HOW COMPETITIVE FORCES SHAPE STRATEGY? -- MICHAEL E. PORTER

SUMMARY, APPLICATION, AND LIMITATIONS

BY GROUP 4 (SECTION A)

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SUMMARY• Underlying Industry structure (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

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• 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.

SUMMARY CONTINUED

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APPLICATION TO INDIAN AVIATION INDUSTRY

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.

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Threat of Potential Entrants

• 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

APPLICATION TO INDIAN AVIATION INDUSTRY CONTINUED

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Rivalry with in the Industry

• Intense price competition• High Fixed Cost and perishable product• Low product differentiation• Low switching cost• Threat of acquisition by larger players

APPLICATION TO INDIAN AVIATION INDUSTRY CONTINUED

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LIMITATION(S)1. It tends to 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.

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THANK YOU.