Industry Structure Definition

Industry Structure Definition
Industry Structure Definition

The “Industry structure” indicator provides important contextual information on how material welfare is created. It shows which are the most important sectors or branches of the Swiss economy and thus the most important sources of added value. 

The importance of the individual industries is illustrated by their shares in value-added and their contributions to growth. The indicator is also suitable for showing structural change, ie the shifts between the primary, secondary, and tertiary sectors. 

The basis for this indicator is the production account of the national accounts, which is shown according to different breakdowns (by industry, by economic sector, by institutional sector).

What Is Industry Structure Analysis?

The industry structure analysis is used to determine the attractiveness of an industry. For this purpose, the five components of the industry structure (“Five Forces”) are analyzed and evaluated: the bargaining power of the suppliers, the bargaining power of the customers, the threat from new competitors, the threat from replacement products, and the intensity of competition in the industry.

The industry structure model offers an analysis grid with which the structure of an industry and the competitive situation can be systematically examined. From the development of the competitive situation in an industry, it can be deduced whether this is attractive for the company, i.e. whether it enables long-term profitable development.

Porter’s model is based on the approach of industrial economics. He assumes that the attractiveness of an industry for a company operating in it is determined by the market structure, as this influences the behavior of market participants. To determine the industry’s attractiveness, the following five components of the industry structure, the so-called “Five Forces”, must be examined:

Bargaining power of suppliers

Bargaining power of customers

New Competitor Threat

Threat from substitute products

The intensity of competition in the industry structure

Each of the five components is to be assessed for the present as well as for the future, e.g. based on a utility value analysis.

Bargaining Power Of Suppliers

The suppliers’ industry structure bargaining power determines how much they can assert their interests in a business relationship with the company. High bargaining power of the suppliers will usually mean that they can either charge higher prices or deliver poorer quality at the same price. Since this has a negative effect on the company’s profit potential, the less the suppliers’ bargaining power, the more attractive an industry is.

Indicators that suppliers have a high level of negotiating power

High differentiation in the products of the suppliers, e.g. if the supplier himself has a strong brand

Little presence of substitutes

High conversion costs for the customer in the event of a change of supplier

Little importance of the respective purchase for the supplier, ie the purchase volume with a supplier only makes up a small part of his total turnover

Purchasing has high cost-related importance for the company: Either the costs make up a large proportion of the company’s total purchasing costs, or the raw material has a major influence on the cost position or differentiation options

High concentration of suppliers: An oligopolistic (or even monopoly) market structure among suppliers leaves the company little opportunity to resort to alternative suppliers and makes it easier for suppliers to enforce high prices

Low risk of backward integration: the company cannot credibly threaten to manufacture the corresponding preliminary products itself (at least less credibly than the supplier can threaten forward integration)

Bargaining Power Of Customers

As with suppliers, the bargaining power of the buyers determines how much they can assert their interests in a business relationship with the company. A high bargaining power on the part of customers will usually mean that they can either ask for lower prices or obtain better quality at the same price. 

Such behavior has a negative impact on the company’s profit prospects, which is why the industry is all the more attractive, the less bargaining power the customers have.

Indicators that customers have high bargaining power

Little differentiation between the company’s products and those of its competitors, e.g. in the case of bulk goods

Low conversion costs for the customer in the event of a change of supplier

High availability of substitutes: Substitutes are available or customers have sufficient knowledge of alternative suppliers or primary materials

The respective sales are very important for the company, ie the purchasing volume of a customer makes up a large proportion of the company’s total turnover

Little influence of the product on the cost position or differentiation possibilities of the customers

High customer concentration: An oligopolistic (or even monopoly) market structure among customers leaves the company with few alternative sales 

opportunities and makes it easier for customers to enforce low prices.

High risk of backward integration: the customer can credibly threaten to manufacture the corresponding products himself

New Competitor Threat

The entry of new competitors into the market usually leads to increased price pressure. The ratio of supply to demand will be less favorable, in order to utilize their capacities and to win customers, the new competitors will contribute to a drop in prices, which will reduce the attractiveness of the branch. 

The risk of new competitors entering the market depends on the level of the market entry barriers. Higher barriers mean a more protected position for existing competitors and thus increase the industry’s attractiveness.

Typical barriers to market entry are

Economies of scale: New competitors usually achieve a lower sales volume than established companies at the beginning and thus have a cost disadvantage if economies of scale play a role in the industry structure

Absolute cost advantages: learning curve based on protected products, protected cost-effective design, protected access to necessary inputs (e.g. raw materials)

Product differentiation often increases customer loyalty, which makes it more difficult for new competitors to acquire customers

Capital requirement: A high investment requirement, e.g. for research and development, production facilities, infrastructure, or even for marketing, industry structure enables only financially strong companies to enter the market. In addition, the high investment requirement increases the risk of entering the market, which makes it less attractive

Conversion costs for customers when switching suppliers reduce their willingness to switch

Access to sales channels: If important sales channels are bound or occupied, a new competitor has poor sales opportunities

Threat From Substitute Products

Substitute products are understood to mean substitutes in the broader sense, ie products that meet similar customer needs but are currently perceived differently by customers, industry structure address other customer groups, or are sold in other regions. 

Such replacement products have a negative impact on the attractiveness of an industry, as customers could switch to these products if necessary.

Are factors influencing the threat from substitute products

Price/performance ratio of the replacement products compared to your own products

Conversion costs for customers when switching to a supplier of a replacement product

Customer attitudes to the replacement products, e.g. whether customers perceive them as such at all

Intensity Of Competition In The industry

Intensity Of Competition In The industry
Intensity Of Competition In The industry

Finally, the fifth factor is the intensity of the competition in the industry (referred to by Porter as rivalry among competitors) which has an impact on the attractiveness of the industry. 

High intensity of competition manifests itself either as price competition (the competitors undercut each other in terms of prices) or as performance competition (the competitors outbid each other in terms of product quality and additional services and thereby increase costs). Both forms of competition have a negative effect on profit prospects and thus on the attractiveness of the market.

Important influencing factors on the degree of competitive intensity in the industry are

The number of competitors: A high number of competitors leads to high competitive pressure. According to macroeconomic theory, a high number of competitors results in production near marginal costs and low profits

Industry growth: In fast-growing industries, competition is often less than in slow-growing or even shrinking industries, as it is possible to expand your own sales without having to take market share from competitors

Overcapacities / utilization: If the capacities significantly exceed the demand, the providers will struggle to achieve high utilization. This leads to price pressure and thus a decline in the attractiveness of the industry

Share of fixed costs in total costs: If there are high shares of fixed costs, there is a strong incentive to achieve high utilization in order to cover at least part of the fixed costs. Due to the high supply pressure, the prices then often fall almost to the level of the variable costs

Exit barriers: In order to reduce excess capacities, it is often necessary for competitors to exit the market. However, this is made more difficult or delayed if high conversion or shutdown costs occur, the business field is important for the relevant competitors for strategic reasons (e.g. synergy effects with other business fields), or investments in the past lead to (irrational) ties to the business field (“Sunk costs”)

Types Of Industrial Structures

At Construcciones Vale we are specialists in a multitude of construction jobs, encompassing, thanks to the practice and constant updating of our company, industry structure different fields of the sector.

One of the most demanded jobs of our company and for which we have an expert team that guarantees its effectiveness, is the construction work related to industry structure building, a comprehensive service that ranges from the design to the construction of the said structure.

Thanks to this experience, from Construcciones Vale we bring you information about the different types of structures in industry structure buildings so that you know which one is best for you depending on your job and function.

Most Common Structures In Industrial Buildings

Concrete Structure

The concrete structure stands out for its robustness, but it must be taken into account that construction times increase compared to the construction of a metal structure, due to the materials used.

The rigidity of this structure, achieved precisely by the use of concrete, makes it possible to achieve hyperstatic knots more easily. These structures are extremely useful in fire risk activities, due to their hermetic capacity and maximum resistance to fire, without the need for any type of extra treatment.

Another beneficial point of concrete structures is that it does not need any type of anticorrosive or antioxidant layer, nor any layer of insulating paint.

Metallic Structure

It stands out for needing a shorter construction time compared to the concrete structure. It is a less rigid structure, whose beams are much lighter, which facilitates the construction process and lowers its price, as it requires less machinery for loading and transportation.

However, this kind of structure requires a revision against fire, as well as a suitable coating so that it does not spread. Likewise, it remains an extremely beneficial option in certain types of industry, such as the steel industry or the livestock industry.

Mixed Structures (Metal And Concrete)

Thinking about achieving the best solution, when developing an industrial structure you can choose the combination of both resources, in order to achieve a resistant and safe infrastructure.

In this way, exits structures have been gaining relevance in the sector, due to their rigidity and resistance, as well as cost savings compared to structures solely made of concrete.

Achieve maximum efficiency in industrial constructions with Construcciones Vale.

Industry Structure Example

Some simple industry structure examples are:  

Telephone industry. Committed to the commercialization of telephone terminals and supplies required for their function, not to the commercialization of the telephone service. Samsung, Nokia, are examples of characters in this room. 

Automotive industry. Dedicated to the production of automobiles and in some cases motorcycles and similar vehicles with internal combustion engines. Honda, Ford, Mercedes Benz, are examples of businesses in the area. 

Oil industry. Committed to the extraction of oil and its commercialization, hand in hand or not with the petrochemical enterprise to purify it. PDVSA, British Petrol, Shell, Texaco, are examples of characters in the domain.

Market Structure Characteristics

Market Structure Characteristics
Market Structure Characteristics

Differentiation of markets according to the number of suppliers and applicants or the similarity of products. There are generally four market structures (competition, monopoly, oligopoly, and monopoly competition).

The monopoly is characterized by the presence of a single supplier and a multitude of applicants.

The oligopoly brings together a small number of suppliers and a multitude of applicants.

In a situation of monopolistic competition, many suppliers are present but sell differentiated products that are difficult to substitute.

1- The size of a market:

It can be measured in volume and in value.

In the first case, it is the physical volume of sales or the number of units sold. In the second case, it is the monetary value of sales, that is to say, the turnover achieved.

The size of the market can also be understood by taking into account the number of buyers.

2- Market structure:

Supply-side structures are determined by the level of competition in the sector.

Thus, faced with a large number of applicants, we can distinguish:

Pure and perfect competition: there are several companies offering the product or service.

Oligopoly: it is a market where a small number of companies coexist offering the same product.

Monopoly: a single company dominates the market.

Oligopsony: characterized by the existence of a few buyers.

The monopsony: it is a market where there is only one buyer.

3- Current market and potential market of the company:

The theoretical market for the profession is obtained by removing absolute non-consumers from the total population.

Absolute non-consumers are the individuals who, in the current state, cannot acquire the product for deep reasons.

The current market for the profession is made up of the current business market and the current competitive market.

From its current market, the business can gain a customer base in the relative non-consumers and in the competitor market.

This is the company’s potential market.

Market Structure Analysis Example

How well is a particular market suited to your offering? A market analysis answers these kinds of questions. Anyone in the market, whether they are companies, entrepreneurs, or customers, can conduct a marketing market analysis. In any case, it serves as the basis for decision-making. 

Information is collected and evaluated from suppliers and buyers in order to make buying or selling decisions. In addition, you can assess your current market or visualize new markets.

A market analysis provides information about the industry, customers, competitors, and scope of a market. Additionally, you can determine the relationship between product and demand for a specific product or service. By referring to this information, you can make more informed decisions about possible marketing strategies.

What Is A Market Analysis For?

If you want to be successful with a business idea, then developing a market analysis is essential. A well-founded marketing market analysis is the basis for developing a marketing strategy and concrete marketing measures.

Other reasons to conduct a market analysis:

With market analysis, you can support your business idea with figures, data, and facts and thus convince with your business plan.

You can quickly recognize the potential of the market and avoid making the wrong decisions.

You can identify the gaps and fill them in time.

A marketing market analysis shows you which competing products are already in the market.

Through market analysis, you can identify the barrier to entering the market and estimate the attractiveness of the market.

Introduction To Production, Costs, And Industry Structure

The conception of an industry structure company can be simplified through a set of activities that allows the transformation of inputs into products. The inputs are provided to the company by the suppliers, according to the quantity and price conditions of the market. 

The products are placements by the company in volume and price set by the market, according to the conditions of supply and demand of the period analyzed. The difference between sales income and the cost of inputs represents the profit of the business. This type of analysis is equally valid for a service company.

The cost of inputs is reflected in the structure of costs and expenses of the company, which in turn depends on market conditions, technology, and applied management. Likewise, Industry Structure sales income depends on the mixture of products that are marketed and the sale price obtained according to market conditions.

Although the basic objective of a company is to maximize profits, there are situations in which the entrepreneur must make decisions that in the short term imply working with losses, Industry Structure but that will allow the business to remain competitive in the medium and long term.

In this context, what is developed below is a model that allows representing the minimum economic situation that allows the company to generate profits at a certain date, and that in turn allows simulating different scenarios of future behavior of the business, which facilitates effective and efficient decision making.

Said analysis instrument is called “Equilibrium Point Model”, which is an approximation, which is based on-premises or assumptions, the same ones that must be reviewed in each particular situation.

The advantage of this model is that it allows predicting future business results in advance, which is fundamental support for business management. The article is developed accompanied by a hypothetical example, Industry Structure with the purpose of objectively showing the scope of a useful management instrument in all types of business activity, be it producing goods or providing services.

Costs

The operation of a business determines the use of a series of resources, which constitute costs and expenses or simply costs. The costs are classified according to the main functions that the company develops and for each one of them, there are different cost elements according to the type of resource used.

In operational terms, the materials consumed are part of the manufacturing cost (in the case of raw materials, 100%), of administrative and sales expenses; The same occurs with the cost of labor, the depreciation of property, machinery, and equipment, Industry Structure and the cost of services. On the other hand, the interests of the debt that the company has contracted constitute the financial expenses.

These costs are required to be classified into fixed and variable. Fixed costs are a permanent obligation, they do not depend on the level of activity, production, or sales; On the other hand, variable costs depend on the volume of production, if there is no production the variable cost is zero and at a higher level of operation the total variable costs increase. 

Industry Structure

The “Industry structure” indicator provides important contextual information on how material welfare is created. It shows which are the most important sectors or branches of the Swiss economy and thus the most important sources of added value. 

Industrial Organization

Industrial Organization
Industrial Organization

Industrial organization in the field of economy and production is a discipline of the theory of the firm that the means of production and the relationship and boundaries between structures of firms and market centers.

The Industrial Organization is the part of the economy that studies the structure and operation of markets. The Industrial Organization, more specifically, focuses on what refers to the companies that act in the market, and the way in which public policies influence this structure.

What Is Industrial Organization?

Industrial organization is the field of economics that studies strategic behavior and the interaction between companies to determine the structure of markets. Knowing their evolution helps to understand them. 

The traditional neoclassical theory established the relationship between “industrial” and “manufacturing”, making the manufacturing market the main objective of studies based on technological results. It left aside aspects such as organization, management, and ownership. 

This perspective was criticized for using unrealistic hypotheses and for not explaining certain phenomena such as imperfect competition and asymmetric information among others.

Industrial Organization Areas Of Study

First of all, we will tell you in what type of companies you can play your role as an industrial organization engineer. One of the most positive aspects of this professional branch, perhaps the most positive of all of them, is that it is a qualification that prepares you to work in all types of companies. 

We can see industrial organization engineers in industrial companies, in companies related to construction, in companies in the service sector, and even in public administrations. Remember that this career opens up borders and prepares you to apply for your work in any field, and this is clear proof of this.

Of course, all your possibilities multiply depending on the sectors in which you want to carry out your activity. It is not the same to work in the energy sector or in the automotive sector. What is certain is that all these companies will have the areas that we have mentioned before and to which as an industrial organization engineer you could dedicate yourself.

The same would happen if you had a special interest in automobiles or transportation. And even other industries as different as metallurgical, chemical, paper, food, or equipment.

However, the outputs of Industrial Organization Engineering go beyond this enumeration of sectors: The roles that you can take in this field will also be varied. For example, you can be a production manager, dedicate yourself to the area of ​​maintenance, procurement, logistics, or quality. 

On the other hand, you could focus on the areas of marketing, commercial, or product design. But… What if none of these outings convinces you? Don’t worry, there is more! For example, if you are more interested in the human aspect of the company, you can focus on human resources, and if what you are concerned about is the environment, you can also dedicate yourself to those issues.

Has this explanation convinced you? Do not hesitate and launch yourself to pursue your career as an engineer, you will surely not regret it!

Example Of Industrial Organization

An industrial company is an economic organization in which its activities are aimed at obtaining and/or transforming raw materials, through organized processes, to produce both inputs and finished products.

Industrial activities are economic activities in which finished products, inputs, and some raw materials are obtained, and they are activities that are generally aided by technology. Two main types of industry are distinguished:

Heavy industry, which is responsible for the extraction of raw materials, their transformation into intermediate products, as well as the design and assembly of heavy machinery, is necessary for the activities of other industries.

For its part, the light industry is responsible for transforming raw materials, and intermediate products into products that are delivered to the end-user or consumer.

A company is an organization dedicated to conducting an economic activity from which it expects to make a profit.

1.5. Industry Structure
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