What are the boundaries of the industry to be analyzed – the major forces of an industry and the forces that affect industry profitability.
An industry is defined as a group of firms that produce or sell the same or similar products (Carpenter & Sanders, 2008, p.103). Additionally, monopolies exist which are described as a company owning the industry (Carpenter & Sanders, 2008, p.103). Something interesting Mussa and Rosen (1978) mentioned is that monopolist almost always reduce the quality of the product since they do not have competition and items will still be purchased (p. 301). Defining industries boundaries is not as simple as it sounds (Carpenter & Sanders, 2008, p. 103).
The boundaries of the industry are broad, and it is difficult to answer the question “what industry am I in†shared by (Carpenter and Sanders, 2008, p.103). For the most part, industries have many firms that make it a competition and not a monopoly. According to Singler and Enkel (2016), industries must be able to communicate and collaborate with foreign industry partners in order to benefit (p.50). Furthermore, Singler and Enkel (2016) also mentioned: “organizations aiming to foster collaborative innovation with partners across industry boundaries need to be able to absorb knowledge from an external industry, i.e., they need to develop high absorptive capacity†(p.50). Before a getting into an industry, it is essential to know the product in depth and know the industry (Carpenter & Sanders, 2008, p.104). Lastly, knowing the most significant competitors in that market would be of great help to the firm.
The five forces of an industry are described by Carpenter and Sanders (2008) as threats of new entrants, buyer power, the threat of substitutes, degree of rivalry, and supplier power (p.105). All of the five forces of an industry described can affect the profitability of the industry. Porter (2008) states that in order to make a profit, a firm must think and respond strategically to the competition (p. 24). BY analyzing the five competitive forces, the firm has a better understanding at what its main focus must be based on the threats. Furthermore, forces can always be reshaped into the firm’s favor by using tactics (Porter, 2008, p.24). There is a number of difficulties for firms when thinking of profitability. For instance, the threat of entry and exit barriers really pinpoints that firms think of other firms entering as a threat and it becomes challenging to enter. Also, when a firm is trying to leave or exit, it can become very costly for the firm which in turn affect the profitability overall (Carpenter & Sanders, 2008, p.107). Furthermore, using the strategic group analysis can help identify potential rivalry and better understand it (Carpenter & Sanders, 2008, p.126).
Industry boundaries help companies understand where a product will fit into a particular market, and gives insight into how the company should position itself to compete within the industry. Carpenter and Sanders provide a great example that helped me understand certain boundaries that exist and how to analyze them. The authors use Coke and Pepsi as their reference to the beverage industry, but mention the necessity of specializing or narrowing the scope to carbonated soft drinks to create a more accurate representation of the products within that market. (Carpenter & Sanders, 2008) Looking at these two producers one could suggest that they are a duology within this market, suggesting that there is limited competition from outside sources.
These types of analysis can provide insight into the profitability of the products or services that will be introduced into a particular market. Carpenter and Sanders (2008) discuss the various forms of competition within the market, and how each variation can lead to different levels of profitability. For example, perfect competition within an industry means that all players involved are providing the same information and that the products or services themselves are similar to offering to the customer. (Carpenter & Sanders, 2008) As the number of firms increases within the same market that means that the percentage of market share that is taken then decreases leading to normal profits. When firms choose to leave the industry it then signifies to companies that there is a potential to capture additional market share through profit opportunities coming from an unbalanced competition within the market. (Carpenter & Sanders, 2008) An important note to remember is that industry boundaries may also be more ambiguous as firms move into global markets. As we discussed in our first discussion posts globalization can lead competitors into multiple markets making it more difficult to identify the competitors precisely, along with their resources, strategies, and future strategic actions. (Bettis, 1995)
Examine the industryâ€s fundamental characteristics and structure using Porterâ€s Five Forces Model.
As previously mentioned, Porterâ€s five forces model is composed of the following:
Supplier power
Buyer power
Competitive rivalry
Threat substitution
Threat of new entry (Porter, 1979).
It is important to identify who the supplier power is within the industry. Is there any specific supplier that has a monopoly and supplies can only be acquired through that monopoly? Carpenter and Sanders (2008) mentioned, there must be a bargaining power of supplies through increasing firms in supply industries (p.118). Supplier powers also capture most of the value (Porter, 2008, p.29). Buyer power refers to the reduction or increase of prices in meeting the customers†demands (Porter, 2008, p.29). Competitive rivalry limits the profitability of the industry (Porter, 2008, p. 32). The more competitor, the more rivals, the less profit. Take for example, in agriculture; there are giant companies that have smaller companies as rivals. Because of the smaller companies and the rivalry between the bigger corporations, profitability is sometimes affected. The threat of substitution is something always to be aware of. Firms often think of innovating product to make them better than the firm currently selling. A great example shared by Porter (2008) is video conferences the substitute for meetings (p.31). An example I can think of is online classes/learning is substituted for real-time/physical classes. Lastly, the threat of entry often sets off and places a cap on profitability for the industry.
Overall, the analysis helps organizations better understand what is currently affecting their profitability and what will possibly affect the firmâ€s profitability in the future.
When identifying and outlining an industry and its qualities firms can use multiple tools to perform thorough analysis that provides ideas and direction for product and service implementation. Carpenter and Sanders (2008) provide Porterâ€s five forces model to provide additional support for a company in identifying the factors that play major roles in the success of the business. These five forces are outlined as degree of rivalry, threat of new entrants, supplier power, buyer power, and threat of substitution, each being able to be broken down for further analysis of competitors. (Carpenter and Sanders, 2008) Being that there is a large amount of variation in the success of companies within a particular industry, it commonly is rooted in a company or companies having a difference in power of the factors that are a part of the five force model. (Carpenter & Sanders, 2008)
Many of today’s companies have to identify their main rivals in order to create marketing to demonstrate the various benefits of their product over others. “The outcome associated with high degrees of rivalry is generally defined in price competition.†(Carpenter & Sanders, 2008, p. 105) Price wars are a prime example of what happens with rivalries become very competitive within the same industry. Klemperer (1989) states that new entrants to a market will often offer initial prices to capture market share, which results in the existing companies in the industry matching the reduced price of goods to remain competitive and retain its own customers. This period often only last during the entry phase of the product as firms will often have to raise their prices once they have been in the market long enough and built some form of a consumer base. (Klemperer, 1989) Next threat of entry and exit barriers play roles in the characteristics of an industry, often industries that are more profitable are more difficult to enter. (Carpenter & Sanders, 2008) This factor is often one of the most pivotal factors that is considered for firms entering into an industry as is allows the firm to understand the competition and profitability that is available for taking.
The third factor discussed in Porterâ€s model is supplier power, this area we have discussed in previous weeks through the formation of value-chain activities and supply chain implementation. The size of a firm, the amount of inventory stacked, and the size of manufacturing can position a company to be successful or fail as it enters a new industry. (Carpenter & Sanders, 2008) We have seen how having ownership or control of resources and capabilities can lead to competitive advantages among competitors, and now relating that to supply chain development it allows firms to have a higher opportunity to succeed compared to other firms in the same industry. Although supplier power is a factor it also refers to the vendors that supply to the firm, if there are long standing relationships, or areas where both parties can benefit greatly there could be greater accommodations to that firm over others giving that firm a competitive advantage on vital resources. Buyer power ties into the supplier power factor, in that a company that is cash heavy will be able to invest more for goods and materials than other companies that are trying to recuperate cash due to poor sales and planning. Buying power refers to the relative power that a firm has over the agreements and purchases of goods from suppliers based on their ability to have multiple offers and use those to find the best option and cost effective outcome.
Threat of substitution refers to the opportunity that a firm would be able to create a product that would easily be substituted for an existing product or service in the industry. (Carpenter & Sanders, 2008) Often we see this happen from products that are existing in one industry, but then are able to meet similar needs of consumers within another industry and become options for subsitions. I think of smartphones as a great example, where it was once used for making a phone call, now it acts as a connection to the internet, acts as a fitness tracker, and can even act as a wallet. Acting as a substitute for each of those industries existing products.
References
Carpenter, M. A., & Sanders, W. M. (2008). Strategic management: A dynamic perspective—Integrated StratSim simulation experience. Upper Saddle River, NJ: Pearson Prentice Hall.
Dingler, A., & Enkel, E. (2016). Socialization and innovation: Insights from collaboration across industry boundaries. Technological Forecasting and Social Change, 109, 50-60.
Mussa, M., & Rosen, S. (1978). Monopoly and product quality. Journal of Economic theory, 18(2), 301-317.
Porter, M. E., & Porter, M. E. (1979). How competitive forces shape strategy.
Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard business review, 86(1), 25-40.
Ruef, M., & Patterson, K. (2009). Credit and classification: The impact of industry boundaries in nineteenth-century America. Administrative Science Quarterly, 54(3), 486-520.
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