Industry analysis and Porter's five
Industry analysis is...
Evaluating an industry’s competitiveness and profitability that are affected by:
- Likelihood of new entrants (into the industry).
- Intensity of rivalry between competitors.
- Bargaining power of customers.
- Bargaining power of suppliers.
- Threat of substitutes (e.g. trains in the car industry).
This is Michael Porter’s (pictured right) “five forces model” as discussed in his book,
Competitive Strategy (1980):
How to reduce competition and increase profits
1. Reduce the number of new entrants into the industry
You can do this through what economists call barriers to entry i.e. factors which deter new entrants:
a) economies of scale
Existing firms reducing costs by mass production (as Henry
Ford did with his Model T, pictured right)
b) cost reductions other than economies of scale
(e.g. patents and industry experience)
c) product differentiation
– product characteristics like quality and image that create brand loyalty.
d) high switching costs
– high costs for the buyer of switching from one seller to another.
e) limiting retail outlets
– where your product is sold (e.g. cars and cosmetics).
f) high capital requirements
– large amounts of money required in the industry e.g. in production (e.g. steel) and innovation (e.g.
g) government policy
– patent protection and regulation e.g. drugs and licensing laws.
2. Less rivalry between competitors
This will be caused by:
a) high industry growth
(leading to fewer battles for market share because sales growth is high).
b) low exit barriers
i.e. the costs of leaving the industry are low (because equipment and people can be easily transferred to
c) market power
How one firm can dictate what competitors do through its control over the market.
For example, Microsoft Windows (pictured right) dominates the PC software market.
– agreements between competitors on price and/or output (these are illegal in America and the EU).
3. Reduce the bargaining power of customers
The main way to do this is product differentiation i.e. create customer loyalty through
giving better value than competitors (often through branding and advertising like Coca-Cola, pictured right).
4. Reduce the bargaining power of suppliers
This will happen when a firm (like a big supermarket such as Wal-Mart, pictured right) buys in
big quantities and so can get lower prices and better quality.
5. Reduce the threat of substitute products
To do this a firm must make its product more attractive in terms of price, quality and image.
But this may be impossible, if the substitute is significantly superior (e.g. the train
replacing the horse).
Key quotes explained
“Know the enemy and know yourself”
Tzu, Chinese general (pictured right)
An organization must know its competitors (the enemy) and its strengths and weaknesses.
“In a competitive industry the key to competitive advantage is product
Kotler (American marketing
professor, pictured right)
Profits come from consistently delivering better value for customers than competitors.
“There are the quick and there are the dead”
Grove , ex-boss
of the American microprocessor maker, Intel (pictured right)
A business will fail in a competitive industry, if it doesn’t continually innovate and deliver new products as
quickly as possible.
Best books and articles
Michael Porter, Competitive Strategy
His five forces model (described above) made the Harvard Business School professor world
famous and is still widely used.
(pictured right), Marketing Myopia (1960 Harvard Business Review
An organization must not define its industry (or business) too narrowly, or it will:
- miss market opportunities.
- lose business to companies that it didn’t even realize were competitors at all.
For example, an oil company should see itself in the energy business, a movie studio in
entertainment and a railroad company in transportation (to deal with
competitors like gas, TV and car companies).