PESTEL and Five Forces Analysis of Nike

Introduction

Analyzing the external environment of a large company may involve excessive work, as well as observation and analysis of numerous factors. To organize the analysis, these factors can be divided into two categories: the general environment and its industry environment. The general environment will analyze the broader society that may affect an industry, while the industry environment analyzes the set of factors that can affect the competitive actions and competitive responses of a firm (Hitt et al., 2007). One of the most common tools to analyze the general environment is called PESTEL analysis, while to analyze the industry environment, managers usually utilize Five Forces analysis. This article will examine the PESTEL and Five Forces analysis of Nike to analyze its general environment and industry environment.

As the largest sportswear brand on earth, Nike should consider an astounding number of external factors. Using both tools, the various factors can still be examined and insight can be extracted. Based on the insight from the analysis, this paper will point out two strategic vulnerabilities of the company and provide a recommendation to address those vulnerabilities. Here is the PESTEL and Five Forces Analysis of Nike.

PESTEL Analysis of Nike

As the largest sportswear company, Nike has a tremendous number of external factors to be considered. The first group of factors can be categorized into the general environment which includes the dimensions of the broader society that influence an industry and the organizations within it (Hitt et al., 2007). One of the most commonly used tools to organize these factors is PESTEL analysis, which is an abbreviation for Political, Economic, Socio-cultural, Technological, Environmental, and Legal (Kennedy, 2020).  Each refers to a segment of the general environment that should be examined.

Political

The political segment of PESTEL analysis should examine the role of governments in shaping business (Kennedy, 2020). As a global company, Nike should interact with the governments of many countries. The company has a contract with over 700 stores worldwide, and it has a network of offices in 45 countries (Martha, 2022). Examining change and interacting with the various governments of these countries can be challenging. In this case, the company is aware that public policy issues in a country have the potential to impact the company’s business. In the US, Nike has made annual political contributions in cash to several Democrat and Republican senators and representatives that align with the business interest (NIKE, Inc. Policy on Public Policy and Political Activities, 2022).

Economic

The economic segment of PESTEL analysis includes factors such as interest rates, inflation rates, gross domestic product, unemployment rates, levels of disposable income, and the general growth or decline of the economy (Kennedy, 2020). Nike should examine the economic stability measures of each country it operates. For instance, offices that operate in countries with a declining economy should have a different strategy from other Nike offices that operates in a booming economy.

Socio-cultural

The socio-cultural aspect examined factors such as demographics, ethnic mix, as well as cultural trends (Kennedy, 2020), such as consumers’ attitudes toward sports and consumers preferences. As of 2021, Nike has already reached 50% representation of women in the global corporate workforce and 43% in leadership positions, as well as 35% representation of U.S. racial and ethnic minorities in the workforce (FY21 NIKE, Inc. Impact Report, 2022). This is a great footing for the company to face future cultural trends and changes toward the inclusiveness of the workforce. Nike should also examine the consumers’ preference and their attitudes toward sports. The company regularly utilizes celebrity marketing, signing big-name athletes and clubs to influence consumers (Hitt et al., 2007).

Technological

The technological segment includes factors such as new product development technology, increases in automation, and advancements in relevant technology (Kennedy, 2020). Nike considers itself a technology company. From developing products, and leading-edge engineering, as well as managing big data, the company strives to reimagine the future (Nike Global Technology, n.d.). Currently, Nike can be considered the front-runner in sportswear technology advancement.

Environmental

The environmental segment of the analysis examines ecological factors, such as climate change, waste, pollution, and reusable energy (Kennedy, 2020). While environmental change can easily be missed, it can have a significant impact on the sports world. Even more, Nike is actively producing waste, as well as greenhouse gas emissions. Nevertheless, the company is committed to reducing its negative environmental impact. In 2021, the company was able to reduce its emissions by 43% through 78% renewable energy, divert 97% of waste from landfill and incineration, and reduce freshwater usage per kg textile dyeing and finishing by 6% (FY21 NIKE, Inc. Impact Report, 2022).

Legal

The legal segment of the analysis examines laws and regulations involving issues such as employment, health, safety, discrimination, etc. (Kennedy, 2020). As with the political segment, Nike should examine the change and interact with the various governments and policymakers from various countries. It can possess opportunities that have to be seized or threats that have to be mitigated quickly.

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Five Forces Analysis of Nike 

Hitt et al. (2007) observed the industry environment as a set of factors that directly influences a company and its competitive actions and competitive responses, which can be analyzed using the framework of the five forces. The five forces of competition framework examine the bargaining power of the customers, the bargaining power of suppliers, the rivalries of the competitors, the threat of new entrants, and the threat of substitutes (Porter, 1985).

Bargaining Power of Buyers

Buyers seek to reduce their expenses, and so they bargain for higher quality and lower prices by encouraging competitive battles among companies in the industry (Hitt et al., 2007). Rowland (2017) examined the moderate bargaining power of sportswear customers, due to the low switching cost, but only a few high-end sportswear brands are available.

Bargaining Power of Suppliers

Powerful suppliers with no competition can increase prices and reduce their products’ quality as means to exert power over companies competing within an industry (Hitt et al., 2007). Since there are many sportswear suppliers almost in every country, the power of suppliers for Nike is low.

Rivals

While Nike is the dominant firm in the sportswear market, the other competitors can continue to do well in this market. The number of rivals in the high-end sportswear market may only be a few, but the challenge of local brands can also give decent competition. For example, Li-Ning, a Chinese athletic shoe manufacturer, competes in the country against Nike and Adidas (Hitt et al., 2007). The same case can be found in Indonesia and Vietnam, where local sportswear brands can compete with Nike.

Threat of New Entrants

New entrants can threaten the market share of existing competitors, so it is important to identify them as well as the factors related to the entry barrier (Hitt et al., 2007). While establishing a company at the scale of Nike is difficult, new local small sportswear manufacturers can still compete with Nike (Adamkasi, 2019). Hence, the force of new entrants threat may be considered moderate.

Threat of Substitution

Generally, substitutes product present a strong threat when their price is lower or their quality is equal to or greater than the competing product, or when customers face small to no switching costs (Hitt et al., 2007). In Nike’s case, the company may consider general apparel as a substitute product for sportswear as it can still be used for sports activities. In a small economy country, the substitution may pose a moderate threat, but in a developed economy, people may avoid using general apparel for sports activity, hence the substitution posed weak threats.

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Nike’s Strategic Vulnerability

Nike’s challenge in examining its external environment is hugely influenced by the fact that it operates in various countries. In lower-economy countries, the competition force can be stronger due to the limited economic and socio-cultural aspects, as well as increased competition from local brands, substitutes, and even counterfeit products. The two strategic vulnerabilities for Nike may come from the challenge of managing competition and consumers’ attitudes in developing countries.

Developing countries usually have lower purchasing power, but they can be advanced enough to establish local sportswear manufacturers. They may also have loose laws and regulations related to counterfeit products. Local consumers may prefer the cheaper local sportswear brands over Nike as its switching cost is almost zero. However, bigger rivals, such as Adidas and Puma, may also have set their foot into the market of those countries, where Nike must not fall behind.

Conclusion and Recommendation: Pestel and Five Forces Analysis of Nike

The PESTEL and Five Forces analysis of Nike has shown that one of the most challenging external issues for Nike comes from the fact that it operates in various types of countries, with different PESTEL landscapes and even different Five Force landscapes. The two strategic vulnerabilities examined for Nike may both be related to the developing countries: the first one is the competition with arch-rivals and local brands, and the second one is the consumers’ attitude in those countries.

The recommendation for the CEO of the company is to take deeper research and analysis of the strategic issues in countries with lower economic indexes. Two actions recommended for Nike are to ensure that the consumer landscape can afford high-end sportswear products and to ensure that the market can afford the usual competition between biggest rivals, such as Adidas, as well as local brands. The company should also look at the country’s regulations regarding counterfeit products.

References

Adamkasi, A. (2019, December 31). Porter’s Five Forces Analysis of Nike. Porter Analysis. Retrieved July 7, 2022, from https://www.porteranalysis.com/porters-five-forces-analysis-of-nike/

Hitt, M. A., Ireland, D. R., & Hoskisson, R. E. (2006). Strategic Management, Competitiveness and Globalization: Concepts and Cases (7th ed.). South-Western College Pub.

Kennedy, R. (2020). Strategic management. Virginia Tech Publishing. This book is licensed under a Creative Commons by-nc-sa 3.0 Attribution-NonCommercial-ShareAlike CC BY-NC-SA license. https://pressbooks.lib.vt.edu/strategicmanagement/

Martha. (2022). What Countries Do Nike Sell Products In? https://www.icsid.org/uncategorized/what-countries-do-nike-sell-products-in/

Porter. (1985). Competitive Advantage. Creating and Sustaining Superior Performance. The Free Press. New York. 1985

Rowland, C. (2017, February 7). Nike Inc. Five Forces Analysis (Porter’s Model). Panmore Institute. Retrieved July 7, 2022, from https://panmore.com/nike-inc-five-forces-analysis-porters-model

FY21 NIKE, Inc. Impact Report. (2022). Retrieved from https://purpose.nike.com/fy21-nike-impact-report

NIKE, Inc. Policy on Public Policy and Political Activities. (2022). Retrieved from https://investors.nike.com/investors/corporate-governance/

Nike Global Technology. (n.d.). Retrieved from https://jobs.nike.com/technology

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