Industry structure means structural attributes i.e. the enduring features that give an industry its different character.
“An explanation of the operations and relationships within a given industrial sector (such as mining or paper products).”
In 1979 M. Porter created a five forces model which is popularly known as Porter’s five forces model. These 5 forces are as follows:
- Threat of entry
- Industry rivalry
- Substitutes’ threat
- Suppliers’ bargaining power and
- Buyers’ bargaining power
These forces are the determinants of an industry structure and the competition level in that industry.
These determinants of an industry structure are briefly discussed below:
- The threat of entry: It determines how difficult or easy it is to enter a specific industry. When an industry is profitable but there are not many barriers to enter, new competitions arise easily. If more companies compete for identical market share, profits begin to fall. Existing companies should develop high barriers to enter to restrict new entrants.
- Industry rivalry: It is the main determinant of how profitable and competitive an industry is. If an industry is competitive, companies need to compete strongly for a market share resulting in low profits.
- Substitutes’ threat: It is truly threatening when customers can easily get substitutes with affordable prices or better quality and when customers can switch from one service or product to another with little or the same cost.
- Suppliers’ bargaining power: If suppliers have strong bargaining power, they can sell low quality or higher priced raw materials to the buyers affecting the buying company’s profits.
- Buyers’ bargaining power: A strong bargaining power allows the buyers to demand higher product quality or lower prices from industry producers.
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