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.
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