Porter's Five forces
Erik Black
Choosing whether or not to enter an industry is never an easy decision to make as there are many factors to take into consideration. Porter’s five forces model is one of the most valuable models that can be used to determine a firm’s potential in an industry. The five forces model allows a firm to analyze competition and develop a competitive strategy of their own. These five forces consist of threats of new entrants, the power of suppliers, the power of buyers, product substitutes, and rivalry among competing firms. Using this model we will analyze the airline industry to determine if a new airline is a worthy investment at this time.
The threat of new entrants is usually the first force to look at. New entrants mean more competition and less market share for existing competitors. To reduce these threats, firms competing try to develop barriers to entry; these may also include government regulations. In the past the airline industry was heavily regulated by the government but currently, existing firms have most control. One way airlines try to prevent new entrants is by buying and selling airport slots to each other. This makes it harder for new airlines to gain any market share (Barrow). It is also becoming harder to differentiate service within this industry. Dominating airlines not only battle for low prices but they have also begun developing reward programs in the hopes of gaining customer loyalty. New entrants and small players are not as able to make such accommodations and will lose market share quickly if they cannot compete.
Capital requirements are a major factor of evaluating barriers to entry. This may be the biggest determinant of joining the airline industry. The cost of labor is an airline’s number one expense; “airlines must pay pilots, flight attendants, baggage handlers, dispatchers, customer service and others” (The Industry Handbook: The Airline Industry). High fixed costs make it a riskier investment, especially when there
Choosing whether or not to enter an industry is never an easy decision to make as there are many factors to take into consideration. Porter’s five forces model is one of the most valuable models that can be used to determine a firm’s potential in an industry. The five forces model allows a firm to analyze competition and develop a competitive strategy of their own. These five forces consist of threats of new entrants, the power of suppliers, the power of buyers, product substitutes, and rivalry among competing firms. Using this model we will analyze the airline industry to determine if a new airline is a worthy investment at this time.
The threat of new entrants is usually the first force to look at. New entrants mean more competition and less market share for existing competitors. To reduce these threats, firms competing try to develop barriers to entry; these may also include government regulations. In the past the airline industry was heavily regulated by the government but currently, existing firms have most control. One way airlines try to prevent new entrants is by buying and selling airport slots to each other. This makes it harder for new airlines to gain any market share (Barrow). It is also becoming harder to differentiate service within this industry. Dominating airlines not only battle for low prices but they have also begun developing reward programs in the hopes of gaining customer loyalty. New entrants and small players are not as able to make such accommodations and will lose market share quickly if they cannot compete.
Capital requirements are a major factor of evaluating barriers to entry. This may be the biggest determinant of joining the airline industry. The cost of labor is an airline’s number one expense; “airlines must pay pilots, flight attendants, baggage handlers, dispatchers, customer service and others” (The Industry Handbook: The Airline Industry). High fixed costs make it a riskier investment, especially when there
Cited: Barrow, H. (n.d.). Barriers to Entry in the Airline Industry. Retrieved from ehow.com: http://www.ehow.com/list_7576197_barriers-entry-airline-industry.html Curtis, G. (n.d.). Is That Airline Ready For Lift-Off? Retrieved from Investopedia.com: http://www.investopedia.com/articles/stocks/07/airline_stocks.asp#axzz23cyq6Qd3 Levine-Weinberg, A. (2014, January 5). Airline Investors Should Heed Warren Buffett 's Wisdom. Retrieved from http://www.fool.com/investing/general/2014/01/05/airline-investors-should-heed-warren-buffetts-wisd.aspx Mouawad, J. (2012, May 25). The Challenge of Starting an Airline. Retrieved from nytimes.com: http://www.nytimes.com/2012/05/26/business/start-up-airlines-face-big-obstacles.html?pagewanted=all&_r=0 The Industry Handbook: The Airline Industry. (n.d.). Retrieved from Investopedia.com: http://www.investopedia.com/features/industryhandbook/airline.asp#axzz23cyq6Qd3