1. Forces Driving Industry Competition

2. Structural Determinants of the Intensity of Competition Competition in an industry continually works to drive down the rate of return on invested capital that would be earned by the economists ‘ perfectly competitive’ industry

3. Structural Determinants of the Intensity of Competition The five competitive forces – entry, threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among the current competitors reflect the fact that competition goes well beyond the established players.

4. Threat of Entry Barriers to entry Economies of Scale : refer to the decline of unit costs of a product as the absolute volume per period increases.

5. Threat of Entry Product Differentiation : Established firms have brand identification and customer loyalties which stem from past. Differentiation creates a barrier to entry by forcing entrants to spend heavily to overcome existing customer loyalties

6. Threat of Entry Capital requirements Switching costs One time cost faced by buyer in switching from one supplier to another. Access to distribution channels

7. Threat of Entry Cost disadvantage independent of scale. Established firms have cost advantages which are not replicable by new entrants: Proprietary product technology Favorable access to raw materials Favorable locations Government subsidy Learning or Experience curve

8. Threat of Entry Government policy : Limits on access to raw material or stipulated pollution norms etc

9. Intensity of Rivalry among existing competitors Numerous or equally balanced competitors Slow Industry Growth High fixed or storage costs

10. Intensity of Rivalry among existing competitors Lack of differentiation or switching costs Capacity augmented in Large increments Diverse competitors High Exit barriers

11. Barriers and Profitability Low stable returns Low Entry Low Exit Low risky returns Low Entry High Exit High, stable returns High Entry Low Exit High risky returns High Entry High Exit

12. Pressure from Substitute Products Identifying substitute products is a matter of searching for other products that can perform the same function as the product of the industry

13. Bargaining power of buyers Large volumes buy relative to seller sales Products are standard, undifferentiated Few switching costs Earns low profits

14. Bargaining power of buyers Buyers pose a threat to backward integration Buyer has full information

15. Bargaining power of suppliers It is dominated by a few companies It is not obliged to contend with other substitute products for sale Industry is not an important customer of the supplier group

16. Bargaining power of suppliers Supplier products are differentiated Supplier poses a threat of integrating forward Industry is not a important customer for supplier