Porter's five forces Assignment help

What is Porter's five forces?

Porter’s Five Forces is a framework that is particularly used for analysing and understanding the competitive nature of the business environment where the business intends to operate. These forces actually influence on parameters like how the firm can sustain in the market, who are its immediate competitors, what potential threats it might have to face in the external business environment. Accordingly the business can strategies its action plan and function in the competitive business environment. This framework actually helps in understanding how the number and power of a company's competitive rivals, potential new market entrants, suppliers, customers, and substitute products influence a company's profitability.

Porter’s five forces model:

Porter’s Five Forces Model constitutes of five different factors that impact differently on the overall functioning of the business. This model is considered as crucial when it comes to analysing the forces that shape competition within an industry. These five factors include: Power of Suppliers that is the availability of suppliers and whether they have a high or low bargaining power. For instance if there are numerous suppliers for a business, then their bargaining power is low and vice versa. The next factor is Bargaining power of buyers which is also highly dependent on factors like existing market competition and easy availability of substitute products where the switching cost for consumer is low and the bargaining power is high. Competitive rivalry is the third factor in this model. This actually determines the level of existing competition in the market from other private brands selling similar products. Then the fourth factor is threat of substitution that is when there are numerous brands that sell the same product at the same price and offer similar benefits then it can be stated that the threat of substitute is very high for the business and here the business must look for some diversification or innovation. The last factor is threat of new entry and the market that is maturing or is still growing in such market the threat of new entrant is always high in comparison to matured markets.

Porter's five forces of competitive position analysis:

Porter’s Five Forces framework allows the marketers to do competitive position analysis because the business actually gets a clear picture of its existing market competition or the potential threats that the business can face in the long run. Identifying these will ultimately help the business to choose the right strategy to operate.

Example:

The business indystry that is chosen for analysis is International Airlines Industry. Here the threat of new entrants in the airline industry can be considered as low to medium. It takes quite some upfront investments to start an airline company (e.g. purchasing aircrafts). Moreover, new entrants need licenses, insurances, distribution channels and other qualifications that are not easy to obtain when you are new to the industry (e.g. access to flight routes). Furthermore, it can be expected that existing players have built up a large base of experience over the years to cut costs and increase service levels.

The bargaining power of suppliers in the airline industry can be considered very high. When looking at the major inputs that airline companies need, we see that they are especially dependent on fuel and aircrafts. These inputs however are very much affected by the external environment over which the airline companies themselves have little control. The price of aviation fuel is subject to the fluctuations in the global market for oil, which can change wildly because of geopolitical and other factors. In terms of aircrafts for example, only two major suppliers exist: Boeing and Airbus. Boeing and Airbus therefore have substantial bargaining power on the prices they charge.

Bargaining power of buyers in the airline industry is high. Customers are able to check prices of different airline companies fast through the many online price comparisons websites such as Skyscanner and Expedia. Switching cost is low and with varied substitutes available the brand loyalty is very low.

In terms of the airline industry, it can be said that the general need of its customers is travelling. It may be clear that there are many alternatives for travelling besides going by airplane. Depending on the urgency and distance, customers could take the train or go by car. Especially in Asia, more and more people make use of high-speed trains such as Bullet Trains and Maglev Trains. Thus there exists various substitutes and the threat is high in this way

Competitive Rivalry is also extremely high because of a number of reasons which include the entry of low cost carriers, the tight regulation of the industry wherein safety become paramount leading to high fixed costs and high barriers to exit, and the fact that the industry is very stagnant in terms of growth at the moment. The switching costs for customers are also very low and many players in the industry are similar in size

Benefits of Porter’s Five Forces Analysis:

The purpose of five forces analysis is to identify how much profit potential exists in an industry and accordingly the business can choose its operational strategy. These five factors actually helps in determining whether the business will bring profit or increase its liabilities as the bargaining power of the buyers, suppliers, the existing market competition, threat of substitutes and new entry altogether helps in explaining what the business should actually focus on to reduce these challenges and build its future potentials. The major benefit of using this framework is that it will ultimately help the business understand its strengths, weaknesses and the existing opportunities and threats in the macro business environment where it chooses to operate.  It actually helps the business get all the necessary information about the market and what potentials it can actually bring for the business. This will help the business to invest in a judicious manner and ensure utmost utilisation of all its resources. Porter’s Five Forces analysis is extremely beneficial even for those start-ups who aim to enter an industry market. It would provide them with a clear picture of the existing possibilities as well as the challenges associated with the industry and how they should operate to gain success