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Michael Porter's Five Forces Industry Analysis

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Paul Noble

on 4 November 2013

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Transcript of Michael Porter's Five Forces Industry Analysis

Consumer’s price sensitivity
Air travel websites
Ticket sales via rivals’ websites

Michael Porter's Five Forces Industry Analysis
“Structure-Conduct-Performance” S-C-P model
Purpose of Industry Analysis
Analyze economic & market forces
industry profit potential
forces that harm firm profitability
Maintain or increase competitive advantage
Better utilization of internal resources
The Five Forces
Bargaining Power of Suppliers
Bargaining Power of Buyers
Threat of Substitutes
Degree of Rivalry among Existing Competitors
Threat of New Entrants
Industry's Structure
Organization's Conduct
(1) Threat of
New Entrants
Risk of new firms entering to the profitability of current firms
Low entry barriers = easy to enter > lower profitability

Entry Barriers
1. Entry-deterring price
2. Incumbent retaliation
3. High entry costs
4. Experience effects
5. Other cost advantages
6. Product differentiation
7. Distribution access
8. Government
9. Switching costs
(2) Bargaining Power of Suppliers
Buyers: firms in the industry
Suppliers: producer of firm's inputs
- labour
- location
- channels
Force supplier power over buyers by:
- incr. prices for goods/services
- decr. quality of purchased goods
Switching costs
Influences of Supplier's BP
(3) Bargaining Power of Buyers
influence industry structure
force prices down by:
- comparison shopping
- raising quality expectations
pit incumbents against one another
Influences of Buyer's BP
Quality or Image
Identify main sources of competition & their strengths
Build strong market position based on competitive advantage
Understand industry evolution
Develop long-term strategy
(4) Threat of Substitutes
Assessing impact of substitutes:
Identify products/services that can perform same function
Difficult as companies in the industry develop “blind spots” over time
Prevents timely identification of substitutes

Influenced by...
Relative price/performance trade off
Switching costs
Underestimates core competencies & capabilities
Socio & political influences not fully recognized
Small in scope
Does not address why/how some companies
May misdirect company focus
How to do it?
(5) Degree of Rivalry among Existing Players
Step 1: Collect Information
Step 2: Assess & Evaluate
Force Direction
Force Value (1-5)
How each force works & its role
Compare company's resource strength to size of the "fit" gap with each of the forces
strategic opportunities & threats
Step 3: Develop a strategy
Integrate long term trends within corporate strategy
For best “fit” between company’s resources/capabilities & external environment
3 types of strategic scenarios involved
Reactive strategy
Proactive strategy
Proactive strategy
Constantly monitor each force
Must consider interaction between forces and trends
Case Study:
U.S. Passenger Airline Industry
Airline profits dependent on revenue and cost
Low operating profits/losses since the end of World War II
6 major U.S. airlines filed for bankruptcy
Caused by:
Difficulty in maintaining profitable pricing levels
Inconsistent profitability
Increasing and volatile fuel costs
Persistent gap between costs and ticket fare
Threat to Entry (4)
High capital intensity
Limited terminal slots available
Threat of Substitutes (3)
Rise of information & communication technologies
Alternative transportation modes

Bargaining Power of Buyers (4)
Bargaining Power of Suppliers (4)
Increasing aggressive and “under pressure” unions
Few suppliers of aircraft for long-distance travel
Lower public funding for airport expansion
Bankruptcy regulations
Degree of Competitive Rivalry (4.5)
Market share warfare
Long-standing carriers folded/bankrupt
Frequent devolution into pricing considerations
Growth in demand offset by larger planes & competitive entry
Heavy discounting
High exit barriers for “legacy” carriers

All forces at least of moderate strength
Airline Industry:
Low attractiveness
Low sustainability
Southwest Airlines & JetBlue Airways Corp.
Need to develop effective strategies based on the 5 forces & trends affecting them
Intensity of competition is determined by:
Market growth
Number of competitors
Competitor capability or size
Cost and price structures
Barriers to entry and exit
Product switching

Identify your industry
Existing patterns
Preexisting sources
Business experts
Identify main sources of competitive pressures
Full transcript