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1Porter’s5Forces-------AMODELFORINDUSTRYANALYSISThemodelofpurecompetitionimpliesthatrisk-adjustedratesofreturnshouldbeconstantacrossfirmsandindustries.However,numerouseconomicstudieshaveaffirmedthatdifferentindustriescansustaindifferentlevelsofprofitability;partofthisdifferenceisexplainedbyindustrystructure.MichaelPorterprovidedaframeworkthatmodelsanindustryasbeinginfluencedbyfiveforces.Thestrategicbusinessmanagerseekingtodevelopanedgeoverrivalfirmscanusethismodeltobetterunderstandtheindustrycontextinwhichthefirmoperates.Inthetraditionaleconomicmodel,competitionamongrivalfirmsdrivesprofitstozero.Butcompetitionisnotperfectandfirmsarenotunsophisticatedpassivepricetakers.Rather,firmsstriveforacompetitiveadvantageovertheirrivals.Theintensityofrivalryamongfirmsvariesacrossindustries,andstrategicanalystsareinterestedinthesedifferences.Economistsmeasurerivalrybyindicatorsofindustryconcentration.TheConcentrationRatio(CR)isonesuchmeasure.TheBureauofCensusperiodicallyreportstheCRformajorStandardIndustrialClassifications(SIC's).TheCRindicatesthepercentofmarketshareheldbythefourlargestfirms(CR'sforthelargest8,25,and50firmsinanindustryalsoareavailable).Ahighconcentrationratioindicatesthatahighconcentrationofmarketshareisheldbythelargestfirms-theindustryisconcentrated.Withonlyafewfirmsholdingalargemarketshare,thecompetitivelandscapeislesscompetitive(closertoamonopoly).Alowconcentrationratioindicatesthattheindustryischaracterizedbymanyrivals,noneofwhichhasasignificantmarketshare.Thesefragmentedmarketsaresaidtobecompetitive.Theconcentrationratioisnottheonlyavailablemeasure;thetrendistodefineindustriesintermsthatconveymoreinformationthandistributionofmarketshare.Ifrivalryamongfirmsinanindustryislow,theindustryisconsideredtobedisciplined.Thisdisciplinemayresultfromtheindustry'shistoryofcompetition,theroleofaleadingfirm,orinformalcompliancewithagenerallyunderstoodcodeofconduct.Explicitcollusiongenerallyisillegalandnotanoption;inlow-rivalryindustriescompetitivemovesmustbeconstrainedinformally.However,amaverickfirmseekingacompetitiveadvantagecandisplacetheotherwisedisciplinedmarket.Whenarivalactsinawaythatelicitsacounter-responsebyotherfirms,rivalryintensifies.Theintensityofrivalrycommonlyisreferredtoasbeingcutthroat,intense,moderate,orweak,basedonthefirms'aggressivenessinattemptingtogainanadvantage.Inpursuinganadvantageoveritsrivals,afirmcanchoosefromseveralcompetitivemoves:2●Changingprices-raisingorloweringpricestogainatemporaryadvantage.●Improvingproductdifferentiation-improvingfeatures,implementinginnovationsinthemanufacturingprocessandintheproductitself.●Creativelyusingchannelsofdistribution-usingverticalintegrationorusingadistributionchannelthatisnoveltotheindustry.Forexample,withhigh-endjewelrystoresreluctanttocarryitswatches,Timexmovedintodrugstoresandothernon-traditionaloutletsandcorneredthelowtomid-pricewatchmarket.●Exploitingrelationshipswithsuppliers-forexample,fromthe1950'stothe1970'sSears,RoebuckandCo.dominatedtheretailhouseholdappliancemarket.Searssethighqualitystandardsandrequiredsupplierstomeetitsdemandsforproductspecificationsandprice.Theintensityofrivalryisinfluencedbythefollowingindustrycharacteristics:1.Alargernumberoffirmsincreaserivalrybecausemorefirmsmustcompeteforthesamecustomersandresources.Therivalryintensifiesifthefirmshavesimilarmarketshare,leadingtoastruggleformarketleadership.2.Slowmarketgrowthcausesfirmstofightformarketshare.Inagrowingmarket,firmsareabletoimproverevenuessimplybecauseoftheexpandingmarket.3.Highfixedcostsresultinaneconomyofscaleeffectthatincreasesrivalry.Whentotalcostsaremostlyfixedcosts,thefirmmustproducenearcapacitytoattainthelowestunitcosts.Sincethefirmmustsellthislargequantityofproduct,highlevelsofproductionleadtoafightformarketshareandresultsinincreasedrivalry.4.Highstoragecostsorhighlyperishableproductscauseaproducertosellgoodsassoonaspossible.Ifotherproducersareattemptingtounloadatthesametime,competitionforcustomersintensifies.5.Lowswitchingcostsincreaserivalry.Whenacustomercanfreelyswitchfromoneproducttoanotherthereisagreaterstruggletocapturecustomers.6.Lowlevelsofproductdifferentiationareassociatedwithhigherlevelsofrivalry.Brandidentification,ontheotherhand,tendstoconstrainrivalry.7.Strategicstakesarehighwhenafirmislosingmarketpositionorhaspotentialforgreatgains.Thisintensifiesrivalry.8.Highexitbarriersplaceahighcostonabandoningtheproduct.Thefirmmustcompete.Highexitbarrierscauseafirmtoremaininanindustry,evenwhentheventureisnotprofitable.Acommonexitbarrierisassetspecificity.Whentheplantandequipmentrequiredformanufacturingaproductishighlyspecialized,theseassetscannoteasilybesoldtootherbuyersinanotherindustry.LittonIndustries'acquisitionofIngallsShipbuildingfacilitiesillustratesthisconcept.Littonwassuccessfulinthe1960'swithitscontractstobuildNavyships.ButwhentheVietnamwasended,defensespendingdeclinedandLittonsawasuddendeclineinitsearnings.Asthefirmrestructured,divestingfromthe3shipbuildingplantwasnotfeasiblesincesuchalargeandhighlyspecializedinvestmentcouldnotbesoldeasily,and