CHAPTER - 1

ANALYSIS – STRUCTURE
OF A COMPETITIVE
INDUSTRY
COURSE – STRATEGIC MANAGEMENT 1
 INTRODUCTION
• Formulation of competitive strategy is relating a
company to its environment i.e. the industry in which it
competes.
• Industry structure has strong influence on determining
the competitive rules and strategies for a firm.
• Differing ability of the firms to deal with the external
forces gives them the competitive edge.
• The state of competition in an industry depend on five
basic competitive forces as given by Michael Porter.
• Determining the ultimate profit potential of the industry
i.e. the long run return on invested capital.
 STRUCTURAL DETERMINANTS
• Industry – Group of firms producing products that are
close substitutes for each other.
• Competition continually works to drive down the rate of
return of invested capital.
• Free Market Return – Yield on long-term government
securities adjusted upward by the risk of capital loss.
• Investors will not tolerate returns below this rate as there
are alternative available.
• Higher return stimulates inflow of capital by new entry or
additional investment by competitors.
• Strength of competitive forces determine this degree of
inflow of investment driving the return to free market
level
STRUCTURAL DETERMINANTS – Contd..
• Five Competitive Forces- (Michael Porter)
– Threat of New Entrants
– Threat of Substitutes
– Bargaining power of Buyer
– Bargaining power of Supplier
– Rivalry among existing Firms
 FIVE COMPETITIVE FORCES – MICHAEL
PORTER
• THREAT OF NEW ENTRANTS
– Bring new capacity with a desire to gain market share
– This results in reduction in price or increase in cost to incumbent
firm resulting in reduced profitability
– BARRIERS TO ENTRY
• Economies of scale.
• Product Differentiation.
• Capital / investment requirements.
• Customer switching costs.
• Access to industry distribution channels.
• Government regulations. Can new entrants get subsidies?
 FIVE COMPETITIVE FORCES – MICHAEL
PORTER
• THREAT OF SUBSTITUTES
– All firms in an industry are competing and producing substitute
products.
– Substitute limits the profitability by placing a ceiling on the
prices.
– BARRIERS TO SUBSTITUTION
• Quality. Is a substitute better?
• Buyers' willingness to substitute.
• The relative price and performance of substitutes.
• The costs of switching to substitutes. Is it easy to change to another
• Product?
 FIVE COMPETITIVE FORCES – MICHAEL
PORTER
• BARGAINING POWER OF BUYERS
– Buyers compete with the industry by forcing down prices and
bargaining for quality and services.
– Buyers play competitors at the expense of Industries profitability.
– BUYER GROUP POSE A THREAT IF
• Concentration of Buyers – Few Buyers and many suppliers.
• Product represents a significant fraction of buyers purchase.
• Differentiation of Products is not existing.
• Switching cost is less.
• Profitability of the buyer.
• Threat of backward integration into the industry.
• Quality and Service.
• Information available to buyer.
 FIVE COMPETITIVE FORCES – MICHAEL
PORTER
• BARGAINING POWER OF SUPPLIERS
– Threatening to raise price or lower the quality of goods or
services supplied.
– SUPPLIERS POSE A THREAT IF
• Concentration of Suppliers – Few Suppliers and more buyers.
• The industry is not an important customer to the supplier.
• The suppliers product is an important input to the buyer’s industry.
• The supplier group’s products are differentiated.
• Switching cost is more.
• Supplier group poses a threat of forward integration.
 FIVE COMPETITIVE FORCES – MICHAEL
PORTER
• RIVALRY AMONG EXISTING COMPETITORS
– Competing for position using tactics like – Price competition,
advertising, product introduction, increased customer service.
– Occurs with a sense of pressure or and opportunity to improve
position.
– Moves have magnified effect on the industry as a whole.
– Price competition are highly unstable and once matched by
rivals lower revenues for the industry.
– Advertising battles will enhance the level of product
differentiation to the benefit of all firms.
 FIVE COMPETITIVE FORCES – MICHAEL
PORTER
• RIVALRY AMONG EXISTING COMPETITORS – Contd..
– RIVALRY IS INTENSE IF
• Rivalry will be more intense if there are lots of small or equally sized
competitors.
• Slower industry growth – Quest for market share.
• Industries with high fixed costs encourage competitors to manufacture at full
capacity by cutting prices if needed.
• Degree of product differentiation. Industries where products are
commodities (e.g. steel, coal) typically have greater rivalry.
• Switching costs. Rivalry is reduced when buyers have high switching costs.
• Capacities augmented in large increments to reach economies of scale.
• Diverse competitors – Diverse firm competing with smaller firm.
• If competitors pursue aggressive growth strategies, rivalry will be more
intense. If competitors are merely “milking" profits in a mature industry, the
degree of rivalry is typically low.
• Exit barriers. When barriers to leaving an industry are high, competitors tend
to exhibit greater rivalry.
 STRUCTURAL ANALYSIS AND COMPETITIVE
STRATEGY
• Knowing the forces affecting competition and their causes, firm can
identify its strength and weakness relative to industry.
• Strategy can be offensive or defensive to create a defendable
position against the five competitive forces.
• Few approaches are:
• Positioning the firm so that its capability provides the best defense
against the forces.
• Influencing the balance of forces through strategic moves, thereby
improving firms relative position.
• Anticipating shifts in the factors underlying the forces and
responding to them, thereby exploiting change by choosing a
strategy appropriate to the new competitive balance before rivals
recognize it.
• Setting diversification strategy by checking the potential of
business in future.
 STRUCTURAL ANALYSIS AND INDUSTRY
DEFINITION
• Industry definition is a crucial step in competitive strategy
formulation.
• Structural analysis help reduce the need for debate on where to
draw the industry boundary.
• Definition of industry is a choice of where to draw a line between :
• Established competitors and substitute products.
• Existing firm and potential entrants.
• Existing firms and Suppliers & Buyers.

• “The framework of structural analysis can be used to identify rapidly

what are the crucial structural features determining the nature of
competition in a particular industry.”

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