Industry Practices

INDUSTRY ANALYSIS (Porter model)

Five forces shape the competitive environment:

1. the rivalry among already existing companies ( direct competition)

2. potential new entrants

3. bargaining power of customers

4. bargaining power of suppliers

5. substitutes (indirect competition)

1. The rivalry among established companies leads to price competition and loss of profits.

The extent of rivalry among established companies depends on:

* competitive structure

* product differentiation - branding ( advertising, patents, innovation, research and development, product quality, good after-sales service)

* demand conditions - if consumers buy less, the existing companies are fighting to maintain profitability and market share by taking away customers from other companies

* exit barriers - may be a major problem when industry demand is declining

o strategic - a low-profit business unit provides inputs for a high profit business unit

o economic - no alternative use of the plant, high redundancy pay

o psychological - management is emotionally locked in

2. Entry of potential competitors. The more companies enter the industry, the more difficult it becomes for established companies to hold their share of the market and to generate high profits.

High or low risk of entry depends on the size of barriers to entry

* brand loyalty - continuing preference of buyers over time for the products of particular companies

* cost advantage - established companies have developed the right size and learning experience to produce cost effectively (discounts on bulk purchases, lower per unit technology costs)

* scale - efficient size of an operation

* legal barriers - regulations, tariffs, quotas, embargoes

3. The bargaining power of buyers -- Buyers can be strong enough to drive down product prices, or to require higher quality and better service (which increases a company's costs and may reduce profits)

Buyers have