Five Competitive Forces That Can Destroy Your Product

© 2014 H. Del Castillo, All Rights Reserved.
Hector Del Castillo
linkd.in/hdelcastillo

Thanks everyone who attended this discussion
at ProductCamp Boston 2014.
I welcome your feedback regarding this topic.
Contact me with any comments or questions.
I look forward to seeing you again soon.

Special Thanks

Hector: @hmdelcastillo
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What We Will Discuss
1. Porter’s Five Forces Model
2. How To Use It
3. Key Takeaways

Gain strong understanding of the
external marketing environment
in which your company operates.

• What’s going on out there in
your industry?
• What matters most to remain
competitive?
• What deserves your attention?

A framework for analyzing an
industry in order to develop a
business strategy

5 Forces That Shape Competition
Source: “Competitive Strategy: Techniques for Analyzing Industries and Competitors,” June 2008, Michael E. Porter.

5 Competitive Forces
• The strength of competition in the industry.Competitive Rivalry
• The ease with which new competitors can enter the
market if they see that you are making good profits.Threat of New Entrants
• The extent to which different products and services
can be used in place of your own.Threat of Substitutes
• The power of your customers to drive down your
prices.Power of Buyers
• The power of suppliers to drive up the prices of your
inputs.Power of Suppliers

US Airline Industry
Threat of
New
Entrants
Buyer Power
Threat of
Substitute
Products
Supplier Power
Competitive
Rivalry
?
Threat of New Entrants:
Competitive Rivalry:
Supplier Power: Buyer Power:
Threat of Substitutes:
?
?
??

Assessing Direction and Strength
Strongly in your favor 5
In your favor 3
Somewhat in your favor 1
Neither 0
Somewhat against you -1
Against you -3
Strongly against you -5

Competitive Rivalry
2014
Number of competitors
Product differences
Switching costs
Customer loyalty
Level of advertising expenses
Cost of exiting market

Threat of New Entrants
2014
Time and cost of entry
Specialist knowledge
Economies of scale
Cost advantages
Technology protection
Barriers to entry

Threat of Substitutes
2014
Substitute performance
Cost of change

Power of Buyers
2014
Number of customers
Size of each order (ARPU)
Differences between competitors
Ability to substitute
Cost of switching vendors

Power of Suppliers
2014
Number of suppliers
Size of suppliers
Uniqueness of service
Your ability to substitute
Cost of changing
Number of suppliers

US Airline Industry
Threat of
New
Entrants
Buyer Power
Threat of
Substitute
Products
Supplier Power
Competitive
Rivalry
Supplier Power:
Buyer Power:
?
?
?
? ?

Global Market
• 2000 Airlines operating more than 23,000
aircraft, providing service to over 3700 airports.
• In 2006, there were 28 million scheduled flight
departures and carried over 2 billion passengers
• Growth of world air travel has averaged
• approximately 5% per year over the past 30 years
• Annual growth in air travel has been about twice
the annual growth in GDP
• Expected to double over next 10 – 15 years
Source: Airline Industry Overview, Eric Henckels, Columbia University.

US Market
• 100 passenger airlines operate over 11 million flight
departures per year
• Carry over one‐third of the world’s total air traffic
• 745 million passengers in 2006
• $160 billion in total revenues
• 545,000 employees and over 8,000 aircraft operating
31,000 flights per day
• Commercial aviation contributes 8% of the US Gross
Domestic Product, according to recent estimates
Source: Airline Industry Overview, Eric Henckels, Columbia University.

US Airline Industry
Threat of
New
Entrants
Buyer Power
Threat of
Substitute
Products
Supplier Power
Competitive
Rivalry
Threat of New Entrants: -5
• Additional competitors from
abroad
Competitive Rivalry: -5
• Large number of competitors
• Little customer loyalty
Supplier Power: -5
• Boeing, Airbus and
Embraer own majority
market share
Buyer Power:
• Many alternatives to buy
based on low priceThreat of Substitutes:
• Alternative modes of
transportation between major
metro areas
-5
-5
-5
-5 -3

Airline Industry Profitability
• During 2004–2011, the airline industry worldwide
averaged a ROIC of 4.1%.
• This is an improvement on the average of 3.8% generated
in the previous business cycle 1996–2004
• Nowhere near Weighted Average Cost of Capital (WACC)
of 7.5%.
• Concerns regarding rising costs, safety and growth
• Significant consolidation through M&A
– United and Continental (2010) – largest airline
– Delta acquired Northwest (2009) – 2nd largest airline
– Southwest acquired AirTran (2013)
Source: International Air Transport Association (IATA) Airline Profitability Report, Aug 2013.

Pick Your Industry
Threat of
New
Entrants
Buyer Power
Threat of
Substitute
Products
Supplier Power
Competitive
Rivalry
Supplier Power:
Buyer Power:
?
?
?
? ?

Profitability of U.S. Industries
Source: “The Five Competitive Forces That Shape Strategy” Michael E. Porter, Harvard Business Review Magazine, Jan 2008.
Profitability of Selected U.S. Industries, Average ROIC, 1992-2006

Key Takeaways
• Understand the competitive landscape1
• Allows you to gauge profitability and risk2
• Can be applied to any established industry3
• Helps align business and product strategies4
• Allows you to anticipate disruption5

Hector Del Castillo
• Senior consultant with over 15 years of experience transforming
products to wealth for technology-based companies
• AIPMM Body of Knowledge (ProdBOK®) Contributor
• Certified instructor for AIPMM and the 280 Group
• Established companies
– Jet Propulsion Laboratory, Lucent Technologies, MEI Technologies
• Small companies and startups
– Nextone Communications, Smith Micro Software
• Launched 27+ Products for global deployment
– HW/SW, Telecom, Enterprise Mobility, Information Security Services,
Professional Development
• Certified PMP®, CPM® and CPMM®
• University of California at Santa Barbara, MS EE
• University of Texas at El Paso, MS EE, BS EE
27

Questions?
Hector Del Castillo, CPM, CPMM
Product Innovation Consultant
hmdelcastillo@aipmm.com
linkd.in/hdelcastillo

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Five Competitive Forces That Can Destroy Your Product

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