BUSINESS ENVIORNMENT

 What Are Porter's Five Forces?

Porter's Five Forces is a model that identifies and analyses five

competitive forces that shape every industry and helps determine an
industry's weaknesses and strengths.

Five Forces analysis is frequently used to identify an industry's structure to

determine corporate strategy.

Porter's 5 forces are:

1. Competition in the industry

2. Potential of new entrants into the industry
3. Power of suppliers
4. Power of customers
5. Threat of substitute product
1. Competition in the Industry
Competition keeps companies on their toes. It motivates them to perform better. Before
buying a stock, you must understand the position of the company in its industry.

The larger the number of competitors, the lesser is the power of a company. Conversely,
low competition means that the company has greater pricing power. It gives them the
power to set the terms of deals to achieve higher profits.

For example, India is the third-largest domestic aviation market in the world. The
switching costs for customers is also very low. Hence there is cut-throat
competition in the Indian aviation sector.

2. Threat of New Entrants

This refers to the difficulties a company faces when a new player enters the industry.
New entrants face many barriers while starting up a new business. These include setting
up a distribution network, huge capital, infrastructure requirements, patents, etc.

Industries with high entry barriers have few competitors. While industries with low entry
barriers have lots of players and thus don’t have a high-profit margin.

For example, assume that a company is about to launch a new product in a market. If
the barriers to entry are low, then a new start-up can easily try to replicate the product.
This would lead to an increase in competition and a further rise in expenses. The stock
price would see no huge impact despite a new product launch.

In the airline industry, new entrant’s threats can be considered as low to medium. The
Indian government has approved 100% Foreign Direct Investment (FDI). However, new
entrants need licenses and huge upfront investment. Plus, the existing airline players
have built up a large base of experience over the years. Thus, a new entrant would have
a competitive disadvantage right from the start.

3. Power of Suppliers
It addresses how suppliers influence and affect profitability. . Fewer the suppliers, the
more dependent a company becomes. . As a result, suppliers have more power and can
drive up input costs to take undue advantage. When there are many suppliers, the
switching costs are low.

For example, the airline industry majorly depends on fuel and aircrafts. The prices of fuel
are subject to fluctuations in the global market. The industry has very little control over
these factors. Very few aircraft suppliers exist which gives them bargaining power.
Suppliers can raise the prices which can impact the entire industry
4 Power of Customers

You cannot run a business without customers. They have the power to force sellers for
better price deals and services. The bargaining power of buyers is their ability to
influence and drive down the prices of goods and services.  The force largely depends
on how many customers a company has and how significant each customer is.

For example, the bargaining power of customers in the airline industry is considered to
be high. Customers have various tools to compare different prices and offers. They will
always prefer to go with the least expensive option. Plus, they do not incur any switching
costs to change airways.

5. Threat of Substitutes

Availability of substitute goods and services is also a major threat. Products with no
close substitutes have high pricing power. When close substitutes are available,
customers have the option to switch to a cheaper product.

Substitution can be within the industry or outside the industry.

For example, a customer can decide to travel by road instead of booking a flight. Various
factors like cost, safety, time, etc. contribute to making a decision. Air travel is relatedly
costlier in India which makes railway a feasible substitute. In India, the railway connects
remote cities making travel cheaper and accessible.

Given the pandemic situation, flight services have declined dramatically. People prefer
traveling short distances by car. So, the threat of substitutes in the airline industry can be
viewed as medium to high.
 2. Business environment Analysis
Stages of Environmental Analysis

Analysis of the Environment makes the Business aware of the Threats and Opportunities in
the environment.

Then in the light of its Strengths and Weaknesses, the business chalks out courses/courses of
actions in order to lessen the impact of Threats and grab the Opportunities.

The environmental analysis included the following stages:

1. Scanning,
2. Monitoring,
3. Forecasting,
4. Assessing.

Scanning: It is the process of analysing the environment. Identification of emerging/ensuing

trends is a critical purpose of environmental scanning. The main aim of environmental
scanning is alerting the organization to potentially significant external impingement before it
has fully formed or crystallized. Successful environmental scanning draws attention to
possible changes and events before their occurrence, allowing time for suitable action.

Monitoring: It entails perspective follow up and a more in-depth analysis of the relevant
environmental trends identified at the scanning stage. The purpose of monitoring is to
assemble sufficient data to discern (make out) whether certain patterns are emerging.

The outputs of monitoring are threefold:

 a specific description of environmental patterns to be forecast;

 identification of trends for further monitoring;
 Identification of patterns requiring further scanning.

Forecasting: Forecasting is concerned with the development of plausible directions of

directions, scope, speed, and intensity of environmental change to layout the evolutionary
path of anticipatory change in the environment.

Assessment: Assessment involves drawing up implications/ possible impacts. In an

assessment, the frame of reference moves from understanding the environment of the focus of
Scanning, Monitoring and Forecasting-to identifying what that understanding of environment
means for the organization.

In short, it involves drawing of possible impacts of the environmental changes on the

organization.