Industry

Analysis
Porter’s Approach to Industry
Analysis
According to Porter, a corporation is
most concerned with its intensity of
competition within the industry.
The level of this intensity is
determined by basic competitive
forces
The collective strength of these forces,
determines the ultimate profit potential in the
industry, where profit is measured in terms of
long run return on invested capital

While scanning the industry, the

corporation must assess the
importance to its success to each of
the five forces:
Threat of New Entrants.
Rivalry among existing firms.
Threat of substitute products
Bargaining power of buyers
Bargaining power of suppliers
 New Entrants

INDUSTRY
Suppliers Buyers
COMPETITORS

Substitutes
Threat of New Entrants
New entrants to an industry bring to it new capacity, a
desire to gain market share, and substantial resources,
which pose threat to the existing competitors
Possible Barriers to entrants:
Economies of Scale
Production Differentiation.
Capital requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantage independent of size.
Government Policy.
Rivalry among existing firms

A Competitive move by one firm can

be expected to have a noticeable
effect on its competitors and thus may
cause retaliation or counter efforts.
Intense rivalry is related to the
presence of several factors
Number of Competitors
Rate of industry Growth.
Product or Service Characteristics.
Amount of Fixed Costs.
Capacity
Height of Exit barriers.
Diversity of Rivals
Threat of Substitute Product

Substitutes limit the potential returns

of an industry by placing a ceiling on
the prices, firms in an industry can
profitable charge.
Price Differential and amount of
switching cost are two important
determinants here.
Bargaining Power of Buyers.

Amount of purchase.
Potential of Backward Integration.
Standard Product.
Low Switching Cost.
Percentage of buyers total cost.
Rate of profit of buyers.
Bargaining Power of Suppliers

Number of Suppliers.
Standard Product / Unique Product.
Potential of Forward Integration.
Non Availability of Substitutes.
Percentage of Sales