Porter's 5 forces

Porter’s Five Forces is a strategic analytical tool that is used to assess the level of
intensity of competition in the industry. The tool can also be applied to evaluate the
balance of power in the industry, Developed by Michael Porter.

1) Threat of new entrants

2) Rivalry among existing firms
3) Threat of substitute products and services
4) Bargaining power of buyers
5) Bargaining power of suppliers
6) Relative power of other stakeholders (Added)
1) Threat of new entrants
High level of profit in a market or industry attracts new companies to join the
industry affecting the level of competition in the marketplace. Theoretically, firms
should be able to enter and exit to maintain the nominal level of profits. In practice,
however, there is a range of factors that may emerge as a barrier for firms aiming to
enter an industry:

1. Economies of scale:
When manufacturing or selling at a large scale, companies are able to get
cost advantage because per unit costs of the product fall.
Other Cost Advantages: Apart from those cost benefits that come from
economies of scale, there are other advantages that an existing firm may
enjoy. These include access to the best suppliers, an understanding of
existing materials and knowledge of their quality, possession of any
important patents, and proprietary information and technological
knowledge. There are also learning advantages, achieved over years of
business and experience.
2. Product differentiation:
If the product being sold by the existing company or companies is highly
differentiated or enjoys strong brand loyalty, then this can act as a strong
barrier to entry.
3. Capital requirements:
If an industry requires huge initial capital investments, then this will act as a
barrier to entry.
4. Customer switching costs:
The cost associated with a consumer’s move from one company or product
to another is called the switching cost. If there are significant switching costs,
then a new entrant may not be able to create means of removing these or
they may have to offer significant advantage to attract the customers.
5. Access to distribution channels:
Existing distributors may have contracts or loyalties with existing companies
and may prove to be difficult to form relationships with. New entrants will
need to invest extra in order to engage these distributors.
6. Legal and regulatory barriers:
Government and regulatory requirements such as permits and licenses may
be a strong barrier to entry.
Pharmacies must be managed by a pharmacist.
7. Expected retaliation from existing businesses:
Existing companies might have strategies to hinder the new entrants.
Acquisition strategy, renew contracts with suppliers and distributers to be
exclusive or launching new product that is hard to imitate or compete with.
8. Time of entry:
Recession is a barrier to the new entrants.
2) Rivalry among existing firms
The level of competition intensity in the industry determines the level of its
profitability. The more competitive is the industry, the more difficult for firms to
maintain and increase their market share. The following set of factors determines
the extent of rivalry among existing firms:

1. Rate of growth of the industry:

If the industry does not enjoy a rapid growth rate, then the only way for a
company to increase its market share is to take it away from a competitor.
There is also a higher degree of protectiveness towards any existing share in
the market, as once lost, it may be hard to regain.
2. Number of competitors and the balance between them:
When there are many competitors, some companies believe that they can
make competitive moves without being noticed.
When companies are relatively balanced in strength, they are more likely to
engage in competitive battles as they strive for market leadership.
3. Diversity of competitors:
If the industry is made of different types of companies who differ in their
origins and strategies, then there may be diverse ways to do business. These
alternate methods may change the nature of competition and the way of
doing business.
4. Switching costs:
If there are little or no switching costs for a consumer then the industry may
be more competitive. This happens often in undifferentiated industries or
ones where the products are very similar in benefits, features and quality.
5. Excess capacity and exit barriers:
If a company uses economies of scale and produces large amount, then there
may be a brief disruption in the demand and supply of the market. This may
result in overcapacity of products and price cutting to make sure products do
not remain unsold and the competition will increase.
For companies that cannot cut their costs they might not be able to generate
profit and may also be unable to cover its variable costs so they have to exit
the market.
6. Differentiation of rival products and services:
If the main product of an industry is generic and there are no grounds to base
differentiation on, then the products may be treated as a commodity. This
will naturally lead to price based competition.
7. Brand equity:
If the brands equities are close then the competition is high between them.
8. Level of advertising expenditure:
Advertising may influence customers and make them try different brands so
it increases the competition.
9. Degree of transparency:
the lower the degree of transparency the company has the weaker it is in the
competition.
3) Threat of substitute products and services
Firms have less bargaining power if substitutes exit to their products and services.
Substitutes can be direct or indirect and the threat of substitute products and
services depends on the following set of factors:

1. Switching costs:
If there are little of no switching costs for a consumer, then there is more of a
chance that they may explore and move over to a more attractive substitute.
In the absence of other factors such as brand loyalty or differentiation, the
choice to move will not be a difficult one.
2. Product price:
If substitutes are priced more reasonably, then there may be more risk of
consumers switching products. In addition, this can act as a barrier to how
much a company can raise the prices for its own product. Any move to price
higher than substitutes may lead to consumer migration and loss profits.
3. Product quality:
If the quality of substitute products is higher than that of any product, then it
is more likely that consumers will want to make use of this difference and
switch over.
4. Product performance:
If a substitute products functions at the same level or at a better level than a
product then there is a chance that consumers will want to switch over.
5. Substitute Availability:
All of the above factors can only come into play if there are actually
substitutes available in the market.
6. Perceived level of product differentiation:
If perceived level of differentiation is low then the customers will find it easy
to switch to another substitute.
7. Buyers' propensity to substitute:
There are customers called butterflies. They tend to switch between brands.
They are not loyal to specific product or brand. The less the loyalty, the more
the customers' propensity to substitute.
4) Bargaining power of buyers
Buyer bargaining power is associated with the extent of impact customers can have
on the industry. The stronger the buyer, the greater his ability to reduce prices
and/or increase the quality of products and services becomes. The following set of
factors determines bargaining power of buyers:

1. Size and concentration of buyers compared to suppliers:

When buyers are fewer in number and more concentrated, they have a
higher power over the producer. The producer’s sales revenue will be
dependent on these few customers and they will not be able to ignore any
demands and vice versa.
2. Percentage of sales:
Another bargaining chip for a buyer or buyer group is the amount of business
they give to a producer. If the percentage of sales from one buyer is
significant, then the producer will not want to risk losing their business.
3. Buyers’ price sensitivity:
If the buyers are sensitive to changes in prices and may stop purchase, the
producer will not be able to ignore their demands. That often happens with
welfare goods and services.
4. Switching costs:
If switching costs are low for a buyer, then any dissatisfaction with a producer
or a product will lead to loss of business as the buyer will be able to find an
alternate with minimum hassle and inconvenience.
5. Product differentiation:
If the producer sells a standard or undifferentiated product, then they will
usually have the potential threat of a buyer switching producers. If there are
many producers supplying the same type of product, a buyer will have the
option of exploring possibilities.
6. Information about products and services:
If buyers have full information regarding the producers operations, what
their actual costs are and the substitute's prices, then they will be able to
demand better prices from the producer.
7. Buyer’s ability to go for substitute products and services:
If the buyer can find convenient substitutes that are the same of or similar to
the product then it is available for him to switch.
5) Bargaining power of suppliers
Supplier bargaining power forms the nature of supplier-manufacturer relationships.
Suppliers with strong bargaining power are able to sell raw materials for higher
prices with direct implications on the levels of profit to be generated by
manufacturers. Supplier bargaining power depends on the following:

1. Number of suppliers:
When suppliers are fewer in numbers, they have higher power over
producers because producers have limited substitutes and have to agree on
the price offered.
2. Differentiation of products provided by suppliers:
If they are differentiated, it is hard for the producer to migrate from one to
another.
3. Switching costs:
If the switching costs are high then the supplier's power is high and can
maintain the producer.
4. Importance of supplies to the product:
If the supplies represent large part or high importance to the final product
then the supplier has the power to set the cost.

6) Relative power of other stakeholders (Added)

The sixth force in this model can refer to a number of other groups or entities,
depending on which factor has the greatest influence, including:

1. Complementors – Complementors are companies or entities that sell or

offer goods or services that are compatible with or complementary to the
goods or services produced and sold in a given industry. Complementary
goods offer more value to the consumer together than apart. Such as hotdog
and hotdog bun or tourism and airlines.
2. The government – it has the potential to impact all the other five forces.
The government can have both a direct impact in the industry as the sixth
force and can also have indirect impact or influence by affecting the other
five forces, whether favorably or unfavorably. Such as: Laws and Regulations.
3. The public – has a strong influence on the dynamics of the industry that
result in changes to the other forces or on the industry as a whole. Such as:
Meddle east countries demanding halal food.
4. Shareholders – Their input has become increasingly more valuable and
therefore has carried more weight in the decision-making process. They push
the company towards profit.
5. Employees – Employees can influence the company in the industry. For
example: the automobile industry in the US, a large part of the workforce are
unionized, and thus could be considered the sixth force instead of the
government.
Porter Six Forces Analysis of Airline
Industry Marketing
Force 1: Threats of New Entrants:
In an airline industry, the space for newcomers is squeezed to such extent that there
is hardly any place for the new entrants in the market. The reason with respect to
entry barriers include high cost of industry because it is one of the most expensive
and complex industry in terms of buying or leasing aircrafts, their maintenance and
demands highly sophisticated technological system to operate. The other barrier
recessing new entrants is that of government restrictions on air traffic and already
established big giants of the industry.

Force 2: Degree of Rivalry:

A cut-throat competition can be observed in airline industry because of greater
saturation of rival airlines. The rival companies of airline industry are continuously
competing each other in the realm of technology, prices, and customer services. Due
to the maxim of competition, the degree of rivalry in airline industry is very high and
that can result in slow market growth rate.

Force 3: Threat of Substitute Products or Service:

In airline industry, the possible substitutes are travelling by train, bus or car and
these substitutes are significantly diverse depending upon various factors of
costumer’s preference. The competition of substitutes depends upon the ease of
traveler to shift on the substitute travelling service and the main key factor in
switching to substitute is price. Hence, the level of this threat can be considered as
medium because of the uncertain traveler preference over substitutes.

Force 4: Bargaining Power of Power:

Each airline company is fighting for the same customer which strengthens the buyer
power. The customers travelling from one destination to another are being provided
with many alternative choices of airline service providers and the one that grab
maximum of them is the one which give more value at same or lesser price.

Force 5: Supplier Power:

The suppliers of airline industry are considered as concentrated because its main giant
suppliers are Airbus and Boeing. This level of supplier concentration dictates the airline
companies to have high bargaining power on the supplier because their main operation is
mainly dependent upon their suppliers provided aircrafts and jets. In this regard, the airline
companies have no such better alternatives to switch their suppliers of aircrafts even at
higher costs.
Force 6: Relative Power of other Stakeholders:
The complementors generally include tourism services of airline industry whose
effectiveness leads to airline effectiveness. The government directs the air-routes
fares and taxation policies which have considerable impact on airline companies.
Similarly, the power of other stakeholders of airline industry is considerably high as
compared to other industries.

Conclusion
In a nutshell, it can be concluded that airline industry is concentrated with much
more competition and the Porter’s six forces analysis explains the reasons for low
returns in the industry. At first, the threat of newcomers is low but the rivalry among
the existing customers is much high. The bargaining power of customer is high
because they are price sensitive. The degree of bargaining power of supplier is also
high due to concentrated and limited suppliers. The threat of available substitutes
can be considered as medium because of various uncertain travelers’ preferences.
Hence, the degree of each force analyzed will be helpful to gauge the market
scenario of airline industry.