I’ve been thinking – should I be considering my company’s industry when I am making strategic decisions? How important is industry structure in understanding a company’s potential profitability?
First, let’s define what an industry is.
Industry: the collection of companies that compete to produce and sell goods and services that meet specific needs of a customer market.
And what are the rivals in my industry competing for? Are we competing to be the best? No! We are competing to earn profits. That is the point of a company – to be profitable.
Profit = Price – Cost
According to Michael Porter, all industries are governed by five competitive forces:
- Threat of new entrants
- Bargaining power of buyers
- Bargaining power of suppliers
- Threat of substitute products or services
- Rivalry among existing competitors
Each of these forces impact profitability.
| THE FORCE | PROFITABILITY DECREASES | REASON |
| IF # of new entrants increases | prices decrease & costs increase | Lower prices in response to new competition. Increased costs for raw materials & additional advertising |
| IF supplier power increases | costs increase | Suppliers increase their prices |
| IF buyer power increases | prices decrease & costs increase | Lower prices to attract buyers. Costs for advertising increase. |
| IF substitutes increase | prices decrease & costs increase | Lower prices in response to new competition. Costs for advertising increase. |
| IF rivalry increases | prices decrease & costs increase | Lower prices & increased costs to steal buyers from rivals. |
So, if I am growing my company to be profitable, does is matter where and how we compete? I think it might.
What do you think?
Until tomorrow, GUNG Ho friends!