Another criticism of industry models is that they overemphasize the importance of industry structure as a determinant of company performance, and underemphasize the importance of variations or differences among companies within an industry.

rivalry between companies can become intense

consists of a large number of small or medium-sized companies, none of which is in a position to determine industry price. Examples of fragmented industries are agriculture, dry cleaning, health clubs, real estate brokerage, and sun-tanning parlors.

growth becomes negative for a variety of reasons, including technological substitution (for example, air travel instead of rail travel), social changes (greater health consciousness impacting tobacco sales), demographics (the declining birthrate damaging the market for baby and child products), and international competition.

Once demand for the industry’s product begins to increase, the industry develops the characteristics of a growth industry.

are companies that sell products that add value to (complement) the products of companies in an industry because, when used together, the use of the combined products better satisfies customer demands.

can be regarded as a threat because it depresses profits.

Exists when consumers have a preference for the products of established companies.

Growth at this stage is slow because of factors such as buyers’ unfamiliarity with the industry’s product, high prices due to the inability of companies to reap any significant scale economies, and poorly developed distribution channels.

Economic, strategic, and emotional factors that prevent companies from leaving an industry.

This model identifies five sequential stages in the evolution of an industry that lead to five distinct kinds of industry environment:This model identifies five sequential stages in the evolution of an industry that lead to five distinct kinds of industry environment:

are companies that sell products that add value to (complement) the products of companies in an industry because, when used together, the use of the combined products better satisfies customer demands.

Over the last half-century there have been enormous changes in the world’s economic system.

Industry boundaries may change over time as customer needs evolve, or as emerging new technologies enable companies in unrelated industries to satisfy established customer needs in new ways.

is the supply side of a market, and companies within the industry are the suppliers.

is a group of closely related industries.

Sometimes established companies have an ________ relative to potential entrants, meaning that entrants cannot expect to match the established companies’ lower cost structure

refers to the competitive struggle between companies within an industry to gain market share from each other.

e four most important macroeconomic forces are:

can be defined as a group of companies offering products or services that are close substitutes for each other—that is, products or services that satisfy the same basic customer needs.

refers to an industry just beginning to develop (for example, personal computers and biotechnology in the 1970s, wireless communications in the 1980s, Internet retailing in the 1990s, and nanotechnology today).

are the costs that must be paid before the firm makes a single sale.

are outcomes of changes in laws and regulations, and significantly affect managers and companies.

forces affect the general health and well-being of a nation or the regional economy of an organization, which in turn affect companies’ and industries’ ability to earn an adequate rate of return.

arise when conditions in the external environment endanger the integrity and profitability of the company’s business.

The organizations that provide inputs into the industry, such as materials, services, and labor (which may be individuals, organizations such as labor unions, or companies that supply contract labor).

refers to the ability of suppliers to raise input prices, or to raise the costs of the industry in other ways—for example, by providing poor-quality inputs or poor service.

are the demand side of a market and are the buyers of the industry’s products.

can be viewed as an opportunity because it allows a company to earn greater profits.

are distinct groups of customers within a market that can be differentiated from each other on the basis of their individual attributes and specific demands.

Michael E. Porter’s well-known framework

Over any reasonable length of time, in many industries competition can be viewed as a process driven by innovation. Innovation is frequently the major factor in industry evolution and causes a company’s movement through the industry life cycle.

constitutes a threat rather than an opportunity.

Explosive growth cannot be maintained indefinitely. Sooner or later, the rate of growth slows, and the industry enters the shakeout stage.

is a function of the height of the barriers to entry, that is, factors that make it costly for companies to enter an industry. The greater the costs potential competitors must bear to enter an industry, the greater the barriers to entry, and the weaker this competitive force.

are outcomes of changes in the characteristics of a population, such as age, gender, ethnic origin, race, sexual orientation, and social class.

Forces Model:

arise when a company can take advantage of conditions in its industry environment to formulate and implement strategies that enable it to become more profitable.

Arise when unit costs fall as a firm expands its output.

may also be the creation of one company’s innovative efforts, as happened with microprocessors (Intel), vacuum cleaners (Hoover), photocopiers (Xerox), small package express delivery (FedEx), and Internet search engines (Google). In such circumstances, the developing company has a major opportunity to capitalize on the lack of rivalry and build a strong hold on the market.

the degree of rivalry among established companies usually increases.

The competitive forces model predicts that falling entry barriers due to government deregulation will result in significant new entry, an increase in the intensity of industry competition, and lower industry profit rates, and that is what occurred here.

refers to the ability of buyers to bargain down prices charged by companies in the industry, or to raise the costs of companies in the industry by demanding better product quality and service.

useful tool for analyzing the effects that industry evolution has on competitive forces is the industry lifecycle model.

dinal force: the products of different businesses or industries that can satisfy similar customer needs.

companies are interdependent because one company’s competitive actions (changes in price, quality, etc.) directly affect the market share of its rivals, and thus their profitability.

The cost structure of firms in an industry is a third determinant of rivalry. In industries where fixed costs are high, profitability tends to be highly leveraged to sales volume, and the desire to grow volume can spark intense rivalry.

is another determinant of the intensity of rivalry among established companies. Growing demand from new customers or additional purchases by existing customers tend to moderate competition by providing greater scope for companies to compete for customers.

arise when a customer invests time, energy, and money switching from the products offered by one established company to the products offered by a new entrant.

refers to the number and size distribution of companies in it, something that strategic managers determine at the beginning of an industry analysis.

refer to the way in which changing social mores and values affect an industry. Like the other macroenvironmental forces discussed here, social change creates opportunities and threats.

are companies that are not currently competing in an industry but have the capability to do so if they choose.

Over the last few decades the pace of technological change has accelerated. This has unleashed a process that has been called a

Just as the decisions and actions of strategic managers can often change an industry’s competitive structure, so too can changing conditions or forces in the wider macroenvironment, that is, the broader economic, global, technological, demographic, social, and political context in which companies and industries are embedded.

It is important to remember that the industry life-cycle model is a generalization. In practice, industry lifecycles do not always follow the pattern illustrated earlier. In some cases, growth is so rapid that the embryonic stage is skipped altogether.

The shakeout stage ends when the industry enters its mature stage: the market is totally saturated, demand is limited to replacement demand, and growth is low or zero.

the former CEO of Intel, has argued that Porter’s original formulation of competitive forces ignored a sixth force: the power, vigor, and competence of complementors.

constitutes a strong threat to profitability.

is dominated by a small number of large companies (an oligopoly) or, in extreme cases, by just one company (a monopoly), and companies often are in a position to determine industry prices. Consolidated industries include the aerospace, soft drink, wireless service, and small package express delivery industries.

An industry’s buyers may be the individual customers who consume its products (end-users) or the companies that distribute an industry’s products to end-users, such as retailers and wholesalers.