Key components of an industry

1. Competitors:

The intensity of competition from existing competitors will depend on several factors including:

1. The number of competitors
2. Their relative size
3. Whether their product offering and strategies are similar
4. The existence of high fixed costs
5. The commitment of competitors and
6. The size and nature of exist barriers

2. Potential competitors:

Potential competitors who might have an interest in entering an industry. Whether potential competitors, identified or not, actually do enter, however, depends in large part upon the size and nature of barriers to entry. Thus, an analysis of barriers to entry is important in projecting the likely competitive intensity and profitability levels in the future.

Entry barriers include:

1. Capital investment required.
2. Industries like mining, refinery or automobiles require huge investments and larger gestation periods that increase the risk.

3. Economies of scale:

If scale economies exist in production, advertising, distribution, or other areas, it becomes necessary to obtain a large volume quickly. Such an effort not only increases the investment but it also increase the risk of retaliation from existing competitors. Reliance Fresh opted this strategy for reducing the price of fruits and vegetables in its retail outlets.

4. Distribution channels:

Gaining distribution in some industries can be extremely difficult and costly. Even large established firms that sell products with substantial marketing budgets have trouble obtaining space on the supermarket shelf Competition between Pepsi and Coke limit the customers’ choice on cola as most of the retail outlets have a policy of eliminating one cola product (either Coke or Pepsi brands) from their shelves.

5. Product differentiation:

Established firms may have high levels of customer loyalty caused and maintained by protected product features, a brand name and image, advertising, and customer service. Industries in which product differentiation barriers are particularly high include soft drinks, beer, cosmetics, over-the-counter drugs, and banking.

Unfortunately Transport Department of Govt. of India banned this advertisement by citing the reason such as youth tend to follow the ad, violate traffic rules and risk their life.

6. Substitute products:

Substitute products are represented by those sets of competitors that are identified as competing with less intensity than the primary competitors.

7. Customer power:

When customers have relatively more power than sellers do, they can force prices down or demand more services, thereby affecting profitability. A customer’s power will be greater when its purchase size is a large proportion of the seller’s business, when alternative suppliers are available, and when the customer can integrate backward and make all or part of the product.

8. Supplier power:

When the supplier industry is concentrated and sells to a variety of customers in diverse industries, it will have relative power that can be used to influence prices. Power will also tend to be enhanced when the costs of customers to switch suppliers is high.