1. The Industry Handbook: Overview
  2. Industry Handbook: Porter's 5 Forces Analysis
  3. The Industry Handbook: The Airline Industry
  4. The Industry Handbook: The Oil Services Industry
  5. The Industry Handbook: Precious Metals
  6. The Industry Handbook: Automobiles
  7. The Industry Handbook: The Retailing Industry
  8. The Industry Handbook: The Banking Industry
  9. The Industry Handbook: Biotechnology
  10. The Industry Handbook: The Semiconductor Industry
  11. The Industry Handbook: The Insurance Industry
  12. The Industry Handbook: The Telecommunications Industry
  13. The Industry Handbook: The Utilities Industry
  14. The Industry Handbook: The Internet Industry

If you are not familiar with the five competitive forces model, here is a brief background on who developed it, and why it is useful.

The model originated from Michael E. Porter's 1980 book "Competitive Strategy: Techniques for Analyzing Industries and Competitors." Since then, it has become a frequently used tool for analyzing a company's industry structure and its corporate strategy.

In his book, Porter identified five competitive forces that shape every single industry and market. These forces help us to analyze everything from the intensity of competition to the profitability and attractiveness of an industry. Figure 1 shows the relationship between the different competitive forces.

 

Figure 1
  1. Threat of New Entrants - The easier it is for new companies to enter the industry, the more cutthroat competition there will be. Factors that can limit the threat of new entrants are known as barriers to entry. Some examples include:
     
    • Existing loyalty to major brands
    • Incentives for using a particular buyer (such as frequent shopper programs)
    • High fixed costs
    • Scarcity of resources
    • High costs of switching companies
    • Government restrictions or legislation
  2. Power of Suppliers - This is how much pressure suppliers can place on a business. If one supplier has a large enough impact to affect a company's margins and volumes, then it holds substantial power. Here are a few reasons that suppliers might have power:
     
    • There are very few suppliers of a particular product
    • There are no substitutes
    • Switching to another (competitive) product is very costly
    • The product is extremely important to buyers - can\'t do without it
    • The supplying industry has a higher profitability than the buying industry
  3. Power of Buyers - This is how much pressure customers can place on a business. If one customer has a large enough impact to affect a company's margins and volumes, then the customer hold substantial power. Here are a few reasons that customers might have power:
     
    • Small number of buyers
    • Purchases large volumes
    • Switching to another (competitive) product is simple
    • The product is not extremely important to buyers; they can do without the product for a period of time
    • Customers are price sensitive
  4. Availability of Substitutes - What is the likelihood that someone will switch to a competitive product or service? If the cost of switching is low, then this poses a serious threat. Here are a few factors that can affect the threat of substitutes:
     
    • The main issue is the similarity of substitutes. For example, if the price of coffee rises substantially, a coffee drinker may switch over to a beverage like tea.
    • If substitutes are similar, it can be viewed in the same light as a new entrant.
  5. Competitive Rivalry - This describes the intensity of competition between existing firms in an industry. Highly competitive industries generally earn low returns because the cost of competition is high. A highly competitive market might result from:
     
    • Many players of about the same size; there is no dominant firm
    • Little differentiation between competitors products and services
    • A mature industry with very little growth; companies can only grow by stealing customers away from competitors

 

 


The Industry Handbook: The Airline Industry
Related Articles
  1. Small Business

    Porter's Five Forces

    Porter’s Five Forces is an analysis scheme created by Harvard Business School professor Michael E. Porter. Using this analysis tool, business managers can gauge the level of competition within ...
  2. Investing

    Analyzing Porter's Five Forces on JPMorgan Chase (JPM)

    Examine the major money-center bank holding firm, JPMorgan Chase & Company, from the perspective of Porter's five forces model for industry analysis.
  3. Investing

    Analyzing Porter's Five Forces on Verizon (VZ)

    Examine Verizon's position in the wireless service industry by considering Porter's Five Forces and determining the company's biggest potential threats.
  4. Investing

    Analyzing Porter's Five Forces on Goldman Sachs (GS)

    Read a Porter's Five Forces breakdown of America's largest stand-alone investment bank, Goldman Sachs, including how the bank is protected from competition.
  5. Investing

    Apple: Porter's 5 Forces Analysis

    Even though Apple is a well established company, there is always a threat from competitive forces.
  6. Investing

    Analyzing Porter's Five Forces on Electronic Arts (EA)

    Explore Porter's Five Forces as they apply to video game producer Electronic Arts; learn which external forces pose the biggest threats to EA's business.
  7. Small Business

    Understanding Competitive Pricing

    Competitive pricing is the practice of setting prices for products or services based on what the competition charges.
Frequently Asked Questions
  1. Why Do Most of My Mortgage Payments Start Out as Interest?

    Fear not: Over the life of the mortgage, the portions of interest to principal will change.
  2. What is the difference between secured and unsecured debts?

    The differences between secured and unsecured debt, and how banks buffer risks associated with each type of loan through ...
  3. How Many Times has Warren Buffett Been Married?

    Warren Buffett has been married twice in his life, but the circumstances surrounding the marriages were unconventional.
  4. What's the smallest number of shares of stock that I can buy?

    Many people would say the smallest number of shares an investor can purchase is one, but the real answer is not as straightforward. ...
Trading Center