Competition in an industry is generally shaped not by immediate rivals but by certain other forces. Coca-Cola knows that Pepsico is its major competitor. LG Electronics Ltd knows that Samsung is a major competitor and Maruti knows that Indica is a major competitor. The nature and extent of actual and potential competition, in reality is much broader. A company, in most cases is likely to be hurt by emerging competitors or new technologies than by current competitors (For example, LG becoming the No 1 electronics firm by replacing BPL an Videocon; new generation, fuel efficient Hero Honda replacing old two or there geared motor cycles). This is because of the fact that the industry is nothing but a lection of firms that offer similar products or services products that customers perceive to be substitutable for one another. So, before beginning to assess the nature and extent of competition a firm should define the industry boundaries. This helps in several ways.

Define Your Arena: It helps executives determine the arena in which their firm is competing. For example television software companies operate in the entertainment industry, not in the television industry. As such they need to find what others are doing in the movie business, music industry, and theatre business and print media. This helps them find winning ways which are favored by the general pubic at large. While most mega bookstore chains were busy in expanding their buildings environs and number, Jeffery Bezos built an online empire called Bezo’s cyber bookstore enjoys the advantage of offering an unlimited variety of books without the expenses of stocking inventory.

Focus on the Competitors: Defining industry boundaries helps the firm to clearly identify its competitors and procedures of substitute products. Such an external focus enables a firm alter its competitive strategies in tune with changing market trends a customers preferences.

Identify Key factors for success: A definition of industry boundaries help executives find crucial factors for success. They can take a informed decision whether to play the game at the top end of the ladder or at the lower end. If they have the technological edge and create a perception that they offer value of money, ten they can think of staying at the top charging premium prices for their products or services. Firms at the lower end of the segment need to focus on customer convenience price at operational efficiency. Whichever way you look at it, answers to questions such as where to operate what skill sets are required and what to do to develop requisite skills etc can be found only when the firm is able to earmarked its space clearly.

Expand the arena:

Historically when studying competitive environment (a situation facing a firm within its specific area of operation) firms concentrated on companies with which they competed directly. Today, the situation is different. The industry boundaries have become blurred because forms are prepared to do anything anywhere to remain successful. For example, telecommunication companies now compete with broadcasters airlines sell mutual funds, and auto makers sell insurance and provide financing (remember Ashok Leyland finance, Bajaj Auto finance, Maruti Country wide Financial services?) Thanks to globalization there is an immediate necessity to expand industry boundaries beyond one’s own country. Current research evidence suggests that different geographic markets for the same product can have considerably different competitive conditions (remember film Lagaan and Dilwale Dulhaniya Le Jayenge in the movies business?) to address this question Michael Porter has provided the five forces framework with a view to broaden the executive thinking about how forces in the competition environment shape strategies and affect performance. Please note that competition and competitive forces are an essential part of industry.
Source: Strategic Management