Sources of Profitability in an Industry

  1. Strength With Respect to Buyers (distributors or customers)
    1. Fragmentation of buyers - each buyer accounts for a small proportion of sales
    2. Purchasing power of buyers - buyers are profitable or wealthy
    3. Small cost to buyers - the purchase is a relatively small one for the buyers
    4. Value added to buyers - the product or service is valuable to the buyers
    5. Differentiation of product or service - its different from competing ones
    6. Switching costs - buyers can be locked in from a learning curve, technological compatibility, frequent buyer premiums, etc.
    7. Make/Buy or Substitution - it's difficult for buyers to make it or use a substitute
    8. Information - buyers have limited information about the market

  2. Strength With Respect to Suppliers
    1. Availability high - the input is not in short supply
    2. Fragmented suppliers - the input is bought or available from a number of sources
    3. Dependence of suppliers - suppliers depend on you as an important customer
    4. Value added small - the input is not particularly valuable to you
    5. Substitutes available - you have alternatives to the input
    6. Differentiation small - there is little differentiation among competing suppliers
    7. Switching costs low - see I.F above
    8. Make/Buy - it is feasible to make the input rather than buy it

  3. Competition (factors that lessen competitive intensity)
    1. Growth rate - the industry is growing rapidly
    2. Existing and potential competitors
      1. number and strength - competitors are few and/or unequal in strength
      2. strategic or emotional stakes - competitors don't have strategic or emotional commitment to the industry
    3. Entry barriers (note: startups will need to circumvent them)
      1. cost/experience advantages - established competitors benefit from economies of scale or cumulative output
      2. input/distribution advantages - established competitors have a lock on supplies or distribution channels
      3. customer loyalty/switching costs - established competitors have a lock on customers (see I.F above)
      4. capital requirements - large investments are needed to get started
      5. government policies - regulation deters new entrants
    4. Exit barriers
      1. specialized assets - equipment or other assets can be used in other industries
      2. expenses - one-time costs of getting out (i.e., severance pay) aren't significant
      3. government restrictions - governments don't subsidize
Derived from Competitive Strategy, Michael Porter, Harvard Business School Press, 1990.

Go to Outline for a Business Plan