Competitive Structure

of Industries

 Factors on which the state of competition in an industry

depends?

1.
2.
3.
4.
5.

Rivalry among existing firms

Threat of new entrants
Threat of substitutes
Bargaining power of suppliers
Bargaining power of buyers

 High Threat of entry of new competitors when:

Profitability does not require economies of scale
Products are undifferentiated
Brand names are not well-known
Initial capital investment is low
Consumer switching costs are low
Accessing distribution channels is easy
Location is not an issue
Proprietary technology is not an issue
Proprietary materials is not an issue
Government policy is not an issue
Expected retaliation of existing firms is not an issue

 Threat of New Entry is Low if:

Profitability requires economies of scale
Products are differentiated
Brand names are well-known
Initial capital investment is high
Consumer switching costs are high
Accessing distribution channels is difficult
Location is an issue
Proprietary technology is an issue
Proprietary materials is an issue
Government policy is an issue
Expected retaliation of existing firms is an issue

Supplier Bargaining Power

In Porters five forces, supplier power refers to the
pressure suppliers can exert on businesses by raising
prices, lowering quality, or reducing availability of their
products. When analyzing supplier power, the industry
analysis is being conducted from the perspective of the
industry firms, in this case referred to as the buyers.
Strong suppliers can pressure buyers by raising prices,
lowering
product
quality,
and
reducing
product
availability. All of these things represent costs to the
buyer. A strong supplier can make an industry more
competitive and decrease profit potential for the buyer.

 If suppliers are concentrated compared to buyers if there

are few suppliers and many buyers supplier bargaining
power is high. If buyer switching costs the cost of switching
from one suppliers product to another suppliers product
are high, the bargaining power of suppliers is high. If
suppliers can easily forward integrate or begin to produce
the buyers product themselves supplier power is high.
If the buyer is not price sensitive and uneducated regarding
the product, supplier power is high. If the suppliers product is
highly differentiated, supplier bargaining power is high. If the
buyer does not represent a large portion of the suppliers
sales, the bargaining power of suppliers is high. If substitute
products are unavailable in the marketplace, supplier power
is high.

 For example, low supplier concentration, low switching

costs, no threat of forward integration, more buyer price
sensitivity, well-educated buyers, buyers that purchase
large volumes of standardized products, and the
availability of substitute products.

Buyers Bargaining Power

Porters Five Forces of buyer bargaining power refers to the
pressure consumers can exert on businesses to get them to
provide higher quality products, better customer service, and
lower prices. When analyzing the bargaining power of buyers,
the industry analysis is being conducted from the perspective
of the seller.
The idea is that the bargaining power of buyers in an industry
affects the competitive environment for the seller and
influences the sellers ability to achieve profitability. Strong
buyers can pressure sellers to lower prices, improve product
quality, and offer more and better services. All of these things
represent costs to the seller.

 The idea is that the bargaining power of buyers in an

industry affects the competitive environment for the seller
and influences the sellers ability to achieve profitability.
Strong buyers can pressure sellers to lower prices, improve
product quality, and offer more and better services. All of
these things represent costs to the seller.
All of these things represent costs to the seller. A strong
buyer can make an industry more competitive and
decrease profit potential for the seller. On the other hand,
a weak buyer, one who is at the mercy of the seller in
terms of quality and price, makes an industry less
competitive and increases profit potential for the seller.
The concept of buyer power Porter created has had a
lasting effect in market theory.

 Several factors determine Porters Five Forces buyer

bargaining power. If buyers are concentrated compared to
sellers if there are few buyers and many sellers buyer
power is high. If switching costs the cost of switching
from one sellers product to another sellers product are
low, the bargain power of buyers is high.
If buyers can easily backward integrate or begin to
produce the sellers product themselves the bargain
power of customers is high. If the consumer is price
sensitive and well-educated regarding the product, buyer
power is high. If the customer purchases large volumes of
standardized products from the seller, buyer bargaining
power is high. If substitute products are available on the
market, buyer power is high.

Strategic Groups
A strategic group is the group of firms in an industry following
the same or similar strategy along the strategic dimensions.
Two significant groups exist in pharmaceutical organisations:(i)Proprietory Group
(ii)Generic Group

 In India we have an example of organized sector and

unorganized sector.

 There may be barriers from shifting from one strategic

group to another there might be barriers for example: a
computer operator.

Implications of a strategic group

On industry analysis & identification of opportunities and
threats.
Nature & intensity of competition & business prospects vary
from strategic group to strategic group.
High mobility barriers normally help insulate the group for new
entrants and facilitates new profitability.
Mobility barriers can change; and as they do firms often
abandon some strategic groups and jump into new ones.
The competitive standing of the different strategic groups
would be different with respect to each of the five competitive
forces.

 Impact of Innovation on industry structure.

Punctuated equilibrium.

 The punctuated equilibrium view holds that long periods

of equilibrium, when industrys structure is stable, are
punctuated by periods of rapid changes when industry
structure is revolutionized by innovation. Thus there is
an unfreezing and refreezing process.

Competitor Analysis
It is required for formulating right strategies and
determining the right positioning for the firm in the
industry.

 Certain basic questions which get answered through

competitor analysis:
1.Who are the competitors of the firm?
2.What are the current strategies of the competitors?
3.What are their future goals and likely strategies?
4.What drives the competitor?
5.Where is the competitor vulnerable?
6.How are the competitors likely to respond to the
strategies of others?

Competitors response profile

An analysis of these components will help to formulate
what Porter calls competitors response profile, i.e.,
answers to critical questions such as: what moves or
developments will provoke the competitor and how is
the competitor likely to respond or retaliate?
The competitor response profile seeks to predict the
competitors
offensive
moves
and
defensive
capabilities.

Further analysis of competitor

Future Goals
Assumptions
a)The competitors assumptions about itself.
b)The competitors assumption about the industry and
other companies in it.
The strategies and moves of a firm will be influenced by
the above two assumptions.
The assumptions may or may not be correct.

 Current Strategy
Capabilities

Value Chain
Porter points out that the firms value chain is an
important determinant of competitive advantage.
Total Revenue reflects the revenue
Creating value for buyers that exceeds the cost of doing
so is the goal of any generic strategy
Value chain displays total value and consists of value
activities and margin. Value activities are the physically
and technologically distinct activities a firm performs.

Value Activities
Primary Activities
(i)Inbound logistics ( Storing, receiving and disseminating
inputs to products)
(ii)Operations (processing activities);
(iii)Marketing & sales; and
(iv)Services

 Support Activities
(i)Procurement
(ii)Technology development
(iii)Human resource management
(iv)Firm infrastructure

Benefits of structural analysis

To diagnose the competitive forces and to identify the
strength and weakness of the firm and a industry, to
help formulate an effective competitive strategy that
Takes offensive or defensive action in order to create a
defendable position against the five competitive
forces.

 Structural analysis would enable a firm to answer such

questions as:
1.How vulnerable is the firm against potential entrants? In
other words, are there or how high are the entry barriers?
Or what measures it can take to ward off new entrants?
2.How serious is the threat of substitutes? What strategies
should the firm employ against them?
3.What is the nature of supplier power? How to combat it?
4.How powerful are the buyers? How to deal with their
bargaining power?
5.What are the strengths and weaknesses and strategies of
the establish competitors and how to cope with them?