Table of Contents
3.Bargaining power of customers
4.Bargaining power of suppliers
6.Usefulness of the Five forces
7.Limitations of the five forces Model
8.Porter in the airline industry/Ryanair
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...
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