Industry Structure Assignment
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In 1980, Porter developed a framework for analysing the profitability of industries and how those profits are divided among the participants. Porter, in five forces analysis identified the forces that shape the industry environment or structure. The framework involves the bargaining power of suppliers and buyers, the availability of the new product, threat of new entrants and the competitive rivalry of firms in the industry. These forces affect the organization’s ability to raise its prices as well as the costs of inputs for its processes. These five forces framework helps describe how a firm can use these forces to obtain a sustainable competitive advantage either differentiation or lower cost. Companies can maximise their profitability by competing in industries with favourable structure. Competitors can take steps to grow the overall profitability of the industry or to take away profit from other parts of the industry structure. Industry structure pertains to the number and size distribution of competitors in an industry. Some industries such as the retailing and restaurant industries contain many firms or competitors. Whereas, other industries contain relatively few competitors. The industry may also be comprised of different sized competitors. There are several other key factors that are extremely important in determining a firm’s profitability.
Some firms exist in industries with intense rivalry levels. There may be three major competitors that make up the industry for example; it is usually difficult for companies to dramatically profits in this type of industry. The firms are usually well-established in their markets. Smaller firms may have been forced out because of their inability to compete. Another factor may be product life cycle because of their inability to compete. Sales are typically stagnant in the maturity or third stage of the product life cycle. This can have a negative impact on impacts.
Ease of Entry
The importance of industry structure is also evident with an industry’s ease of entry. New industry also provides the best profit opportunities for small businesses. As demand is relatively high among consumers, sales are usually strong in a new industry. The smaller competitor may even be the industry leader. In contrast, industries that are difficult to enter have a negative impact on profits. The smaller industries may not have an easy access to distribution. They may also lack the needed capital for expanding their businesses.
Availability of Substitute
Another industry structure element influencing a firm’s profitability is the availability of substitutes. If no substitute exists, consumer pay higher prices for a certain products. Therefore, companies in the industries earn greater profits.
Competitors within the same industry often have similar organizational structure. These organizational structures can also determine the profitability of competing firms. The major competitors in an industry may use a more decentralized structure to better serve in certain geographical reasons.
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