April 25, 2020
According to North American Industry Classification System, NAICS, Southwest Airlines lie under ‘Transportation and Warehousing’ industry. The NAICS code is 48. It is then narrowed down to ‘481 Air Transportation.
Sufficient data to conduct a Michael Porter 5-Forcers analysis was available in the following websites and library references;
Michael Porter identified a framework of five forces that models an industry. Strategic business managers, who are rigorous with survival of their organizations, often refer to this model to understand better the context of the industry they are operating. This helps them to strategize on how to acquire a competitive edge over their rivals.
These five forces include; threat of substitutes, rivalry and threat of new entrants which he all referred as ‘horizontal competition’ forces. The other two forces from ‘vertical competition’ are bargaining power of buyers and the bargaining power of suppliers.
Firms in the same industry are engaged in stiff competition as they struggle to gain a competitive edge over their counterparts. Less efficient firms unable to withstand the competition suffer losses and drops out of business. Rivalry intensity can be attributed o these three industry characteristics;
- Large number of firms engaged in a similar industry; this is because firms compete for the same resources as well as customers.
- Slow growth of the market served by the rival firms
- High fixed costs which result to an effect of economies of scale.
Threat of substitute products or services
This is the threat caused by existence of products or services that are substitutable with a company’s products or services. It increases buyer’s propensity to substitute. This is made possible if buyer switching costs are low, quality depreciation, substandard products as well as relative price performance of substitute.
Threat of new entrants
This is the threat caused by the likelihood that new competitors will enter the industry. However, industries make it difficult for firms to enter and exit the industry freely by putting in place barriers to entry. Government too creates these barriers through regulations and granting monopolies.
Another market force described by porter is the bargaining power of suppliers. Suppliers of inputs to a firm can exact pressure to it, especially if there are few substitutes. These suppliers can charge exorbitant prices for unique resources. Other factors that give power to suppliers over the firm include strength of supplier’s distribution channel and high supplier switching costs.
This is the ability of buyers to exact pressure over the firm. This can be due to several factors including buyer price sensitivity, availability of existing substitute products and buyer switching costs relative to firm switching costs.
Diagram of Porter’s 5 Forces
trade-off of substitutes)
Barriers to entry
(access to inputs,
Economies of scale,
(differentiation of inputs,
Presence of substitute inputs,
High switching costs,
DEGREE OF RIVALRY
fixed costs/ value added
Studying PEST analysis is examining the key external environmental influences on a business. PEST stands for the Political, Economic, Social and Technological aspects that affect the strategic growth of a business( Ann, 2004).
This includes aspects of Environmental regulation and protection, International trade regulation, taxation, consumer protection, competition regulation and employment law.
These concerns among others, the overall economic growth of the country’s economy as well as that of the industry. Another aspect is that of government spending either for the overall level or for specific spending priorities (Frederic, 2011). Taxation, as an economic factor, influences consumer disposable income, and the willingness to invest in capital equipment. Other aspects that fall under this category include inflation and exchange rates.
Social factors, to a great extent influence the strategic growth of a business. This include among others, income distribution, demographic factors (family size, gender, age), lifestyle changes, education, health and welfare, living conditions (pollution, housing and amenities)(Howard, 2008).
New discoveries and developments go a long way in influencing business survival. This lies squarely on the speed of technology transfer and ease of adoption. Technological influence is high on businesses especially if the government is consider with technological advancement and as a result spending heavily on research (Zheng, 2009).
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