Global / How to Use Industry Research
Using Porter’s Five Forces to Develop Business Strategies
by Kiera Outlaw
Mar 11 2019

Porter’s Five Forces was first published in 1979 in the Harvard Business Review. Developed by Harvard professor Michael E. Porter, the framework focuses on the microenvironment of an industry, analyzing five forces that are closer to a company and affect its ability to service its customers and turn a profit. The framework aims to determine the competitive intensity and attractiveness of an industry in terms of its profitability.

IBISWorld industry research, which is closely aligned with the Porter’s Five Forces model, provides analysis and insight into the threats and opportunities within an industry, helping you to develop more robust, strategic plans, gain a competitive advantage, mitigate risks and reduce costs.

The Breakdown

IBISWorld reports were created with the Porter’s Five Forces framework in mind. As a result, dissecting a report into the framework can be done with relative ease, as demonstrated using the Domestic Airlines industry in the US below. And don’t worry, even if this specific industry doesn’t relate to you, IBISWorld has hundreds of industry reports that follow the same standardized format, so you can easily dissect any industry into the Porter’s Five Forces framework.

1. Threat of New Entrants

Profitable, easy-to-enter markets attract a larger number of competitors, which erodes profitability over the long run. Some questions this section aims to answer include: How easy is it for a player to enter the market and become a formidable competitor? What are the costs of entry? How tightly is the industry regulated? 

IBISWorld Chapter: Competitive Landscape

This chapter analyzes an industry’s external environment by discussing each major player’s level of dominance, the breakdown of cost structures, barriers that operators face upon entering the industry and what differentiates one operator from another.

The Competitive Landscape chapter is essential in providing a holistic view of an industry within the Porter’s Five Forces framework. As a result, this chapter and the sub-sections within it are referenced throughout the different components of the framework.

**Keep in mind: we’re still using the IBISWorld industry research report on Domestic Airlines as an example. However, because IBISWorld industry research reports follow the same standardized format, you can easily dissect any IBISWorld industry report into the Porter’s Five Forces framework.

Competitive Landscape sub-sections to consider:

Barriers to Entry – High & Steady

Start-up costs, such as hangar and airfield space, labor, highly specialized machinery and adherence to stringent safety requirements, are extremely high for operators in this industry. Additionally, once a company enters the industry, it will experience significant barriers to success, since incumbent companies already have network alliances, strong industry relationships and a proven safety record.

Cost Structure Benchmarks

Purchases make up the largest cost category for domestic airlines. This includes the acquisition of materials (e.g. fuel, food, uniforms and similar items) and transportation-related services (e.g. aircraft maintenance and lease, landing fees). Together these account for an estimated 32.6% of industry revenue. Jet fuel is one of the most significant expenses for an airline, often accounting for between 25.0% and 40.0% of total purchase expenses for companies in this industry. As a result, potential players looking to enter the industry must contend with constant volatility in oil prices.

IBISWorld Chapter: Operating Conditions

Providing deeper insight into the external environment of an industry, the Operating Conditions chapter provides analysis on capital ratios, required technology, an overview of the regulatory environment and information on industry assistance.

Operating Conditions sub-sections to consider:

Regulation & Policy – Heavy & Steady

The US Department of Justice, which has jurisdiction over airline antitrust matters, is primarily responsible for ensuring there is workable competition in the domestic aviation market. Additionally, the Federal Aviation Administration (FAA) has primary responsibility for matters relating to air carrier flights operations, including airline operating certificates, control of navigable airspace, flight personnel, aircraft certification and maintenance and other matter affecting air safety.

Those are just two of the many government entities that have regulatory power within the Domestic Airlines industry, not to mention the numerous trade associations that set industry standards and best practices.

Industry Assistance – High & Steady

Over the past few decades, industry assistance has been provided through the reduction of many trade tariffs and the overall liberalization of the aviation market, as well as government assistance to expand airports. For example, the Airline Deregulation Act of 1978 eliminated most controls on entry, exit and pricing for US domestic airlines, which led to extensive structural changes within the industry.

Technology & Systems – High

To enhance their operational efficiency, industry operators rely on technological innovations in computerized reservation systems, flight operations systems, telecommunications systems, websites, check-in kiosks and in-flight entertainment systems. For example, online booking, payment, scheduling and check-in systems have eliminated many paper costs and administrative expenses associated with air travel. Additionally, the proliferation of smartphones has enabled consumers to search, book and manage flights remotely. The use of mobile internet devices has also led to the increased installation of wireless internet equipment on planes.  

2. Buying Power of Customers

This section assesses the power of buyers by looking at the size and importance of each buying market and the costs associated with switching from one supplier to another.

Some questions this section aims to answer include: How large are the industry’s buying markets? Do they have the power to drive down or dictate prices?

IBISWorld Chapter: Products & Markets

This chapter provides insight into what an industry does, details on how it operates and how different factors have influenced its performance. It includes analysis on the industry’s products and/or services as well as its markets, locations, international trade (if applicable), supply chain and how it differentiates itself from other industries.

Products & Markets sub-sections to consider:

Major Markets

Leisure travellers compose an estimated 49.9% of the Domestic Airlines industry, making this segment the largest major market for industry operators. It is the price of air travel that generally has a significant effect on demand from leisure travellers, with ticket prices being the primary concern for everyday consumers planning a trip.  

Demand Determinants

Demand for the Domestic Airlines industry by leisure travellers is typically for vacations, visiting friends and family, moving to another city or similar related activities. Demand for these activities is closely tied to disposable incomes and leisure time availability. When disposable incomes experience growth, demand for domestic airlines services tends to rise.

IBISWorld Chapter: Competitive Landscape

In the context of Buying Power of Customers, the Competitive Landscape chapter will provide information relevant to competition stemming from substitute products in alternative industries, which influences customers’ buying power.

Competitive Landscape sub-sections to consider:

Basis of Competition – High & Increasing

Competition between industry operators has intensified over the past five years. Providers of less expensive air transportation have increased the level of price competition in the industry, raising the focus on quantity over quality. Price competition is the more important tool in attracting customers when economic conditions are poor and unemployment is increasing and incomes are falling. During stable economic times, airlines may offer additional services and higher-quality services to avoid having to cut prices.

3. Supplier Power

Like buyer power, supplier power assesses the number of suppliers in the industry, their uniqueness and their relative size and strength. These things are taken into consideration to determine the amount of influence the supplier base has on prices.

Some questions this section aims to answer include:

How many suppliers are there?  How unique are the products and services they provide, and how expensive are switching costs?  

IBISWorld Chapter: Products & Markets

In the context of Supplier Power, the Products & Markets chapter provides insight on key selling and buying industries, as well as key information on current industry incumbents and their influence on prices.

Products & Markets sub-sections to consider:

Supply Chain

Key buying industries include consumers, couriers and local delivery services, and freight forwarding brokerages and agencies. Key selling industries include aircraft maintenance, repair and overhaul, aircraft, marine and railroad transportation equipment wholesaling, and gasoline and petroleum wholesaling.

*An IBISWorld subscription would provide you with full access to each of these reports to obtain deeper insight into upstream and downstream industries.

IBISWorld Chapter: Major Companies

This chapter, which identifies the key companies operating in the industry, can be used to benchmark against top players in the industry, identify emerging companies and see how industry factors affect top players’ performance.

Major Companies

Delta Airlines is one of the world’s largest airlines and commands 22.4% of total industry revenue, making it the largest player in the Domestic Airlines industry. Delta’s domestic revenue is expected to increase at an annualized rate of 5.2% over the five years to 2018 to total $31.9 billion. Despite stronger price competition, the company has slightly increased its market share over the past five years.

IBISWorld Chapter: Competitive Landscape

The Competitive Landscape chapter, specifically the Cost Structure Benchmarks sub-section, is particularly useful within the Supplier Power section of the framework because it sheds light on the average costs for a company operating within the industry. Moreover, it allows for each company to be benchmarked against the industry average.

Competitive Landscape sub-sections to consider:

Cost Structure Benchmarks

Industry profit, measured as earnings before interest and taxes, accounts for an estimated 8.1% of industry revenue in 2018. Profit margins are highly volatile and dependent on aircraft utilization and variable costs like fuel.

4. Threat of Substitutes

This section within the framework looks at the substitute products and services that buyers gravitate toward in response to price increases.

Some questions this section aims to answer include:

How viable and competitive are the available substitutes? How likely are buyers to gravitate to those substitutes in the event of price increases?

IBISWorld Chapter: Competitive Landscape

The Competitive Landscape chapter is especially useful within this framework section because it discusses relative competition that threatens the industry, such as substitute products.

Competitive Landscape sub-sections to consider:

Basis of Competition – High & Increasing

Although the Basis of Competition is high and increasing, external competition from ground and sea transportation poses a weak threat to the Domestic Airlines industry. Consumer preferences for different forms of passenger and freight transportation are generally determined by differences in price, travel time and destinations served. Fortunately for industry operators, the convenience and the competitive price of air travel limits competition from these substitutes.

IBISWorld Chapter: About this Industry

This chapter provides an outline of what the industry is and what it includes.

  • About this Industry sub-section to consider:
  • Similar Industries (includes potential competitors or substitutes)
  • International Airlines
  • Rail Transportation
  • Travel Agencies
  • Ocean & Coastal Transportation

5. Industry Competitors

Essentially, this component of the framework focuses on the number and capabilities of competitors within the market.

Some questions this section aims to answer include:

How many competitors are currently operating in the industry and what are their capabilities? How have they performed financially over the past five years? What are their strengths and weaknesses?

Who are they, and how does their product or service offering differ from yours?  

IBISWorld Chapter: Major Players

As previously mentioned, Delta Airlines is the largest player in the Domestic Airlines industry. Interestingly, Delta’s operations have traditionally focused on the US domestic market, where it has become one of the fastest-growing carriers. International flights account for less than one-third of the company’s revenue. However, Delta has codeshare agreements with various airlines and is part of the SkyTeam Airline Alliance. The airlines in this alliance cooperate on routes between North America and Africa, the Middle East and India, and on flights between Europe and several countries in Latin America.

IBISWorld Chapter: Competitive Landscape

Within this framework section, the Competitive Landscape chapter, which provides insight into the type of competition among industry operators, outlines the factors that can prevent a new company from entering the industry and indicates how much industry turnover is accounted for by the top four players.

Competitive Landscape sub-sections to consider:

Basis of Competition – High & Increasing

The strongest competitive advantage an airline can have is exclusive coverage of a route. Additionally, to improve access to each other’s markets, various US and foreign air carriers have established marketing relationships. Alliances, such as the aforementioned SkyTeam Airline Alliance, link the member carriers’ networks to enhance customer service and smooth connections to the destinations served by the alliance, including linking carriers’ frequent flyer programs and access to the carriers’ airport lounge facilities.

Barriers to Entry – High & Steady

Low-cost business models operated by no-frills airlines have proven to be an effective model for new players. However, the market for new low-cost airlines is slowly becoming saturated due to the number of players already in existence. Moreover, low-cost operators are also more susceptible to swings in fuel costs.

Market Share Concentration - High

In 2018, the top four players in the Domestic Airlines industry hold a combined market share of more than 75.8%. This combined market share has decreased slightly over the past five years due to low-cost carriers enticing budget-conscious travellers; however, the overall concentration has increased.

IBISWorld Chapter: Operating Conditions

Operating Conditions within this framework section will provide a guide to the amount of capital used in production or for providing a service and compare it to the amount of labor in the total mix of inputs.

Operating Conditions sub-sections to consider:

Capital Intensity - Medium

Industry operators are expected to spend $0.25 on capital investments for every dollar spent on wages in 2018, indicating a moderate to high level of capital intensity.

IBISWorld Chapter: Industry Life Cycle

The Industry Life Cycle chapter discusses the life cycle stage the industry is in and indicates the various competitive pressures faced within each respective stage.

Domestic air transport services have remained relatively unchanged over the past five years. There is very little scope to expand domestic services due to strong competition and a saturated market. This has resulted in deteriorating operating conditions for most airlines, particularly in response to unstable costs with volatile fuel prices.

IBISWorld Chapter: Industry Outlook

This chapter outlines expectations for the key industry indicators over the next five years.

The Domestic Airlines industry will continue to grow over the next five years to 2023 as economic conditions continue to improve and consumers continue taking trips for both business and leisure. The market price of jet fuel is also expected to grow in the coming years, enabling domestic airlines to generate additional revenue by reinstating fuel surcharges.

As evidenced above, IBISWorld reports complement the Porter’s Five Forces framework, providing decision makers with the insight and analysis needed to make better, more strategic business decisions. A subscription to IBISWorld provides decisions makers with access to our full suite of 1,300+ industry reports. Want more information on IBISWorld and Porter’s Five Forces? Check out this video or contact us to speak with one of our representatives today.