THE INDUSTRY LIFE CYCLE

The industry structure and competitive forces that shape the environment in which business operate change throughout the life cycle. Therefore, a business’s strategy must adapt accordingly.

Michael Porter’s famous five forces of competitive advantage explains the whole business life cycle.

Porter’s Five Forces Driving Industry Competition

Industry Competitors

Rivalry among Existing Firms

PotentialEntrants

Buyers

Substitutes

Suppliers

Potential Entrants

The greater the importance of economic of scale, the higher the entry barrier.

Competing with established brands and loyalty is harder (e.g. Coca-cola).

High up-front (risky) capital requirements make entry difficult.

High switching costs for products are a great advantage for existing players.

Potential Entrants

Is access to distribution channels difficult or legally restricted?

Do existing companies have cost advantages that are independent of market scale (e.g. patents, licenses)?

A government-regulated industry could limit entry by requiring operating licenses.

Expecting a low level of retaliation by existing players makes entry easier for newcomers.

The concept of ‘entry deterring price’: the bigger the margin, the more new entrants there will be.

Substitutes

How easily can your product or service be substituted with a different type of product or service?

For example, the bus is a substitutes for the MTR.

A substitute is threatening if it represents a significant improvement in the price/performance trade-off.

Buyers’ Bargaining Power

When buyers buy in large volumes, they are more likely to command better prices. For example, large grocery retailers pay lower wholesale prices than small stores.

The larger the fraction of costs represented by the purchase price, the harder buyers will bargain.

Undifferentiated products make it easier to play suppliers off against each other.

Buyers’ Bargaining Power

Low switching costs increase buyer power. Low-profit buyers will be tough negotiators. The potential for ‘DIY’ production or

backwards integration are strong bargaining levers.

The less the buyer’s performance is affected by the product, the more price-sensitive the buyer will be.

The more information a buyer has, the better his bargaining position is.

Suppliers’ Command of Industry A few suppliers selling to relatively more buyers

will be able to have a bigger say. The absence of substitutes increases supplier

power, as buyers have little choice. Suppliers with alternative customers, industries

and channels have more power. The suppliers’ product is indispensable or of

great value to your company. Switching suppliers will incur high expenses or

rapidly depreciate your company’s assets. Suppliers may integrate forwards by producing

for and selling to your customers.

Existing Competitors

Many and/or equally strong competitors. Slow industry growth, leading to a focus o dividing,

rather than expanding the industry; High fixed-costs and asset-bases making rivals

compete to turn stock and fill capacity; Products are considered to be commodities and

made available at low cost, which encourages buyers to switch supplier at no risk, and buy by price;

Diversity of competitors and their strategies, making it difficult to anticipate competitive moves;

High exit barriers for economic, strategic, emotional or legal reasons. Major exit barriers are specialized assets that are difficult to sell.

Final Analysis

Porter’s Five Competitive Forces model is widely used and recognized for strategic analysis. However, it has one disadvantage, it tends to emphasize on external forces and the company’s intrinsic strengths and ability to develop its competencies has not been considered.