Industry and Competitor Analysis - Unit 5

Unit 5: Industry and Competitor Analysis

• Unit 5 covers industry and competitor analysis.
• A Venn diagram shows the overlap between "Same customer" and "Same solution".
• The unit objectives include explaining the purpose of industry analysis, identifying and discussing the five competitive forces that determine industry profitability, explaining the value of entrepreneurial firms using the five forces model, identifying the five primary industry types and opportunities, and explaining the purpose of competitor analysis and competitive grid.
• An industry is a group of firms producing similar products or services. Examples include music, Pilates studios, yoga studios, and solar panel manufacturing.
• Industry analysis is business research that focuses on the potential of an industry.
• Key reasons for analyzing industry strengths: determining new venture feasibility in a given industry and market and doing a deep dive analysis to understand industry ins and outs.
• There are three key questions entrepreneurs must answer when studying an industry: accessibility (realism), opportunities for innovation (identifying underserved markets), and potential entry positions.
• Firm-level factors include a firm's assets, products, culture, teamwork and reputation among employees.
• Industry-level factors include the threat of new entrants, rivalry among existing firms, bargaining power of buyers, and related factors.
• Researchers have found that 8-30% of firm profitability variation is directly attributable to the industry.
• There are techniques to assess industry attractiveness. One is to evaluate environmental and business trends. Another is to use the five competitive forces model.
• Environmental trends include economic, social, technological, political and regulatory changes.
• Business trends impact an industry, including profit margins, innovation and input costs.
• Porter's Five Forces Model is a framework for understanding industry structure, composed of the forces determining industry profitability that impact the average rate of return. Well-managed firms avoid or diminish these forces.
• The five forces are: threat of substitutes, threat of new entrants, rivalry among existing firms, bargaining power of suppliers, and bargaining power of buyers.
• Threat of substitutes: The price consumers pay depends on substitute product availability. For example, prescription medicines often don't have close substitutes..
• The extent to which substitutes affect profitability depends on the propensity for buyers to switch.
• Threat of new entrants : Profitable industries attract new entrants. To prevent decline, incumbent firms erect barriers to entry. Barriers include economies of scale, product differentiation, substantial capital requirements and cost advantages independent of size, access to distribution channels, and government/legal barriers.
• Nontraditional barriers include: a strong management team, first-mover advantage, passionate management team and employees , unique business model, and inventing a new approach to the industry.
• Rivalry among existing firms: A major industry profitability factor. Some industries see intense price competition, while others are less intense.
• Factors driving rivalry include the number and balance of competitors, degree of difference between products and the growth rate of the industry as well as level of fixed costs.
• Bargaining power of suppliers: Suppliers can affect industry profitability through price increases, or reducing component quality. Power depends on supplier concentration, switching costs, attractive substitutes and the threat of forward integration (suppliers entering the buyer's industry).
• Bargaining power of buyers: Buyers can demand quality increases and price concessions. Strong buyer positions (few large buyers, low switching costs) can suppress profitability. Factors affecting buyer power include buyer group concentration, buyer's costs, degree of standardization of supplier products and the threat of backward integration.
• First Application of the Model: Use the five forces model to assess an industry's threat to profitability. High threats can make industry entry risky.
• Second Application of the Model: Use the model to project venture success. Key questions consider whether the industry is a realistic place to enter and if there are ways to mitigate negative industry factors (avoid the five forces).
• Industry types offer different opportunities. Emerging industries (e.g., new procedures) offer first-mover advantage. Fragmented industries (e.g., many firms of similar size) have the opportunity for consolidation to consolidate. Mature industries (e.g., slow growth) have opportunities for process or after-sale service innovation. Declining industries (reduction in demand) might see opportunities to establish a niche, or reducing costs. Global industries (significant international sales) have opportunities for multidomestic or global strategies.
• Competitor analysis: A detailed analysis of a firm's competition helps understand major competitor positions and opportunities, using a competitive analysis grid to organize information.
• Identifying competitors: Direct competitors offer similar products, indirect competitors have similar products or close substitutes, and future competitors could become competitors at any time.
• Competitive intelligence: Gathering information about competitors ethically (attending conferences, buying products as samples, studying websites, utilizing email alerts, using industry sources, and talking directly with customers).
• Competitive Analysis Grid (Examples) : This is a tool to organize competitor data. The example provided was for envelopes using a competitive advantage grid.