Industry Analysis Techniques

Industry Analysis Purpose

• Business research focuses on an industry's potential
• Helps firms determine if the target market identified during feasibility analysis favors new firms
• An in-depth analysis is needed to learn the industry's ins and outs once a new venture's feasibility is determined

Key Questions for Entrepreneurs

• Is the industry accessible for a new venture?
• Does the industry contain markets ripe for innovation or are underserved?

Techniques to Assess Industry Attractiveness

• Studying industry trends
• Porter's Five Forces Model:

Studying Industry Trends

• Involves environmental and business trends

Environmental Trends

• Includes economic, social, technological, political, and regulatory changes

Business Trends

• Are a part of the core nature of an industry
• Some firms benefit from outsourcing to lower-cost foreign labor markets, while others don’t

Porter's Five Forces

• Created by Harvard Business School professor, Michael Porter
• Used to analyze an industry's attractiveness and assess its potential profitability
• A framework for understanding an industry's structure
• Determines industry profitability, impacting the rate of return for firms

Five Forces Model

• Includes the number/power of rivals, new market entrants, suppliers, customers, and substitute products

Threat of Substitutes

• Consumers' willingness to pay depends on substitute products' availability
• Firms offer facilities to reduce the likelihood of switching to a substitute, even with price increases.

Threat of New Entrants

• Highly profitable industries attract new entrants
• Firms try to limit entrants by creating barriers to entry
• A barrier to entry is a condition creating a disincentive for new firms

Barriers to Entry

• Economies of scale: Difficult for new firms unless they accept cost disadvantages
• Product differentiation: Industries with strong brands require heavy advertising to break into
• Capital requirements: Large investments needed to enter
• Cost advantages: Existing firms may have cost advantages not related to size
• Access to distribution channels: Distribution channels are often hard to crack, especially in crowded markets

Non-traditional Barriers to Entry

• Start-ups find it hard to execute barriers to entry that are expensive
• Reliance on nontraditional barriers like assembling a world-class management team

Other Barriers to Entry

• Strength of management team: A strong team may deter rivals
• First-mover advantage: Pioneering establishes a name recognition barrier
• Passion of the management team and employees: Unique culture motivates employees
• Unique business model: A well-established network creates advantage
• Internet domain name: Spot-on names provide an advantage in e-commerce
• Inventing a new approach: Innovatively executing a new industry approach creates a barrier

Rivalry Among Existing Firms

• A major determinant of profitability is the level of competition
• Some industries are fiercely competitive leading to prices below costs and industry-wide losses

Factors Determining Rivalry

• Number of competitors: More competitors increase the likelihood of price cutting
• Degree of difference between products: Affects industry rivalry
• Growth rate of an industry: Competition is stronger in slow-growth industries
• Level of fixed costs: Firms with high fixed costs must sell a higher volume to reach break-even

Bargaining power of suppliers

• Suppliers can suppress profitability by raising prices or reducing quality
• Quality reduction affects the finished product, potentially lowering the manufacturer's price

Factors Impacting Supplier Power

• Supplier concentration: Few suppliers give them an advantage
• Switching costs: High switching costs make buyers less likely to switch suppliers
• Attractiveness of substitutes: Less attractive substitutes enhance supplier power
• Threat of forward integration: Possibility of supplier entering the buyer's industry enhances power

Bargaining Power of Buyers

• Refers to pressure from customers for higher quality, better service, or lower prices.
• Buyer power allows customers to squeeze industry margins, pressuring firms to reduce prices or increase service quality

Application of the Five Forces Model

• Asseses industry attractiveness by evaluating the threat level to profitability -Firms may reconsider entering the industry if threats are high

Alternatives

• Firms can fill out a form to assess threats to profitability
• If threats are high, firms may want to reconsider entering or rethink their position

Second Application of the Five Forces Model

• It can determine if a firm should enter a specific industry

Industry Types and Opportunities

• Emerging, fragmented, mature, declining, and global industries

Emerging Industries

• Standard operating procedures are yet to be developed
• Opportunity: First-mover advantage

Fragmented Industries

• They are characterized by a large number of approximately equal-sized companies
• OpportunitY: Consolidation-alliance-partnership

Mature Industries

• Experience little or no increase in demand
• Opportunity: Process innovation and after-sale service innovation

Declining Industries

• Experiencing a reduction in demand
• Opportunity: Leadership, niche market, or cost reduction

Global Industries

• Experiencing significant international sales

Competitor Analysis

• A detailed analysis of a firm's competition
• Helps understand competitors' positions and available opportunities
• A competitive analysis grid is a tool for organizing information about competitors

Types of Competitors

• Direct: Businesses offering similar products
• Indirect: Businesses offering substitute products
• Future: Businesses not yet competitors but potentially so

Collecting Competitive Intelligence

• Understanding strategies and behaviors of competitors is important
• Information gathered to learn about competitors is referred to as "competitive intelligence"
• New ventures should collect competitive intelligence ethically and professionally

Ethical Ways to Obtain Competitor Information

• Attend conferences and trade shows
• Purchase competitors' products
• Study competitors' websites and social media
• Set up Google e-mail alerts
• Read industry relevant sources
• Talk to customers to understand their choices

Competitive Analysis Grid

• Used to organize the information about competitors
• Helps firms see how they compare, find market ideas, and identify competitive advantages

Competitive Analysis Questions

• Determine who primary competitors are
• What products or services do they offer?
• What are customer perception of them?