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Data Mining Decision Support System Porter's 5 Forces Model Application Audit

Porter's Five Forces Model

Our company is not an isolated unit in the world and performs within a market full of other competitors. To be able to evaluate our position on market and to act accordingly we use the Porter's Five Forces Model. This model helps us define and realize our business and its surroundings and identify threats and opportunities to focus on. We review this model periodically to obtain up-to-date data in this global and turbulent environment.

The Porter Model consists of 5 elements which together comprises the environment business operate in. These elements are: suppliers, customers, new entrants, existing competition and the product itself. By assessing every one of these elements we get the whole picture of our company within the market and the rating helps us target the key areas. We use the scale of 0-5 to evaluate the power of each element where 0 means no power and 5 very high power (reffering to the number in the brackets).

1) Power of Suppliers

As we operate in the areas of services there are no critical commodities having large influence of our everyday service delivery. Therefore this area is not of critical power in a short run. However, we should not underestimate this element as we wouldn't be able to continue the business in long run without suppliers.

Now let's have a look at some features of suppliers' power:

The market is dominated by a few large suppliers rather than a fragmented source of supply (3)

This is a threat in case of the aircraft machines. There are not many reputable airplanes (and airplanes parts) producers and therefore they could have strong power to control the air travel industry. As for the catering, gift services and other indirect materials there are many fragmented sources and therefore their power is of almost no significance as they could be replaced quickly.

There are no substitutes for the particular input (5)

There are no substitutes for planes (in case we want to continue providing air transportation instead of ground routes) and therefore the power of this element is very high - business critical. We could reduce this power by handling cargo using the earth services but this might decrease service level we provide to our customers.

The suppliers' customers are fragmented, so their bargaining power is low (4)

There are more than 200 airlines all over the world and despite some alliance organizations (such as IATA) we are all potential competitors. The power of this element is relatively high as the suppliers could afford losing one customer but the customer can't afford loosing the critical supplier (e.g. Boeing).

The switching costs from one supplier to another are high (3)

Switching costs in air transport industry are mainly related to the fact of limited airplanes producers and to the machine a company already owns. We use planes form 3 producers: Airbus, Boeing and ATR. Switching to a different producer would mean higher maintenance costs for another type of plane (training of maintenance staff including) and also necessary training for our pilots which is time and money consuming and it's not necessary.

There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins.

This threat is especially high when:

2) Power of Customers

Similarly as the suppliers' power, the bargaining power of customers determines how much customers can impose pressure on margins and volumes. In general, our customers could be divided into three groups:

The aspects of customers' power are as follows:

They buy large volumes, there is a concentration of buyers (2)

As for the individual buyers, the name of the category itself reveals that they usually act as indivuals and therefore have no strong bargaining power. Travel agencies buy larger volumes or order charter flights and therefore their switching to a different supplier might have larger impact on our profits. As for the 3rd group, we are not threaten by their power as we are the major servicing subject on Prague airport.

The supplying industry comprises a large number of small operators (4)

This fact should be of high importance as there are many airlines providing similar service to their customers and therefore the customers could choose among them easily. With introduction of e-tickets choosing the company to fly with is a matter of 5minutes. Therefore the importance to identify the key decision factors rises and we should find our way to distinguish Czech Airlines from other companies to be attractive to our customers.

The supplying industry operates with high fixed costs (3)

Fixed costs in CSA are represented by costs on aircraft purchase and maintenance and by costs of executives' salaries, i.e. our fixed costs are relatively high. On the other hand, we do not invest in new airplanes that frequently so the fixed costs do not influence our performance and profitability too seriously.

The product is undifferentiated and can be replaces by substitutes (4)

One of the features of our product (service) is that it's geographically bound. All our services are connected to Czech Republic and namely Prague so we mainly compete with companies operating within the same area. This is a high threat as the core of the product it the same for all the competitors: transport via air. However, we try to differentiate by additional services and providing high comfort to all segments of our customers. There are many substitutes to air travel but not with equal value to customers (more in the substitutes section).

Switching to an alternative product is relatively simple and is not related to high costs (1)

Switching to an alternative product (i.e. other ways of transportation - ground, water) is easy and requires no financial costs at all. But it could bring increased costs of time, money or comfort of travelling. And this rises with the distance travelled. Therefore this aspect is not of high influence.

Customers have low margins and are price-sensitive (4)

The margin related to travelling itself is low in case of any means of transportation and therefore price plays an important role when deciding whose services to use. In addition, with online booking customers could express their price-sensibility very easily and quickly by choosing different airlines. We are aware of that and we try to balance our price politics with the services we provide.

Customers could produce the product themselves (0)

Obviously no impact here, customers are not able to produce the porudct themselves.

The product is not of strategic importance for the customer (2)

For long-distance travelling flying is the top means of transportation as it's the fastest and most comfortable way to reach the desired destination. Therefore it is of strategic importance because without air transport a lot of places would remain almost unreachable to the customer. But as for the close destinations, other means of transport could be considered.

The customer knows about the production costs of the product (1)

This industry is very specific and the service delivered can't be easily substituted or performed by the majority of customers and therefore no subjective results of observation of costs are available (to the customers). However, the customers realize that the costs must be high and is therefore impossible for them to produce the service on their own.

There is the possibility for the customer integrating backwards (2)

For the 1st group of customers, i.e. private individuals, it is barely possible to integrate backwards with all the high costs of establishing and running such business. There might be a way for the second group, i.e. travel agencies, in case it's a large and well established company who finds the sense of optimizing costs of producing travelling services in buying and running their own airplanes. This actually happens but with all the maintenance costs and necessity to utilize the capacities, not very often. The 3rd category of customers is not of a large power as it is not cost-effective to run their own support and handling services on Prague's airport.

3) Threat of New Entrants

The competition in an industry is higher, the easier it is for other companies to enter this industry. In such a situation, new entrants change major determinants of the market environment (market shares, prices, customer loyalty) at any time and there is always a pressure for reaction and adjustment for existing players. In almost every industry one can never be sure of its position and should be aware of new entrants bringing new products or just being innovative and attractive to the customers.

The threat of new entries always depends on the extent to which there are barriers to entry and these typically are:

Economies of scale (minimum size requirements for profitable operations) (1)

This is usually the case of production companies rather than servicing areas. However, a well established company with a large customer's base and air fleet could be more efficient in their performance and therefore in a certain way realize economies of scale. As for the handling and support on Prague airport, we are the major provider of those services and therefore we are realizing economies of scale in that area.

High initial investments and fixed costs (1)

This is a huge barrier for any company interested in entering this market as large investments into aircraft should be expected. You also need to find trained staff, fully equip all the planes, rent hangars, etc.

Brand loyalty of customers (4)

This is a real threat as the customers are not forced to be loyal to the brand. They can choose from various providers by just-a-click-away change and do not hesitate to try another, new provider. We try to reduce this threat by providing special services to our regular customers based on a loyalty card program where they collect miles for which they are later refunded. We have special lon-term agreements and contracts with travel agencies which also make it very inconvenient for them to switch to different provider.

Protected intellectual property like patents, licenses etc. (5)

There are no limitations in air transportation concerning intellectual property and therefore this results in no barriers for new entrants.

Scarcity of important resources, e.g. qualified expert staff (4)

It might be difficult to find new staff at the beginning but one can try to hunt for staff of competitors or just use the training courses provided e.g. by Czech Airlines. That is this is not a real barrier.

Distribution channels are controlled by existing players (5)

The main distribution channel from airlines to customers is the Internet and therefore anyone can access and no control is performed. The other channels are individual and again of no restriction or limitation. So the power of this aspect is strong.

Existing players have close customer relations, e.g. from long-term service contracts (3)

This is the case of travelling agencies with long term and convenient contracts. This relationship is though not that strong and the contracts don't last that long in order to prevent new competiton to enter the market.

High switching costs for customers (4)

We try to increase the switching cost by loyalty programs for our customers and by emphasizing the tradition of Czech airlines (the only airlines with Czech speaking staff onboard) as well as by long-term convenient contracts with travel agencies and airlines we service on ground. But for the majority of our private individual customers the switching costs are very low and that's why we should be aware of this aspect's high influence.

Legislation and government action (5)

No legislation or government action binds this industry and this does not represent any barrier of entry at all.

4) Threat of Substitutes

A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. In case of air transport possible considered substitutes could be

As for the water transport, its huge advantage is that large amount or weight could be carried this way. However, there is limitation of water accessibility of the site and also time inconvenience. Ground transport is more likely to be a substitute to air travel but for larger distances travelling on ground might get uncomfortable and time consuming. Also overseas destinations are out of reach. However, travelling on plane is limited to the fact that only destinations with airports are accessible. This fact is but one of those the customers count with.

Similarly to the threat of new entrants, the treat of substitutes is determined by factors like:

Brand loyalty of customers (4)

This point was already discussed.

Close customer relationships (3)

This point was already discussed.

Switching costs for customers (4)

This point was already discussed.

The relative price for performance of substitutes (2)

There is no actual substitute for air travelling in global scope but alternative means of transportation (trains, trucks, ships, cars etc.) could be used to provide similar service. These substitutes could be more convenient for local or near transportation but for overseas or holiday travelling as well as for fast cargo transportation air is the best option. The price might vary but customers don't evaluate the whole service just in terms of actual price paid but also in terms of implicit costs such as time saved, comfort of travelling etc.

Current trends (0)

Transportation industry is not an example of trend determined domain and this is hence not a real threat.

5) Existing Competition

We identify our competition as the airline companies flying to destination Prague, Czech Republic. The reason for that is that all our flight start/terminate in Prague. There are almost 50 companies flying from Prague to various destinations all over the world and we compete on separate routes. As the switching cost for customers are low and they can just select any provider flying the desired way we try to identify with our clients and put emphasize on Czech tradition. We find competitive advantage in being the only Czech company operating on Prague airport and try to attract Czech customers (as well as foreign of course) to enjoy all the benefits we could, in comparison to our competitors, provide.

There are many players of about the same size (5)

This is a high-power factor as there actually are many small players (such as Aer Lingus, EasyJet,…more here) on Prague airport providing similar product (i.e. air transport).

Players have similar strategies (4)

There is not an easy way to differentiate from competition in this industry and the strategies of the competitors are very similar. They all use loyalty programs, they all conclude long-term contracts with travel agencies, online check-in … We try to provide additional service to place ourselves differently in the market, such as online services , sms info, cargo tracking, sky shop, special care of children and disabled clients, etc.

There is not much differentiation between players and their products, hence, there is much price competition (3)

The major differentiation of our products is in destinations we fly to as there could be places that are (from Prague) covered only by Czech Airlines. Otherwise we are competitors with similar products and we could try to differentiate by additional services. Price usually plays an important role for the customers and with the low switching cost customers are likely to be price sensitive.

Low market growth rates (growth of a particular company is possible only at the expense of a competitor) (3)

The airlines market is relatively saturated as the most attractive destinations are covered but that leaves the space for new destinations and new routes and offering to draw clients and bind them to our company.

Barriers for exit are high (e.g. expensive and highly specialized equipment) (3)

All the investments into aircraft and staff might make it difficult to leave the industry but it might get also very expensive to stay in the area when being unprofitable. In addition, planes are machines which are not company-specific and could be sold and further used by other airlines.

Summary

The analysis of Five Forces clearly implies that the main threats to Czech Airlines are represented by existing competition and new possible entrants. We should therefore focus on those areas to prevent losing our market share and customers while maintaining delivery of high-quality services.

We should try to diversify our services and differentiate the product to bring additional value to customers; we should discover new destinations to attract new clients; we should work on relationship with our customers and try to build a loyalty toward our brand and company; etc.

We also should not forget about the other areas as the differences are not so large and their omitting could result in increased power and new threat. That is also the reason for repetitive evaluation and careful observation of the market to be able to react to changes in time.