The Importance of Industry Structure for the Determination of a Firm's Profitability

by Rick Suttle Google

Industry structure pertains to the number and size distribution of competitors in an industry, according to University of Maryland University College. Some industries, such as the restaurant and retailing industries, contain many firms or competitors. Other industries contain relatively few competitors. Industries may also be comprised of different-sized competitors. The number and size of competitors and several other key factors are extremely important in determining a firm's profitability.

Rivalry Intensity

Some firms exist in industries with intense rivalry levels. There may be three major competitors that make up the industry, for example. It is usually difficult for companies to dramatically increase profits in this type of industry. The firms are usually larger and well-established in their markets. Smaller firms may have been forced out because of their inability to compete. Larger companies usually enjoy lower cost structures because they purchase in volume. Another factor may be product life cycle, which is the lifespan of a product. Sales are typically stagnant in the maturity or third stage of the product life cycle. This can have a negative impact on profits. Companies in this type of industry environment also have less flexibility in lowering prices. Lower prices may set off price wars, furthering diminishing profitability.

Ease of Entry

The importance of industry structure is also evident with an industry's ease of entry. And the ease of entry is greatest in new industries. New industries also provide the best profit opportunities for smaller businesses. Sales are usually strong in a new industry because demand is relatively high among consumers. A smaller competitor may even be the industry leader, especially if it created a new technology or product. In contrast, industries that are difficult to enter have a negative impact on profits. Smaller companies may not have easy access to distribution. They may also lack the necessary capital for expanding their businesses, according to, an online business reference site.

Availability of Substitutes

Another industry structure element influencing a firm's profitability is the availability of substitutes. Consumers will pay higher prices for certain products if no substitutes exist. Hence, companies in the industry earn greater profits. For example, pharmaceutical companies possess 20-year patents on new drugs, according to a 2002 article by This means companies cannot manufacturer generic substitutes for two decades. Conversely, consumers may seek cheaper substitutes when available, which has a negative impact on profits.


Competitors within the same industry often have similar organizational structures. These organizational structures can also determine the profitability of competing firms. For example, major competitors in an industry may use a more decentralized structure to better serve customers in certain geographical regions. Companies that conform to this type of structure may stand to gain the most from a profitability standpoint. Those that stay centralized may sacrifice potential profits, because they may not know the exact needs of consumers in different geographical regions.

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