Traditional view of competitive industry structures - Marketing Management

The traditional view of competitive industry structures preferred by economists. Different types of industry structure are based on the two key dimensions of ‘number of sellers’ (competitors) and the degree of product differentiation in the market. This results in five distinct types of competitive industry structure, ranging from ‘monopoly’, which is characterized by there being only one supplier and hence no competition, to ‘perfect competition’, this market structure being characterized by many sellers (competitors) and undifferentiated products.

Both the number of competitors and degree of product differentiation are important facts of competitive industry structure. Useful though this framework is it is generally recognized that it yields only a partial view of competitive forces at work in an industry so planners need to look to some of the more comprehensive frameworks of industry analysis.

The Porter framework of competitive industry structure

One of the most useful frameworks for analysing competitive structure is that developed by Michael E. Porter8 who suggests that competition in an industry is rooted in its underlying economic structure and goes beyond the behaviour of current competitors. The state of competition depends on five basic competitive forces. Together, these factors determine the ultimate profit potential in an industry where profit potential is measured in terms of long-run return on invested capital. Not all industries have the same potential. Forces range from intense, e.g. tyres, paper, steel with no spectacular returns available; to mild, e.g. cosmetics, toiletries, soft drinks with high returns being common.

The goal of competitive strategy is to find a position in the industry where the company can best defend itself against these forces, or can influence them in its favour. Knowledge of these underlying pressures highlights critical strengths and weaknesses of the company, shows the position in the industry, clarifies areas where strategy changes yield the greatest pay-off and highlights areas where industry trends hold greatest significance as opportunities or threats. Structure analysis is fundamental for formulating competitive strategy.

Traditional view of competitive industry structure

Traditional view of competitive industry structure

The Porter model of competitive industry structure

The Porter model of competitive industry structure

The five competitive forces in Porter’s model

As suggested earlier, the five competitive forces suggested by Porter jointly determine the intensity of industry competition and hence profitability. each of the five major forces in turn comprises a number of elements which together combine to determine the strength of each factor and hence its effect on competitiveness. Some of these are outlined here.

1 New entrants can potentially serve to increase the degree of competition in an industry. In turn, threat of new entrants is largely a function of the extent to which barriers to entry exist in the market. Some of the key factors affecting these entry barriers include:

  • economies of scale;
  • product differentiation and brand identity;
  • capital requirements;
  • switching costs;
  • government policy;
  • access to distribution.

Because high barriers to entry can make even a potentially lucrative market unattractive (or even impossible) to enter for new competitors, the marketing planner should not take a passive approach but should actively pursue ways of raising barriers to new competitors.

2 Suppliers Bargaining power of suppliers is greater when, for example:

  • supply is dominated by a few companies and they are more concentrated than the industry they sell to;
  • their products are unique or differentiated, or if they have built up switching costs;
  • they are not obliged to contend with other products for sale to the industry;
  • they pose a credible threat of integrating forward into the industry’s business;
  • the industry is not an important customer to the supplier group.

3 Buyers Bargaining power of buyers is greater when, for example:

  • they are concentrated or purchase in large volumes;
  • the products they purchase are standard or undifferentiated;
  • the products they purchase from the industry form a component of the product and represent a significant fraction of the cost;
  • they earn low profits which create a great incentive to lower purchasing cost;
  • the industry’s product is unimportant to the quality of the buyer’s products;
  • the industry’s product does not save the buyer money;
  • the buyers pose a credible threat of integrating backwards to manufacture the industry’s product.

A company can improve its strategic posture by finding suppliers or buyers who possess the least power to influence it adversely.

4 Substitute products can limit the potential of an industry by placing a ceiling on prices it can charge. If the industry is successful and earning high profits then it is more likely that competitors will enter the market via substitute products in order to obtain a share of the potential profits available.

5 Industry competitors Intensity of rivalry between industry competitors depends upon: n the concentration of the industry (numerous competitors of equal size will lead to more intense rivalry);

  • rate of industry growth (slow growth will tend towards greater rivalry);
  • value of fixed costs (high fixed costs might be a temptation to cut prices);
  • whether the product is a commodity dependent upon price and service;
  • the similarity of competitor strategies (if they have different ideas of how to compete they will run into each other continuously);
  • whether the firm has high stakes in achieving success;
  • whether the industry exhibits high exit barriers (if yes, firms will tend to remain in the industry even if they are making low or negative returns).

The Porter framework has added considerably to our knowledge of how to appraise the elements of competitive industry structure. Another approach is the concept of strategic group analysis.

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