Sunday, November 26, 2006

Porter 5 forces

Michael Porter, elder brother of Harry Potter, wrote and published a book in 1980 called Competitive Strategy that helped frameworked how we should look at an industry and the forces that interact with the various companies in the same industry. Ok, just kidding hor, Michael Porter is a real academic while Harry Potter is a wizard in a bestselling septology i.e. a story with seven episodes!

Well what Mr Porter said was somewhat common sense but they will nevertheless teach it in business school and set 1 exam question on this per semester. Anyways, the canonical Porter's five forces are

1) Existing competitive rivalry between industry players
2) Threat of new market entrants
3) Bargaining power of buyers
4) Power of suppliers
5) Threat of substitute products (including technology change)

An industry leader/formidable player should be able to tackle all the forces with ease. As an example, let's look at the aircraft makers: Airbus and Boeing.

1) Rivalry between these two players: yes they are somewhat bitter rivals, but on the whole, because there are only two players, price competition is quite limited, and profitability remains high.

2) New market entrants? Not likely, since they are the leaders with all the experience, no airline will think of getting planes from new entrants. Well maybe African airlines buying cheap Russian planes, but overall, not a big threat.

3) With over 100 airlines, basically the airlines don't have any bargaining power. Boeing and Airbus set the price, airlines just accept. If they don't there will be 99 airlines waiting to buy anyway.

4) Suppliers, well depending on the parts, suppliers can be quite powderful. Especially high-end stuff like engines etc. Hence they (Boeing and Airbus) may lose out here.

5) Substitute? Er like flying cars? Or high-speed broomsticks? Well sorry this is not Hogwarts, so in short, no threat from substitutes.

So Boeing and Airbus are in a good position, of the 5 forces, they have the upper-hand in 4 of them. Of course, this is just one aspect to look at one industry. Will be introducing more!

See also SWOT analysis
and Secular trends
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