An industry can be defined as a group of com-

panies offering products or services that are

close substitutes for each other. Close substi-

tutes are products or services that satisfy the

same basic customer needs.

2. The main technique used to analyze competi-

tion in the industry environment is the competi-

tive forces model. The six forces are: (1) the

risk of new entry by potential competitors,

(2) the extent of rivalry among established

firms, (3) the bargaining power of buyers,

(4) the bargaining power of suppliers, (5) the

threat of substitute products, and (6) the power

of complement providers. The stronger each

force is, the more competitive the industry and

the lower the rate of return that can be earned.

3. The risk of entry by potential competitors is a

function of the height of barriers to entry. The

higher the barriers to entry are, the lower is the

risk of entry and the greater are the profits that

can be earned in the industry.

4. The extent of rivalry among established compa-

nies is a function of an industry’s competitive

structure, demand conditions, cost conditions,

and barriers to exit. Strong demand conditions

moderate the competition among established

companies and create opportunities for expan-

sion. When demand is weak, intensive compe-

tition can develop, particularly in consolidated

industries with high exit barriers.

5. Buyers are most powerful when a company de-

pends on them for business, but they are not

dependent on the company. In such circum-

stances, buyers are a threat.

6. Suppliers are most powerful when a company

depends on them for business but they are not

dependent on the company. In such circum-

stances, suppliers are a threat.

7. Substitute products are the products of com-

panies serving customer needs similar to the

needs served by the industry being analyzed.

When substitute products are very similar to

one another, companies can charge a lower

price without losing customers to the substitutes.

8. The power, vigor, and competence of comple-

mentors represents a sixth competitive force.

Powerful and vigorous complementors may

have a strong positive impact on demand in an

industry.

9. Most industries are composed of strategic

groups: groups of companies pursuing the

same or a similar strategy. Companies in differ-

ent strategic groups pursue different strategies.

10. The members of a company’s strategic group

constitute its immediate competitors. Because

different strategic groups are characterized by

different opportunities and threats, a company

may improve its performance by switching stra-

tegic groups. The feasibility of doing so is a

function of the height of mobility barriers.

11. Industries go through a well-defined life cycle:

from an embryonic stage, through growth, shake-

out, and maturity, and eventually decline. Each

stage has different implications for the competitive