MBA in 2 minutes | Lesson 19 : Analyzing industry profitability
Updated: Jan 8, 2021
We will be solving practical challenges through MBA concepts. No theory only applications !
Often as an investor or a first time founder, you are expected to analyze profitability of industries before investing in firms or starting your ventures. Hence, it becomes absolutely critical to analyze attractiveness of industries in addition to relying on current market trends.
As a case example, we would analyze airlines industry and leverage Porters 5 forces model to arrive and deeply understand profitability of the sector.
Step 1: What is Porters 5 forces model
The famous Porters 5 forces was written by Michael Porter-one of the founders of Monitor Group and FSG- consulting firms. An academician, Michael devised a framework which became very applicable to the practioners in corporate world.
Based on diagram on the left, Porter highlighted there are 5 major forces which impact profitability of any industry-
Existing Competition which can keep market prices in check
Supplier power which can keep your costs in check
Buyer power which can again influence the pricing charged from consumers
Substitution/alternatives driving prices down
Last but not the least how easy/difficult it is for new players to enter the industry. The harder it is the more profitable the industry is because refer point 1
Step 2: To operationalize the framework, lets apply this to Airlines industry
Warren buffet once asked in a seminar how do you make a million dollars in airlines Industry ?
After a long debate and interesting replies, he himself answered the question- You make a million dollar in airline industry by investing a billion dollar :p
It has been well established in corporate strategy and management that airlines is hard to sustain business despite of all jazzy marketing deployed by them. We all know the end outcome of many such airlines. Off course there are exceptions in all industries as well. For eg- South West Airlines in US and Indigo in India with the fast turn around and cost reduction measures deployed have been able to turn the narrative around.
Step 3: Porters 5 forces for Airlines industry (Scope: India)
Existing Competition: There are multitude of flight options available to the consumer when he/she wants to fly from Bombay to Delhi
Supplier Power: There is high negotiation power with Boeing, Airbus (aircrafts provider) and oil supplying companies
Buyer Power: With so many deals available, the masses always gravitate towards cheapest deal than luxury brands
Substitution: The choice of travel via railways and road always remain with the consumers
Threat of a new entrant: As much as the initial capex requirement is high, the ease of entering is relatively easy with sub-leasing of aircrafts etc.
Why don't you now use Porters 5 forces framework to look and evaluate other interesting industries such as hospitals, soft drinks, Edtech etc. Porters framework is not only used to determine the attractiveness but also used to build strategies over and above the underlying fundamental levers.
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