The structure of any industry can be analysed using Porter's five forces.
According to Porter (1980) the profit generation of each firm will depend on the following factors:
Possibility of new entry
The more difficult it is for other firms to enter the market the bigger possibility that the firm can generate more profits. The difficulty of a firm entering a market would depend on the cost of the entry. Marketing, equipment and investment required may be too challenging or firms. Additionally, firms which have a sound knowledge and presence in the market already would make it difficult to others to penetrate the market without that experience. Additionally, generally existing brands in the industry would have a high level of loyalty. They could also react aggressively with price reductions to diminish new entries.
Strong buyers
The stronger buyers on the market the more likelihood they can control the price. If there is only few big buyers and buyers can easily change a supplier their power will be higher. Often also in those situations buyers are in a position to buy the supplier and gain more control.
Strong suppliers
It would be difficult for new provider to make a profit if already existent suppliers power is high. They are able to dictate the conditions of sale. If there is only few bigger suppliers and switching to another one is fairly difficult suppliers will have more control.
Aggressive competition
If there is a large number of similar sized firms they all will be competing with each other. The businesses will compete to remain in the market especially if the investment was significant to enter it and maintain it at the first place. Additionally, in shrinking markets firms will be more prepared to fight against each other.
Available product alternatives
If buyers can change to another product which substitute the one available already the cost would be the determining factor on how likely customers are likely to switch.
Using this analysis businesses are likely to generate more profit if the market is difficult to enter, there is low competition, customers and suppliers have low power and there are not many substitutes.
On the other hand profits are likely to be low if the market is easy to penetrate, high extend of competition, customers and providers power is strong and not difficult to change to substitute products.
Managers should evaluate their business in the above factors or even manipulate them to make the business more attractive.
This could be done through merging organisations, getting distributors or even product differentiation.
These factors are also not static, but change over time.
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