Industry structure in the context of Competitive rivalry (porter's 2nd Force)

Today I have been...

Reading more of Section 3 of unit 2. This section is about Industry Structure, and in particular this is about that in the context of Competitive Rivalry, the centre box in the 5f diagram.

Why?

Required reading

So What?

The Hirschmann-Herfindahl Index has shown up. This is the sum of the squared market shares for all firms in the industry:-

HH=SUM (mi^2) where mi is the market share of firm i

The lower the index the more competitive the market. Sometimes you don't always need a framework to figure this out - look at UK supermarkets for example, it's obvious there's a small number of high-share players.

Anyway, index values under 1000 indicate a high level of competition. A single firm with a 100% market share would score 10000.

Another important thing to consider when looking at industry internal competition is the Industry life-cycle (diagram p31).

The phases are Introduction, growth, maturity and decline.

Introduction:-
Early adopters etc, low competition

Growth:-
Demand is growing and price starts to fall, and demand exceeds supply

Maturity:-
Demand is mainly replacement demand. Product innovation gives way to process innovation. Cost efficiency becomes important

Decline:-
Industry is challenged by new industries with substitute products. Potential for profit is low and competition is high

eg Video vs DVD but betamax vhs price war during introduction


How will I use it?