HOW

COMPETITIVE
FORCES SHAPE
STRATEGY?
-- MICHAEL E. PORTER

SUMMARY, APPLICATION, AND LIMITATIONS

BY GROUP 4 (SECTION A)
SUMMARY
Underlying Industry structure (fundamental/Economic characteristics)
gives rise to five basic competitive forces.
Forces determine ultimate profit potential of Industry (The weaker the
forces better the opportunity).
Threat of entry (High barriers and potential of sharp retaliation reduce
threat)
Economies of scale/ or differentiated product, Capital requirements
Access to distribution channels/ or government policy
Potential rivals also consider reaction of existing competitors and their
behavior in the past.
Supplier group powerful if:
Dominated by few companies/ or supply unique product (Switching cost)
No obligation to compete with other products
Poses credible threat of forward integration/ or industry is not important
customer
Buyer group powerful if:
Involves bulk buying/ or buys standard products
Purchase represents a significant cost in end produc
Pose a credible threat of backward integration
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Indian Institute of Management Raipur
SUMMARY CONTINUED

Substitute products
Place a ceiling on prices industry/product can charge
Limit profits in normal times and kill bonanza in boom
Existing rivals pose intense threat if:
Rivals numerous and equal in size and power
Slow industry growth, product lacks diff or switching cost
High fixed cost, perishable product
High exit barriers; rivals diverse in strategies/origin/personalities
Strategy formulation (Self analysis (SW of SWOT) after analyzing
forces.
Formulate a plan of action based on:
Positioning the company (Defend against strong forces or find weak forces).
Influencing the balance of the forces through strategic moves .
Anticipating shifts and responding to them.
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Indian Institute of Management Raipur
APPLICATION TO INDIAN
AVIATION INDUSTRY
Supplier Power
Fewer fuel suppliers (IOCL, HPCL) work as a cartel
Few aircraft leasing companies(ILFC,GE CSA)
Scarce supply of skilled pilots.
Labor unions with bargaining power.
Airport (Limited runway and apron) authorities are powerful.
No concept of secondary airports in a city.
Buyer Power
Undifferentiated product for price sensitive (leisure) travellers
High threat of Backward integration from logistics industry.

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3
Indian Institute of Management Raipur
APPLICATION TO INDIAN
AVIATION INDUSTRY CONTINUED
Threat of Potential Entrants
Lower entry barriers but very high exit barriers
Branding Cost
High capital requirements
High degree of unpredictable government regulation
National carrier enjoys preferential treatment from
government bodies

Threat of Substitutes
Video Conferencing
Railways (e.g. Mumbai Delhi Rajdhani)/Roads

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4
Indian Institute of Management Raipur
APPLICATION TO INDIAN
AVIATION INDUSTRY CONTINUED
Rivalry with in the Industry
Intense price competition
High Fixed Cost and perishable product
Low product differentiation
Low switching cost
Threat of acquisition by larger players

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Indian Institute of Management Raipur
LIMITATION(S)
1. It tends to over-stress macro analysis, i.e. at the industry
level, as opposed to the analysis of more specic product-
market segments at a micro level.
2. It over simplies industry value chains: for example,
invariably buyers may need to be both segmented and also
differentiated between channels, intermediate buyers and
end consumers
3. It appears to be self-contained, thus not being specically
related, for example, to PEST factors, or the dynamics of
growth in a particular market.
4. The model is best applicable for analysis of simple market
structures
5. The model is based on the idea of competition, hence
doesnt take into account the strategies like strategic
alliances, electronic linking of information system etc.

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Indian Institute of Management Raipur
 THANK YOU.

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7
Indian Institute of Management Raipur