Sources of Profitability in an Industry Strength With Respect to Buyers (distributors or customers) Fragmentation of buyers - each buyer accounts for a small proportion of sales Purchasing power of buyers - buyers are profitable or wealthy Small cost to buyers - the purchase is a relatively small one for the buyers Value added to buyers - the product or service is valuable to the buyers Differentiation of product or service - its different from competing ones Switching costs - buyers can be locked in from a learning curve, technological compatibility, frequent buyer premiums, etc. Make/Buy or Substitution - it's difficult for buyers to make it or use a substitute Information - buyers have limited information about the market Strength With Respect to Suppliers Availability high - the input is not in short supply Fragmented suppliers - the input is bought or available from a number of sources Dependence of suppliers - suppliers depend on you as an important customer Value added small - the input is not particularly valuable to you Substitutes available - you have alternatives to the input Differentiation small - there is little differentiation among competing suppliers Switching costs low - see I.F above Make/Buy - it is feasible to make the input rather than buy it Competition (factors that lessen competitive intensity) Growth rate - the industry is growing rapidly Existing and potential competitors number and strength - competitors are few and/or unequal in strength strategic or emotional stakes - competitors don't have strategic or emotional commitment to the industry Entry barriers (note: startups will need to circumvent them) cost/experience advantages - established competitors benefit from economies of scale or cumulative output input/distribution advantages - established competitors have a lock on supplies or distribution channels customer loyalty/switching costs - established competitors have a lock on customers (see I.F above) capital requirements - large investments are needed to get started government policies - regulation deters new entrants Exit barriers specialized assets - equipment or other assets can be used in other industries expenses - one-time costs of getting out (i.e., severance pay) aren't significant government restrictions - governments don't subsidize Derived from Competitive Strategy, Michael Porter, Harvard Business School Press, 1990. Go to Outline for a Business Plan