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How competitive forces shape strategy sec a group 4 (1)
- Michael Porter's five forces framework analyzes the competitive environment in an industry by looking at five key areas: the threat of new entrants, the power of suppliers, the power of buyers, the threat of substitute products, and the intensity of rivalry among existing competitors. - The framework is used to understand the profit potential and attractiveness of an industry, and can help companies develop strategies to improve their competitive position. - When applied to the Indian aviation industry, the five forces analysis shows high supplier power, strong buyer power, low barriers to entry but high exit barriers, threats from substitutes like trains and video conferencing, and intense price competition among airlines.
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How competitive forces shape strategy sec a group 4 (1)
- 1. HOW COMPETITIVE FORCES SHAPE STRATEGY?-- MICHAELE. PORTER SUMMARY, APPLICATION, AND LIMITATIONS BY GROUP 4 (SECTION A)
- 2. SUMMARY • Underlying Industrystructure (fundamental/Economic characteristics) gives rise to five basic competitive forces. • Forces determine ultimate profit potential of Industry (The weaker the forces better the opportunity). • Threat of entry (High barriers and potential of sharp retaliation reduce threat) • Economies of scale/ or differentiated product, Capital requirements • Access to distribution channels/ or government policy • Potential rivals also consider reaction of existing competitors and their behavior in the past. • Supplier group powerful if: • Dominated by few companies/ or supply unique product (Switching cost) • No obligation to compete with other products • Poses credible threat of forward integration/ or industry is not important customer • Buyer group powerful if: • Involves bulk buying/ or buys standard products • Purchase represents a significant cost in end produc • Pose a credible threat of backward integration August 3, 2013 Indian Institute of Management Raipur 1
- 3. • Substitute products •Place a ceiling on prices industry/product can charge • Limit profits in normal times and kill bonanza in boom • Existing rivals pose intense threat if: • Rivals numerous and equal in size and power • Slow industry growth, product lacks diff or switching cost • High fixed cost, perishable product • High exit barriers; rivals diverse in strategies/origin/personalities • Strategy formulation (Self analysis (SW of SWOT) after analyzing forces. • Formulate a plan of action based on: • Positioning the company (Defend against strong forces or find weak forces). • Influencing the balance of the forces through strategic moves . • Anticipating shifts and responding to them. August 3, 2013 Indian Institute of Management Raipur 2 SUMMARY CONTINUED
- 4. APPLICATION TO INDIAN AVIATIONINDUSTRY Supplier Power • Fewer fuel suppliers (IOCL, HPCL) work as a cartel • Few aircraft leasing companies(ILFC,GE CSA) • Scarce supply of skilled pilots. • Labor unions with bargaining power. • Airport (Limited runway and apron) authorities are powerful. • No concept of secondary airports in a city. Buyer Power • Undifferentiated product for price sensitive (leisure) travellers • High threat of Backward integration from logistics industry. August 3, 2013 Indian Institute of Management Raipur 3
- 5. Threat of PotentialEntrants • Lower entry barriers but very high exit barriers • Branding Cost • High capital requirements • High degree of unpredictable government regulation • National carrier enjoys preferential treatment from government bodies Threat of Substitutes • Video Conferencing • Railways (e.g. Mumbai – Delhi Rajdhani)/Roads August 3, 2013 Indian Institute of Management Raipur 4 APPLICATION TO INDIAN AVIATION INDUSTRY CONTINUED
- 6. Rivalry with inthe Industry • Intense price competition • High Fixed Cost and perishable product • Low product differentiation • Low switching cost • Threat of acquisition by larger players August 3, 2013 Indian Institute of Management Raipur 5 APPLICATION TO INDIAN AVIATION INDUSTRY CONTINUED
- 7. LIMITATION(S) 1. It tendsto over-stress macro analysis, i.e. at the industry level, as opposed to the analysis of more specific product- market segments at a micro level. 2. It over simplifies industry value chains: for example, invariably ‘buyers’ may need to be both segmented and also differentiated between channels, intermediate buyers and end consumers 3. It appears to be self-contained, thus not being specifically related, for example, to ‘PEST’ factors, or the dynamics of growth in a particular market. 4. The model is best applicable for analysis of simple market structures 5. The model is based on the idea of competition, hence doesn’t take into account the strategies like strategic alliances, electronic linking of information system etc. August 3, 2013 Indian Institute of Management Raipur 6
- 8. THANK YOU. August 3,2013 Indian Institute of Management Raipur 7
Editor's Notes
- #7 3. PEST analysis stands for "Political, Economic, Social, and Technological analysis" and describes a framework of macro-environmental factors used in the environmental scanning component of strategic management4. . A comprehensive description and analysis of all five forces gets very difficult in complex industries with multiple interrelations, product groups, by-products and segments. A too narrow focus on particular segments of such industries, however, bears the risk of missing important elements.5. The model is based on the idea of competition. It assumes that companies try to achieve competitive advantages over other players in the markets as well as over suppliers or customers. With this focus, it dos not really take into consideration strategies like strategic alliances, electronic linking of information systems of all companies along a value chain, virtual enterprise-networks or others.