Porter’s Five Forces and Transit Protocol’s Market Strategy

“The essence of strategy formulation is coping with competition. In the fight for market share, competition is not manifested only in the other players. Rather, competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry. Customers, suppliers, potential entrants, and substitute products are all competitors that may be more or less prominent or active depending on the industry.” — Harvard Business Review

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. First described by Michael Porter in his classic 1979 Harvard Business Review article, Porter’s insights started a revolution in the strategy field and continue to shape business practice and academic thinking today. Frequently used to identify an industry’s structure to determine corporate strategy, Porter’s model can be applied to any segment of the economy to search for profitability and attractiveness.

Today we shall look at the transportation industry, and more specifically Transit Protocol, and analyse the competitive landscape in the industry using Porter’s Five Forces framework…

Competitive Rivalries

This force refers to the number of competitors in the industry and the intensity of the rivalries within the industry. The larger the number of competitors, along with the number of equivalent products and services they offer, the lesser the power of a company. When rivalry is intense, it drives down prices or dissipates margins by raising the cost of competing. Conversely, when rivalry is low, a company has greater power to charge higher prices and set the terms of deals to achieve higher sales and profits.

The transportation and mobility services industry has a somewhat high barrier of entry, where there is a limited number of competitors, especially in public transit. That said, private mobility service providers have been ripping up the traditional playbook and disrupting the industry with internet-styled digital transport services, examples are companies like ride hailing companies Uber, Didi Chuxing and Grab, bicycle sharing companies like Mobike and car-sharing companies like ZipCar. Moving forward, the landscape is likely to see more integration and cooperation in the form of Mobility as a Service, where mobility services are centred around the end user instead of just the supply of transport.

Conclusion: Rivalry Among Existing Competitors — Medium

Transit Protocol provides the common platform for various mobility services to be integrated and the single interface for commuters to search, book and pay for their journeys in a frictionless manner. The future will see more cooperation and collaboration rather than direct competition from the other players in the transportation market.

Threats of New Entrants

A company’s competitive position is also affected by new entrants into its market. The threat of new entrants can force existing players to maintain price or keep prices down, and to spend more to retain their existing customers. This threat is dependent on the barriers to entry, including economies of scale, to the cost of building brand awareness, to accessing distribution channels, to governmental restrictions. The less time and money it costs for a competitor to enter a company’s market and be an effective competitor, the more a company’s position may be significantly weakened. An industry with strong barriers to entry is an attractive proposition for companies that allow them to charge higher prices and negotiate better terms.

The transportation industry has significant barriers to entry, and the success for any mobility service provider is to achieve a certain level of economies of scale, without which it would be impossible for the company to survive in such brutal environment. With the new digital mobility service companies, tons of money have been spent on brand building, as well as educating the end customers the new ways their mobility service works and how it can help them. In certain cases, there also exist significant challenges navigating governmental policies. Some examples would be the difficulties Uber, Mobike and similar companies faced dealing with the various legal implications with different city governments in their rollout into the global markets.

Conclusion: Threat of New Entrants — Low to Medium

There have been fairly large sized companies built in US, Europe and China to provide traffic information and navigation mobility services, but no one has been able to crack the public transit market. Transit Protocol, through its exclusive partnership with TransitLink in China, has signed up key partnerships with more than 100 cities. As TransitLink sign up more cities in China, the bigger is the Transit Protocol network and the higher is the barrier to entry, and the higher it is for other entrants into the market.

Bargaining Power of Suppliers

Companies in every industry purchases various inputs from suppliers. The cost of inputs are affected by the number of suppliers of key inputs of a good or service, how unique these inputs are, and how much it would cost the company to switch from one supplier to another. The fewer the number of suppliers, and the more a company depends on a supplier, the more power a supplier holds to drive up input costs and push for advantage in such trades. On the other hand, when there are many suppliers or low switching costs between rival suppliers, a company can keep input costs lower and increasing its profits.

In the transportation industry, the key hardware and infrastructure equipment has a number of suppliers vying for the same customers, and providing somewhat similar products with relatively low product differentiation. The ability to substitute and cost of changing is relatively low for the mobility service provers to switch suppliers, thereby forcing a downward pressure on prices.

Conclusion: Bargaining Power of Suppliers — Low

Transit Protocol provides a unique service, a proprietary “middleware” software platform integrating various transport modes, hardware equipment and payment services, and allowing commuters to search, book and pay for their mobility needs on a single interface. Supplier contribution to the competitiveness of the service is non-critical and thus provides little leverage nor possesses significant bargaining power.

Bargaining Power of Customers

Powerful customers can use their clout to force prices down or demand more service at the same price. It is affected by how many buyers or customers a company has, how significant each customer is, and how much it would cost a company to find new customers or markets for its output. Buyer power is highest when the buyers are relatively large, the products are undifferentiated and represent relatively low switching costs and pain for the buyer. A company that has many, smaller, independent customers will have an easier time charging higher prices to increase their margins.

As in all businesses these days, the customer is “king”, and the centre of the universe for most companies. The transport industry is no different. Instead of the supply of transport in traditional mass transit, there is a gradual shift towards Mobility as a Service, where commuters can create their own journeys and mix and match the mobility services required to get them from Point A to Point B. This puts the customer in control and the ability to personalise their journeys, and choose the transport modes and service providers available to them.

Conclusion: Bargaining Power of Customers — Medium to High

Customers always get to choose who they want to service them, Transit Protocol is not any different. However, Transit Protocol is in an unique position, as an early mover in Mobility as a Service platform, we are able to provide commuters feature-rich services to satisfy their mobility needs and a frictionless journey without having to source for routes, buy tickets and paying for each of the rides.

Threat of Substitute Products or Services

Substitute goods or services that can be used in place of a company’s products or services will cause prices and profitability to fall. The threat of a substitute is high if it offers superior price-performance trade-off relative to the company’s products or services, and the buyer’s cost of switching to the substitute is low. When such options to forgo buying a company’s product or services surface, the company’s bargaining power can be weakened.

Urban transit is a unique service, and one that any urbanite cannot do without… To get from Point A to Point B within an urban context has few options available, and hence very few substitutes for the commuter. In such an environment, the commuter does not have much choices other than what is currently available in the market. Until such time when a novel or innovative service comes along, there really is little threat from substitute products or services.

Conclusion: Threat of Substitute Products or Services — Low

Being a new and novel mobility service, Transit Protocol faces little threat from substitute products or services. Until such time when there is a revolutionary disruption in the market, Transit Protocol will face little pressure from the threats of substitute products and services.

Last Words…

Industry structure changes over time, and is never static… Over time, buyers or suppliers can become more or less powerful. Technological or managerial innovations can make new entry or substitution more or less likely. Changes in regulation can change the intensity of rivalry, or affect barriers to entry. Choices by competition, such as new pricing or distribution approaches, can also affect the path of industry competition. Continual efforts in market analysis is critical to anticipate and exploit industry structural changes.

Michael Tan is the Founder of Transit Protocol, and has extensive experience in the consulting and investment industries in APAC.

Transit Protocol is transforming mass transit to provide urban commuters with a seamless commuting experience everyday, bringing every mode of transport together into one single app that integrates transport options from different providers (such as buses and train), and handling the full experience from journey planning to payments and dynamic journey adjustments.

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