Porter's 5 Forces Model

Porter's Five Forces is a model that identifies and analyses five competitive forces that shape
every industry and helps determine an industry's weaknesses and strengths. Five Forces
analysis is frequently used to identify an industry's structure to determine corporate strategy .
Porter's 5 forces are:

1. Competition in the industry

2. Potential of new entrants into the industry
3. Power of suppliers
4. Power of customers
5. Threat of substitute products

1. Competition in the Industry

The first of the Five Forces refers to the number of competitors and their ability to undercut
a company. The larger the number of competitors, along with the number of equivalent
products and services they offer, the lesser the power of a company. Suppliers and buyers
seek out a company's competition if they are able to offer a better deal or lower prices.
Conversely, when competitive rivalry is low, a company has greater power to charge higher
prices and set the terms of deals to achieve higher sales and profits.

2. Potential of New Entrants into an Industry

A company's power is also affected by the force of new entrants into its market. The less
time and money it costs for a competitor to enter a company's market and be an effective
competitor, the more an established company's position could be significantly weakened. An
industry with strong barriers to entry is ideal for existing companies within that industry
since the company would be able to charge higher prices and negotiate better terms.

3. Power of Suppliers
The next factor in the Porter model addresses how easily suppliers can drive up the cost of
inputs. It is affected by the number of suppliers of key inputs of a good or service, how
unique these inputs are, and how much it would cost a company to switch to another
supplier. The fewer suppliers to an industry, the more a company would depend on a
supplier. As a result, the supplier has more power and can drive up input costs and push for
other advantages in trade. On the other hand, when there are many suppliers or low
switching costs between rival suppliers, a company can keep its input costs lower and
enhance its profits.

4. Power of Customers

The ability that customers have to drive prices lower or their level of power is one of the
Five Forces. It is affected by how many buyers or customers a company has, how significant
each customer is, and how much it would cost a company to find new customers or markets
for its output.

A smaller and more powerful client base means that each customer has more power to
negotiate for lower prices and better deals. A company that has many, smaller, independent
customers will have an easier time charging higher prices to increase profitability.

5 Threat of Substitutes

The last of the Five Forces focuses on substitutes. Substitute goods or services that can be
used in place of a company's products or services pose a threat. Companies that produce
goods or services for which there are no close substitutes will have more power to increase
prices and lock in favourable terms. When close substitutes are available, customers will
have the option to forgo buying a company's product, and a company's power can be
weakened.

Airline industry Porter's Five Forces

Competition in the industry (Strong force)

The airline industry competitors’ analysis shows that the rivalry in the airline industry is
extremely strong based on several reasons. Since it is a high investment business option, the
number of competitors is not increasing phenomenally. This industry has entry and exit
barriers; companies need substantial investment to vent into this business. Also, exiting is
not easy because of long-term commitments and agreements.

So, how can we deduce that the competition in the industry in Porter's five forces model
airline industry is strong? It is based on the competition between existing companies and the
power of suppliers. The competitive industry competitors’ analysis shows that no company
can count on extra profits and the fares from different airlines are more or less the same. So,
they will have to count on more expensive measures to combat this competition.

The threat of new entrants (low to medium force)

New entrants may use lower pricing by reducing extra costs and offering innovation to put
pressure on airline industry. However, this is a low to moderate force in the competition.
The entry and exit barriers are moderate, and the initial investment to start a coffee shop is
not exuberant. So, locally new entrants have the potential to compete with giants like airline
industry. Studying Porter's five forces example, airline industry, we can see that the brand
image, brand loyalty, and market share of airline industry can mitigate this risk effectively.
It has the infrastructure, efficiency, and very high product quality as its defense against this
threat. Exclusive access to raw materials and suppliers is another factor contributing to
airline industry ' competitive edge.

The bargaining power of suppliers (strong force)

The power of suppliers in the airline industry is a strong force in Porter's five forces in the
airline industry. There are three main suppliers in the airline industry, including fuel,
aircraft, and labor. External factors influence all these because the oil price is fixed based on
global fluctuations. The second factor is aircraft companies, and there are two big suppliers,
i.e., Airbus and Boeing. So, the bargaining power of these suppliers is very strong. The third
factor is labour, which always challenges companies with union politics and demands.

The bargaining power of customers (Strong force)

The airline industry has always remained very competitive. Still, with the online ticketing
and distribution system, customers have direct access to schedules and fares that helps them
keep the most economical decisions. The entry of low-cost carriers has also increased the
bargaining power of customers in Porter's five forces in the airline industry

Threat of substitute products or services (medium force)

There are many alternatives for passengers to replace air travel. They can travel by road,
train or water transport. However, air travel is still the best option when time is a factor. So
we can conclude that this is a low to medium force. This factor is more impactful in regional
travel, where short distance makes road and train travel more economical. In international
travel, this factor has a very minimal effect.

Strategies for Success

We have studied Porter's five forces for the airline industry, so let us suggest success
strategies based on this our analysis.

1. Cost leadership
2. Differentiation
3. Focus

Cost leadership

Cost Leadership strategy is a strategy of reducing the cost of operation to produce the least
priced products and services. As we already discussed, there is less room for substantial
price hikes in the industry. So, airlines can only minimize costs using economies of scale,
efficient utilization of resources, and gain an edge with high-quality services. So, the airline
industry can also gain by providing high-quality travel services, loyal customer rewards,
more scheduled flights, etc.

Differentiation

Price is mostly the determining factor for the passengers. However, airlines can take an edge
with product distinction and personalization. These products may include a luxury travel
experience with more room, better food quality, entertainment services, and others.

Focus
Focus strategy means identifying a small-scale segment of the market and creating exclusive
products or services for them. Airline companies can provide some comfort services for
special segments of passengers like women, youth, kids, or elderly. Sometimes, regional
airlines can find room for unique geographical routes and special products for their
passengers.