Understanding and being in touch with the environment of any organisation is critical to being able to function as an ever-changing organisation. Many of the forces for change an organisation experiences arise in the external environment. These come from customers, suppliers, competitors, technological advances, globalization of businesses, and the demands of different cultures and regulations established (Pieters & Young, p.23).
In a competitive environment, it is usually useful to perform the ‘five forces analysis’. With respect to understanding the broad aspects of the environment, the strategy is to search for opportunities to identify bases of advantages over competitors. Although the five forces analysis by Porter was designed primarily with commercial organizations in mind, it is of most value to organizations (Johnson and Scholes, p.108).
Key forces at work in a competitive will differ by type of industry. For the low-cost airline industry, new entrants with more commercial experience might be the central issue (Johnson and Scholes, p. 118). Sometimes, global forces are driving the way competitiveness is established in the low-cost airline industry such as the rising oil prices which are forcing some of the airlines to increase their charges.
The threat of Entry
The threat of entry to an industry will depend on the extent to which there are barriers to entry. Most of these are related to economies of scale, the capital requirement of entry, access to distribution channels, and cost advantage independent of size. There is also the expected retaliation, legislation or government action, and differentiation. In the low cost airline industry, it is easy to identify the factors which affect the barriers to entry of new low cost carriers (LCCs).
The capital needed by low cost carriers to enter the low cost airline industry is capital-intensive. It usually requires a huge investment. In the past, government deregulation of the industry in 1978 allowed new players to enter the industry. However, most were not able to sustain their business as major players took most of the market share and these new players had insufficient capital. Most of the major players in the entire airline industry are established players who know the market very well.
By today however, most of these major airlines were faced with different sets of economic problems which the LCCs easily took advantage of. The threat of new entrants was still relatively low because of the low fares being offered by established LCCs. Problems in the middle east (the war in Iraq and the Iran Nuclear dilemma) are continuing to discourage the entry of new players. In the future, LCCs would have been able to consolidate their hold on the low cost airline market thereby making it harder for new players to enter the market. At the same time, the reality faced by the world today with regards to world crude supply will continue to linger and continue to pressure the prices of crude products.
All organizations have to get hold of resources in order to be able to provide goods and services. The power of buyers is likely high when there is a concentration of buyers. It will be further increased when the supplying industry comprises a large number of operators. The power of suppliers would be high when there is a concentration of suppliers than a fragmented source of supply. Sometimes, if the brand name is powerful, there is a risk that the organisation would not be able to do without it.
The threat of substitutes may take many forms. There could be a product-for-product substitution, substitution of need, generic substitution, and even doing without. The availability of substitutes can place a ceiling price for an organisation.
Organizations need to be concerned with the extent of direct rivalry between themselves and competitors. There are questions like ‘what is it based