Industry Structure Rules of the Game

1
Industry Structure Rules of the Game

• Galbraith, MSA 515 International Strategy,
  Spring, 2008

2
Structure of Industries Rules of the Game

• Competing approaches
• Industrial Organization versus Resource
  Dependency
• Industrial Organization Approach
• Has roots in early 20th century effort to
  regulate the robber barons and monopolists,
  and benefit the general consumer
• Developed field of economics called industrial
  organization economics
• Based on structure-conduct-performance (SCP)
  model
• Idea that regulating structure will ultimately
  regulate performance

3
The SCP model in strategy theory

• Conduct in the SCP model essentially represents
  business strategy
• 1980s, application of model to understanding
  strategy Purdue University researchers and
  Michael Porter at Harvard
• Starting point is to understand the industry
  structure, or rules of the game
• Porter developed 5-factor approach to
  understanding industry structure

4
Porters 5-factor model of industry structure
Threat of New Entry
Substitute Products/Services
Attractiveness of Industry (profit, etc)
Power of Suppliers
Power of Buyers
Industry Rivalry
5
Factor 1 Industry Rivalry

• Structure related
• Concentration
• 4-firm measures of concentration
• Monopolistic competition (CR4lt.95), oligopoly
  (CR4gt.80, and pure competition (CR4lt.70)
• Exit barriers, strategic groups, mobility
  barriers, industry growth
• Culture related
• Attitudes toward competition, informal
  agreements, social capital
• Customer related
• Dimension of product value, customer segments,
  brand loyalty, discretionary income, luxury
  versus necessity