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

4 comments:

Anonymous said...

I believe Porter 5 forces is a deep and complicated competitive advantage analysis than a simple one like what was being written.

Example:
Threat of substitute products: Must include travel thru ship and train, even car or anything due to advance of technology or lack of confident in current aircraft maker

Anyway half of Boeing profit comes from selling fighter jets in which there are a handful of competitors around. And there are many more aircraft maker around such as Embraer, a Brazil company, complete with Boeing new dreamliner.

Porter 5 forces are just the starting stage on competition.

8percentpa said...

Point taken, I have over-simplified things here. For more detailed knowledge on the five forces, read Porter's book.

Must also acknowledge that my knowledge on the industry and the two companies are not good enough.

Well nobody has a monopoly on knowledge. Thanks for pointing out the mistakes.

Anonymous said...

Hey I thing your Porte 's lecturette is very useful. Especially since you seem to combine learning while laughing, and it seems to work for me.

Thank you and I HOPE i get this question in my tomorrow's exam! that would be a gift!

K12

ohene said...

your write up is useful and comprehensive.