Micheal Porter projected five forces model in capacity to analyze competitive strategy of the management in any industry. These forces hold an exigent spectrum of importance in the airline industry because of enormous market saturation. The concentration of airline service providers in the market are more than the actual needed demand. Due to immense competition, the level of competition is enhanced within the complex market offering in terms of technology, prices, in-flight entertainment, customer services, and so on. Hence, this paper is presented to analyze the Porter’s five forces model in the horizon of airline industry. Porter has also given the more enhanced framework of forces by including the sixth force as well, which will subsequently be analyzed according to said industry.
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Porter’s Six Forces Model Analysis
The extension of Porter’s five forces model is actually regarded as Porter’s six forces model. The enhanced stimuli of forces did not gain such popularity as that of its previous model integrating five forces only, because of its less positive acceptance. The model is similar to the five forces model with only difference of sixth force in the framework. Hence, all Porter’s (1980) forces are explained below with their certitude rating in the parameters of airline industry.
Force 1: Threats of New Entrants
The threat of new firm into the same industry is the force which describes the dependability of new entrants on the entering barriers. These barriers are a kind of great threat to any industry, if they are feasible and flexible because it will increase the number of potential competitors in the industry and on the contrary they can react in diverse manner to the potential entrants to replicate the incumbents’ position. These barriers may exist within economies of scale, distribution channel, cost of entry, government legislation and product or service differentiation of the industry (Porter, 1980). In an airline industry, the space for newcomers is squeezed to such extent that there is hardly any place for the new entrants in the market. The reason with respect to entry barriers include high cost of industry because it is one of the most expensive and complex industry in terms of buying or leasing aircrafts, their maintenance and demands highly sophisticated technological system to operate. The other barrier recessing new entrants is that of government restrictions on air traffic and already established big giants of the industry. Hence, it can be concluded that in airline industry, the degree of potential entrants is low because of the discussed mentioned facts.
Force 2: Threat of Substitute Products or Service
The substitute products or service are posed to threats when for the same basic need of customer’s satisfaction, the ratio of price to performance differs. This threat is mainly associated by the cost factor of the products or services because customers normally switched to substitute alternatives when the same seek of satisfaction are achieved at lower cost (Porter, 1980). The shift of customer to substitutes involves product-for-product substitution, generic substitution and the substitution without any reason. In airline industry, the possible substitutes are travelling by train, bus or car and these substitutes are significantly diverse depending upon various factors of costumer’s preference. The competition of substitutes depends upon the ease of traveler to shift on the substitute travelling service and the main key factor in switching to substitute is price. Hence, the level of this threat can be considered as medium because of the uncertain traveler preference over substitutes.
Force 3: Degree of Rivalry
The head-to-head competition leads the existing organization of same industry to captivate greater market share because of its increased and distinct value (Barney, 1996). This force frames the core competency of the firm in the market and is the most exigent force that tracks other forces to determine industry attractiveness. It is most likely observed to be high in the industry where there is greater threat of substitute products and the existing powers of buyers and suppliers hold considerable strength (Porter, 2008). A cut-throat competition can be observed in airline industry because of greater saturation of rival airlines. The rival companies of airline industry are continuously competing each other in the realm of technology, prices, and customer services. Due to the maxim of competition, the degree of rivalry in airline industry is very high and that can result in slow market growth rate.
Force 4: Bargaining Power of Power
The buyer’s bargaining power is mainly dependent upon the concentration and size of the customers. However, the other factors do have impact on the buyer power which include the degree to which the buyers are informed and the intensity of differentiation to the competitors (Porter, 2008). The buyer power can also be gauged by distinguishing willingness of potential buyer to use the power and the willingness is derived from the spectrum of risk association of product or service usage by the customer (IBM, Aviation Week). This force is seemed to be high where there are few big players in the market and there is low cost in switching between suppliers. Similarly, each airline company is fighting for the same customer which strengthens the buyer power. The customers travelling from one destination to another destination are being provided with many alternative choices of airline service providers and the one that grab maximum of them is the one which give more value at same or lesser price. Therefore, it is most obvious fact that bargaining power of the customers or buyers in the airline industry is very high because of high price sensitivity.
Force 5: Supplier Power
The mirror image of buyer power is the supplier bargaining power. The difference lies on the part that this force has main focus on the size and concentration of suppliers in capacity with participants of industry. It also highlights the importance of suppliers in the arena of differentiation in the realm of quantity supplied as input. When the firm has an advantage to charge distinct prices for its products or services due to difference in the line of value chain then it claims to have greater supplier power. However, bargaining power of supplier is usually high in the industry where the cost of switching supplier is very high. The suppliers of airline industry are considered as concentrated because its main giant suppliers are Airbus and Boeing. This level of supplier concentration dictates the airline companies to have high bargaining power on the supplier side (Supply Dynamics, Aviation Week) because their main operation is mainly dependent upon their suppliers provided aircrafts and jets. In this regard, the airline companies have no such better alternatives to switch their suppliers of aircrafts even at higher costs.
Force 6: Relative Power of other Stakeholders
The other entities and groups generally termed as stakeholders do have impact on the firm and this is the Porter’s sixth force which include complementors, government, public, shareholders and employees (Grove, 1996). These stakeholders’ power has considerable impact on airline industry as well. The complementors generally include tourism services of airline industry whose effectiveness leads to airline effectiveness. The government directs the air-routes fares and taxation policies which have considerable impact on airline companies. Similarly, the power of other stakeholders of airline industry is considerably high as compared to other industries.
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In a nutshell, it can be concluded that airline industry is concentrated with much more competition and the Porter’s six forces analysis explains the reasons for low returns in the industry. At first, the threat of newcomers is low but the rivalry among the existing customers is much high. The bargaining power of customer is high because they are price sensitive. The degree of bargaining power of supplier is also high due to concentrated and limited suppliers. The threat of available substitutes can be considered as medium because of various uncertain travelers’ preferences. Hence, the degree of each force analyzed will be helpful to gauge the market scenario of airline industry.
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