| Economists have long understood that
Supply (the number of producers) and Demand (the number of
buyers) are inadequate to explain why some industries are more
profitable than others. To identify factors to explain
differences across industries, economics has drawn from the work
of two J. S. Bain and E S. Mason to derive a general model of how
industries are "organized". By "organized" is
meant that there are identifiable factors and characteristics
that make it possible to make descriptive, hopefully predictive,
statements about industry competition, behavior, and
profitability. The way an industry is organized is assumed to
affect the way firms in the industry behave and pursue profits.
Thus, the Bain-Mason model is often termed
"Structure-Conduct- Performance" (S-C-M) model: the
structure of an industry impacts on the conduct of firms in an
industry and this, in turn, affects industry performance or
profitability. |
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| While economists use the S-C-M model to
examine industry and to develop government policy, the concern of
the model is with industry performance in the context of
the larger national economy. And, the policy question for
economists is: What intervention (if any) is needed to improve
industry performance so as to improve the national economy.
In business strategy, however, the
concern is with "my business's" performance, not the
"fairness" of a competitive market. Michael Porter, a
Harvard Industrial Economist and strategy guru, developed the 5
Forces Model for Industry Analysis. While much of the theory
and terminology is borrowed from economics, the 5 Forces Model
places the firm at the center of economic factors. Importantly,
the firm's profitability is assumed to be affected by the
strength of industry forces. To understand the model it is
helpful to view the firm's strategy as moves to improve profits,
but there are these 5 forces that limit this and appropriate the
value that the firm does create. An understanding how these
forces affect the business's profits often can be used to develop
moved to counter the effects or, better, to create a strategy
that enhances profits.
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