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The framework allows a business to identify and analyze the important forces that determine the profitability of an industry. It is these forces that determine how much competition will exist in a market and consequently the profitability and attractiveness of this market for a company. Through sound corporate strategies, a company will aim to shape these forces to its advantage to strengthen the organizations position in the industry.
For the purpose of this model, industry attractiveness is the overall profitability potential of the industry. An attractive industry will be one where the combined power of the competitive forces will increase profitability potential. While an unattractive industry will be one where the collective impact of the forces will drive down profitability potential.
These forces, termed as the micro environment by Porter, influence how a company serves its target market and whether it is able to turn a profit. Any change in one of the forces might mean that a company has to re-evaluate its environment and realign its business practices and strategies.
An attractive market place does not mean that all companies will enjoy similar success levels. Rather, the unique selling propositions, strategies and processes will put one company over the other.
Composition of Forces Within each industry, the effect of different forces will be different. This is why it becomes imperative to develop this model separately for every industry even if the same company is competing across different markets and industries.
As an example, the airline industry has fierce competition among the two producers, Airbus and Boeing. The bargaining power of the buyers, all airlines, is fairly high. On the other hand, there is almost no threat of new entry into the market given high degrees of proprietary knowledge and high investments.
There is also no threat of substitutes and the power of suppliers is also generally benign. On the other hand in the film business, there is a high threat of substitutes from various other forms of entertainment. In addition, the power of suppliers e. Whatever the industry, there may be one or two forces that end up driving all strategy formation.
It is not always easy to determine which force is the key one. An obvious force may not be the one increasing or decreasing profitability. Porter developed the five forces model.
It was later detailed in his book on Competitive strategy. Despite criticisms regarding its applicability in a much altered world, it remains one of the most widely used methods of industry analysis. Threat of substitutes, threat of new entrants, competitive rivalry Vertical forces: Bargaining power of buyers and bargaining power of customers 1.
Competitive Rivalry One important force that Porter describes is the degree of rivalry between existing companies in the market. If there are more companies competing with each other, the resulting competitive pressure will mean that prices, profits and strategy will be driven by it.
One company may end up having little or no power in its own industry if there is a variety of quality products are offered in the market in direct competition with it.
Customers have the option of simply moving on to a different company easily. Conversely, in the absence of this rivalry, the company may be able to freely set prices and profit margins without being dictated by what the customer finds attractive. When is competitive rivalry high?
Competitive rivalry may be higher when: Similar sized companies operate in one market These companies have similar strategies Products on offer have similar features and offer the same benefits Growth in the industry is slow There are high barriers to exit or low barriers to entry 2.
If an industry is profitable, or attractive in a long term strategic manner, then it will be attractive to new companies. Unless there are barriers to entry in place, new firms may easily enter the market and change the dynamics of the industry.
The particular dynamics of an industry that restrict entry into it are called barriers to entry The most attractive scenario for a new company is when a potential market has low barriers to exit but high barriers to entry. The economics of any industry will determine the level of difficulty faced when trying to enter this market.
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After that, the paper discusses two academic journals that provide useful frameworks for southwest airline to overcome its difficulties.
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