Industry Structure

The idea behind industry analysis is that a company's profits depend on the structure of the industry it's in. For example, if there are many companies selling essentially the same thing then industry competition will be intense and profits will be low. But profits depend on more than the amount of competition. They also depend on four other factors: the power of customers, the power of suppliers, the threat of new entrants and the threat of substitutes. The Five Forces models helps you to analyze the different forces that affect industry profitability.

To analyze an industry you need to divide companies into five groups:

  • Industry competitors: companies competing for the same business
  • Customers: the customers of the companies in the industry
  • Suppliers: the suppliers to the companies in the industry
  • New entrants: companies who might enter the industry to compete with the existing companies
  • Substitutes: companies that provide a substitute to the product the industry competitors are selling

Then you assess the power of each of the five forces. The more powerful a force is, the more impact it has on the industry's profits.

More recently, industry analysis has come to includes a "sixth force":

  • Complementors: companies that produce complementary products

Products are complements when they are usually consumed together. For example, hot dogs and mustard are complementary products (at least in New York!).


Photographic Film Industry

In the photographic film industry, the biggest threat to industry profits is not the competition between the major companies in the industry - Kodak and Fuji Films - but the threat of substitute products - in this case, digital cameras and camera phones. The power of substitutes decreases the profit of film makers. It's the industry's major strategic threat.

Airline Industry

The long-haul airline industry had only one supplier for a long time - Boeing. That meant that the supplier had a lot of power. Boeing could charge whatever price it wanted, especially for long-haul aircraft such as the 747. That reduced airline profits.

Now that Airbus is well established, Boeing faces intense competition, and power has shifted to the airlines. Airlines that place large orders have the power to bargain prices down. The reduced power of suppliers means that the airlines can be more profitable, all else being equal.

Five Forces Diagram:



This page talks about industry analysis and Porter's Five Forces model. The model was first published in the Harvard Business Review. You can see an updated 2008 version at Porter (2008) (Login required)1 For a detailed description of how to do industry analysis, see the Harvard Business School Core Curriculum reading Industry Analysis (purchase required).

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