Structure Analysis of Industries

This article discuss about identifying the competitive forces in the industry and formulating competitive strategy in relating to its environment. The state of competition in an industry depends upon five basic competitive forces:

1. Rivalry among existing firms: Rivalry among existing competitors takes form of jockeying for position using tactics like price competition, advertising battles, increased warranties etc. Intense rivalry is related to presence of number of interacting structural factors like presence of numerous competitors of equal size and power, slow industry growth, high fixed cost, lack of differentiation of products, diverse set if competitor strategies, or where exit barrier are high. Company can improve matters by strategic shifts like raising buyer switching cost, product differentiation, or sidestepping.

2. Bargaining power of suppliers: Suppliers exerts bargaining power over participants in an industry thereby squeezing profitability out of an industry. Sometimes they also improve the situation by backward integration, eliminating switching costs etc.

3. Bargaining power of buyers: Buyers compete with the industry by forcing down prices or demanding higher quality. Power of buyer depends upon characteristics of its market situation and relative importance of its purchase.

4. Threat of new entrants: Threat of new entrants into an industry depends on barriers to entry that are present coupled with reacting from existing competitors. Six major sources of barriers to entry are economies of scale, product differentiation, capital requirements, access to distributors' channels, cost disadvantages independent of scale and government policy. The potential entrants also faces reacting from existing competitors in form of entry deterring prices, properties of entry barriers, experience and scale of entry barriers.

5. Threat of substitutes: All firms in an industry compete