meeting the needs of the selected segments. Under Armour, Inc. may select segments with an eye to meeting its needs in the best way possible. The segment must also be attractive in terms of its size to support the operations of this firm. The strategic implication of this factor is that this firm will be manufacturing products to meet the special needs of the selected market segments.

Industry Profile and Attractiveness

The analysis of the characteristics of the sportswear industry conducted above shows that there are some opportunities as well as threats that this company will have to be prepared for, especially given that it has decided to expand its operations beyond the United States. The growing popularity of sportswear, even among non-athletes, is creating a huge market for the products provided by Under Armour, Inc. and other companies within this industry. The growing size of the middle class in some regions such as China, India, Brazil and Japan means that the purchasing power of customers is on the rise. However, the firm must be ready to deal with competitive rivalry, power of the suppliers and buyers and the threat of new entries into its current markets. The nature of the industry is very attractive to incumbents, especially in terms of profitability. The prospects of the industry are bright because of the growing popularity of different sports in various parts of the world. However, the challenges mentioned above may hinder Under Armour’s ability to take advantage of these new opportunities.

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Company Situation

Under Armour has become a major player in the global sportswear industry; it is important to investigate its current situation and how it fares in its market operations. Conducting a comprehensive financial and SWOT analysis will help in determining the company’s situation in the market.

Financial Analysis

Conducting a comprehensive financial analysis of Under Armour, Inc. and some of its prominent competitors in the market may help to determine the current situation in the market. One of the most important factors that should be analyzed is the sales growth rate for the company; thus, the sales growth rate for Under Armour, Inc will help in determining its growth in the market. The sales revenue of Under Armour in the financial year that ended on December 31, 2014, was USD 3,084,370. This value increased to USD 3,963,313, an increase of 28.5%.

The top three competitors of this firm in the international market include Adidas, Puma, and Nike. In the past three years, there has been an average drop in the sales revenue of these three leading competitors as shown in the appendix. The sales revenue for Adidas for the years ending 2015, 2014 and 2013 was USD 695,000, USD 600,000 and USD 1,089,000 respectively. These numbers show a consistent drop in sales that makes one believe that the lifecycle of the market is in a stage of decline. It appears the only way of achieving success is for firms in this industry to reinvent themselves and come up with unique products that meet unique customer needs.

Profitability ratio

The profitability ratios of the Under Armour, Inc. show that the firm’s activities are profitable. As a smaller competitor compared to dominant players such as Nike and Adidas, it is clear that the firm is making impressive profits in the global market. This is an indication that the firm has been making the right decisions in the market about its strategic growth.

Liquidity ratio

The liquidity ratios help in determining how well a firm can meet its financial obligations based on its liquidity. Analysis of Under Armour, Inc.’s liquidity ratios, especially the cash ratio, show that the firm is capable of meeting its financial obligations.

Leverage ratio

According to Williams (2016), a firm shouldn’t rely heavily on debts to finance its operations. The leverage ratios of Under Armour, Inc. show that the company relies more on debt than on shareholders’ equity to finance its operations.

Activity ratio

The activity ratios of this company, as listed in the appendix, show that this company has a moderate capability to convert its assets and liabilities into cash through sales.

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SWOT Analysis

Conducting a SWOT analysis helps in understanding the internal environment of this firm and how it may affect operations. The biggest strength of Under Armour, Inc. is its innovative capabilities. The company came up with Cold-Gear, special sportswear meant for athletes during cold seasons, which is designed to give warmth to players when playing or practising under very cold weather conditions. The company also developed Hot-Gear, sportswear meant for players during hot weather conditions, designed to keep the body cool when temperatures are high. Other innovative products of this firm include Tuff-Gear, Street-Gear and All-Season-Gear. These products give this firm a competitive edge over its market rivals.

Under Armour, Inc. as a sportswear company has several weaknesses that may affect its normal operations. The biggest weakness is its inexperience in some foreign markets. The firm has yet to have a mastery of emerging markets in Asia and parts of Africa. Its financial capacity is also not as strong as that of its market rivals. According to Thompson (2016), the sportswear industry offers some opportunities. The growing middle-class population in Asia and parts of Africa translates in practical terms to a very big opportunity. The firm should also take advantage of the growing popularity of sportswear in the global market. Competition is the biggest threat to the firm.

Recommendations

Strategy Recommendations

Under Armour, Inc. should consider several factors based on the above analysis. The following are the strategy recommendations that this firm should consider.

  • The management of this company should encourage innovation among its employees by developing innovation centres in various regions.
  • The firm should consider expanding its operations to new markets in Africa and other parts of Asia.
  • Under Armour should diversify its products in the market as a way of expanding its revenue stream.

Objectives

The objective of the above recommendations is to give Under Armour Inc. a competitive edge over its market rivals. If implemented, the company will continue on its path of innovation in the market.

Strategic Justification

The recommendations provided will allow Under Armour Inc. to gain a unique competitive position in the market. The innovation centres will provide a perfect opportunity for this firm to promote innovation in its operations. The current markets in which this firm operates are very competitive. Expansion into new markets will create new markets for this company. Diversification into new products will also help in creating alternative sources of revenue and will make it easy to overcome the threat posed by possible substitute products.

References

Hall, D., & Yip, J. (2016). Discerning career cultures at work. Organizational Dynamics, 45(3), 174–184. Web.

Rumelt, R. (2011). Good strategy, bad strategy: The difference and why it matters. London, UK: Profile.

Terpstra, V., Sarathy, R., & Foley, J. (2012). International marketing. New York, NY: Naper Publishing Group.

Thompson, A. (2016). Crafting and executing strategy, the quest for competitive advantage: Concepts and cases. New York, NY: Cengage.

Williams, E. F. (2016). Green giants: How smart companies turn sustainability into billion-dollar businesses. New York, NY: Cengage.

Wallusch, J. (2016). International TV market selection. Case study of Time Warner Inc. Hoboken, NJ: Wiley & Sons.

Appendices

Appendix 1: Porter’s Five Forces Model

Porter’s Five Forces Model

Appendix 2: SWOT Analysis

Strengths
  1. Highly innovative
  2. Dedicated management
Weaknesses
  1. Less popular brand name
  2. Relatively small market share
Opportunities
  1. The growing popularity of sportswear
  2. The growing size of the middle class in the Asian market
Threats
  1. Stiff market competition
  2. Erratic technologies

Appendix 3: Financial Analysis

Profitability Ratios

Profit margin

Gross profit margin = Profit margin/Net sales = 48.1%
Return on assets Return on assets = Net income/average total assets =3.68%
Return on equity Return on equity = net income/Average shareholder’s equity = 6.3%
Liquidity Ratios

Current ratio

Current ration = current assets/current liabilities = 3.13
Quick ratio Quick ratio = (cash & equivalents+ short term investment+ accounts receivables)/current liabilities = 1.40
Cash ration Cash ratio = (cash+ cash equivalents+ invested funds)/ current liabilities = 1.6
Leverage Rations

Debt/equity

Debt/equity ratio = Total debt/Total equity = 1.72
Interest coverage Interest coverage = Operating Income/ Interest Expense = 5.10
Activity Rations

Inventory turnover ratio

Inventory turnover ratio = Net sales/ average inventory = 0.1%
Total assets turnover ratio Total assets turnover ratio = Net sales/ assets = 39.5%
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