Analysis of the German Long Distance Bus Market by Porter´s Five Forces


Term Paper, 2015

20 Pages


Excerpt

Table of Contents

List of Abbreviations

List of Figures

1 Introduction
1.1 Problem definition
1.2 Objective
1.3 Structure and methodology

2 Market analysis by Porter’s five forces
2.1 Objective and field of application
2.2 Description
2.2.1 Threat of new entrants
2.2.2 Level of rivalry among existing competitors
2.2.3 Threat of substitutes
2.2.4 Bargaining power of suppliers
2.2.5 Bargaining power of customers

3 Business case: German long distance bus market
3.1 Procedure
3.2 Results
3.2.1 Threat of new entrants
3.2.2 Level of rivalry among existing competitors
3.2.3 Threat of Substitutes
3.2.4 Bargaining power of suppliers
3.2.5 Bargaining power of customers

4 Conclusion
4.1 Summary
4.2 Further Research
4.3 Limitation of the research

Appendix

References

List of Abbreviations

illustration not visible in this excerpt

List of Figures

Figure 1: Development of passenger numbers of the remote bus market

Figure 2: Porter's Five Forces

Figure 3: Positioning of substitutes.

Figure 4: Porter’s five forces applied to the long distance market.

1 Introduction

From 1935 to early 2013, the German domestic bus service was strictly limited by the Passenger Transport Act. The aim of the Act was the safeguarding of public transport interests, especially the prevention of competition between different traders with each other or with the railways. The legislature assumed that such competition has a negative effect on the transport service, and therefore protected the existing transport against new competitors.[1] With the liberalization of the remote bus market the situation on the domestic travel market has changed significantly. The remote bus is since 2013 the new strong competition for car, train and budget airlines. The new traffic model is well accepted by travelers and therefore the passenger numbers have more than doubled within one year from 8.2 million in 2013 to 19.6 million in 2014 as shown in figure 1. Due to the growing number of providers the range of destinations has increased. Buses are connecting now many larger German cities with each other or with tourist destinations. Modern buses, seating warranty, WLAN, punctuality, hardly bus changes and affordable ticket prices ensure the future for the dynamic growth of the remote buses.[2]

illustration not visible in this excerpt

Figure 1: Development of passenger numbers of the remote bus market.[3]

1.1 Problem definition

Until the liberalization of the market the DB (Deutsche Bahn) was the largest remote bus provider in Germany. At the beginning of the liberalization the DB thought about to expand significantly its bus business. However, the group rejected the idea and underestimated the development of the market. Currently the DB operates two remote bus brands (Berlin Linienbus and IC Bus) but makes sensitive losses in the core business at ICE and ICs. Especially on the parade routes of the DB like the track Berlin-Leipzig long distance buses take away around 953 passengers per day that is equal to revenue of around 8.6 million EUR per year just for the mentioned track. In 2014 the DB lost 120 million EUR of revenue to the long distance buses.[4] The loss is especially painful, because the losses have due to the high fixed costs of the DB directly impact on the profit.[5] Estimates of the DB assume that the result of the passenger transport division might decrease by 672 million EUR in the next few years through the competition of long-distance busses.[6] Surveys show that 38% of bus riders have used so far the car and 44% of bus riders are disappointed railway customers.[7] For DB the question arises how they can recover or compensate the lost customers and the associated revenue. Therefore a new strategy is needed with which the DB can position itself in the market.

1.2 Objective

In order to develop a new strategy an analysis of the internal company resources like the cost structure, portfolio, strength and weaknesses a.s.o. is necessary. Also an analysis of the external market factors is recommended. The external investigation can be made on a macro level by using e.g. the PESTEL analysis or Porters diamond and on a micro level by studying e.g. the competition and customers. Since the examination is the basis for preparing any new competitive strategy this assignment deals with the analysis of the long distance bus market. The objective is to determine the forces by which the market is driven and demonstrate the development, changes and dynamic of the industry.

1.3 Structure and methodology

This work is divided into different parts. The first part shows the theoretical background and introduces the concept of Porter’s five forces. Therefore the section starts with the objective and field of application of the model followed by the description of the five individual forces. In the section of the business case the concept is applied to the German long distance bus market in order to get a comprehensive picture of the industry situation, risks and opportunities. The last section will complete the entire work by doing a summary, limiting the research and will giving recommendation for further research.

For that work no primary data was gathered, the entire work is based on secondary data as the scope of this assignment does not allow for any explorative approaches, interviews or surveys. The necessary information for the work that were previously scattered published or accessible will be arranged, analyzed and interpreted. The sources of secondary data are gathered from books, magazines and sources in the world-wide-web. Due to the relevance of the topic, for the second part of the assignment no information could be drawn from books, so that the research was limited to online resources, articles and reports.

2 Market analysis by Porter’s five forces

The structure and development of an industry can be analyzed and forecasted by many different models like the Co-opetition model from Brandenburger/Nalebuff or the deconstruction analysis from Heuskel. The most widely used and best known model is certainly the analysis by Porter's five forces. This model can be applied to any industry and is introduced and described in detail in the following.

2.1 Objective and field of application

In order to survive as a company in competition, it is necessary to know the structure of the industry in which the firm operates. The industry structure strongly affects the game rules of the competition, the profitability and the potential business strategies. By using the industry analysis the company is gaining clarity about the development, changes and dynamic and thus the attractiveness of the industry. This makes it possible to derive measures with their help the company can be brought into a long-term competitive position. The industry analysis is the starting point for any strategy formulation.[8]

2.2 Description

The five forces model describes the five crucial competitor forces within an industry. According to Michael Porter the competition of an industry is not only affected by the competition of the existing competitors but also by the threat of new entrants, the power of customers, the power of suppliers, rivalry among existing businesses and the threat by substitutes as demonstrates in figure 2.[9]

illustration not visible in this excerpt

Figure 2: Porter's Five Forces. (Source: Porter 2013, p. 38)

In a broader sense this competition calls Porter the “advanced rivalry”[10]. The strength of these individual competitive forces determine the profit potential and the amount of investments of an industry.[11] If the forces are intense, as they are in such industries as airlines, textiles, and hotels, almost no company earns attractive returns on investment. If the forces are benign, as they are in industries such as software, soft drinks, and toiletries, many companies are profitable.[12]

2.2.1 Threat of new entrants

The term threat of new entrants describes the probability that new competitors enter the market. New market participants bring new capacity, the desire for profit and often significant funds in the industry. This can lead by the established competitors to falling prices or increasing cost and thus to a reduced profitability. The threat of new entrants depends of existing barriers to entry and the predictable reactions of the established competitors. If the barriers are high and the new company has to expect strong counter measures from the long-established providers so the likelihood for a new entrant is quite low.[13] Typical market barriers to entry are:

- High capital requirements
- Difficult access to distribution channels
- High switching cost
- Scale-independent cost disadvantages
- Expected retaliation
- Distinctive image and brand for established companies
- Government policy
- Economies of scale for established companies

If it is foreseeable that competitors cannot be stopped by the market barriers a competition analysis can help to identify relevant competitors to classify them and to identify the strengths and weaknesses of the competition. This knowledge of competitors serves as an important basis for developing their own strategies and can be considered in order to ensure long-term competitive advantage.[14]

2.2.2 Level of rivalry among existing competitors

The second competitive force is the current competitors and the current and future rivalry among them. The rivalry among existing competitors is expressed by price competition, advertising battles, introduction of new products as well as service and warranty improvements. The rivalry arises because one or more competitor’s see opportunities to improve their position in the market. In most of the industries this measures and countermeasures affecting the overall profitability of the industry. Intense rivalry comes from:

- Number and similarity of competitors
- Slow industry growth
- High fix- or storage costs
- Lack of differentiation between competitors (differentiation-only about price)
- High exit barriers
- High strategic inserts (market share gains at any cost)

The mentioned factors determine the degree of competition and changing constantly. For example, the industry growth changes within the life cycle. With increasing maturity the growth rate decreases which leads to increased rivalry and sinking profit.[15]

2.2.3 Threat of substitutes

The third factors that affects the attractiveness of an industry is the treat of substitutes products. All companies within an industry compete with industries which offering substitutes. Replacement products are limiting the profit potential of the entire industry, because they fulfill the same function and thereby satisfy the customer needs. The more attractive the price-performance-alternative of the substitutes, the more limited is the profit potential of the industry. Substitution risk arises by:

- Existing or potential attractive replacement products
- Offensive marketing for replacement products
- New products by technology developments.[16]

2.2.4 Bargaining power of suppliers

The suppliers are also a crucial factor influencing the industry. Vendors can exploit their bargaining strength by threatening to raise prices or reduce the quality. Thus, the profitability of the industry can decline. Factors that may increase the bargaining power of suppliers are:

- Small number of potential suppliers
- Great importance of this product for the quality of this product the customer
- High switching costs
- The industry is relatively unimportant as a customer for suppliers
- Large competitive advantages of the supplied product.[17]

2.2.5 Bargaining power of customers

The last market force which is to consider is the bargaining power of the customers. The customer can weaken the profitability of an industry by claiming lower prices, higher quality or better product performance and playing competitors against each other. The strength of each major customer group depends on certain characteristics of their market situation and the share of their sales to the total disposals of the industry. A customer group is strong if the following conditions are met:

- High market power on the side of the customer
- Large number of alternative providers
- Low switching costs
- Cost and market transparency for customer
- Low profit margin
- A few customers come in concentrates.[18]

3 Business case: German long distance bus market

In the following, the theory previously described is applied to the remote buses industry in order to get a comprehensive picture of the industry situation, risks and opportunities.

3.1 Procedure

In the analysis each market force and the related drivers are individually examined. Therefore in a first step the five forces and the different drivers are listed and scored on a scale from 1 to 5. The number 1 means very low, 2 low, 3 medium, 4 high and 5 very high. For example is the number of competitors very high within the industry the market attractiveness is very low. By this model 27 different drivers are evaluated. The assessment of the five market forces results of the average of the individual driver. In the appendix the list and the rating of all drivers and market forces can be found.

3.2 Results

3.2.1 Threat of new entrants

In order to enter the long distance bus market the capital requirements are quite low since currently no charges for tolls and only very little for stations exist. Also due to the fact that most of the companies do not operate own busses but order busses at regional bus companies the needed capital is low. The new competitors could easily use most of the distribution channels since most tickets are sold in the internet. As the customer can easily switch from on company to the other without having any switching costs the new competitor could easy gain customers. So far no company in this market has an unattainable cost advantage through favorable access to raw materials, experience curve effects or location advantages. Also no company has a distinctive image so far. Beside the already mentioned drivers the low risks by the government policy to limit the market by certain measures (e.g. license compulsory) also attract new competitors. Overall the threat of new entrants is relatively high that means the market attractiveness is also quite high.

3.2.2 Level of rivalry among existing competitors

The more players there are, the more intense the competition for the same customers. Since the liberalization of the long distance bus market the number of competitors is constantly increasing. Especially foreign companies and Startups are entering the market. Because of the growing number of providers in the next a consolidation is unavoidable. Currently around 60 companies are operating in the market. The growing number and the lack of differentiation lead to price competition. Therefore hardly a company is profitable. Nevertheless thru the high growth rate of the industry it is quite easy to gain market share because it is easier to gain market share in fast growing than in slow growing markets. By considering all the driver related to this factor the impact on the market attractiveness is neutral with a tendency to moderate attractive.

3.2.3 Threat of Substitutes

For the remote bus there are four attractive substitutes the car, carpooling, budget airlines and the train. All these substitutes have different strengths and weaknesses. On the theme flexibility, travel time and mobility at the destination the remote bus performs significantly worse than the substitution products as demonstrates in figure 3.

illustration not visible in this excerpt

Figure 3: Positioning of substitutes. Source: MOONROC, Infratest Verkehrsforschung.

Nevertheless the number of substitutes is quite high. The marketing of other branches can be described as medium, since currently no comprehensive, aggressive promotional activities are carried out. However, comprehensive and permanent promotional activities, as well as an improvement in the supply structure of substitution industries can cause an increasing pressure by substitutes. Since the danger of the different driver within this market force is neither extremely high nor extremely low the impact on the market attractiveness is currently neutral.

3.2.4 Bargaining power of suppliers

The bargaining power of the suppliers is determined by the uniqueness of supplier’s products. The main supplier for the long distance bus market is definitely the oil and gas industry represented thru the gas stations. Without gas the long distance busses driving nowhere. Even their existing electro busses this is not an option for long distances. Therefore the product gas is the most important for this industry. The number of gas station is large so the companies could easily change from one gas station to the other if it would be necessary. One the other side the gas stations have so many customers that they can stop delivering the long distance bus market. Therefore the switching costs of suppliers are very low. In sum the power of suppliers is medium.

3.2.5 Bargaining power of customers

In general the more customers a company has the less bargaining power each customer will have. And if the switching costs are high then buying power substantially decreases. Due to the fact that the number of providers has increased significant in the last years the customer has the choice. If the customer wants to switch form one provider to the other there does not raise any cost for him. Therefore switching costs are very low. Beside this the customer is good informed about prices thru independent comparison sites in the internet and different apps. The power of customers is quite high but due to the fact the customers do not occurs as a bulk the power limited and can be indicated as medium.

4 Conclusion

4.1 Summary

With the liberalization of the remote bus market the politic has created a new market. This new market is challenging the DB because the long distance buses taking away passenger from the DB. This has led already to decreasing revenue at the DB. In order to create a new strategy a market analysis has to be made. The result of the analysis is demonstrated in figure 4.

illustration not visible in this excerpt

Figure 4: Porter’s five forces applied to the long distance market. (Source: own creation)

[...]


[1] cf. Dieter Fockenbrock 2012, p. 18f.

[2] cf. Fernbusse.de 2015

[3] Own graphic based on Fernbusse.de

[4] cf. AFP Agence France-Presse GmbH 2015

[5] cf. Carsten Brönstrup 2014

[6] cf. Michael Machatschke, p. 6-8.

[7] cf. IGES Institut GmbH 17.04.2014, p. 1f.

[8] cf. Porter 2013, p. 37 ff.

[9] cf. Porter 2013, p. 37.

[10] Porter 2013, p. 40.

[11] cf. Porter 2013, p. 38 ff.

[12] cf. Porter 2008

[13] cf. Porter 2013, p. 41 ff.

[14] cf. Kerth et al. 2011, p. 131.

[15] cf. Porter 2013, p. 53 ff.

[16] cf. Porter 2013, p. 60 f.

[17] cf. Porter 2013, p. 64 ff.

[18] cf. Porter 2013, p.61 ff.

Excerpt out of 20 pages

Details

Title
Analysis of the German Long Distance Bus Market by Porter´s Five Forces
College
University of applied sciences, Nürnberg
Author
Year
2015
Pages
20
Catalog Number
V432962
ISBN (eBook)
9783668751682
File size
531 KB
Language
English
Tags
Fernbus, Marktanalyse, Porters five Forces
Quote paper
Master of Business Administration (MBA) Martin Pruschkowski (Author), 2015, Analysis of the German Long Distance Bus Market by Porter´s Five Forces, Munich, GRIN Verlag, https://www.grin.com/document/432962

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