Report on Porter’s five forces

1. 1
Porter’s Five Forces
Porter five forces analysis is a framework for industry analysis and business strategy development
formed by Michael E. Porter of Harvard Business School in 1979.
The Porter's Five Forces tool is a simple but powerful tool for understanding where power lies in a
business situation. This is useful, because it helps you understand both the strength of your current
competitive position, and the strength of a position you're considering moving into.
With a clear understanding of where power lies, you can take fair advantage of a situation of strength,
improve a situation of weakness, and avoid taking wrong steps. This makes it an important part of
your planning toolkit.
Conventionally, the tool is used to identify whether new products, services or businesses have the
potential to be profitable. However it can be very illuminating when used to understand the balance
of power in other situations.
Understanding the Tool
Five Forces Analysis assumes that there are five important forces that determine competitive power
in a business situation. These are:
1. Supplier Power: Here you assess how easy it is for suppliers to drive up prices. This is driven
by the number of suppliers
of each key input, the
uniqueness of their
product or service, their
strength and control over
you, the cost of switching
from one to another, and so
on. The fewer the supplier
choices you have, and the
more you need suppliers'
help, the more powerful
your suppliers are.
2. Buyer Power: Here you
ask yourself how easy it is
for buyers to drive prices
down. Again, this is driven
by the number of buyers,
the importance of each
individual buyer to your
business, the cost to them
of switching from your
products and services to
those of someone else, and
so on. If you deal with few,
powerful buyers, then they
are often able to dictate
terms to you.
Figure 1

2. 3. Competitive Rivalry: What is important here is the number and capability of your
competitors. If you have many competitors, and they offer equally attractive products and
services, then you'll most likely have little power in the situation, because suppliers and
buyers will go elsewhere if they don't get a good deal from you. On the other hand, if no-one
else can do what you do, then you can often have tremendous strength.
4. Threat of Substitution: This is affected by the ability of your customers to find a differe nt
way of doing what you do – for example, if you supply a unique software product that
automates an important process, people may substitute by doing the process manually or by
outsourcing it. If substitution is easy and substitution is viable, then this weakens your power.
5. Threat of New Entry: Power is also affected by the ability of people to enter your market. If
it costs little in time or money to enter your market and compete effectively, if there are few
economies of scale in place, or if you have little protection for your key technologies, then
new competitors can quickly enter your market and weaken your position. If you have strong
and durable barriers to entry, then you can preserve a favorable position and take fair
advantage of it.
2
These forces can be neatly brought together in a diagram like the one in figure 1.
Example of Porter’s Five Forces in airlines industry
Now that you know a little bit about the airline industry from viewing our DEPEST analysis, we will
know give you further information on the industry using our Porter's Five Forces Analysis.
The Airline industry provides a very unique service to its customers. It transports people with a
high level of convenience and efficiency that cannot not be provided by any other industry or
substitute. Airline companies pride themselves on the way they treat their customer during the
flight. They have things such as food, drinks, entertainment, and a welcoming staff. The service of
transportation is provided in other industries but the airline surpasses all of them when it comes to
timeliness. The geographic scope of the airline industry is at a global level. Some firms are able to
fly their planes all over the world while others focus on smaller geographic areas.
The five forces model is one way to answer the first basic question in strategic management; “Why
are some industries more attractive than others?” This model shows the five forces that shape
industry competition; threat of new entrants, bargaining power of buyers, threat of substitutes,
bargaining power of suppliers, and competitors. In order to analyze the airline industry we have look
at each of these forces.
1. Bargaining power of Buyers
The airline industry is made up of two groups of buyers. First, there are individual flyers. They buy
plane tickets for a number of reasons that can be personal or business related. This group is extremely
diverse; most people in developed countries have purchased a plane ticket. They can do this through
the specific airline or through the second group of buyers; travel agencies and online portals. This
buyer group works as a middle man between the airlines and the flyers. They work with mult iple
airline firms in order to give customers the best flight possible. Between these two groups there is
definitely a large amount of buyers compared to the number of firms.

3. There are low switching costs between firms because many people choose the flight based on where
they are going and the cost at the time. This is some loyalty to firms but not enough for high
switching costs. Each customer needs a lot of important information. They need to know the details
of what is provided during the flight. Buyers need to understand the timing of the flight and the
safety aspects of flying in general. The service provided is unique. Each airline has a niche. Some
airlines focus on cost, while others focus on having the best amenities, etc. Overall the bargaining
power of buyers has an extremely low threat in this industry.
3
2. Bargaining Power of Suppliers
Next we look at the bargaining power of the suppliers. In this case the major suppliers are the airplane
manufacturers. The top two manufacturers in the world currently are Boeing and Airbus (Odell,
Mark). In this industry the inputs are extremely standardized. Airline companies only seem to
differentiate with amenities. The planes are very similar. Currently some manufacturers are trying
to make their plans more ecofriendly.
Airline companies cannot easily switch suppliers. Most firms have long term contracts with their
suppliers. Planes are such high capital products that firms probably make long term loan agreements
and have more favorable credit terms when they don’t switch companies. It is difficu lt to enter into
the plane manufacturing industry because of the capital needed to enter. The amount of money and
expertise needed to make even one plane is around 200 million dollars. For this reason there are very
few suppliers in the airline industry. Airline firms are the only source of income for these
manufacturers so their business is extremely important. Based on these things the bargaining power
of suppliers has a low threat as well.
3. Threat of New Entrants
Threat of new entrants is another major aspect of the five forces. This aspect has a low threat for the
airline industry. There are two aspects that do however raise the threat level. First, there are
extremely low switching costs. Second, there are no proprietary products or services involved.
Even with these two aspects the industry still has a very low threat overall. Existing firms have a
large cost advantage. This industry requires a large amount of capital and without a strong customer
base there will be little to no profit in the first few years. Existing firms can and will use their high
capital to retaliate against newer firms with whatever means necessary such as lowering prices and
taking a loss.
Although there are low switching costs between brands, consumers tend to only chose well-known
names. Airline tickets are expensive so people don’t want to give that money to firms they don’t
trust. There is also a huge safety aspect involved and most consumers feel safer with firms that have
been around for a long period of time. This industry requires plane and flying experience which also
lowers the threat of entry. When firms decide to enter the market they first have to become licensed
which can take about a year. After that they are constantly being regulated by several organizat ions
such as the Federal Aviation Administration and the Department of Transportation. The time and
money spend to solely open an airline company is enough to prevent most people from entering the
industry.

4. 4
4. Threat of Substitutes
After looking at the threat of entry it is important to also consider the threat of substitutes. This
industry has a medium substitute risk level. There are substitutes in the airline industry. Consumers
can choose other form of transportation such as a car, bus, train, or boat to get to their destination.
There is however a cost to switch. Some means of transportation can be more costly than a plane
ticket. The main cost is time. Planes are by far the fastest form of transportation available. Airlines
surpass all other forms of transportation when it comes to cost, convenience, and sometimes service.
Consumers do sometimes choose other methods for various reasons such as cost if they are not
traveling very far which raises the risk.
5. Rivalry among Existing Players
The last area of the five forces is the rivalry among existing players. The rivalry in the airline industry
is very intense for many reasons. The industry is currently very stagnant. It seems to be in the mature
stage of the business cycle. The number of competitors stays the same in the long run and it doesn’t
seem to be under or over capacitated. The fixed costs are extremely high in this industry. This makes
it hard to leave the industry because they are probably in long term loan agreements in order to stay
in business. The products involved or the planes are highly complex which also heightens the
competition.
The competition is lessened by the brand identities of different firms. For example, JetBlue is known
for its amenities and Southwest is known for its low prices. The market share seemed to be equally
distributed because each company has its own part of the market and because switching costs are
low none of the firms can really hold a large percentage of the market.
The strongest forces in this industry are the competition of existing firms and the power of suppliers.
The rivalry of existing players is high and will push out any firm that doesn't have enough capital.
Suppliers are strong forces because planes are so costly to make. If the suppliers changed the credit
terms by even a small amount it could mean a significant loss for the firm. On the other hand the
other forces involved seem to have a weak threat. It is costly and time consuming to enter the market
which lowers the risk of entry. Buyers have a weak force because of the low switching costs and
substitutes are weak because they are usually too costly.
The profit in this industry is high because for most people flying in necessary. It is not a trend which
makes this industry profitable for the long term. Airlines that are more profitable are in a better
position because they usually have more planes and a larger variety of flights which provides further
convenience for the consumer.
Recently there have been some changes in some of the forces. Some airplane manufacturers have
been making ecofriendly planes, which is a change in the bargaining power of suppliers. This would
differentiate the products, raising the threat of suppliers. Another recent change is the use of web
portals such as Expedia to book flights. This positive change creates a whole new group of buyers
and makes purchasing flights faster and easier. The increase in gas prices has also been a positive
change for the industry because it lessens the power of substitutes. People are more willing to fly to
their destination if driving would be more expensive.
After looking at the Five Forces Model firms should make dealing with the competition their main
priority. The other areas in the model seem to have an overall low threat so existing firms don’t have
to focus on those areas as much in their business strategy.

5. Now that we have brought you through our Porter's Five Force analysis, the last thing that is
important to consider when exploring an industry, are the dominant economic features. The next
section of our report will give you an overview of what features affect the airline industry most.
5
Bargaining power of Buyers – Low Threat
Question Yes
(Low
Threat)
No
(High
Threat)
Cannot
Assess
Are there a large number of buyers relative to the number of
firms in this business?
X
Do you have a large number of customers, each with
relatively small purchases?
X
Does the customer face any significant costs in switching
suppliers?
X
Does the buyer need a lot of important information with
regard to using the product?
X
Is the buyer aware of the need for additional information? X
Is there anything that prevents the customers from
X
manufacturing the product/service in-house?
Are customers highly sensitive to price? X
Are products unique to some degree? Do they have accepted
branding?
X
Do firms provide incentives to decision-makers on the buyer
side?
X
Bargaining Power of Suppliers- Low Threat
Question Yes (Low
Threat)
No (High
Threat)
Cannot
Assess
Inputs (material, labor, services) in this industry are
standard rather than differentiated.
X
Firms can switch between suppliers quickly and easily. X
Suppliers would find it difficult to enter this business. X
There are many current and potential suppliers in this
industry.
X
This business is important to the suppliers. X

6. 6
Threat of New Entrants- Low Threat
Question Yes(Low
Threat)
No
(High
Threat)
Cannot
Assess
Do existing firms have cost and/or performance advantage in
this industry?
X
Are there proprietary products/services on offer in this
industry?
X
Are there established brand identities in this industry? X
Do customers incur significant costs in switching suppliers? X
Is a lot of capital needed to enter this industry? X
Does a new comer to the industry face difficulty in assessing
distribution channels?
X
Does experience in this industry help firms to continual ly
lower costs and/or improve performance? In other words, is
there a “learning effect” in this industry?
X
Are there any licenses, insurance and other qualificat ions
required in this industry that are difficult to obtain?
X
Can a new comer entering this industry expect strong
retaliation from the existing players?
X
Threat of Substitutes- Medium Threat
Question Yes
(Low
threat)
No
(High
threat)
Cannot
assess
Available substitutes have performance limitat ions
and/or high prices that do not justify their use as mainline
products.
X
Customers will incur costs in switching to substitutes. X
There truly are no real substitutes for the products
available in this industry.
X
Customers are not likely to go for substitutes. X
Rivalry among Existing Players- High Threat
Question Yes
(Lowers
rivalry)
No
(Intensifies
rivalry)
Cannot
assess
The industry is growing rapidly. X

7. 7
The industry does not have overcapacity at the moment. X
The fixed costs of the business are a relatively low
proportion of the total costs.
X
There are significant product differences and brand identit ies
among the competitors.
X
It would not be hard to get out of this business because there
are no long-term commitments that bind players to the
industry.
X
Customers would incur high costs if the switched from one
player to another.
X
Products on offer are highly complex and require significant
customer-producer interaction.
X
Market shares in the industry are more-or-less equally
distributed among competitors.
X