Porter's Five Forces: Threat of New Entrants
Porter's Five Forces: Threat of New Entrants
Porter's Five Forces: Threat of New Entrants
August 3, 2016 Administrator 0 Comments Bargaining Power of Buyers, Bargaining Power of Suppliers, Barriers to
Entry,Competition, Competitiveness, Concentration Rate, Industry Analysis, Porter's Five Forces, Rivalry, Threat of New
Entry, Threat of Substitute Products or Services
Porter’s Five Forces analysis is a framework that helps analyzing the level of competition within a
certain industry. It is especially useful when starting a new business or when entering a new industry
sector. According to this framework, competitiveness does not only come from competitors. Rather,
the state of competition in an industry depends on five basic forces: threat of new entrants,
bargaining power of suppliers, bargaining power of buyers, threat of substitute products or services,
and existing industry rivalry. The collective strenght of these forces determines the profit potential of
an industry and thus its attractiveness. If the five forces are intense (e.g. airline industry), almost no
company in the industry earns attractive returns on investments. If the forces are mild however (e.g.
softdrink industry), there is room for higher returns. Each force will be elaborated on below with the
aid of examples from the airline industry to illustrate the usage.
Example
The bargaining power of suppliers in the airline industry can be considered very high. When looking
at the major inputs that airline companies need, we see that they are especially dependent on fuel and
aircrafts. These inputs however are very much affected by the external environment over which the
airline companies themselves have little control. The price of aviation fuel is subject to the
fluctuations in the global market for oil, which can change wildly because of geopolitical and other
factors. In terms of aircrafts for example, only two major suppliers exist: Boeing and Airbus. Boeing
and Airbus therefore have substantial bargaining power on the prices they charge.
Example
In terms of the airline industry, it can be said that the general need of its customers is traveling. It
may be clear that there are many alternatives for traveling besides going by airplane. Depending on
the urgency and distance, customers could take the train or go by car. Especially in Asia, more and
more people make use of highspeed trains such as Bullet Trains and Maglev Trains. Furthermore, the
airline industry might get some serious future competition from Elon Musk’s Hyperloop concept in
which passengers will be traveling in capsules through a vacuum tube reaching speed limits of 1200
km/h. Taken this altogether, the threat of substitutes in the airline industry can be considered at least
medium to high.