Chapter 2
The External Environment:
Opportunities, Threats, Industry
Competition, and Competitor Analysis
Aviation Marketing
By:
Imtiaz Hussain
Superior University
Ch2-1
The purpose of
Five-Forces Analysis
• The five forces are environmental forces
that impact on a company’s ability to
compete in a given market.
• The purpose of five-forces analysis is to
diagnose the principal competitive
pressures in a market and assess how
strong and important each one is.
Ch2-2
Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining
Power of
Suppliers
Rivalry Among
Competing Firms
in Industry
Bargaining
Power of
Buyers
Threat of
Substitute
Products
Ch2-3
NOKIA
Threat of new entrants: low
•
•
•
The mobile phone industry is already a well established market
high investments in R&D, technology and marketing.
Nokia hold 29% of the market share in the industry, the highest market share in the industry.
Power of suppliers: moderate
•
•
Although Nokia rely on its suppliers to supply equipment for their advanced mobile phones there are
actually a number of large equipment makers, which Nokia could switch to.
The software suppliers for their Smartphone's are now Microsoft, who will have a very high bargaining
power.
Powers of buyers: high
•
•
•
The power that customers have is rising because of the increasing number of choices in the mobile
telecommunication industry.
With a lot of the Nokia competitors all offering similar products and packages
Long term contracts so switching from one handset to another will be difficult
•
Threats of substitute’s products: low
•
•
•
Mobile phones are an everyday essential in people’s lives today.
social networking websites, email and home telephones.
Digital camera can take better photos then smart phones, notebooks can surf the web just as effectively
and PDAs can plan a day the same way a smart phone can.
•
Competitive rivalry: high
•
Apple and HTC.
Ch2-4
Example
•
•
•
•
•
This worries him:
The threat of new entry is quite high
Competitive rivalry is extremely high: if someone raises prices, they'll be quickly undercut.
Buyer Power is strong, again implying strong downward pressure on prices.
There is some threat of substitution
Ch2-5
Porter’s Five Forces Model
&
Its Application in Aviation
Ch2-6
1. Rivalry Amongst Existing
Firms
Low competition
Same type of aircrafts
Same type of fares
Less fare for economy class
High fare for business class
Ch2-7
2.Substitution
Telecommunication
Surface transport
Air Freight industry
Ch2-8
3. New Entry
Regulatory Limitations
Airport Slots
Staff Resources
Maintenance and Ground handling
Economies of Scale
Learning Curve effects
High Risks
“Where there is muck there’s brass”
Ch2-9
4. Power of Customers
Number of customers
“True customers” are decreasing
Over-ride comissions
Bucket Shops
Why not to do the job YOURSELF?
Integrated Carriers
Switching Costs
“Golden Hello” tactic
Ch2-10
5. Power of Suppliers
Monopoly
Airports and ATCs
Aircraft manufacturers (B747, A380)
Global Distribution System (GDSs)
SABRE and Galileo International
Cost to be mutually share by agent and airline
Airlines continued to pay
85 to 90%
Ch2-11
Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Ch2-12
Threat of New Entrants
Economies of Scale
Barriers to
Entry
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent
of Scale
Government Policy
Expected Retaliation
Ch2-13
Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining
Power of
Suppliers
Ch2-14
Bargaining Power of Suppliers
Suppliers are likely to be powerful if:
Suppliers exert power
in the industry by:
* Threatening to raise
prices or to reduce quality
Powerful suppliers
can squeeze industry
profitability if firms
are unable to recover
cost increases
Supplier industry is dominated by a
few firms
Suppliers’ products have few substitutes
Buyer is not an important customer to
supplier
Suppliers’ product is an important
input to buyers’ product
Suppliers’ products are differentiated
Suppliers’ products have high
switching costs
Supplier poses credible threat of
forward integration
Ch2-15
Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining
Power of
Suppliers
Bargaining
Power of
Buyers
Ch2-16
Bargaining Power of Buyers
Buyer groups are likely to be powerful if:
Buyers are concentrated or purchases
are large relative to seller’s sales
Purchase accounts for a significant
fraction of supplier’s sales
Products are undifferentiated
Buyers face few switching costs
Buyers’ industry earns low profits
Buyers compete
with the supplying
industry by:
* Bargaining down prices
* Forcing higher quality
* Playing firms off of
each other
Buyer presents a credible threat of
backward integration
Product unimportant to quality
Buyer has full information
Ch2-17
Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining
Power of
Suppliers
Bargaining
Power of
Buyers
Threat of
Substitute
Products
Ch2-18
Threat of Substitute Products
Keys to evaluate substitute products:
Products
with similar
function
limit the
prices firms
can charge
Products with improving
price/performance tradeoffs
relative to present industry
products
Example:
Electronic security systems in
place of security guards
Fax machines in place of
overnight mail delivery
Ch2-19
Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining
Power of
Suppliers
Rivalry Among
Competing Firms
in Industry
Bargaining
Power of
Buyers
Threat of
Substitute
Products
Ch2-20
Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:
Jockeying for strategic position
Using price competition
Staging advertising battles
Increasing consumer warranties or service
Making new product introductions
Occurs when a firm is pressured or sees an opportunity
Price competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, but
may be costly to smaller competitors
Ch2-21
Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur when:
Numerous or equally balanced competitors
Slow growth industry
High fixed costs
High storage costs
Lack of differentiation or switching costs
Capacity added in large increments
Diverse competitors
High strategic stakes
High exit barriers
Ch2-22
The Five Forces are Unique to
Your Industry
• Five-Forces Analysis is a framework for
analyzing a particular industry.
– Yet, the five forces affect all the other
businesses in that industry.
Ch2-23
Competitor Analysis
The follow-up to Industry Analysis is
effective analysis of a firm’s Competitors
Industry
Environment
Competitive
Environment
Ch2-24
Competitor Analysis
Assumptions
What assumptions do our
competitors hold about the future
of industry and themselves?
Current Strategy
Does our current strategy support
changes in the competitive
environment?
Future Objectives
How do our goals compare to our
competitors’ goals?
Response
What will our
competitors do in the
future?
Where do we have a
competitive
advantage?
How will this change
our relationship with
our competition?
Capabilities
How do our capabilities compare
to our competitors?
Ch2-25
Competitor Analysis
Future Objectives
What Drives the competitor?
How do our goals compare
to our competitors’ goals?
Where will emphasis be
placed in the future?
What is the attitude
toward risk?
Ch2-26
Competitor Analysis
Future Objectives
How do our goals compare
to our competitors’ goals?
Where Current
will emphasis
be
Strategy
placed inHow
the future?
are we currently
What is the
attitude
competing?
toward risk?
Does this strategy
support changes in the
competitive structure?
What is the competitor doing?
What can the competitor do?
Ch2-27
Competitor Analysis
Future Objectives
What does the competitor believe
about itself and the industry?
How do our goals compare
to our competitors’ goals?
Where Current
will emphasis
be
Strategy
placed in the future?
How are we currently
What is the
attitude
competing?
Assumptions
toward risk?
Does thisDo
strategy
we assume the future
support changes
in the
will be volatile?
competition
structure?
What
assumptions do our
competitors hold about the
industry and themselves?
Are we assuming stable
competitive conditions?
Ch2-28
Competitor Analysis
Future Objectives
What are the competitor’s
capabilities?
How do our goals compare
to our competitors’ goals?
Where Current
will emphasis
be
Strategy
placed in the future?
How are we currently
What is the
attitude
competing?
Assumptions
toward risk?
Does this
Dostrategy
we assume the future
supportwill
changes
in the
be volatile?
competition
Whatstructure?
assumptions do our
competitors
hold about the
Capabilities
industry and themselves?
What are my competitors’
Are we operating under
strengths and weaknesses?
a status quo?
How do our capabilities
compare to our
competitors?
Ch2-29
Competitor Analysis
Response
Future Objectives
How do our goals compare
to our competitors’ goals?
Where Current
will emphasis
be
Strategy
placed in the future?
How are we currently
What is the
attitude
competing?
Assumptions
toward risk?
Does this
Dostrategy
we assume the future
supportwill
changes
in the
be volatile?
competition
Whatstructure?
assumptions do our
Capabilities
competitors
hold about the
industry and themselves?
What are my competitors’
Are we operating
strengths under
and weaknesses?
a status quo?
How do our capabilities
compare to our
competitors?
What will our competitors
do in the future?
Where do we have a
competitive advantage?
How will this change our
relationship with our
competition?
Ch2-30