Understanding why firms may want to adapt industry structure
Industry structure can play a big role in influencing profitability. There are some industries where firms only earn modest profits and other industries where profit levels are much greater. Porter’s Five Forces is a systematic approach to examine the structure of the industry – helping to explain why some industries are more profitable than others.
While industry structure can’t easily be changed, there are opportunities for firms to adapt the structure of the industry over time. This may allow the company to change the structure, in turn changing it to being more attractive.
Approaches to changing industry structure
Approach 1: Consolidation
One approach to change industry structure is through consolidation. If industry rivalry is high – with competitors undercutting one another on price, a firm may look to change the industry structure by merging or acquiring with another firm.
Approach 2: Backwards vertically integrating
Another approach to adapt the industry structure is by backward vertically integrating – moving into areas typically undertaken by your suppliers. The company may for example develop the ability to undertake activities of suppliers internally, or they may merge or acquire a supplier.
The reason why firms may look to backward vertically integrate is that supplier power is too high. If you are dependent on a small number of suppliers, for example, those suppliers may be able to push up input prices and capture a large proportion of the overall value that is being created. By moving into that area yourself, a firm avoids having to be beholden to the prices of the suppliers.
Approach 3: Forward vertically integrating
Another approach to adapting industry structure is by forward vertically integrating – moving into areas typically performed by your customers. If, for example, a large proportion of the overall value crated is being captured by retailers that you supply to, you may be able to capture a greater proportion of the overall value by vertically integrating forward – moving into retailing.
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