PORTER'S 5 FORCES MODEL & VALUE CHAIN

CASE STUDY:

BY: NORIDAH YAHYA (GP 02434)

WHAT IS PORTER’S 5 FORCES MODEL?

is a framework to analyse level of competition within an industry and business strategy development (Wikipedia).

It captures key elements of industry competition

Rivalry among the

existing competitors

Threats of new

entrants

Bargaining power of

buyers

Threat of substitute

products or services

Bargaining power of suppliers

OBJECTIVES OF PORTER’S 5 FORCE MODEL

To identify the behavior factors of the competition

To manage the long-term business attractiveness in the industry

To analyse and access industry attractiveness structured

To explain the relationship between the 5 dynamic forces and the business performance

PORTER’S 5 FORCES MODEL : AIRLINES INDUSTRY (MALAYSIA

AIRLINES)

Competitive

Rivalry:

• AirAsia

• Malindo

Threats of new entrances

Bargaining power of

buyers

Threat of substitute products or services

Bargaining power of suppliers

• National airlines

• Foreign airlines

• Budget Travelers

• Pleasure Travelers

• Business Travelers

• Travelling alternative: Bus,

car, train

• Technology alternative :

Video Conferencing

• Fuel Companies

• Catering supplies

• Aircraft companies

MALAYSIA AIRLINES BACKGROUND

Founded 1 May 1946; 68 years ago (as Malayan Airways)

Commenced operations 1 October 1972; 42 years ago

Hubs Kuala Lumpur International Airport

Kota Kinabalu International Airport

Secondary Hubs Kuching International Airport

Frequent-flyer program Enrich

Subsidiaries Firefly

MASwings

MASkargo

Destination 60 exl. codeshare and subsidiaries`

Parent Company Penerbangan Malaysia Berhad (Government Holding Company)

Headquaters Sultan Abdul Aziz Shah Airport

Subang, Selangor, Malaysia

Company Slogan More than just an airline code. MH is Malaysian Hospitality

Website www.malaysiaairlines.com

COMPETITIVE RIVALRY

Competitive

Rivalry:

• AirAsia

• Malindo

Threats of new entrances

Bargaining

power of

buyers

Threat of

substitute

products or

services

Bargaining

power of

suppliers

Competitive Rivalry:• The main driver is the number and capability of competitors in the

market. Many competitors, offering undifferentiated products and

services, will reduce market attractiveness.

• The airline industry is extremely competitive because of a number

of reasons which include entry of low cost carriers, the tight

regulation of the industry wherein safety become paramount

leading to high operating expenses.

• It seems to be in the mature stage of the business cycle. The

number of competitors stays the same in the long run and it

doesn’t seem to be under or over capacitated. The fixed costs are

extremely high in this industry. This makes it hard to leave the

industry because they are probably in long term loan agreements

in order to stay in business. The products involved or the planes

are highly complex which also heightens the competition.

• The competition is lessened by the brand identities of different

firms. As for example; Malaysia Airlines is worldwide known giving

the best hospitality to the passenger, while Air Asia formerly

known for its low price.

COMPETITIVE RIVALRY

Threat of new entrances:• Profitable markets attract new entrants, which erodes profitability.

Unless incumbents have strong and durable barriers to entry, for

example, patents, economies of scale, capital requirements or

government policies, then profitability will decline to a competitive

rate.

• Airline industry has a high barrier to entry and exit as once an airline

is operative then exist from the industry would amount to huge

amount of loss.

• Since the needs to start an airlines company are hard, consequently,

the threat of new entrants has reduced. Furthermore, brand name is

important to the consumers these days. Adding to that, to go into

this business not also need high capital but also need an establish

brand name. Thus, rather than start an establish brand name, the

new threat entrants will focus more on the loyal customer.

• Malaysia Airlines has a good history as the safest airlines and an

excellent hospitability service. Unfortunately, after the sad tragedy of

MH17 & MH 370 it affected the company's reputation and an

establish MAS brand name

• Now, the new threat entrants Malaysia Airlines need to focus on the

international (foreign) airlines.

• National airlines• Foreign airlines

Threat of new

entrances

Bargaining

power of

buyers

Threat of

substitute

products or

services

Bargaining

power of

suppliers

Competitive Rivalry:

• AirAsia• Malindo

COMPETITIVE RIVALRY

Bargaining power of buyers• An assessment of how easy it is for buyers to drive

prices down. This is driven by the: number of buyers

in the market; importance of each individual buyer to

the organisation; and cost to the buyer of switching

from one supplier to another. If a business has just a

few powerful buyers, they are often able to dictate

terms.

• As for Malaysia Airlines buyers can be categorized by

type of travelers :

i. Budget Travelers

ii. Pleasure Travelers

iii. Business Travelers

• It a big challenges for Malaysia Airlines to have

business attractiveness for budget travelers compare

to pleasure travelers and business travelers.

• Frequent flyer programme and online duty free

purchase services can create customer loyalty and

reduce the threat of customer switching over to other

airlines to some extent.

Bargaining

power of

buyers

Threat of

substitute

products or

services

Bargaining

power of

suppliers

Competitive Rivalry:

• AirAsia• Malindo

Threat of new entrances

• Budget Travelers • Pleasure Travelers• Business Travelers

COMPETITIVE RIVALRY

Threats of substitute products or services

• Porter’s threat of substitutes definition is the availability of a

product/services that the consumer can purchase instead of the

industry’s product/services. It also as an alternative way for consumer

to go to other option with different approach. According to Porter’s 5

forces, threat of substitutes shapes the competitive structure of an

industry.

• Consumers can choose other form of transportation such as a car, bus,

train, or boat to get to their destination.

• There is however a cost to switch because plan ticket can be more

expensive. For Malaysia Airlines to win domestic traveler is quite

challenge because of this alternative and pricey cost to the consumer.

• But, the main cost is time. Planes are by far the fastest form of

transportation available and also convenience way for oversea

destination.

• With the development of technology today, consumer also have a

choice for not travelling. Video conferencing can save time & money

especially for business traveler.

Threat of substitute

products or

services

Bargaining

power of

suppliers

Competitive Rivalry:

• AirAsia• Malindo

Threat of new entrances

• Travelling alternative: Bus, car, train• Technology alternative : Video Conferencing

Bargaining

power of

buyers

COMPETITIVE RIVALRY

Bargaining power of suppliers• An assessment of how easy it is for suppliers to drive up prices. This is

driven by the: number of suppliers of each essential input; uniqueness of

their product or service; relative size and strength of the supplier; and cost

of switching from one supplier to another.

• For fuel, the bargaining power of suppliers is not really high since in

Malaysia there is only little petrol organization and the price is set by the

government.

• The 25 years catering contract with Brahim’s Holdings Bhd is a bailout for

Malaysia Airlines. Brahim’s Holdings Bhd paid 170 million upfront and took

over the accumulated losses. So, this 25 years contract can be long term

threat to Malaysia Airlines.

• There are 2 companies that are competing against each other in the

aircraft manufacturing industry which are Boeing and Airbus. Since

Malaysia Airlines are choosing Boeing as their main aircraft, therefore,

Boeing has no option to increase their aircraft prices. But it a big risk for

Malaysia Airlines, to change to another aircraft manufacturer since their

maintenance staff are experienced with Boeing’s aircraft. By changing the

aircraft manufacturer, Malaysia Airlines need to spend a lot of money to

train their maintenance staff which and switching cost is high. Therefore,

the power of suppliers cannot be a negative factor since Malaysia Airlines

only rely on one aircraft manufacturer.

Bargaining

power of

suppliers

Competitive Rivalry:

• AirAsia• Malindo

Threat of new entrances

Bargaining

power of

buyers

Threat of

substitute

products or

services

• Fuel Companies• Catering supplies• Aircraft companies

WHAT IS PORTER’S VALUE CHAIN?

is a chain of activities that a firm operating in a specific industry performs in order to deliver a valuable product or services for the

market. (Wikipedia).

Value chain analysis is a powerful tool for managers to identify the key activities within the firm which form the value chain for that

organization, and have the potential of a sustainable competitive advantage for a company.

For efficient value chain analysis, it can be focus in 2 major activities:

1. Primary Activities : Related with production

2. Support Activities : Background need for the effectiveness & efficiency of the company

• includes planning and control systems, such as finance,accounting, and corporate strategy

• E.g: Financial Department, Legal Department

Value Chain Activities

Inbound logistics

- Involved material

management. From

the upon of receive

the material from

supplier, stored and

handling it for

production

- E.g: Supplier

scheduler (fuel,

airlines food

catering)

Operation

- Related to the

production of

products and

service. This

operation can be

split into more

department in

certain

companies.

- E.g: Aircraft

Maintenance

work

Outbound logistics

- Involved activities

that can be delay

& intrude final

product or service

to the customer

- E.g: Purchasing

airplane ticket

Marketing &

Sales- To analyses the

needs & demand

of customer and

responsible for

creating awareness

among the target

customer

- E.g: Market

research

Firm Infrastructure

• Involved recruiting,training, motivating and rewarding the workforce of the company. Human Resource

Management

• an area that is concerned with technological innovation, training and knowledge that is crucial for most companies today in order to survive

• E.g: Marketing Testing, R&D

Product & Technology Development

• responsible for purchasing the materials that are

necessary for the company’s operations. An efficient procurement

department should be able to obtain the highest quality goods at the lowest

prices.

• E.g: Machinery, Subcontracting, Supplier management

Procurement

S

U

P

P

O

R

T

P

R

I

M

A

R

Y

Services- Related to the

production of

products and

service. This

operation can be

split into more

department in

certain companies.

- E.g: Complaint

Handling

VALUE CHAIN OF MALAYSIA AIRLINES

• From this value chain analyses we can conclude Malaysia Airlines income is based from good services

(Primary Activity-Services)

• On the other hand to reduce expenses, Malaysia Airlines need to focus more on product & technology

development (Support Activity); such as research of reducing spending on material services, but at the same

time maintain the premium quality services. Beside that, operation (primary activities) such as aircraft

maintenance need to more efficient.

• As such, MAS needs to be cognizant with the business cycle so that it can to take full advantage of such

effects especially when there are changes in discretionary income and consumer spending patterns.

• By coordinate these value chain analysis activities, Malaysia Airlines can have a lower cost structure and

increase the value of outcome product. By increasing the value of outcome product, Malaysia Airlines can

compete better in the industry by understanding the connection between each of the value-chain activity.

• Additionally, a proper coordination with their union, customers and suppliers can reduce cost and adds up

the bonding between customers and company itself. As its outcome, improvement of the performance in

Malaysia Airlines primary and secondary activities can be achieved and higher profit can be gained in the

process.

• Last but not least, the impact of tragedy of MH370 & MH17, was able to hit the Malaysia Airlines business

badly and as such they continue to pose serious threat to the business

REFERENCES:

http://en.wikipedia.org/

https://sites.google.com/site/admn703ai/the-team

http://managementstudyguide.com/porters-five-forces-analysis-of-airlines-industry-in-united-states.htm

http://strategiccfo.com/wikicfo/threat-of-substitutes-one-of-porters-five-forces/

Malaysia Airlines Annual Report 2012 (http://ir.chartnexus.com/mas/doc/ar/ar2012.pdf )

Malaysia Airlines Annual Report 2013 (http://ir.chartnexus.com/mas/doc/ar/ar2013.pdf)

http://www.slideshare.net/harrisonaimiyekagbon/malaysian-airlines-power-point

Shahren, “Brahim’s Willing To Sell AC stake; New Straits Times Online, 21 August 2014 (http://www.nst.com.my/node/25010 )

http://www.academia.edu/7519765/MALAYSIA_AIRLINES_UNDER_STRATEGIC_MANAGEMENT

http://www.mbaskool.com/business-concepts/marketing-and-strategy-terms/2516-porter-value-chain.html

http://www.monografias.com/trabajos89/strategy-michael-porter/strategy-michael-porter2.shtml

http://www.slideshare.net/busterblitzstrikeaegisduel/strategic-management-20393538

http://www.ukessays.com/essays/management/value-chain-analysis-at-air-asia-management-essay.php