Overview
This lecture introduces Porter’s Five Forces, a strategic framework for analyzing the competitiveness and profitability of an industry, with examples from the airline sector.
Introduction to Porter’s Five Forces
- Porter’s Five Forces was published in 1979 to assess industry structure and competitive intensity.
- The model evaluates how competition influences long-term profitability and industry attractiveness.
- Five Forces is an external analysis tool, focusing on the task (meso) environment—factors directly interacting with the company.
The Five Forces Explained
1. Rivalry Among Existing Competitors
- Intensity of rivalry depends on number/size of competitors, slow industry growth, low product differentiation, and high exit barriers.
- High rivalry leads to price wars, increased advertising, and lower profit margins.
- Airline industry has high rivalry due to many similar-sized competitors, stagnant growth, high fixed costs, and hard exit.
2. Threat of New Entrants
- New entrants increase competition by seeking market share; seriousness depends on barriers to entry.
- High entry barriers (capital, licenses, experience, access to channels) reduce threat.
- Airlines face high barriers, but low-cost carriers have entered due to market liberalization and leasing options.
3. Threat of Substitutes
- Substitutes fulfill the same customer need by different means and increase switching risk.
- Factors include number of substitutes, customer willingness to switch, and substitute price/performance.
- In airlines, trains, cars, and emerging technologies like Hyperloop are significant substitutes.
4. Bargaining Power of Suppliers
- Supplier power rises when few suppliers are available, switching costs are high, or inputs are unique.
- Airlines are highly dependent on fuel and aircraft (mainly from Boeing and Airbus), making supplier power high.
5. Bargaining Power of Buyers
- Buyer power grows when customers have many alternatives, buy in large quantities, and can easily switch.
- Internet and price comparison tools empower airline customers, reducing loyalty and increasing buyer power.
Using Five Forces for Strategy
- Companies can influence these forces through actions like standardizing components, product differentiation, and increasing marketing to raise entry barriers.
- Strategic actions based on Five Forces help protect long-term profitability.
Key Terms & Definitions
- Porter’s Five Forces — framework for analyzing industry competition: rivalry, new entrants, substitutes, supplier and buyer power.
- Barriers to Entry — obstacles preventing new competitors from easily entering an industry.
- Substitutes — products/services fulfilling the same customer need differently.
- Bargaining Power — the influence suppliers or buyers have on transaction terms.
Action Items / Next Steps
- Review and apply Porter’s Five Forces to a chosen industry, analyzing each force’s impact on profitability.
- Prepare examples illustrating each force for class discussion.