Porter's Five Force Model and Porter's Value Chain Model

1. TU6414
Management of Information Technology
Name : HASLINDA BINTI SHAHARUDDIN
MATRIC NO : GP02182
TITLE : ASSIGNMENT INDIVIDUAL #2
(Porter’s Five Force Model and Porter’s Value Chain for Air Asia)

2. Company Introduction
• Air Asia Berhad is an established in 1993 with commenced operations in 1996 with the
dream of making flying possible for everyone.
• Air Asia became a Malaysian low cost airline and even Asia's largest low fare with no frills
airline.
• AirAsia group operates scheduled domestic and international flights to 100 destinations
spanning 22 countries.
• Its main hub is KLIA2 at the Kuala Lumpur International Airport (KLIA)
• Air Asia was named the World’s Best Low Cost Airline in the annual World Airline Survey
by Skytrax for five consecutive years in 2009, 2010, 2011, 2012 and 2013.
• Also has been ranked Top 5 among the most recognized and admired airlines in the Asia
Pacific Top 1000 Brands 2008.
• With the subsidiaries such as AirAsia X, Thai AirAsia, Indonesia AirAsia, Philippines' AirAsia
Inc, AirAsia Zest, AirAsia India and Thai AirAsia X, AirAsia, is set to take low-cost flying to
an all new high with our belief, "Now Everyone Can Fly".

3. Porter’s Five Forces Analysis
• Porter’s Five Forces Model :-
- Introduced by Michael Porter in 1979. Michael Porter is Bishop William
Lawrence University Professor at Harvard Business School.
- This model are used by companies for industry analysis and corporate
strategy development.
- The five forces are include :
1. Threat of substitute products
2. Threat of new entrants
3. Intense rivalry among existing players
4. Bargaining power of suppliers
5. Bargaining power of Buyers
http://www.notesdesk.com/notes/strategy/porters-five-forces-model-porters-model/

4. Porter’s Five Forces Analysis for Air Asia
1. Threat of Substitute Products
• Customer easy to switching to other airline. In the airline industry , there are 59 airlines
company that offer low cost fare. The airlines have the same flight path included more
than one hundred cities and islands throughout the South Asia, Southeast Asia and
Northeast Asia. It’s easily for the customer to look for alternative.
• Performance of competitors. For all an airline carrier, they are no significant differences in
product offering. Performance of airlines normally consists of the accuracy of take off
time, aircraft performance and staff services.
• Relative price. The price offer by an airline company may not be fixed and it depend on
the time different between booking date and flight date. No significant differences of
price between MAS and Singapore Airline when customers purchase last minute tickets.
Customer will choosing the airline carrier who will offer them more comfortable facility in
almost same price with Air Asia.

5. Porter’s Five Forces Analysis for Air Asia
2. Threat of New Entrants
• Customer loyalty is low against airline. Increasing of airline competitor such as Jet Star and
Tiger Airways who also offering low cost fare will decrease of Air Asia’c customer loyalty.
• High cost to start-up. Airline industry needs a high cost in start-up capital to set up
headquarters, purchase or hiring aircraft, appointment pilots and staffs like stewardess
and etc. Thus, the threat is low for Air Asia.
• Different of product offered. Air Asia has expanded their product and offer the different
product compare to competitors. Air Asia not only sales ticket but also offering a holiday
package which affordable around Asia. It must have a good relationship with hotels and
tourism company.
• Costs of switching low. No significant differences in the price compare to Air Asia’s
competitor, their customer do not spend more to shift to another airline. The competitions
depending on service and facilities provided in the flight time to customers.
• Strict government regulations. Due to competitive in airline industry and protects on
national airline, MAS which facing losses in these years, it is quite difficult to apply for
licensing and permit for operating airline company.

6. Porter’s Five Forces Analysis for Air Asia
3. Intense Rivalry among Existing Players
• High numbers of competitor. Air Asia are now facing high competitor with approximately
59 low fares airline such as Tiger Airways, Air Arabia, Jet Star Airways, JAL Express and
etc. They may compete in term of their route offering that Air Asia does not fly.
• Fixed cost is high. The airline industry incurs high fixed cost consists of finance cost, hire
purchase and staffs costs.
• Exit cost is high. It’s hard to leaving airline industry because cost is high in paying loans,
staff retrenchment and flight cancellations refunds.
• Similarity of product offering. Every airline provides similar services is to reach the
destination. Air Asia had expanded its services provides hotel booking such as Tune Hotel
which located not far away from its airport and tour packages.

7. Porter’s Five Forces Analysis for Air Asia
4. Bargaining Power of Suppliers
• Supplier concentration in a few hands. Due to a few suppliers in market will increasing the
bargaining power of supplier. Aircraft supplier who gaining most bargaining power as only
in two operation, Boeing and Airbus. Other supplier such as fuel supplier, merchandise
supplier and food supplier may depend on market condition.
• High switching cost. Most of Air Asia’s aircraft using Airbus models. Previously, they are
using Boeing models, and Air Asia is then lease it. In case if Air Asia want to switch back to
Boeing, the cost for employee training in operating the aircraft features is high. Besides,
Airbus is using advanced technology in designing aircraft, the power of supplier is high
due to Air Asia must depends to the Airbus engineer to do maintenance.
• Relative insignificant influence of buyer to supplier. Airbus is a UK based company. Their
customer come from around the world. Air Asia is a small portion of Airbus customer who
order 200 aircraft. The total of order of Airbus is 9,113 aircraft. Air Asia contribute only 2%
from Airbus total order.

8. Porter’s Five Forces Analysis for Air Asia
5. Bargaining Power of Buyers
• No significant product differentiation. Differences of Air Asia products is offering holiday
packages. They offers to providing package including flight tickets, accommodation and
travel guide for customer. The important thing is fly to destination which shows the
stronger bargaining power of buyers.
• Low switching costs. Bargaining power of buyer strong if costs of switching to other
airlines is low. Not only Air Asia operated in Asia. The price offer by competitor not much
different. Customer will choose their convenience and flight schedule must fit them best.
• Modern portion of expend buyer on airline. Bargaining power of buyer will strong if
customer look for cheaper price.
• Market information will access by customers. IT mostly used by big company and success
company in the world. With IT, its allow for international business without boundaries.
Information is easy to access by customers only by click. With the online application, Air
Asia didn’t have to prepared room for negotiation. Thus, customers had strong bargaining
power.

9. Porter’s Value Chain Analysis
• Porter’s Value Chain Model :-
- Introduced by Michael Porter in his book ‘ The Competitive Advantage’ on
1985.
- Porter suggested that activities within an organization add value to the
service and products that the organization produces, and all these activities should
be run at optimum level if the organization is to gain any real competitive
advantage.
- Michael Porter suggested that the organization is split into ‘primary activities’
and ‘support activities’.
Primary Activities Support Activities
1. Inbound logistics
2. Outbound logistics
3. Sales and Marketing
4. Services
1. Technology development
2. Human resource management
3. Firm infrastructure
http://www.learnmarketing.net/valuechain.htm

10. Porter’s Value Chain for Air Asia
Primary Activities :-
1. Inbound Logistics
• Involved in different categories such as how to schedule a flight, what are the competitor
strategy, for adopting, how to sustain market, how to cut cost for ticket and how to plan
routes.
2. Outbound Logistics
• Air Asia using online ticketing for customer booking their tickets online. They also can
print their boarding card from homes. Air Asia uses electric engine for customer safety.

11. Porter’s Value Chain for Air Asia
3. Sales and Marketing
• Air Asia has a strong name and have significant impact on organization sales, Air Asia do a
advertisement by sponsoring “The amazing race” and also Manchester United football
club. Air Asia also do painting some of their aircraft with club colors and sport stars.
4. Services
• Air Asia provide different type of services to customers such as if the flight delayed by
more three hours voucher give will given. Passenger also can do pre-book for hotels,
hostels and also rent a car.

12. Porter’s Value Chain for Air Asia
Secondary Activities :-
1. Technology Development
• Air Asia use technology to make their operation efficient. They are using yield
management system (YMS) to take care of operating cost and expected revenues. They
using computer reservation system (CRS) for web base reservation and inventory system.
Air Asia also using enterprise resources planning system (ERP) to save time for making a
month end closing.
2. Human Resources Management
• Air Asia was hire the capable staffs and assign skilled people in term of human resources
and can maintain their company mission to low price airline.
3. Firm Infrastructure
• Air Asia involved from a classic LCCT into integrated service provider. They focus their goal
to provide cheapest fare and exploring new markets.

13. Summary
• Porter's Five Forces Analysis - important tool for assessing the potential for profitability in
an industry. With a little adaptation, it is also useful as a way of assessing the balance of
power in more general situations.
• The value chain encompasses the whole organization. It looks at how primary and support
activities can work together to help the organization create a superior competitive
advantage. If an activity is performed well it is said to add value.