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Leg Zero: One model to analyze the competition of your beautiful business…

Professor Michael Porter originally published his own interpretation on how to analyze the state of competition in an industry in the year 1979.  This model name is called “Porter’s Five Forces Model”. Thirty-eight years have passed since then. Can you imagine?

Porter determined there are five forces or sources of competitive pressure to your company.5-forcesporter

I will explain each of these five forces in detail using international examples, and also the examples of coffee and the metro train San Salvador. On each of both examples, I will try to develop and integrate the concepts into the application. I will try to give you some data analysis in each of the five forces too. At the end, you will verify in your own mind why is it important to analyze and understand very well the competition in your industry.  A good industry analysis is not merely economic or useful for the determination of the industry profitability, but also because companies which belong to the same industry must focus on the health and attractiveness of their own industries in order to push and evolve for a positive transformation of the industry structure. Each economic industry must evolve… it is part of the human nature to change and evolve, the same happens with industries.

The determinants of an industry profit are:

a. The value of the product or service to customers

b. The intensity of the competition

c. The relative bargaining power at different levels in the production chain

I-am-in-competition-with-no-oneThere are several types of industry’s structures: perfect competition, oligopoly, monopolistic competition, duopoly, monopoly, and others. Where there is a single firm in an industry and new firms are unable to enter, there is a monopoly.  In this case, competition is absent and the monopolist can appropriate in profits the full surplus of the value of output over the costs of inputs. Where there are many firms in an industry, all producing an identical product and with no restrictions on entry, perfect competition exists. In the real world, industries fall between these two extremes, and there are monopolistic competition, oligopolies or duopolies or others.

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