New entrants in an industry bring new capacity and the desire to gain market share.Įach force will be elaborated on below with the aid of examples from the airline industry to illustrate the usage.įigure 1: Five Forces Model Threat of new entrants softdrink industry), there is room for higher returns. The seriousness of the threat depends on the barriers to enter a certain industry. The higher these barriers to entry, the smaller the threat for existing players.

Examples of barriers to entry are the need for economies of scale, high customer loyalty for existing brands, large capital requirements (e.g. large investments in marketing or R&D), the need for cumulative experience, government policies, and limited access to distribution channels. More barriers can be found in the table below.

The threat of new entrants in the airline industry can be considered as low to medium. It takes quite some upfront investments to start an airline company (e.g. Moreover, new entrants need licenses, insurances, distribution channels and other qualifications that are not easy to obtain when you are new to the industry (e.g. Furthermore, it can be expected that existing players have built up a large base of experience over the years to cut costs and increase service levels. A new entrant is likely to not have this kind of expertise, therefore creating a competitive disadvantage right from the start. However, due to the liberalization of market access and the availability of leasing options and external finance from banks, investors, and aircraft manufacturers, new doors are opening for potential entrants. Even though it doesn’t sound very attractive for companies to enter the airline industry, it is NOT impossible. Porter’s Five Forces Video Tutorial Bargaining power of suppliers Many low-cost carriers like Southwest Airlines, RyanAir and EasyJet have successfully entered the industry over the years by introducing innovative cost-cutting business models, thereby shaking up original players like American Airlines, Delta Air Lines and KLM.

This force analyzes how much power and control a company’s supplier (also known as the market of inputs) has over the potential to raise its prices or to reduce the quality of purchased goods or services, which in turn would lower an industry’s profitability potential. The concentration of suppliers and the availability of substitute suppliers are important factors in determining supplier power. The fewer there are, the more power they have. Businesses are in a better position when there are a multitude of suppliers. Sources of supplier power also include the switching costs of companies in the industry, the presence of available substitutes, the strength of their distribution channels and the uniqueness or level of differentiation in the product or service the supplier is delivering.

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