Government has been discussed primarily in terms of its possi-ble impact on entry barriers, but in the 1970s and 1980s government at all levels must be recognized as potentially influencing many if not all aspects of industry structure both directly and indirectly. In many industries, government is a buyer or supplier and can influence in-dustry competition by the policies it adopts. For example, govern-ment plays a crucial role as a buyer of defense-related products and as a supplier of timber through the Forest Service‘s control of vast timber reserves in the western United States. Many times govern-ment‘s role as a supplier or buyer is determined more by political factors than by’economic circumstances, and this is probably a fact of life. Government regulations can also set limits on the behavior of firms as suppliers or buyers.
Government can also affect the position of an industry with substitutes through regulations, subsidies, or other means. The U.S. government is strongly promoting solar heating, for example, using tax incentives and research grants. Government decontrol of natural gas is quickly eliminating acetylene as a chemical feedstock. Safety and pollution standards affect relative cost and quality of substi-tutes. Government can also affect rivalry among competitors by in-fluencing industry growth, the cost structure through regulations, and so on.
Thus no structural analysis is complete without a diagnosis of how present and future government policy, at all levels, will affect structural conditions. For purposes of strategic analysis it is usually more illuminating to consider how government affects competition through the five competitive forces than to consider it as a force in and of itself. However, strategy may well involve treating govern-ment as an actor to be influenced.
Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.