This page is a guide to applying the principles of Economics to researching and understanding a market and the industries and firms that make up the market.
An excellent source for the information needed to conduct an industry study or an analysis of a firm's competitive strategy is the Babson College Horn Library at http://www.babson.edu/library/. The Horn Library provides a research guide and sources for researching a company and an industry.
There are two distinct yet related models for studying markets. One method of analysis is the "Structure-Conduct-Performance" paradigm from the Industrial Organization field of Economics. Another is Porter's Five Forces. As we will see shortly, Porter's Five Forces and the "Structure-Conduct-Performance" paradigm overlap in many ways. This page combines both methods into a unified guide for industry studies and the analysis of firms and competitive strategy.
. A. 2. The Microfoundations of Porter's Five Forces
The real genius of Porter's Five Forces is that it builds on and combines two tools from microeconomics, namely the analysis of market structure and vertical boundaries. The analysis of market structure is the first element of the "Structure-Conduct-Performance" paradigm.
I. A. 2. a. Market Structure
The vertical elements of Porter's Five Forces are shown in Figure 2.
Figure 2: The Vertical Elements of Porter's Five Forces
Each of these elements corresponds to a determinant of market structure as detailed in Table 1 below.
Table 1: Porter's Five Forces and Market Structure
Element of Porter's Five Forces Determinant of Market Structure
Potential Entrants Barriers to Entry
(Direct Substitutes) Number of Sellers
Indirect Substitutes Product Characteristics
I. A. 2. b. Vertical Supply Chain
The horizontal elements of Porter's Five Forces are shown in Figure 3.
Figure 3: The Horizontal Elements of Porter's Five Forces
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