Industrial Profitability.

There is a vast body of research in industrial organization on the influence of industry structure on profitability. Strategy literature suggests that the average profitability of an industry is influenced by five forces which are: (1) rivalry among existing firms, (2) threat of new entrants, (3) threat of substitute products, (4) bargaining power of buyers and (5) bargaining power of suppliers. According to these forces, the intensity of competition determines the potential for creating abnormal profits by the firms in …

…companies and few substitutes available to their customers. Suppliers are powerful when there are only a few companies and few substitutes available to their customers and they also have more power over the buyers when their products or services are critical to the buyers business. Also, supplies are more powerful when they pose a credible threat of forward integration. Reference: Palepu, K., Healy, P., and Bernard, V. Business Analysis and Valuation Using Financial Statements. Thomson 2004.