Chapter 5: Industry and Competitor Analysis PDF

Chapter 5 Industry and Competitor Analysis Opening prOFile Greenvelope occupying a unique position in an evolving industry—and thriving Web: www.greenvelope.com Facebook: Greenvelope Twitter: @Greenvelope I t was one of those moments in time when a business idea was born. Sam Frankli...

Chapter 5 Industry and Competitor Analysis Opening prOFile Greenvelope occupying a unique position in an evolving industry—and thriving Web: www.greenvelope.com Facebook: Greenvelope Twitter: @Greenvelope I t was one of those moments in time when a business idea was born. Sam Franklin’s family received a wedding invitation in the mail, which was printed on card stock. Card stock is a type of paper that is thicker and more durable than normal writing paper. Because most wedding invitations are ultimately thrown away, that got Franklin thinking there might be a better way. At roughly the learning Objectives same time, Franklin read an article in USA Today about wedding invi- After studying this chapter you should be tations. The article said that in the previous year, 1.2 million wedding ready to: invitations were sent out by the free online service Evite. While Evite is free, the invitations include ads, which to Franklin seemed a little 1. Explain the purpose of an industry analysis. unseemly. Franklin’s idea was to create a paid solution for sending wedding invitations online that didn’t include ads and would be a 2. Identify and discuss the five com- petitive forces that determine industry cleaner and a more elegant experience for everyone involved. profitability. That was mid-2008. Franklin took a year off from school so he 3. Explain the value that entrepreneurial could build on his idea. He entered Washington University in St. Louis, firms create by successfully using the five forces model. Missouri, as a freshman in 2009. He followed through with the idea and launched Greenvelope, the name he chose for the company, literally 4. Identify the five primary industry types and the opportunities they offer. from his dorm room. He invested $50,000 in start-up funds—half from 5. Explain the purpose of a competitor a loan from a family member and half from savings he accumulated analysis and a competitive analysis grid. during high school—and created the back end of the company’s web- site and 20 templates for wedding invitations. He also developed software that mimicked the experience of opening a traditional printed invitation. Greenvelope’s first customers were secured by buying Google AdWords for people who were searching for terms like “e-mail wedding invitations” or “e-mail save the date.” The company initially gave away e-mail “save the date” messages and made money by encouraging people to upgrade to paid invitations. An added benefit of Greenvelope’s offering was cost savings. At the time, it cost couples about $650 (on average) to print and mail invitations for a 100-guest wedding. Greenvelope offered template packages starting at $100 for up to 300 guests. When Franklin started analyzing his initial sales data, he realized that engaged cou- ples were only part of his customer base. To his surprise, businesses and individuals were customizing the wedding templates to send invitations for a variety of purposes, including corporate events. That realization prompted Franklin to widen his vision for Greenvelope, adding business templates to the company’s offerings as a result. Midway through his degree program at Washington University, Franklin returned to Seattle, his hometown, to work on Greenvelope full time. The way the Greenvelope 149 150 PART 2 | DEvELoPInG SUCCESSFUL BUSInESS IDEAS site works is that a customer creates an account, selects an invitation, and then loads the e-mail invitation list into a spreadsheet. The invitations are then delivered via e-mail in a personalized spinning envelope (with the guest’s name on the front) that emulates the fun and excitement of opening a traditional paper invitation. The digital invitations look like real paper. An advanced RSvP tracking system allows customers to see which invites have been opened, which haven’t been opened, and which were undeliverable for whatever reason. When guests RSvP, they can select meal options, make song requests, write a note to the bride or groom, or respond to any question that the cus- tomer sets up. If someone is on the invitation list that doesn’t have an e-mail address or never opens the electronic invitation, a paper version of the invitation can be printed from the Greenvelope site. The invitation can then be sent by regular mail. Greenvelope currently has five full-time employees with part-time employees used as needed. An in-house design staff works with freelance designers and artists who create the invitation and are paid a commission when their designs are picked. Many of the designs are stylish and inviting and objectively rival handmade invitations. Currently, roughly 60 percent of Greenvelope’s sales are for wedding invitations, with the remaining 40 percent being for graduation announcements, baby showers, birthdays, corporate events, and a variety of other purposes. An integral part of Greenvelope’s offering is the opportunity to participate in environ- mental sustainability. Sam Franklin grew up in Seattle, and spent his childhood camp- ing, fishing, and hiking. Through those experiences, he gained a deep appreciation for the outdoors. Greenvelope donates 1 percent of its revenue each quarter to Mountains to Sound, a nonprofit organization that supports the greenway along the I-90 corridor in northwest Washington State. These donations were made even before the firm was earning profits. The fact that the company’s electronic invitations replace paper invita- tions, which is an environmental plus, is also a key facet of how it operates. Greenvelope’s main competitors include Paperless Post, a recently launched venture-capital-funded electronic invitation start-up, Evite, and old-fashioned snail mail. The company feels that it has sufficiently differentiated itself through its diverse collec- tion of designs, its outstanding customer service, and its brand. An interesting facet of what Greenvelope does is the viral nature of its offering. Towards the bottom of each of its invitations is an unobtrusive statement that says “Powered by Greenvelope” with the Greenvelope logo. If recipients click on the logo, they are directed to the Greenvelope website. This is the manner in which Greenvelope obtains many of its new customers. Greenvelope envisions a bright future. As time moves on, the company believes that people will become increasing comfortable performing the majority of their tasks online—which bodes well for its online electronic invitation service. Greenvelope also believes that sufficient barriers to entry have been put in place that will enable it to maintain a leadership position in the invitation industry. The strength of its brand, its network of freelance designers, its social mission, and the functionality of its website are all factors that place Greenvelope in an enviable position in the invitation industry. G reenvelope is a success in part because of Sam Franklin’s ability to ana- lyze the invitation industry and precisely position Greenvelope within it. In this chapter, we’ll look at industry analysis and competitor analysis. The first section of the chapter considers industry analysis, which is business research that focuses on the potential of an industry. An industry is a group of firms producing a similar product or service, such as music, pilates and yoga studios, and solar panel manufacturing. Once it is determined that a new  CHAPTER 5 | InDUSTRy AnD CoMPETIToR AnAlySiS 151 venture is feasible in regard to the industry and the target market in which it intends to compete, a more in-depth analysis is needed to learn the “ins and outs” of the chosen industry. The in-depth analysis helps a firm determine if the niche or target markets it identified during its feasibility analysis are accessible and which ones represent the best point of entry for the new firm. We focus on competitor analysis in the chapter’s second section. A competi- tor analysis is a detailed evaluation of a firm’s competitors. Once a firm decides to enter an industry and chooses a market in which to compete, it must gain an understanding of its competitive environment. We’ll look at how a firm identifies its competition and the importance of completing a competitive analysis grid. industry analysis When studying an industry, an entrepreneur must answer three questions be- learning Objective fore pursuing the idea of starting a firm. First, is the industry accessible—in 1. Explain the purpose of an other words, is it a realistic place for a new venture to enter? Second, does the industry analysis. industry contain markets that are ripe for innovation or are underserved? Third, are there positions in the industry that will avoid some of the negative attributes of the industry as a whole? It is useful for a new venture to think about its posi- tion at both the company level and the product or service level. At the company level, a firm’s position determines how the company is situated relative to its competitors, as discussed in Chapter 4. For example, Fresh Healthy Vending has positioned itself as a vending machine provider that specializes in healthy alternatives to traditional vending machine snack foods and beverages. The com- pany’s refrigerated machines offer carrots, yogurt, smoothies, granola bars, and beverages such as milk, juice, and teas. This is a much different position than the vending machine providers that offer the standard fare such as chips, pret- zels, salted peanuts, candy bars, sports drinks, and sodas. The importance of knowing the competitive landscape, which is what an in- dustry is, may have been first recognized in the fourth century bc by Sun Tzu, a Chinese philosopher. Reputedly he wrote The Art of War to help generals prepare for battle. However, the ideas in the book are still used today to help managers prepare their firms for the competitive wars of the marketplace. The following quote from Sun Tzu’s work points out the importance of industry analysis: We are not fit to lead an army on the march unless we are familiar with the face of the country—its pitfalls and precipices, its marshes and swamps.1 These words serve as a reminder to entrepreneurs that regardless of how ea- ger they are to start a business, they are not adequately prepared until they are “familiar with the face of the country”—that is, until they understand the industry or industries they plan to enter and in which they intend to compete. It’s also important to know that some industries are simply more attrac- tive than others in terms of their annual growth rate and other factors. For example, according to IBISWorld the industry for e-book publishing is expected to grow at an annual rate of 7.5 percent over the next five years. For the same period, the industry for traditional book publishing is expected to grow at an annual rate of 0.7 percent. What this means is that the conditions for grow- ing a company are significantly more favorable in the e-book industry than in the traditional book publishing industry.2 These types of differences exist for comparisons across other types of industries. The differences can be mitigated some by firm-level factors, including a company’s products, culture, reputa- tion, and other resources.3 Still, in various studies researchers have found that from 8 to 30 percent of the variation in firm profitability is directly attributable to the industry in which a firm competes.4 As a result, the overall attractive- ness of an industry should be part of the equation when an entrepreneur 152 PART 2 | DEvELoPInG SUCCESSFUL BUSInESS IDEAS decides whether to pursue a particular opportunity. Studying industry trends and using the five forces model are two techniques entrepreneurs have avail- able for assessing industry attractiveness. Studying industry trends The first technique that an entrepreneur has available to discern the attractive- ness of an industry is to study industry trends. Environmental and business trends are the two most important trends for entrepreneurs to evaluate. Environmental Trends As discussed in Chapter 2, environmental trends are very important. The strength of an industry often surges or wanes not so much because of the management skills of those leading firms in a particular industry, but because environmental trends shift in favor or against the prod- ucts or services sold by firms in the industry. Economic trends, social trends, technological advances, and political and regulatory changes are the most important environmental trends for entre- preneurs to study. For example, companies in industries selling products to seniors, such as the eyeglasses industry and the hearing aid industry, benefit from the social trend of the aging of the population. In contrast, industries selling food products that are high in sugar, such as the candy industry and the sugared soft-drink industry, suffer as the result of a renewed emphasis on health and fitness. Sometimes there are multiple environmental changes at work that set the stage for an industry’s future. This point is illustrated in the following statement from IBISWorld’s assessment of the future of the motor- cycle dealership and repair industry. After first reporting that motorcycle sales are anticipated to increase at an annualized rate of 2.3 percent between 2014 and 2018 to reach a sales volume of $25.2 billion, the report goes on to say: With more money in their pockets, consumers will head to motorcycle lots again; with favorable consumer sentiment about the future of the economy, consumers will resume purchasing industry products. Furthermore, the tight lending stan- dards of the past are projected to dissipate and more financing will be available for consumers to use when purchasing a motorcycle. High fuel prices will also feed into industry demand as some consumers switch from cars to motorcycles.5 This short assessment about sales in the motorcycle industry illustrates the degree to which environmental trends affect an industry’s prospects. Note that nothing is said about improvements in the management of motorcycle dealer- ships or innovation in the motorcycle industry. The somewhat positive assess- ment of the motorcycle industry’s future is tied to an improved U.S. economy, a loosening of tight credit standards, and high fuel prices. High fuel prices work to the advantage of the motorcycle industry because motorcycles use less fuel than cars. Similar forces are at work in all industries. Business Trends Other trends affect industries that aren’t environmental trends per se but are important to mention. For example, the firms in some in- dustries benefit from an increasing ability to outsource manufacturing or service functions to lower-cost foreign labor markets, while firms in other industries don’t share this advantage. In a similar fashion, the firms in some industries are able to move customer procurement and service functions online, at consider- able cost savings, while the firms in other industries aren’t able to capture this advantage. Trends such as these favor some industries over others. It’s important that start-ups stay on top of both environmental and business trends in their industries. One way to do this is via participation in industry trade associations, trade shows, and trade journals, as illustrated in the “Partnering for Success” feature.  CHAPTER 5 | InDUSTRy AnD CoMPETIToR AnAlySiS 153 Partnering for SucceSS Three Ts That Are Important for Becoming Active in an Industry: Trade Associations, Trade Shows, and Trade Journals O ne thing that’s important for a start-up is to become active in the industry it’s entering. Activity leads to learning about and understanding the industry, find- ing business partners, and becoming recognized as an industry leader. Three important Ts that lead to industry Along with displaying their products and services, businesses attend trade shows to study their rivals, meet members of the press, and network with industry par- ticipants. Companies must rent exhibit space at trade shows. Some of the high-quality shows, which usually activity are trade associations, trade shows, and trade last just under a week, cost upward of $20,000 to attend. journals. Start-ups should consider utilizing these Ts as a Small companies are often able to share exhibit space part of their early and ongoing activities. and split the cost. Trade shows offer prime opportunities for networking in order to generate business and to estab- trade associations lish new relationships and nurture existing ones. In fact, there are many articles and “how-to” guides published in A trade association (or trade group) is an organization periodicals and posted on websites that teach businesses that firms in the same industry form for the purpose of how to maximize their time at trade shows and establish collecting and disseminating trade information, offering business relationships. legal and technical advice, furnishing industry-related training, and providing a platform for collective lobby- trade journals ing. In addition to promoting industry-related issues, trade associations typically provide a variety of other Trade journals or magazines are usually published by trade services to their members. For example, the American associations and contain articles and advertising focused Watchmakers-Clockmakers Institute, which is a trade on a specific industry. very little general-audience adver- association of watchmakers and clockmakers, provides tising appears in trade journals. They may also include its members with training, a database of hard-to-find industry-specific job notices and classified advertising. parts, technical support for watch and clock repair, bul- Some trade journals are available to the general pub- letins with up-to-date product information, and an exten- lic, while others are very specifically controlled—mean- sive library of industry-specific educational material.6 ing that you must be an industry participant to receive Trade associations are typically governed by a paid the journal. This practice ensures advertisers that their staff and a volunteer board. Busy CEos and entrepreneurs ads will be viewed by people in their target audience. are motivated to serve on trade association boards, not Many of the articles in trade journals are written about only to influence the direction of the associations but be- companies in the industry. It enhances the stature and cause their service provides them visibility and a platform visibility of a company to have a favorable article written to network closely with other members of the association. about it in a premier industry trade journal. These types of interactions can lead to businesses forming Along with trade journals, some industries have peer- partnerships and working together in other ways. reviewed journals that contain both technical articles There are 7,600 national trade associations in the and heavy advertising content. The articles are often co- United States. The vast majority have websites that list authored by people who work for vendors that advertise their activities and their members. in the journal. BioTechniques, which is concerend with the life sciences area, is an example of an industry-specific trade shows peer-reviewed journal that follows this format. These jour- nals blur the distinction somewhat between trade journals A trade show (or a trade fair) is an exhibition organized and peer-reviewed journals. to create opportunities for companies in an industry to Although trade journals do not provide the direct net- showcase and demonstrate their products and services. working opportunities that trade associations and trade Some trade shows are open to the public, while others shows do, the visibility a company can obtain by being can only be attended by company representatives and featured in an article or by running ads can result in mul- members of the press. over 10,000 trade shows are tiple positive outcomes. held annually in the United States. There are several on- line directories, such as the Trade Show news network (www.tsnn.com), that help organizers, attendees, and marketers identify the most appropriate trade shows to Questions for Critical Thinking attend. The largest trade show in the United States is the 1. Pick an industry in which you have an interest. Make a International Consumer Electronics Trade Show, which is list of the premier trade associations, trade shows, and held every January in Las vegas, and is not open to the trade journals associated with that industry. public. In 2014, it included more than 2,700 exhibitors, 2. How can an entrepreneur assess whether offering to 150,000 attendees, and 5,000 tech journalists. serve in a leadership capacity in a trade association, (continued) 154 PART 2 | DEvELoPInG SUCCESSFUL BUSInESS IDEAS on a voluntary basis, will be worth the time and effort? right balance between giving out enough informa- Establish a set of criteria that you would follow if mak- tion about itself to attract the attention of potential ing this type of decision. partners without divulging too much proprietary 3. Spend some time looking at the organic Trade information? Association. Make a list of networking opportunities Sources: American Watchmakers-Clockmakers Institute home available via membership in this organization. page, www.awci.com (accessed February 18, 2014); B. Barringer 4. What are the risks involved with networking? For and J. Harrison, “Walking a Tightrope: Creating value Through example, are there risks involved with sharing infor- Interorganizational Relationships,” Journal of Management 26, no. mation with industry participants about how your 3, 1999: 367–403; organic Trade Association home page, www. firm competes? How can a company strike the craftandhobby.org (accessed February 18, 2014). the Five Forces Model learning Objective The five forces model is a framework entrepreneurs use to understand an 2. Identify and discuss the industry’s structure. Professor Michael Porter developed this important tool. five competitive forces Shown in Figure 5.1, the framework is comprised of the forces that determine that determine industry industry profitability.7 These forces—the threat of substitutes, the threat of new profitability. entrants (that is, new competitors), rivalry among existing firms, the bargaining power of suppliers, and the bargaining power of buyers—determine the average rate of return for the firms competing in a particular industry (e.g., the restau- rant industry) or a particular segment of an industry (e.g., the fast-casual seg- ment of the restaurant industry). Each of Porter’s five forces affects the average rate of return for the firms in an industry by applying pressure on industry profitability. Well-managed companies try to position their firms in a way that avoids or diminishes these forces—in an attempt to beat the average rate of return for the industry. For example, the rivalry among existing firms in the wedding invitation industry is high. Greenvelope has diminished the impact of this threat to its profitability by selling customized wedding invitations online. Compared to traditional wed- ding invitation services, this approach lowers the cost to the consumer and provides a high profit margin per order for Greenvelope. In his book Competitive Advantage, Porter points out that industry prof- itability is not a function of only a product’s features. Although the book was published in 1980 and the dynamics of the industries mentioned have changed, Porter’s essential points still offer important insights for entrepre- neurs such as the insight suggested by the following quote: Industry profitability is not a function of what the product looks like or whether it embodies high or low technology but of industry structure. Some very mundane industries such as postage meters and grain trading are extremely profitable, while some more glamorous, high-technology industries such as personal computers and cable television are not profitable for many participants.8 The five competitive forces that determine industry profitability are described next. As mentioned in previous chapters, industry reports, produced by companies such as IBISWorld, Mintel, and Standard & Poor’s NetAdvantage, FigurE 5.1 Threat of Threat of Rivalry Among Forces That Determine Substitutes New Entrants Existing Firms Industry Profitability Bargaining Power Bargaining Power of Suppliers of Buyers  CHAPTER 5 | InDUSTRy AnD CoMPETIToR AnAlySiS 155 provide substantive information for analyzing the impact of the five forces on specific industries. All three of these resources are available free through many university library websites and are highlighted in the Internet Resources Table in Appendix 3.2. threat of Substitutes In general, industries are more attractive when the threat of substitutes is low. This means that products or services from other industries can’t easily serve as substitutes for the products or services being made and sold in the focal firm’s industry. For example, there are few if any substitutes for prescription medicines, which is one of the reasons the pharmaceutical industry has his- torically been so profitable. When people are sick, they typically don’t quibble with the pharmacist about the price of a medicine. In contrast, when close substitutes for a product do exist, industry profitability is suppressed because consumers will opt not to buy when the price is too high. Consider the price of airplane tickets. If the price gets too high, businesspeople will increasingly switch to videoconferencing services such as Skype and GoToMeeting as a substitute for travel. This problem is particularly acute if the substitutes are free or nearly free. For example, if the price of express mail gets too high, peo- ple will increasingly attach documents to e-mail messages rather than sending them via UPS or FedEx. The extent to which substitutes suppress the profitability of an industry depends on the propensity for buyers to substitute alternatives. This is why the firms in an industry often offer their customers amenities to reduce the likeli- hood they’ll switch to a substitute product, even in light of a price increase. Let’s look at the coffee restaurant industry as an example of this. The coffee sold at Starbucks is relatively expensive. A consumer could easily find a less expensive cup of coffee at a convenience store or brew coffee at home rather than pay more at Starbucks. To decrease the likelihood that customers will choose ei- ther of these alternatives, Starbucks offers high-quality fresh coffee, a pleasant atmosphere (often thought of as part of the “Starbucks experience”), and good service. Starbucks doesn’t do this just so its customers don’t go to a different This independently owned coffee shop doesn’t just sell coffee. It also offers its patrons a convenient and pleasant place to meet, socialize, and study. The shop offers these amenities in part to decrease the likelihood that its customers will “substitute” coffee at this shop for a less expensive alternative. Lucky Business/Shutterstock 156 PART 2 | DEvELoPInG SUCCESSFUL BUSInESS IDEAS coffee restaurant. It offers the service so its customers won’t switch to sub- stitute products as well. Although this strategy is still working for Starbucks, there have been times (such as during the recent economic slowdown) when its effectiveness was reduced. Because of this, Starbucks is now experimenting with offering less expensive coffees while maintaining its commitment to quality and providing customers with what the firm believes is the unique Starbucks experience. threat of new entrants In general, industries are more attractive when the threat of entry is low. This means that competitors cannot easily enter the industry and successfully copy what the industry incumbents are doing to generate profits. There are a num- ber of ways that firms in an industry can keep the number of new entrants low. These techniques are referred to as barriers to entry. A barrier to entry is a condition that creates a disincentive for a new firm to enter an industry.9 Let’s look at the six major sources of barriers to entry: Economies of scale: Industries that are characterized by large economies of scale are difficult for new firms to enter, unless they are willing to accept a cost disadvantage. Economies of scale occur when mass-producing a product results in lower average costs. For example, Intel has huge micro- processor factories that produce vast quantities of computer chips, thereby reducing the average cost of each chip produced. It would be difficult for a new entrant to match Intel’s advantage in this area. There are instances in which the competitive advantage generated by economies of scale can be overcome. For example, many microbreweries have successfully entered the beer industry by brewing their beer locally and relying on a local niche market clientele. By offering locally brewed, high-quality products, suc- cessful microbreweries counter the enormous economies of scale (and the lower price to consumers they permit) of major and often global brewers, such as Anheuser-Busch InBev, which manages a portfolio of over 200 beer brands.10 Product differentiation: Industries such as the soft-drink industry that are characterized by firms with strong brands are difficult to break into without spending heavily on advertising. For example, imagine how costly it would be to compete head-to-head against PepsiCo (owner of the Pepsi brands) or Coca-Cola Company. Product innovation is another way a firm can differentiate its good or service from competitors’ offerings. Apple is an example of a company that has differentiated itself in laptop computers by regularly improving the features on its line of MacBooks, such as the MacBook Air, as well as the unqiuness of the accessories customers can buy to enhance their experience as users. It does this to not only keep existing customers and win new ones, but also to deter competitors from making a big push to try to win market share from Apple in the laptop computer industry. Capital requirements: The need to invest large amounts of money to gain entrance to an industry is another barrier to entry. The automobile industry is characterized by large capital requirements, although Tesla, which launched in 2003, was able to overcome this barrier and raise sub- stantial funds by winning the confidence of investors through its expertise and innovations in electric car technology. Current evidence suggests that this firm may have potential to achieve long-term success. In early 2014 for example, Tesla reported results for the fourth quarter of 2013 that exceeded analysts’ expectations and projected that sales of its Model S electric sedan would increase by 55 percent in 2014 compared to 2013.11  CHAPTER 5 | InDUSTRy AnD CoMPETIToR AnAlySiS 157 Cost advantages independent of size: Entrenched competitors may have cost advantages not related to size that are not available to new entrants. Commonly, these advantages are grounded in the firm’s history. For example, the existing competitors in an industry may have purchased land and equipment in the past when the cost was far less than new entrants would have to pay for the same assets at the time of their entry. Access to distribution channels: Distribution channels are often hard to crack. This is particularly true in crowded markets, such as the convenience store market. For a new sports drink to be placed on a convenience store shelf, it typically has to displace a product that is already there. If Greenvelope decided to start producing traditional wed- ding invitations and greeting cards, it would find it difficult to gain shelf space in stationery stores where a large number of offerings from major producers are already available to consumers. Government and legal barriers: In knowledge-intensive industries, such as biotechnology and software, patents, trademarks, and copyrights form major barriers to entry. Other industries, such as banking and broadcasting, require the granting of a license by a public authority. When start-ups create their own industries or create new niche markets within existing industries, they must create barriers to entry of their own to reduce the threat of new entrants. It is difficult for start-ups to create barriers to entry that are expensive, such as economies of scale, because money is usu- ally tight. The biggest threat to a new firm’s viability, particularly if it is creating a new market, is that larger, better-funded firms will step in and copy what it is doing. The ideal barrier to entry is a patent, trademark, or copyright, which prevents another firm from duplicating what the start-up is doing. Companies like Greenvelope typically have trade secrets associated with the functionality of their websites; in turn, trade secrets create a barrier to entry for a firm think- ing about emulating the service provided by firms holding those secrets. The strength of Greenvelope’s brand and the network of freelance designers and artists that it has assembled to create its invitations are also aspects of its busi- ness model that would be difficult to copy. Apart from these types of options, however, start-ups have to rely on nontraditional barriers to entry to discourage new entrants, such as assembling a world-class management team that would be difficult for another company to replicate. In Table 5.1, we provide a list of nontraditional barriers to entry that are particularly suited to start-up firms. rivalry among existing Firms In most industries, the major determinant of industry profitability is the level of competition among the firms already competing in the industry. Some indus- tries are fiercely competitive to the point where prices are pushed below the level of costs. When this happens, industry-wide losses occur. In other industries, competition is much less intense and price competition is subdued. For exam- ple, the airline industry is fiercly competitive and profit margins hinge largely on fuel prices and consumer demand. In contrast, the market for specialized medi- cal equipment is less competitive, and profit margins are higher. There are four primary factors that determine the nature and intensity of the rivalry among existing firms in an industry: Number and balance of competitors: With a larger number of competi- tors, it is more likely that one or more will try to gain customers by cutting prices. Price-cutting causes problems throughout the industry and occurs more often when all the competitors in an industry are about the same size and when there is no clear market leader. 158 PART 2 | DEvELoPInG SUCCESSFUL BUSInESS IDEAS TaBlE 5.1 nontraditional barriers to entry Barrier to entry explanation example Strength of management If a start-up puts together a world-class management team, Square team it may give potential rivals pause in taking on the start-up in its chosen industry. First-mover advantage If a start-up pioneers an industry or a new concept within an Facebook existing industry, the name recognition the start-up establishes may create a formidable barrier to entry. Passion of management If the key employees of a start-up are highly motivated by its Amgen team and employees unique culture, are willing to work long hours because of their belief in what they are doing, and anticipate large financial gains through stock options, this is a combination that cannot be replicated by a larger firm. Think of the employees of a biotech firm trying to find a cure for a disease. Unique business model If a start-up is able to construct a unique business model and netflix establish a network of relationships that make the business model work, this set of advantages creates a barrier to entry. Internet domain name Some Internet domain names are so “spot-on” in regard www.1800contacts.com to a specific product or service that they give a start-up a meaningful leg up in terms of e-commerce opportunities. Think of www.1800flowers.com, www.1800gotjunk.com, and www.bodybuilding.com. Inventing a new approach to If a start-up invents a new approach to an industry and executes Cirque du Soleil an industry and executing the it in an exemplary fashion, these factors create a barrier to entry idea in an exemplary fashion for potential imitators. Degree of difference between products: The degree to which products differ from one producer to another affects industry rivalry. For example, commodity industries such as paper products producers tend to compete on price because there is no meaningful difference between one manufac- turer’s products and another’s. Growth rate of an industry: The competition among firms in a slow- growth industry is stronger than among those in fast-growth industries. Slow-growth industry firms, such as insurance, must fight for market share, which may tempt them to lower prices or increase quality to obtain customers. In fast-growth industries, such as e-book publishing, there are enough customers to satisfy most firms’ production capacity, making price-cutting less likely. Level of fixed costs: Firms that have high fixed costs must sell a higher volume of their product to reach the break-even point than firms with low fixed costs. Once the break-even point is met, each additional unit sold contributes directly to a firm’s bottom line. Firms with high fixed costs are anxious to fill their capacity, and this anxiety may lead to price-cutting. Bargaining power of Suppliers In general, industries are more attractive when the bargaining power of sup- pliers is low. In some cases, suppliers can suppress the profitability of the industries to which they sell by raising prices or reducing the quality of the components they provide. If a supplier reduces the quality of the components it supplies, the quality of the finished product will suffer, and the manufacturer  CHAPTER 5 | InDUSTRy AnD CoMPETIToR AnAlySiS 159 will eventually have to lower its price. If the suppliers are powerful relative to the firms in the industry to which they sell, industry profitability can suffer.12 For example, Intel, with its Pentium chip, is a powerful supplier to the PC industry. Because most PCs feature Pentium chips, Intel can command a premium price from the PC manufacturers, thus directly affecting the overall profitability of the PC industry. Several factors have an impact on the ability of suppliers to exert pressure on buyers and suppress the profitability of the in- dustries they serve. These include the following: Supplier concentration: When there are only a few suppliers to provide a critical product to a large number of buyers, the supplier has an advan- tage. This is the case in the pharmaceutical industry, where relatively few drug manufacturers are selling to thousands of doctors and their patients. Switching costs: Switching costs are the fixed costs that buyers encounter when switching or changing from one supplier to another. If switching costs are high, a buyer will be less likely to switch suppliers. For example, suppliers often provide their largest buyers with special- ized software that makes it easy to buy their products. After the buyer spends time and effort learning the supplier’s ordering and inventory management systems, it will be less likely to want to spend time and effort learning another supplier’s system. Attractiveness of substitutes: Supplier power is enhanced if there are no attractive substitutes for the products or services the supplier offers. For example, there is little the computer industry can do when Microsoft and Intel raise their prices, as there are relatively few substitutes for these firms’ products (although this is less true today than has been the case historically). Threat of forward integration: The power of a supplier is enhanced if there is a credible possibility that the supplier might enter the buyer’s industry. For example, Microsoft’s power as a supplier of computer operat- ing systems is enhanced by the threat that it might enter the PC industry if PC makers balk too much at the cost of its software or threaten to use an operating system from a different software provider. Bargaining power of Buyers In general, industries are more attractive when the bargaining power of buy- ers (a start-up’s customers) is low. Buyers can suppress the profitability of the industries from which they purchase by demanding price concessions or increases in quality. For example, even in light of the problems it has en- countered over the past several years, the automobile industry remains dom- inated by a handful of large automakers that buy products from thousands of suppliers in different industries. This enables the automakers to suppress the profitability of the industries from which they buy by demanding price reductions. Similarly, if the automakers insisted that their suppliers pro- vide better-quality parts for the same price, the profitability of the suppliers would suffer. Several factors affect buyers’ ability to exert pressure on sup- pliers and suppress the profitability of the industries from which they buy. These include the following: Buyer group concentration: If the buyers are concentrated, meaning that there are only a few large buyers, and they buy from a large number of suppliers, they can pressure the suppliers to lower costs and thus affect the profitability of the industries from which they buy. Buyer’s costs: The greater the importance of an item is to a buyer, the more sensitive the buyer will be to the price it pays. For example, if the 160 PART 2 | DEvELoPInG SUCCESSFUL BUSInESS IDEAS component sold by the supplier represents 50 percent of the cost of the buyer’s product, the buyer will bargain hard to get the best price for that component. Degree of standardization of supplier’s products: The degree to which a supplier’s product differs from its competitors’ offering affects the buy- er’s bargaining power. For example, a buyer who is purchasing a standard or undifferentiated product from a supplier, such as the corn syrup that goes into a soft drink, can play one supplier against another until it gets the best combination of features such as price and service. Threat of backward integration: The power of a buyer is enhanced if there is a credible threat that the buyer might enter the supplier’s indus- try. For example, the PC industry can keep the price of computer monitors down by threatening to make its own monitors if the price gets too high. the value of the Five Forces Model learning Objective Along with helping a firm understand the dynamics of the industry it plans to 3. Explain the value that enter, the five forces model can be used in two ways: (1) to help a firm deter- entrepreneurial firms create mine whether it should enter a particular industry and (2) whether it can carve by successfully using the out an attractive position in that industry. Let’s examine these two positive five forces model. outcomes. First, the five forces model can be used to assess the attractiveness of an industry or a specific position within an industry by determining the level of threat to industry profitability for each of the forces, as shown in Table 5.2. This analysis of industry attractiveness should be more in-depth than the less rigorous analysis conducted during feasibility analysis. For example, if a firm filled out the form shown in Table 5.2 and several of the threats to industry profitability were high, the firm may want to reconsider entering the industry or think carefully about the position it will occupy in the industry. In the res- taurant industry, for example, the threat of substitute products, the threat of new entrants, and the rivalry among existing firms are high. For certain res- taurants, such as fresh-seafood restaurants, the bargaining power of suppliers TaBlE 5.2 Determining the attractiveness of an industry Using the Five Forces Model threat to industry profitability competitive Force low medium high Threat of substitutes Threat of new entrants Rivalry among existing firms Bargaining power of suppliers Bargaining power of buyers instructions: Step 1 Select an industry. Step 2 Determine the level of threat to industry profitability for each of the forces (low, medium, or high). Step 3 Use the table to develop an overall feel for the attractiveness of the industry. Step 4 Use the table to identify the threats that are most often relevant to industry profitability.  CHAPTER 5 | InDUSTRy AnD CoMPETIToR AnAlySiS 161 may also be high (the number of seafood suppliers is relatively small compared to the number of beef and chicken suppliers). Thus, a firm that enters the restaurant industry has several forces working against it simply because of the nature of the industry. To help sidestep or diminish these threats, it must establish a favorable position. One firm that has accomplished this is Panera Bread, as discussed in Case 5.1 at the end of this chapter. By studying the restaurant industry, Panera found that some consumers have tired of fast food but don’t always have the time to eat at a sit-down restaurant. To fill the gap, Panera helped to pioneer a new category called “fast casual,” which combines relatively fast service with high-quality food. Panera has been very successful in occupying this unique position in the restaurant industry. You’ll learn more about Panera Bread’s success while reading Case 5.1. The second way a new firm can apply the five forces model to help determine whether it should enter an industry is by using the model pictured in Figure 5.2 to answer several key questions. By doing so, a new venture can assess the thresholds it may have to meet to be successful in a particular industry: Question 1: Is the industry a realistic place for our new venture to enter? This question can be answered by looking at the overall attractiveness of an industry, as depicted in Table 5.2, and by assessing whether the window of opportunity is open. It’s up to the entrepreneur to determine if the window of opportunity for the industry is open or closed. Question 2: If we do enter the industry, can our firm do a better job than the industry as a whole in avoiding or diminishing the impact of the forces that suppress industry profitability? Entering an industry with a fresh brand, innovative ideas, and a world-class manage- ment team and performing better than the industry incumbents increases the likelihood a new venture will be successful. This was the case when Google entered the Internet search engine industry and displaced Yahoo as the market leader. Outperforming industry incumbents can also be achieved if a new venture brings an attractive new product to market that is patented, preventing others from duplicating it for a period of time. Question 3: Is there a unique position in the industry that avoids or diminishes the forces that suppress industry profitability? As we’ve described, this is the advantage that both Greenvelope and Panera Bread have captured. Question 4: Is there a superior business model that can be put in place that would be hard for industry incumbents to dupli- cate? Keep in mind that the five forces model provides a picture of an industry “as is,” which isn’t necessarily the way a new venture has to approach it. Sometimes the largest firms in an industry are trapped by their own strategies and contractual obligations, providing an opening for a start-up to try something new. For example, when Dell started sell- ing computers directly to consumers, its largest rivals—Hewlett-Packard, Compaq, and IBM—were not able to respond quickly and effectively. They were locked into a strategy of selling through retailers. If they had tried to mimic Dell and sell directly to end users or customers, they would have alienated their most valuable partners—retailers such as Sears and Best Buy. However, with the passage of time, Dell’s competitors have learned how to effectively and efficiently sell directly to consumers, largely erasing Dell’s historic advantage in the process of doing so. The steps involved in answering these questions are pictured in Figure 5.2. If the founders of a new firm believe that a particular industry is a realistic place for their new venture, a positive response to one or more of the questions posed in Figure 5.2 increases the likelihood that the new venture will be successful. 162 PART 2 | DEvELoPInG SUCCESSFUL BUSInESS IDEAS Are there areas in which we can avoid or diminish the factors Is the industry that suppress industry A positive response to a realistic profitability? Yes any of these questions place for a Yes increases the likelihood new venture? of the new venture’s Is there a unique success. position in the industry that avoids or No diminishes the factors that suppress industry profitability? A negative response to all three questions No indicates reconsidering Reconsider Is there a superior the new venture. new venture. business model that industry incumbents would find hard to duplicate? FigurE 5.2 Using the Five Forces Model to Pose Questions to Determine the Potential Success of a new venture industry types and the Opportunities they Offer learning Objective Along with studying the factors discussed previously, it is helpful for a new ven- 4. Identify the five primary ture to study industry types to determine the opportunities they offer.13 The five industry types and the op- most prevalent industry types, depicted in Table 5.3, are emerging industries, portunities they offer. fragmented industries, mature industries, declining industries, and global in- dustries.14 There are unique opportunities associated with each type of industry. Home health care is an example of a fragmented industry. A fragmented industry is fertile ground for an entrepreneurial start-up. Lisa S/Shutterstock  CHAPTER 5 | InDUSTRy AnD CoMPETIToR AnAlySiS 163 TaBlE 5.3 industry structure and Opportunities examples of entrepreneurial Firms industry type industry characteristics opportunities exploiting these opportunities Emerging Recent changes in demand First-mover Brain Sentry’s device to help detect industries or technology; new industry advantage sports-related concussions standard operating procedures Windspire in small-scale wind-generated power have yet to be developed Buzzy’s procedure that helps relieve the pain and anxiety associated with getting a shot Fragmented Large number of firms of Consolidation Chipotle Mexican Grill in fast-casual industries approximately equal size restaurants 1-800-GoT-JUnK? in junk removal Modcloth in women’s clothing Mature Slow increases in demand, Process and Justin’s in peanut butter industries numerous repeat customers, after-sale service Pure Fix Cycles in bicycles and limited product innovation innovation Flings Bins in trash bags Declining Consistent reduction in industry Leaders, niche, nucor in steel industries demand harvest, and divest JetBlue in airlines Cirque du Soleil in circuses Global Significant international sales Multinational and PharmaJet in needleless injection systems industries global d.light in solar-powered lanterns emerging industries An emerging industry is a new industry in which standard operating proce- dures have yet to be developed. The firm that pioneers or takes the leadership of an emerging industry often captures a first-mover advantage. A first-mover advantage is a sometimes insurmountable advantage gained by the first com- pany to establish a significant position in a new market. Because a high level of uncertainty characterizes emerging industries, any opportunity that is captured may be short-lived. Still, many new ventures enter emerging industries because barriers to entry are usually low and there is no established pattern of rivalry. Fragmented industries A fragmented industry is one that is characterized by a large number of firms of approximately equal size. The primary opportunity for start-ups in fragmented industries is to consolidate the industry and establish industry leadership as a result of doing so. The most common way to do this is through a geographic roll- up strategy, in which one firm starts acquiring similar firms that are located in different geographic areas.15 This is an often observed path for growth for busi- nesses such as auto repair shops and beauty salons. It is difficult for them to generate additional income in a single location, so they grow by expanding into new geographic areas via either organic growth or by acquiring similar firms. mature industries A mature industry is an industry that is experiencing slow or no increase in demand, has numerous repeat (rather than new) customers, and has lim- ited product innovation. Occasionally, entrepreneurs introduce new product 164 PART 2 | DEvELoPInG SUCCESSFUL BUSInESS IDEAS innovations to mature industries, surprising incumbents who thought nothing new was possible in their industries. An example is Steve Demos, the founder of White Wave, a company that makes vegetarian food products. White Wave introduced a new product—Silk Soymilk—into a mature industry—consumer milk. Silk Soymilk became the best-selling soymilk in the country. Soymilk isn’t really milk at all—it’s a soybean-based beverage that looks like milk and has a similar texture. Still, it has made its way into the dairy section of most supermarkets in the United States and has positioned itself as a healthy sub- stitute for milk. Who would have thought that a major innovation was possible in the milk industry? The lure of mature industries, for start-ups, is that they’re often large industries with seemingly vast potential if product and/or process innova- tions can be effectively introduced and the industry can be revitalized. This is the hope for a company such as Beyond Meat, the subject of the You Be the VC 5.1 feature. Beyond Meat is producing a plant-based substitute for chicken strips, called Chichen-Free Strips, that replicate the look, taste, and sensory experience of eating meat. The company is not targeting people who are ultra careful about what they eat, but a more mainstream market of people who are trying to eat healthier. Beyond Meat is now working on a similarly healthy substitute for ground beef. Meat is a mature industry. If Beyond Meat’s products can be effectively introduced into the marketplace and it is successful in revitilizing the meat industry, the firm’s market po- tential is huge. Declining industries A declining industry is an industry or a part of an industry that is experienc- ing a reduction in demand. The renting of DVDs and video games by mail and producing and distributing hard copy textbooks are examples of products as- sociated with industries or segments of an industry that are in some state of decline. Typically, entrepreneurs shy away from declining industries because the firms in the industry do not meet the tests of an attractive opportunity as we described in Chapter 2. There are occasions, however, when a start-up will do just the opposite of what conventional wisdom would suggest and, by do- ing so, stakes out a position in a declining industry that isn’t being hotly con- tested. That is what Cirque du Soleil did in the circus industry. Entrepreneurial firms employ three different strategies in declining indus- tries. The first is to adopt a leadership strategy, in which the firm tries to become the dominant player in the industry. This is a rare strategy for a start- up in a declining industry. The second is to pursue a niche strategy, which focuses on a narrow segment of the industry that might be encouraged to grow through product or process innovation. The third is a cost reduction strategy, which is accomplished through achieving lower costs than industry incumbents through process improvements. Achieving lower costs allows a firm to sell its product or service at a lower price, creating value for consumers in the process of doing so. Initially a small firm but now quite large as a result of its success, Nucor Steel revolutionized the steel industry through the introduction of the “minimill” concept, and is an example of an entrepreneurially minded firm that pursued this strategy. Historically, most steel mills in the United States used large blast furnaces to produce a wide line of products; however, the scale of these furnaces meant that firms had to produce and sell significant quantities of their products in order to be profitable. In contrast, Nucor’s then-innovative minimills were smaller and were used to produce a narrower range of products. Of great importance too is the fact that minimills are energy efficient and make high-quality steel.16 Nucor proved its concept and quickly found growth mar- kets within the largely declining U.S. steel industry.  CHAPTER 5 | InDUSTRy AnD CoMPETIToR AnAlySiS 165 global industries A global industry is an industry that is experiencing significant international sales. Many start-ups enter global industries and from day one try to appeal to international rather than just domestic markets. The two most common strat- egies pursued by firms in global industries are the multidomestic strategy and the global strategy. Firms that pursue a multidomestic strategy compete for market share on a country-by-country basis and vary their product or service offerings to meet the demands of the local market. In contrast, firms pursu- ing a global strategy use the same basic approach in all foreign markets. The choice between these two strategies depends on how similar consumers’ tastes are from market to market. For example, food companies typically are limited to a multidomestic strategy because food preferences vary significantly from country to country. Firms that sell more universal products, such as ath- letic shoes, have been successful with global strategies. Entrepreneurial firms can use both strategies successfully. The key to achieving success is gaining a clear understanding of customers’ needs and interests in each market in which the firm intends to compete.17 competitor analysis After a firm has gained an understanding of the industry and the target mar- learning Objective ket in which it plans to compete, the next step is to complete a competitor 5. Explain the purpose of a analysis. A competitor analysis is a detailed analysis of a firm’s competition. competitor analysis and a It helps a firm understand the positions of its major competitors and the op- competitive analysis grid. portunities that are available to obtain a competitive advantage in one or more areas. These are important issues, particularly for new ventures.18 In the words of Sun Tzu, quoted earlier in this chapter, “Time spent in reconnais- sance is seldom wasted.” First we’ll discuss how a firm identifies its major competitors. We’ll then look at the process of completing a competitive analysis grid, which is a tool for organizing the information a firm collects about its primary competitors. identifying competitors The first step in a competitive analysis is to determine who the competition is. This is more difficult than one might think. For example, take a company such as 1-800-FLOWERS. Primarily, the company sells flowers. But 1-800-FLOWERS is not only in the flower business; in fact, because flowers are often given for gifts, the company is also in the gift business. If the company sees itself in the gift business rather than just the flower business, it has a broader set of com- petitors and opportunities to consider. In addition, some firms sell products or services that straddle more than one industry. For example, a company that makes computer software for dentists’ offices operates in both the computer software industry and the health care industry. Again, this type of company has more potential competitors but also more opportunities to consider. The different types of competitors a business will face are shown in Figure 5.3. The challenges associated with each of these groups of competitors are described here: Direct competitors: These are businesses that offer products or services that are identical or highly similar to those of the firm completing the analysis. These competitors are the most important because they are going after the same customers as the new firm. A new firm faces winning over the loyal followers of its major competitors, which is difficult to do, even when the new firm has a better product. 166 PART 2 | DEvELoPInG SUCCESSFUL BUSInESS IDEAS FigurE 5.3 Indirect Direct Future Types of Competitors Competitors Competitors Competitors new ventures Face Businesses Businesses Businesses offering identical or offering close that are not yet similar products substitute direct or indirect products competitors but could be at any time Indirect competitors: These competitors offer close substitutes to the product the firm completing the analysis sells. These firms’ products are also important in that they target the same basic need that is being met by the new firm’s product. For example, when people told Roberto Goizueta, the late CEO of Coca-Cola, that Coke’s market share was at a maximum, he countered by saying that Coke accounted for less than 2 percent of the 64 ounces of fluid that the average person drinks each day. “The enemy is coffee, milk, tea [and] water,” he once said.19 Future competitors: These are companies that are not yet direct or indi- rect competitors but could move into one of these roles at any time. Firms are always concerned about strong competitors moving into their mar- kets. For example, think of how the world has changed substantially for Barnes & Noble and other brick-and-mortar bookstores since Amazon.com was founded. These changes are perhaps especially dramatic for Borders, which filed for bankruptcy in 2011. Former competitor Barnes & Noble bought Borders’s remaining assets (primarily its brand name) later in that year. But this story has yet to reach a conclusion, in that in February of 2014, investment firm G Asset Management offered “to acquire a major- ity interest in Barnes & Noble Inc.” If this transaction takes place, G Asset intends to split Barnes & Noble’s retail and e-reader businesses into sepa- rate operations.20 And, think of how smartphone technology continues to change the nature of competition for a variety of firms, including those selling entertainment services, telephone services, and the like. It is impossible for a firm to identify all its direct and indirect competitors, let alone its future competitors. However, identifying its top 5 to 10 direct com- petitors and its top 5 to 10 indirect and future competitors makes it easier for the firm to complete its competitive analysis grid. If a firm does not have a direct competitor, it shouldn’t forget that the sta- tus quo can be the toughest competitor of all. In general, people are resistant to change and can always keep their money rather than spend it.21 A product or service’s utility must rise above its cost, not only in monetary terms but also in terms of the hassles associated with switching or learning something new, to motivate someone to buy a new product or service.22 Creating meaningful value and sharp differentiation from competitors are actions small firms in crowded industries can take to remain competitive and gain market share. Three firms that have successfully accomplished this are profiled in the “Savvy Entrepreneurial Firm” feature. Sources of competitive intelligence To complete a meaningful competitive analysis grid, a firm must first under- stand the strategies and behaviors of its competitors. The information that is gathered by a firm to learn about its competitors is called competitive intel- ligence. Obtaining sound competitive intelligence is not always a simple task.  CHAPTER 5 | InDUSTRy AnD CoMPETIToR AnAlySiS 167 Savvy entrePreneurial firm Thriving in a Crowded Industry by Creating Meaningful Value and Differentiation from Competitors Hipmunk: Web: www.hipmunk.com; Facebook: Hipmunk; Twitter: @thehipmunk Element Bars: Web: www.elementbars.com; Facebook: Element Bars; Twitter: @elementbars BenchPrep: Web: www.benchprep.com; Facebook: BenchPrep; Twitter: @benchprep F irms do well in a crowded industry when two con- ditions exist: (1) they create meaningful value for customers at a fair price and (2) they effectively differentiate themselves from competitors. In fact, di- minishing the impact of three of Porter’s five forces element bars Another tough industry is protien bars. Seriously, how many choices does a consumer have for buying protein bars at a store? In 2007 Element Bars launched with a new twist in the energy bar market. The company would rests largely on these factors. A firm is able to with- differentiate itself by offering fresh, nutritious bars that stand rivalry among existing firms and is able to deter could be sold online and “customized” by its customers. substitutes and new entrants by creating value for its Here’s how Element Bars was orginally set up, and customers and offering something that people can’t get how the company operates today. Customers log on anywhere else. to Element Bars’s website, and in five steps they can The following are examples of three businesses that “build” their own energy bar. They are first asked to pick are creating unique value in their industries and have differ- a basic texture, with options such as Chewy, Crispy, and entiated themselves from their competitors. Each industry Datey. They then add their choice of fruits, nuts, sweets, is very competitive, yet these companies are growing and and boosts (such as whey protein or fiber) to create their thriving. customized bar. A nutrition label on the right portion of the screen changes as ingredients are added, so the cre- Hipmunk ator can see how different ingredients affect the calories Talk about a crowded industry, consider the options a or the grams of saturated fat in the bar. After the bar is consumer has for booking an airline flight. Choices in- built, the final step is for the consumer to name the bar clude tavel agents, airline websites, and online travel sites whatever he or she wants. once the order is placed, the like Travelocity or orbitz. never mind—Hipmunk, an online bar is made and is shipped in just a few days. travel service, launched in 2010, offering travelers what Along with selling customizable energy bars via the they believe is an improved way to plan travel. Hipmunk’s Internet, Element Bars sells directly to speciality retail- premise is that existing travel sites provide too much in- ers who want to create their own branded energy bars. formation in a less-than-optimal format. It differentiates Its difficlut for fitness centers, for example, to sell well- itself by tackling that problem and displaying results in a known bars like Clif bars at a premium, when their mem- more appealing manner. bers can buy the same bars at Walmart or a similar type Here’s how it works. For airline travel you go to of outlet. By branding their own bar via Element Bars, a Hipmunk’s site and enter your departure airport, arrival lo- fitness center can sell the bars for a premium and cap- cation, departure date, and return date just like any other ture higher margins. travel site. Then things change. Instead of offering pages of results, Hipmunk displays its results on a single page. benchprep The flights are color coded—each color represents a different airline. The flights are displayed as bars, and the BenchPrep is competing in the hyper-competitive test length of the flight corresponds to the width of the bar. prep industry. For standardized tests such as the SAT, Flights can be sorted by price, time of day, and “agony,” GRE, GMAT, LSAT, and MCAT, there are many print which is a score based on the best combination of price, test preparation guides, online courses, smartphone duration, and number of stops. The flights with the least apps, and face-to-face short courses taught on col- amount of agony are shown first. Flights that are similar lege and university campuses to help students prepare to the ones displayed, but are more expensive or have a for the tests. BenchPrep differentiates itself by selling higher agony score, are automatically removed from the cross-platform test prep courses. What this means is results. Thus, the only results shown are the ones that that not only can students access their courses on their make the most sense to purchase. computers and mobile devices, they can also sync their Hipmunk doesn’t release booking numbers, but it progresss so they can pick up right where they left off is reportedly gaining momemtum in the travel industry. regardless of what device they’re using. As a result, a A similar easy-to-use interface is available for booking student could start a practice test on her/his laptop in hotel rooms. Hipmunk is aggressively moving into the the morning, answer a few questions during the day on mobile market, and its app is highly ranked in the Apple an iPhone, and finish the test in the evening on a desk- App Store. top computer. (continued) 168 PART 2 | DEvELoPInG SUCCESSFUL BUSInESS IDEAS BenchPrep differentiates itself in additional ways. 2. In what ways are each company’s features redefining The company partners with the world’s top publishers, the customer experience in their industries? authors, and subject matter experts in preparing its 3. of the three companies featured, which one do you think courses. BenchPrep’s test preps give students progress has the most potential to remain competitive? Which reports to show where they are excelling and where company do you think is the most vulnerable to increased performance needs to be improved. In addition, the test competition from competitors? Explain your answers. preps have social features, and allow students to study 4. Find an example of another company that is thriving their progress and performance against other students in a highly competitive industry. Analyze the company preparing for the same test. and discern what sets it apart from its competitors. Sources: Hipmunk, Hipmunk home page, www.hipmunk.com Questions for Critical Thinking (accessed February 19, 2014); Element Bars home page, www. elementbars.com (accessed February 19, 2014); BenchPrep home 1. What are the common attributes across the three com- page, www.benchprep.com (accessed February 19, 2014); B. Sherr, panies in this feature? How do these attributes help the “App Watch: Making Test Preparation Mobile, Social,” Wall Street companies thrive in otherwise competitive industries? Journal, november 1, 2010. If a competitor is a publicly traded firm, a description of the firm’s business and its financial information is available through annual reports filed with the Securities and Exchange Commission (SEC). These reports are public records and are available at the SEC’s website (www.sec.gov). If one or more of the competitors is a private company, the task is more difficult, given that private companies are not required to divulge information to the public. There are a number of ways that a firm can ethically obtain information about its competi- tors. A sample of the most common techniques is shown in Table 5.4. completing a competitive analysis grid As we mentioned previously, a competitive analysis grid is a tool for or- ganizing the information a firm collects about its competitors. It can help a firm see how it stacks up against its competitors, provide ideas for markets to TaBlE 5.4 sources of competitive intelligence Source Description/Benefit Attend conferences and trade shows Participants talk about the latest trends in the industry and display their most current products. Purchase competitors’ products Purchasing and using a competitor’s products can provide insight into their benefits and shortcomings. The purchase process itself can provide data about how a competitor treats its customers. Study competitors’ websites and Many companies put a lot of information on their websites, including product social media pages information and the latest news about the company. The same goes for a company’s pages on social media outlets, such as Facebook and Twitter. Set up Google e-mail alerts Google e-mail alerts are updates of the latest Google results, including press releases, news articles, and blog posts, on any keywords of interest. you can set up e-mail alerts using your company’s name or the name of a competitor. Read industry-related books, Many of these sources contain articles or features that have information about magazines, websites, and blogs competitors. Talk to customers about what motivated Customers can provide a wealth of information about the advantages and them to buy your product as opposed disadvantages of competing products. to your competitor’s product  CHAPTER 5 | InDUSTRy AnD CoMPETIToR AnAlySiS 169 pursue, and, perhaps most importantly, identify its primary sources of com- petitive advantage. To be a viable company, a new venture must have at least one clear competitive advantage over its major competitors. An example of a competitive analysis grid is provided in Table 5.5. This grid is for Greenvelope, the online wedding invitation start-up featured at the begin- ning of the chapter. The main competitive factors in the industry, which include online and traditional wedding invitation services, are cost, selection, customiz- able, presentation to invitee, turnaround time, no ads, green, and social con- sciousness/philanthropy. Some industry participants, such as Greenvelope, also engage in philanthropy. (As highlighted previously, Greenvelope gives 1 percent of its revene each quarter to Moutains to Sound, a nonprofit or- ganization that supports the greenway along the I-90 corridor of Northwest Washington State.) These factors are placed on the vertical axis of Greenvelope’s competitive analysis grid. The horizontal axis contains Greenvelope and its four main competitors. In each box, Greenvelope rates itself against its main com- petitors. The purpose of this exercise is for a company to see how it stacks up against its competitors and to illustrate the areas in which it has an advantage (and has a disadvantage). For example, Greenvelope rates itself as superior to its competitors in terms of presentation to invitee and social consciousness/ philanthropy. It will likely use this information in its advertising and promo- tions. An additional benefit of completing a competitive analysis grid is that it helps a company fine-tune its offering. For example, Greenvelope rates itself as “even” with its competitors on several criteria. It might use that knowledge to look for ways to up its game on one or more of these criteria to increase its over- all competitiveness in relation to its competitors. As this discussion shows, analyzing competitors is a complex and chal- lenging process. But, the link between understanding competitors and how an entrepreneurial venture stacks up against them and the new firm’s suc- cess in both the short and long term is clear and strong. In the “What Went Wrong?” feature, we describe the experiences of Digg. Once one of the hottest Internet sites, this firm competed in a rapidly emerging industry. While read- ing about Digg, keep in mind the actions firms should take to understand their competitors and to form a competitive analysis grid. In an overall sense, might more effective work in terms of understanding its competitors and their actions increase the likelihood of Digg’s competitive success? TaBlE 5.5 competitive analysis grid for greenvelope greenvelope evite paperless post minted local Stationery name (electronic) (electronic) (electronic) (traditional) Store (traditional) cost Even Advantage Even Disadvantage Disadvantage Selection Even Even Even Even Disadvantage customizable Even Even Even Even Even presentation to invitee Advantage Even Even Even Even turnaround time Even Even Even Disadvantage Disadvantage no ads Even Disadvantage Even Even Even green