Understanding Business Competition and Profitability according to Michael Porter
Key Concepts
Competition Complexity: More than just a tug-of-war for sales or market share.
Profitability Focus: True competition is about who is most profitable, not who is biggest.
Michael Porter's Five Competitive Forces:
Buyers/Customers: They prefer to pay less and get more.
Example: Fierce price competition in the airline industry due to customers wanting cheaper flights.
Suppliers: Aim to be paid more and deliver less.
Powerful suppliers raise prices or insist on other favorable terms.
Substitute Products/Services: Non-obvious competitors that meet the same basic need.
Tough competitors may come from different industries.
New Entrants: Create tension and competition by introducing new ways to attract customers.
Example: Southwest Airlines reduced costs by using one type of airplane, offering better ticket deals.
Existing Rivals: Direct competitors that reduce everyone’s profitability.
Example: Major airlines having narrow profit margins due to intense competition and additional charges (e.g., for exit row upgrades, checked bags, snacks).
Applications
Industry Structure: These forces define industry structures and determine company futures.
Strategic Planning: Understanding these forces allows for better predictions, competitive strategies, and increased profits.