Threat of New Entrants: New entrants add capacity, inflate costs, push prices down, and reduce profitability. Hence, if an industry faces the threat of new entrants, its profit potential would be limited. The threat from new entrants is low of the entry barriers confer an advantage on existing firms and deter new entrants. Entry barriers are high when:
1. The new entrants have to invest substantial resources to enter the industry.
2. Economies of scale are enjoyed by the industry.
3. Existing firms control the distribution channels, benefit from product differentiation in the form of brand image and customer loyalty, and enjoy some kind of proprietary experience curve.
4. Switching costs – these are essentially one-time costs of switching from the products of one supplier to another – are high.
5. The government policy limits or even prevents new entrants.
Rivalry between Existing Firms: Firms in an industry compete on the basis of price, quality, promotion, service, warranties, and so on. Generally, a firm’s attempts to improve its competitive position provoke retaliatory action from others. If the rivalry between the firms in an industry is strong, competitive moves and countermoves dampen the average profitability of the industry. The intensity of rivalry in an industry tends to be high when:
1. The number of competitors in the industry is large.
2. At least a few firms are relatively balanced and capable of engaging in a sustained competitive battle.
3. The industry growth is sluggish, prodding firms to strive for a higher market share.
4. The level of fixed costs is high, generating strong pressure for all firms to achieve a higher capacity utilization level.
5. There is chronic over capacity in the industry.
6. The industry’s product is regarded as a commodity or near-commodity stimulating strong price and service competition.
7. The industry confronts high exit barriers.
Pressure from Substitute Products: In a way, all firms in an industry face competition from industries producing substitute products. Performing the same function as the product of industry, substitute products may limit the profit potential of the industry by imposing a ceiling on the prices that can be charged by the firms in the industry. The threat from substitute products is high when:
1. The price-performance tradeoff offered by the substitute products is attractive.
2. The switching costs for prospective buyers are minimal.
3. The substitute products are being produced by industries earnings superior profits.
Bargaining Power of buyers: Buyers are a competitive force. They can bargain for price cut, ask for superior quality and better service and induce rivalry among competitors. If they are powerful, they can depress the profitability of the supplier industry. The bargaining power of a buyer group is high when:
1. Its purchases are large relative to the sales of the seller
2. Its switching costs are low.
3. It poses a strong threat of backward integration.
Bargaining Power of Suppliers: Suppliers, like buyers, can exert a competitive force in am industry as they can raise prices, lower quality and curtail the range of free services they provide. Powerful suppliers can hurt the profitability of the buyer industry. Suppliers have strong bargaining power when:
1. Few suppliers dominate and the supplier group is more concentrated than the buyer group.
2. There are hardly any viable substitutes for the products supplied.
3. Suppliers do present a real threat of forward integration.
In a globalized business environment, the top-down analysis of the prospects of a firm must begin with the global economy. The global economy has a bearing on the export prospects of the firm, the competition it faces from international competitors, and the profitability of its overseas investments.
The government employs two broad classes of macroeconomic policies, viz., demand side policies and supply side policies. The former are meant to influence the demand for goods and services and the latter the supply for goods and services. Traditionally the focus was mostly on fiscal and monetary policies, the two major tools of demand side economies. From 1980s onward, however, supply side economics has received a lot of attention.