When we’re training companies, the topic of profit in an industry often comes up. There’s few better frameworks for understanding the factors that drive profit in a given industry than Porter’s five forces framework. In this article, we look at how these five forces can be used to reveal the nature of a market, using the airline industry as an example.
Force 1: Industry Competition
Rivalry with competitors has an obvious impact on profit within a market segment. The airline industry has a large number of participants, with product offerings that are only slightly differentiated among those providers, and growth of the total addressable market is quite low. Together, these factors tend to make commercial air travel extremely competitive, helping to explain the difficulty of driving up profitability.
Force 2: Suppliers
There are relatively few companies that supply commercial aircraft, and there is some room for differentiating products, such as with innovative materials and engine technologies that increase fuel efficiency. And while industry growth is fairly low, those other factors tend to enhance the profit potential for aircraft makers, although they are obviously dependent on the often-troubled airlines. As a result, those suppliers tend to have widely varying profit over time.
Force 3: Buyers
Consumers purchasing air travel have such sophisticated Internet-based tools at their disposal that they continue to place extreme pressure on the airlines’ profitability. Buyers typically think of air tickets as being an undifferentiated commodity, and those buyers have the ability to switch among airlines from one purchase to the next without any added cost. These factors tend to put further challenges on airlines, in terms of profitability.
Force 4: New Entrants
In the airline industry, the arrival of a new airline can be disruptive, particularly since new carriers tend to focus on high-value route corridors and bill themselves as bargain carriers. On the other hand, the cost of entry into the market is fairly high, and that fact together with the industry’s reputation for limited profitability make such disruptions rather rare.
Force 5: Substitutes
At first glance, alternate modes of transportation have a difficult time competing directly with air travel because of airplanes’ unique ability to cover large distances quickly. One potential substitute was teleconferencing, which had the possibility to radically reduce the amount of business travel required. For a variety of reasons, it didn’t. Other disruptors are high-speed rail between regional cities, which have had some disruptive effect outside of the US.
In other industries, substitutes are more common, and are often not obvious as they begin to take root. In subsequent articles, we’ll look at each of these forces in more detail.
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