Porters five Forces and Ryanair
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The model of the Five Competitive Forces was developed by Michael Porter in his book Competitive Strategy: “Techniques for Analyzing Industries and Competitors” in 1980. Since that time it has become an important instrument for analyzing an organisations industry structure in the strategic processes. Porter’s model is based on the idea that a business strategy should meet the opportunities and threats in the organisations external environment. Porter came up with a set of five factors/forces that includes substitute products, bargaining power of customers, bargaining power of suppliers, entrance barriers and rivalry among existing firms in the industry. Michael Porter’s Five Forces have become a measuring tool for evaluating a industrys profitability. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to revise these competitive forces in a way that improves the position of the organization. Porters model supports analysis of the driving forces in an industry. Based on the information derived from the Five Forces Analysis, management can decide how to influence or to take advantage of particular characteristics in their industry.
In economics the threat of a substitute exists when a products demand is affected by a price change in a substitute product. A threat from substitutes exists if there are alternative products with lower prices. They could potentially attract a significant share of market volume and therefore reduce the potential sales volume for existing players.The treat of substitutes is determined by factors such as brand loyalty and the price of substitute goods. Unless corporation’s can separate there product or service from there competitors through various marketing techniques the firm will find it very difficult to increase there market share. One such example is customer loyalty schemes which have the potential to make consumers very reluctant to switch to an alternative supplier.
In Ryanair’s case the threat of substitutes is relatively low. Examples of substitutes include boats and the euro tunnel. The main reason for the threat of these substitutes been low is because of the extra time it takes to travel using different forms of travel and the price difference is relatively low.
Bargaining power of customers
Likewise, the bargaining power of customers can determine how much customers can inflict pressure on the amount of sales and market share a firm can create.
Customers bargaining power is likely to be high when there is a large amount of buyers and sellers, the firm has a large amount of fixed costs, the product as a large amount of substitutes, switching to another product is fairly easy, and when the customer is price sensitive and know how much the product costs to produce. Improved customer service and high quality levels help to reduce the risk of buyers changing supplier.
In the case of Ryanair there are a large amount of buyer’s high fixed costs and in some cases other forms of transport may be used and customers generally tend to be price sensitive. Being a no frills airline company, consumers having a high bargaining power actually works to Ryanair’s advantage. The main reason for this is because buyers have a high level of power on the net and because the are price sensitive will generally purchase the cheapest flights which is Ryanairs main differentiation from its competitors.
Bargaining power of suppliers
Supplier bargaining power is likely to be high when there is a small amount of large suppliers, there are no alternative substitutes and where switching supplier is expensive and time consuming. The availability of resources also has a major effect on the bargaining power of a supplier. For example when there is a limited amount of raw materials such as gold the bargaining power of suppliers can be quite high.
The competition in an industry will be higher, when it is for relatively easy for other companies to enter the industry. In such circumstances, new entrants could change major factors of the market environment including market shares, prices and customer loyalty.
The threat of new entries will depend on the extent to which there are barriers to entry. Whether it is easy or not for a firm to enter a market depends on aspects such as how brand loyal customers in the industry are, how expensive it is for a firm to enter the market, how beneficial economies of scale are to the firms in that industry such as bulk buying, whether there are copyright and patents in the industry, whether or not there are legal issues and whether changing firms is time consuming and expensive for the consumer.
New entrants can reduce sales and profits of existing firms in an industry. By providing strong supply channels that are difficult for new entrants to match, a business can be strategically strong.
In Ryanair’s case entrance barriers are very valuable for the company. The cost of setting up an airline company is phenomenal. One plane alone costs billions to purchase making it extremely difficult for competitors to enter the market.
This force describes the intensity of competition between businesses in an industry. Industurys with a large amount of suppliers in the market can lead to competiton on prices and market share and how has a direct influence on how successful the firm is in the market.
Competition between existing players is likely to be intense when there is little differentiation in there products when the size of the industry as a low market growth or more so when the industry is diminishing and when barriers for exit are high in firms which have specialized equipment as discussed above.
For a business to survive in a very competitive marketplace firms often have only two options for increasing profitability by either reducing costs or increasing revenues or both. Cost reduction can be accomplished through more efficient channels production techniques. Sales increase can be achieved through various marketing techniques such as innovative advertising campaigns and researching the most effective form of media for advertising there products or services.
When a firm is trying to compete with rival firms for market share it can choose from several competitive moves such as 1. Improving there product differentiation by improving certain features of a product or by lowering costs of production through new innovative designs, or by 2. By raising or lowering prices
Main factors effecting rivalry among firms
The intensity of the rivalry is influenced by the following industry characteristics
(A)A large number of firms enhances the rivalry for the reason that more firms must compete for the same consumers and resources
(B)Highly perishable products cause a manufacturer to sell supplies as soon as possible when other producers are doing the same thing it leads to increased competition
(C)Brand awareness on the other tends to limit rivalry. A low level of product differentiation is connected with higher levels of competition.
(D)High exit barriers place a high cost on discarding a product. This is true for firms with specific equipment and machinery
(E)Slow market development causes firms to fight for market share. In a increasing market firms are able to improve revenues purely because of the growing market
(F)High fixed costs result in increased rivalry. When total costs are mostly fixed costs, the firm must produce as close to there full capacity as possible in order to be as profitable as possible. Since the firm must sell this large amount of product, it can cause conflicts among rival firms for market share and results in increased rivalry.
Usefulness of the Five forces
Porter’s five Forces study can offer useful information for three aspects of company planning including statical analysis, dynamical analysis and an analysis of a firms options.
When used with a Pest analysis Porter’s five forces can also reveal future trends about the likely future attractiveness of the industry. When political, economical, social and technological changes are identified it allows firms to predict future trends in the market and there impact on the competitive forces in the market.
The five Forces study helps evaluate the attractiveness of a market place. It offers insights on profitability. As a result, it supports a firms evaluation about entry to or exit from an industry. It also allows a firm to judge the effect of competitive forces on there business
Analysis of Options:
When equipped with this knowledge businesses can use this information to there advantage by influencing these forces in such a way that it increase the effectiveness of there own competitive strategy. It can help a firm identify the potential success of there current competitive strategy and help identify changes that may have to be made.
Limitations of the five forces Model
According to ( ) Porter’s model of Five Forces main weakness results from the historical perspective in which it was formed. In the early eighties, cyclical growth characterized the global economy. Thus, primary corporate objectives consisted of profitability and survival. A major prerequisite for achieving these objectives has been optimization of strategy in relation to the external environment. At that time, development in most industries has been fairly stable and predictable, compared with today’s dynamics.
In general, the meaningfulness of this model is reduced by the following factors:
* In the economic sense, the model assumes a classic perfect market. The more an industry is regulated, the less meaningful insights the model can deliver.
* The model is best applicable for analysis of simple market structures. A comprehensive description and analysis of all five forces gets very difficult in complex industries with multiple interrelations, product groups, by-products and segments. A too narrow focus on particular segments of such industries, however, bears the risk of missing important elements.
* The model assumes relatively static market structures. This is hardly the case in today’s dynamic markets. Technological breakthroughs and dynamic market entrants from start-ups or other industries may completely change business models, entry barriers and relationships along the supply chain within short times. The Five Forces model may have some use for later analysis of the new situation; but it will hardly provide much meaningful advice for preventive actions.
* The model is based on the idea of competition. It assumes that companies try to achieve competitive advantages over other players in the markets as well as over suppliers or customers. With this focus, it dos not really take into consideration strategies like strategic alliances, electronic linking of information systems of all companies along a value chain, virtual enterprise-networks or others.