Porter’s Five Forces Model

• The tool was created by Harvard Business School professor Michael Porter,
to analyze an industry's attractiveness and its potential profitability.

• Since its publication in 1979, it has become one of the most popular and
highly regarded business strategy tools.

• Porter recognized that organizations like to keep a close watch on their

rivals, but, in his Harvard Business Review article, 'How Competitive
Forces Shape Strategy,' he encouraged them to look beyond the actions of
their competitors and examine the forces at work in their wider business
environment.
• According to Porter, there are five forces that represent the key sources of competitive
pressure within an industry. They are:

• Competitive Rivalry.

• Supplier Power.

• Buyer Power.

• Threat of Substitution.

• Threat of New Entry.

Porter’s five forces of competitive position analysis:
 Competitive Rivalry

• The first of Porter's Five Forces looks at the number and strength of your competitors.

• How many rivals do you have?

• Who are they, and

• How does the quality of their products and services compare with yours?

• In an industry where rivalry is intense, companies attract customers by aggressively cutting

prices and launching high-impact marketing campaigns. However, this can make it easy for
suppliers and buyers to go elsewhere if they feel that they're not getting a good deal from you.

• On the other hand, where competitive rivalry is minimal, and no one else is doing what you
do, then you'll likely have tremendous competitor power, as well as healthy profits.
• Competition in an industry is low if few companies are offering the same products.
They have more opportunities to grow and be profitable. Things that can affect
competitive rivalry include:
• Number of competitors
• Variety of competitors
• Differences in products
• Differences in quality
• Industry growth
• Customer loyalty to existing brands
• Barriers (high costs) to exit the industry
 • Example: Airline Industry
• When looking at the airline industry, we see that the industry is extremely
competitive because of a number of reasons which include the entry of low cost
carriers, the tight regulation of the industry wherein safety become paramount
leading to high fixed costs and high barriers to exit, and the fact that the industry
is very stagnant in terms of growth at the moment.
• Rivalry among Existing players is very high
• Saturated market
• Few long term competitors
• Equally distributed market share among each player
• Standardization of aviation industry
• High exit cost
• 2. Supplier Power

• Supplier power is determined by

• How many potential suppliers do you have?

• How unique is the product or service that they provide?

• how easy it is for your suppliers to increase their prices.

• And how expensive would it be to switch from one supplier to another?

• The more suppliers you have to choose from, the easier it will be to switch to a cheaper
alternative.

• Conversely, the fewer suppliers there are and the more you rely on them for help, the
stronger their position and their ability to charge you more is. This can impact your
profitability, for example, if you're forced into expensive contracts.
• Things that can affect a supplier's power over company profits include:
• The number of suppliers
• The size of the suppliers
• A company's ability to find substitute suppliers
• The uniqueness of the supplier's product
• The quality of the supplier's product
• The strength of the supplier's distribution channels
• The volume of product needed
• The cost of switching suppliers
• The industry's importance to the supplier's business
• Example

• The bargaining power of suppliers in the airline industry can be considered very high. When
looking at the major inputs that airline companies need, we see that they are especially
dependent on fuel and aircrafts. These inputs however are very much affected by the external
environment over which the airline companies themselves have little control.

• The price of aviation fuel is subject to the fluctuations in the global market for oil, which can
change wildly because of geopolitical and other factors.

• In terms of aircrafts for example, only two major suppliers exist: Boeing and Airbus. Boeing and
Airbus therefore have substantial bargaining power on the prices they charge.
• 3. Buyer Power
• If the number of buyers is low compared to the number of suppliers in an industry,
then they have what's known as "buyer power." This means they likely find it easy to
switch to new, cheaper competitors, which can ultimately drive down prices.
• Think about how many buyers you have. How big are their orders? How much would
it cost them to switch from your products and services to those of a rival? Are your
buyers strong enough to dictate terms to you?
• When you deal with only a few savvy customers, they have more power. However,
your power increases if you have many customers and little competition.
• Judging how to price your product to attract the customers you want, and to protect
your brand, requires great skill
• Buyers have less bargaining power when they buy in small amounts and have few
alternative product options.
• Things that can affect how much power buyers have over a company's pricing include:
• The number of customers
• How much product each customer is buying
• The buyer's ability to substitute products
• The buyer's sensitivity to price
• The buyer's access to information (such as on the internet) so they can compare
products and prices
• Example
• Bargaining power of buyers in the airline industry is high.
• Customers are able to check prices of different airline companies fast
through the many online price comparisons websites
• In addition, there aren’t any switching costs involved in the process.
• Customers nowadays are likely to fly with different carriers to and from
their destination if that would lower the costs.
• Brand loyalty therefore doesn’t seem to be that high. Some airline
companies are trying to change this with frequent flyer programs aimed
at rewarding customers that come back to them from time to time.
• 4. Threat of Substitution

• This refers to the likelihood of your customers finding a different way of doing what
you do.

• For example, if you supply a unique software product that automates an important
process, people may substitute it by doing the process manually or by outsourcing it.

• A substitution that's easy and cheap to make can weaken your position and threaten
your profitability.
• Things that can affect substitute products' potential threats to a
company include:
• The number of substitute products
• The quality of substitute products
• The price of substitute products
• The customer's likelihood to switch between products
• Customers' perceived difference between products
• The competition's aggressiveness
• The competition's profits
• Example

• In terms of the airline industry, it can be said that the general need of its customers is
traveling. It may be clear that there are many alternatives for traveling besides going by
airplane. Depending on the urgency and distance, customers could take the train or go by
car. Especially in Asia, more and more people make use of highspeed trains such as
Bullet Trains and Maglev Trains.

• Furthermore, the airline industry might get some serious future competition from Elon
Musk’s Hyperloop concept in which passengers will be traveling in capsules through a
vacuum tube reaching speed limits of 1200 km/h. Taken this altogether, the threat of
substitutes in the airline industry can be considered at least medium to high.
• 5. Threat of New Entry
• Your position can be affected by people's ability to enter your market. If it takes little
money and effort to enter your market and compete effectively, or if you have little
protection for your key technologies, then rivals can quickly enter your market and
weaken your position.
• However, if you have strong and durable barriers to entry, then you can preserve a
favorable position and take fair advantage of it.
• Is it relatively easy for a new competitor to gain a foothold in your industry or
market?
• How much would it cost, and how tightly is your sector regulated?
• Do new entrants come and go regularly?
• Or is the industry dominated by a few, big players?
• Things that can make it more difficult for competitors to become established include:

• Government regulations

• Customer loyalty to existing brands

• High costs of entry

• Limited access to distribution

• Technologies needed

• Experience needed

• Economies of scale
• Example
• The threat of new entrants in the airline industry can be considered as low to medium. It takes quite
some upfront investments to start an airline company (e.g. purchasing aircrafts). Moreover, new
entrants need licenses, insurances, distribution channels and other qualifications that are not easy to
obtain when you are new to the industry (e.g. access to flight routes).
• Furthermore, it can be expected that existing players have built up a large base of experience over the
years to cut costs and increase service levels.
•  A new entrant is likely to not have this kind of expertise, therefore creating a competitive
disadvantage right from the start. However, due to the liberalization of market access and the
availability of leasing options and external finance from banks, investors, and aircraft manufacturers,
new doors are opening for potential entrants. Even though it doesn’t sound very attractive for
companies to enter the airline industry, it is NOT impossible. Many low-cost carriers have
successfully entered the industry over the years by introducing innovative cost-cutting business
models, thereby shaking up original players
 How to Use Porter's Five Forces Model

• Porter's Five Forces Model can help you to analyze the attractiveness of a particularly industry, assess
investment options, and measure competition intensity.
• To use the model, start by looking at each of the five forces in turn, and how they apply in your industry.
Ask yourself the following questions:

• Is rivalry between competitors intense or do you tend to retain customers relatively easily?
• Do you have lots of suppliers to choose from or do you rely heavily on a small group of suppliers?
• Is buyer power high or low?

• Would buyers find it easy to substitute your product or service?

• Do new competitors find it easy to enter the market or is it difficult?

• After you've considered these questions, write down each of the five forces, and summarize
the size and scale of each using your findings. An easy way of doing this is to use a single "+"
sign for a force that's moderately in your favor, or a "-" sign for a force that's moderately
against you. Use "++" for a force that's strongly in your favor, or "--" for one that's strongly
against. For a neutral force, you can use "o."

• Finally, think about how your analysis will likely impact you. Bear in mind that few situations
are perfect – but analyzing your industry using Porter's Five Forces can help you to think
through what you could change to improve your competitive position and increase your
profitability.

• What's more, if you find yourself in a structurally weak position, the model can help you to
think about what you can do to move into a stronger one.
 Criticism of Porter's Five Forces Model
• Despite its enduring popularity, Porter's Five Forces Model has come in for considerable
criticism in recent years. You can read more about this is in Isabelle et al's 2020 article, 'Is
Porter's Five Forces Still Relevant?' [3] but the main argument is as follows.

• Michael Porter's model was devised during the 1980s which was largely a period of:

• Strong competition.

• Relative market stability.

• Steady technological change.

• Today, however, technological advances have revolutionized the way in which we do
business – and the speed at which we do it. Indeed, according to business academic and
consultant, Richard D'aveni, many organizations now operate in a "hypercompetitive"
environment, where they need to be consistently dynamic, relentless and aggressive in order
to stay on top.[4] This can lead to a constant state of flux and market instability.
• In an ever-shifting business environment such as this, many believe that the rather inflexible
Five Forces Model is of little help in anticipating what lies ahead or where competitive
advantage can be gained.
• There are also economists and strategists who believe that the attractiveness of an industry
cannot be assessed without considering the resources that the organization brings to that
industry as well.
• This would suggest that it's best to use the Five Forces approach alongside an "inside out"
or "resource-based" view of the organization, where competitive advantage is derived from
leveraging resources and competences within the organization.
• VRIO Analysis : Making the Most of Organizational Resources

• When did you last ask yourself why your business has a certain market position? Do you
know why it's doing better or worse than its competitors?
• For example, how do your team's skills and knowledge contribute to the organization's
success? Do your patents and copyrights put the company in a winning position? Or is
some other factor helping – or impeding – you?
• Each organization has its own specific set of resources, from people through processes,
physical assets, and more. And the way that you use those resources to operate day to day
will be a major factor in your success, too.
• You'll need to evaluate both the potential and the effectiveness of all of these resources, so
that you can build a competitive edge. And one useful model for doing this is VRIO
Analysis.
• What Is VRIO?

• VRIO Analysis was developed by Jay Barney, as reported in his article, "Firm Resources
and Sustained Competitive Advantage." At first, Barney used the terms "Value,"
"Rareness," "Inimitability," and "Substitutability" but, in later writings, he changed
"Substitutability" to "Organization," leading to the acronym we know today: VRIO.

• According to Barney, the resources and assets that are valuable, rare and inimitable, and
that you are organized to use effectively, will likely contribute most to delivering your
organization's mission. Therefore, you need to make sure that you make the fullest use of
such resources, and take care to protect them.
• VRIN Framework

• Note that the VRIO framework is a follow-up of the VRIN framework

(Valuable, Rare, Hard to Imitate, Non-substitutable). The creator of the
VRIN and VRIO framework, Jay Barney, combined the I and N into one
attribute and added the O as extra criteria. Inimitability in the VRIO
framework therefore means that resources are hard to imitate because
competitors cannot duplicate and/or substitute them.
 SWOT ANALYSIS

• SWOT stands for Strengths, Weaknesses, Opportunities, and Threats,

Strengths Weaknesses
What do you do well? What could you improve?
What unique resources can you draw on? Where do you have fewer resources than others?
What do others see as your strengths? What are others likely to see as weaknesses?

Opportunities Threats
What opportunities are open to you? What threats could harm you?
What trends could you take advantage of? What is your competition doing?
How can you turn your strengths into opportunities? What threats do your weaknesses expose to you?
 SWOT analysis of Indigo
• An airline company headquartered in Gurgaon, Haryana, Indigo positions itself as a low-cost
carrier. Established as a private enterprise in the year 2006 by Rahul Bhatia, Indigo listed
publicly in the year 2009.

• In addition to domestic flights to various Tier 1 and Tier 2 cities across India, Indigo also
flies to international locations like Dubai, Malaysia, Singapore, Bangkok, Kathmandu,
Sharjah, and Doha. Indigo is currently India’s largest passenger carrier

• The company operates a fleet of 161 aircraft flying them to 42 domestic and 8 international
destinations. The company registered an annual turnover of 2.5 billion USD and employs
around 12,362 employees. The company has been awarded consecutively for eight years in
various surveys done by rating agencies as one of India’s best places to work with.
 Strengths

• Positive Image
• Indigo Airlines has entered international markets has boosted its brand value
• High stakeholder engagement and Excellent offerings and on-board services provided by  Indigo Airlines
• Higly diven workforce; More than 10000+ employees are with Indigo serving more than 40 million passengers
• CSR Initiatives
• Indigo Airlines has strong backing promoters and is one of the largest low cost carriers in India
• Only LCC to make consistent profits and is one of the major airlines in India in terms of market share
• Good advertising and marketing strategies have increased its brand recall
 Weaknesses

• Sustaining profits

• Overdependence on volumes

• Grounding of aircraft
 Opportunities

• Growing demand for domestic and international travel

• Opening up of International routes can boost business of Indigo

• Largest market share among LCCs in Indian Market

• Middle class taking to the skies can be a huge opportunity for Indigo
airlines
 Threats
• Covid-19

• Competition; plenty of new LCCs to compete with for Indigo airlines

• Costing;

• Rising Labour costs and changing govt policies

• Rising Fuel Costs can affect business margins for Indigo