Understanding Industry Structure

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REV: AUGUST 13, 2007

MICHAEL E. PORTER

Understanding Industry Structure
The essence of the job of the strategist is to cope with competition. The arena in which competition takes place is the industry in which a company and its rivals vie for business. Each industry has a distinctive structure that shapes the nature of competitive interaction that unfolds there. Understanding the underlying structure of a company’s industry, now and in the future, is a core discipline in strategy formation.
On the surface, every industry is different. Consider the global automobile industry, the worldwide market for art masterpieces, the booming private equity industry, and the heavily regulated health-care delivery industry in Europe. At one level, these industries appear to have little in common. Industries also differ in another crucial aspect: they register sharply different levels of average profitability in the long run. For example, Exhibit 1 shows a histogram of long-run return on invested capital in the United States for more than 400 industries. The most profitable industries generate much higher returns than the least profitable. Equally significant differences arise in other countries, both advanced and emerging.
To understand industry competition and profitability, however, one must look beyond their differences and view industries at a deeper level. In any industry, there are five basic competitive forces—diagrammed in Figure A—whose collective strength determines the long-run profit potential
Figure A

Forces that Shape Competition in an Industry

Threat of new entrants

Bargaining power of suppliers

Rivalry among existing competitors

Bargaining power of customers

Threat of substitutes Source:

Casewriter.…...

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