The model of the Five Competitive Forces was developed by Michael E. Porter in his book Competitive Strategy: Techniques for Analyzing Industries and Competitors in 1980. Since that time it has become an important tool for analyzing an organizations industry structure in strategic processes. Porter’s model is based on the insight that a corporate strategy should meet the opportunities and threats in the organizations external environment. Especially, competitive strategy should base on and understanding of industry structures and the way they change. Porter has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that improves the position of the organization. Porter’s 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 exploit particular characteristics of their industry.
The Aviation Industry
Rivalry amongst firms
Porter (1980) argues that, in many industries, often little of the true competition and the drive for changes come from long established firms. These long established firms often resemble one another in terms of the strengths which they have, and in their problems and weakness. They therefore can only identify benefit from aggressive competition at the margins of their activities.
In the air transport industry, the policies of the long established airline of Europe illustrate this point, especially in their short haul markets. According to Jiangtian Xu (2006), Since April 1997, the airlines of the European Union have competed in a Single Aviation Market where they have been only the loosest controls over entry, capacity and fares. This represented a major change when it took place compared with the tight regulation characteristics of the previous system. Yet, one would hardly know that the change had occurred if one had merely looked at the reaction of the old established airline to it. They continued to fly mostly similar aircraft (usually drawn from the Airbus A320 family), and placed them identical seating configurations. Frequencies and timings remained similar, with few airlines prepared to allow their competitors a frequency advantage. The onboard products were mostly comparable and did not change. As well as this, these particular airlines pursued an almost identical pricing policy including very high fares for Business Class Seats. Lower fares were also on offer, however these had restrictions attached to them to prevent business class travellers using them.
As a result of these policies it made it much easier for Low Cost Carriers to grow in Europe and for them to have a dramatic effect on the economics of the long established firms. According to Oliver (2007) the British Airways, lost approximately 250 million pounds on its European network during its 2002/2003 financial year.
Porter (1980) argues that disturbance to the competitive equilibrium set up by the long established firms can come from two possible sources, the first of these being that of substitution. Substitution occurs when firms in another industry find a new and better way of meeting the same customer needs as are being targeted by the existing players. Of these, potentially the most serious is the effect of electronic methods of communication on the market for business travel. Videoconferencing, teleconferencing and email all have the potential to mean that business travellers will travel less, and still satisfy their needs for effective communication. It is inevitable that there will be future downturns especially after the September 11 attacks in 2001. Surface transport, especially by rail, also raises important substitution issues....