Industry Structure—
Porter’s 5 forces
Paul C. Godfrey
Marriott School of Management
Brigham Young University
14 March 2016
The Importance of Industry Structure
• Industry structure creates the context in which competition
occurs
• Industry structure can be intrinsic—due to the nature of the
product or process (e.g., commodities)
• Industry structure can be derived—by the competitive
actions of industry players (e.g., branding power)
A Map of Industry Structure
Barriers
To Entry
Supplier
Power
Competitive
Rivalry
Substitute
Products
Buyer
Power
Barriers to Entry
• What are the economic drivers of barriers to entry?
• What are the practical sources of barriers to entry?
• What barriers to entry exist in the professional sports
industry?
Barriers to Entry: The Economics
• Monopolistic competition
allows increased
profitability
• Limit pricing precludes
entry
P
S
P**
P*
• High barriers to entry
create an attractive
industry
D
Q**
Q*
Q
Barriers to Entry: Sources
•
Economies of Scale
•
Access to Distribution
•
Proprietary Product
Differences
•
Absolute Cost Advantages
•
•
•
– Learning Curves
– Input Lock-up
Brand Identity
– Product Design
Switching Costs
Capital Requirements
•
Government Policy
•
Expected Retaliation
Supplier and Buyer Power
• What are the economic drivers of supplier and buyer
power?
• What are the practical sources of supplier and buyer
power?
• What types of supplier and buyer power exist in
professional sports industries?
Supplier/Buyer Power: The Economics
P
•
Supplier power is determined
by price elasticity of demand
for the product
•
Supplier power forces
bargaining and hold-up
•
The question: Who gets most
of the value added?
•
Strong supplier power makes
an industry less attractive
De
Di
Q
Supplier Power: Sources
•
Differentiation of inputs
•
•
Switching costs of suppliers
and firms
Cost relative to total
purchases
•
Impact of inputs on buyers
cost or differentiation
•
Threat of forward or
backward integration
•
Presence of substitutes
•
Supplier concentration
•
Importance of volume to
buyer
Buyer Power: Sources
• Buyer concentration vs.
firm
• Buyer volume
• Buyer switching costs
• Buyer information
• Ability to backward
integrate
• Substitutes
• Pull-through
• Price Sensitivity
–
–
–
–
Price/ total purchases
Product differences
Brand identity
Impact on quality/
performance
– Buyer profits
– Decision maker’s incentives
Substitute Products
• What are the economic drivers of the power of
substitution?
• What are the practical sources of power for substitute
products?
• What substitute products exist within the professional
sports industry?
Substitute Products: The Economics
Inelastic
•
Cross-elasticity of demand
•
Competitors need to think
broadly about substitutes
•
Competitors need to link to
complements where ever
possible
•
Threat of substitution
dampens profitability in the
industry
P1
Substitute
Complement
Q2
Substitute Products: Sources
• Relative price performance of substitutes
• Linking of intangibles to products and services
• Switching costs
• Buyer propensity to substitute
Competitive Rivalry
• What are the economic drivers of competitive rivalry?
• What are the practical sources of competitive rivalry?
• What factors create/ maintain competitive rivalry in
professional sports industries?
Competitive Rivalry: The Economics
P
•
Classical competition drives
the force
•
The effect of rivalry is
uncertain
•
High degrees of rivalry turn
into destructive price
competition
•
Moderate degrees of rivalry
improve industry
performance
S
P*
D
Q*
Q
Competitive Rivalry: Sources
•
Industry growth
•
Concentration and balance
•
Fixed costs/ value added
•
Informational complexity
•
Capacity utilization
•
Diversity of competitors
•
Product differences
•
Corporate stakes
•
Switching costs
•
Exit barriers
The 5 Forces: Summary
“Optimal” Industry Structure
Barriers to Entry
High
Supplier Power
Low
Buyer Power
Low
Competitive Rivalry
Moderate
Threat of Substitution
Low
• “Optimal” industry structure varies
– An industry that is too attractive is often stagnant
• The five forces must be viewed in a dynamic context
– How are the forces changing?