Industry and Competitor Analysis PDF

SERVICE EXCELLENCE  Learning Objectives Explain the purpose of an industry analysis Identify and discuss the five competitive forces that determine industry profitability Explain the value that entrepreneurial fi...

SERVICE EXCELLENCE  Learning Objectives Explain the purpose of an industry analysis Identify and discuss the five competitive forces that determine industry profitability Explain the value that entrepreneurial firms create by successfully using the five forces model Identify the five primary industry types and opportunities they offer Explain the purpose of a competitor analysis and a competitive analysis grid October 21, 2024 SERVICE EXCELLENCE 1  What is Industry Analysis? Industry Why is Industry Analysis Important? An industry is a group of firms Once it is determined that a new venture producing a similar product or is feasible in regard to the industry and service, such as airlines, fitness market in which it will compete, a more drinks, furniture, or electronic in-depth analysis is needed to learn the games. ins and outs of the industry. Industry Analysis Is business research that focuses The analysis helps a firm determine if the on the potential of an industry. niche market it identified during feasibility analysis is favorable for a new firm. October 21, 2024 SERVICE EXCELLENCE 1  Three Key Questions an Entrepreneur to Consider? Is the industry accessible—in other words, is it a realistic place for a new venture to enter? Does the industry contain markets that are ripe for innovation or are underserved? Are there positions in the industry that avoid some of the negative attributes of the industry as a whole? October 21, 2024 SERVICE EXCELLENCE  How Industry and Firm-Level Factors Affect Performance Firm Level Factors Conclusion A firm’s assets, products, culture, In various studies, it is teamwork among employees, established between 8% to 30% reputation, amongst others affect of the variation in firm performance. profitability is directly Industry Level Factors attributable to the industry in Threat of new entrants, rivalry which the firm operates. among existing firms, bargaining power of buyers & sellers etc., affect performance. October 21, 2024 SERVICE EXCELLENCE 5  Techniques Available to Assess Industry Attractiveness The Five Competitive Forces Model Study Environmental and Business Trends October 21, 2024 SERVICE EXCELLENCE 1  Studying Industry Trends Environmental Trends Business Trends Analyse the economic, social, Trends that impact an industry. technological advances, and For example, are profit margins political and regulatory changes. in the industry increasing or falling? For example, industries that sell products to seniors citizens are Is innovation accelerating or benefiting because the waning? Are input costs going up population is aging. or down? October 21, 2024 SERVICE EXCELLENCE 1  The Five Competitive Forces Model The five competitive forces model is a Each of the five-forces impacts framework for understanding the the average rate of return for the structure of an industry. firms in an industry by applying pressure on industry profitability. It is composed of the forces that determine industry profitability. Well managed firms try to position their firms in a way that They help determine the average rate avoids or diminishes these forces of return for the firms in an industry. October 21, 2024 SERVICE EXCELLENCE 1  The Five Competitive Forces Model October 21, 2024 SERVICE EXCELLENCE 1  Threat of Substitutes The price that consumers are willing In contrast, when close substitutes for a to pay for a product depends in part product exist, industry profitability is on the availability of substitute suppressed, because consumers will opt out products. if the price gets too high. The extent to which substitutes suppress For example, there are few if any the profitability of an industry depends on substitutes for prescription the propensity for buyers to substitute medicines, which is one of the between alternatives. reasons the pharmaceutical industry This is why firms in an industry often offer is so profitable. their customers amenities to reduce the likelihood of switch to a substitute product, even in light of a price increase. October 21, 2024 SERVICE EXCELLENCE 1  Threat of New Entrants If the firms in an industry are highly Firms in an industry try to keep the profitable, the industry becomes a number of new entrants low by magnet to new entrants. erecting barriers to entry. Unless something is done to stop this, the competition in the industry will increase, and average industry profitability will decline. A barrier to entry is a condition that creates a disincentive for a new firm to enter an industry. October 21, 2024 SERVICE EXCELLENCE 1  Threat of New Entrants Economies of scale: Industries Capital requirements: The need to characterized by large economies of invest large amounts of money to scale are difficult for new firms to gain entrance to an industry is enter, unless they are willing to accept another barrier to entry. E.g. a cost disadvantage. Automobile industry Product differentiation: Industries Cost advantages as a result of characterized by firms with strong independent of size: Entrenched competitors may have cost advantages brands are difficult to break into that are not available to new entrants. without spending heavily on Commonly, these advantages are advertising. E.g. Soft drinks grounded in the firm’s history. October 21, 2024 SERVICE EXCELLENCE 1  Threat of New Entrants Access to distribution channels: Non Traditional Barriers to Entry Distribution channels are often hard It is difficult for start-ups to execute to crack. This is particularly true in barriers to entry that are expensive, crowded markets, such as the such as economies of scale, because convenience store market. money is usually tight. Government and legal barriers: In Start-ups have to rely on non knowledge-intensive industries, such traditional barriers to entry to as biotechnology and software, discourage new entrants, such as patents, trademarks, and copyrights assembling a world-class management form major barriers to entry. E.g. team that would be difficult for banking and broadcasting. another company to replicate. October 21, 2024 SERVICE EXCELLENCE 1  Threat of New Entrants Non traditional barriers 1. Strength of management team: If a 3. Unique business model: If a start-up start-up puts together an excellent constructs a unique business model and management team, it may give establish a network of relationships that potential rivals pause in taking on the make the business model work, this set start-up in its chosen industry. of advantages creates a barrier to entry. 2. First-mover advantage: If a start-up pioneers an industry/new concept within an existing industry, the name the start-up establishes create a formidable barrier to entry. E.g. Facebook October 21, 2024 SERVICE EXCELLENCE 1  Threat of New Entrants 4. Passion of management team and employees: If the key employees of a start-up are highly motivated by its 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. 5. Inventing a new approach to an industry and executing the idea in an exemplary fashion: If a start-up invents a new approach to an industry and executes it in an exemplary fashion, these factors create a barrier to entry for potential imitators. October 21, 2024 SERVICE EXCELLENCE 1  Rivalry Among Existing Firms In most industries, the major In other industries, competition determinant of industry profitability is is much less intense and price the level of competition among existing firms. competition is subdued. Some industries are fiercely competitive, to the point where prices are pushed below the level of costs, and industrywide losses occur. October 21, 2024 SERVICE EXCELLENCE 1  Determinants of Rivalry Among Existing Firms Number and balance of Degree of difference between competitors: With a larger number of products: The degree to which competitors, it is more likely that one products differ from one producer to or more will try to gain customers by another affects industry rivalry. For cutting prices. Price-cutting causes example, commodity industries such as problems throughout the industry and paper products producers tend to occurs more often when all the compete on price because there is no competitors in an industry are about meaningful difference between one the same size and when there is no manufacturer’s products and clear market leader. another’s. October 21, 2024 SERVICE EXCELLENCE 1  Determinants of Rivalry Among Existing Firms Growth rate of an industry: The Level of fixed costs: Firms that have competition among firms in a slow high fixed costs must sell a higher growth industry is stronger than volume of their product to reach the among those in fast-growth break-even point than firms with low industries. 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. October 21, 2024 SERVICE EXCELLENCE 1  Bargaining Power of Suppliers Suppliers can suppress the profitability If the suppliers are powerful of the industries to which they sell by relative to the firms in the raising prices or reducing the quality industry to which they sell, of the components they provide. industry profitability can suffer. If a supplier reduces the quality of the components it supplies, the quality of the finished product will suffer, and the manufacturer will eventually have to lower its price. October 21, 2024 SERVICE EXCELLENCE 1  Determinants of Suppliers Bargaining Power Supplier concentration: When there Attractiveness of substitutes: Supplier are only a few suppliers to provide a power is enhanced if there are no attractive critical product to a large number of substitutes for the products or services the buyers, the supplier has an advantage. supplier offers. This is the case in the pharmaceutical Threat of forward integration: The industry, where relatively few drug power of a supplier is enhanced if there is a manufacturers are selling to thousands credible possibility that the supplier might of doctors and their patients. enter the buyer’s industry. Switching costs: Switching costs are – For example, Microsoft’s power as a supplier the fixed costs that buyers encounter of computer operating systems is enhanced by when switching or changing from one the threat that it might enter the PC industry if supplier to another. If switching costs are PC makers balk too much at the cost of its high, a buyer will be less likely to switch software or threaten to use an operating suppliers. system from a different software provider October 21, 2024 SERVICE EXCELLENCE 1  Bargaining Power of Buyers Buyers can suppress the profitability of the industries from which they purchase by demanding price concessions or increases in quality. – For example, the automobile industry is dominated by a handful of large companies that buy products from thousands of suppliers in different industries. This allows the automakers to suppress the profitability of the industries from which they buy by demanding price reductions. October 21, 2024 SERVICE EXCELLENCE 1  Determinants of Buyers Bargaining Power Buyer group concentration: If the buyers Degree of standardization of are concentrated, meaning that there are supplier’s products: The degree to only a few large buyers, and they buy from a which a supplier’s product differs from large number of suppliers, they can pressure its competitors’ offering affects the the suppliers to lower costs and thus affect buyer’s bargaining power. the profitability of the industries from which they buy. Threat of backward integration: The power of a buyer is enhanced if Buyer’s costs: The greater the importance there is a credible threat that the buyer of an item is to a buyer, the more sensitive might enter the supplier’s industry. For the buyer will be to the price it pays. For example, the PC industry can keep the example, if the component sold by the price of computer monitors down by supplier represents 50 percent of the cost of threatening to make its own monitors if the buyer’s product, the buyer will bargain the price gets too high. hard to get the best price for that component. October 21, 2024 SERVICE EXCELLENCE 1  Reducing bargaining power Raising the entry barrier of suppliers By High promotional and R&D Seeking new supply sources expenditures Threatening to integrate Taking patents backwards into supply Tying up suppliers and/or Designing standardized distributors components so that many suppliers can produce it Members currently in the industry can come together to make it difficult for other players to enter e.g. Star Alliance, Ghana Chamber of Telecommunications October 21, 2024 SERVICE EXCELLENCE 23 bargaining power Reducing buyer substitutes Lowering threat of By increasing the number of buyers Building up switching costs (e.g. sold to branding- psychological) and pricing appropriately Threatening to integrate forwards into the buyers industry If it (branding) fails, copy the substitute and build in a Producing highly valued, differential advantage differentiated products Alternatively, form a strategic alliance with rival or move to different market October 21, 2024 SERVICE EXCELLENCE 24 Intensity of rivalry Structure of the competition – when there are large number of small competitors or a few equally balanced competitors the rivalry is keen/strong but less when there is a clear leader (at least 50% larger than second) Structure of cost – high fixed costs encourages price-cutting to fill capacity Degree of differentiation – commodity products encourage rivalry unlike highly differentiated ones Switching costs – less rivalry when there is high switching costs as the product is specialized (training, customized software) Strategic objectives – build strategies tend to induce greater competition than hold or harvesting Exit barriers – when they are high due to lack of alternative opportunities An intensive competitive environment means that the value created by firms in satisfying customer needs is given away to buyers through lower prices, or reduced through advertising wars, or passed on to suppliers through higher prices for raw materials and components In Europe for example the lifting of trade barriers to trade between countries has radically altered industry structure by affecting its underlying determinants - threat of new entrants and the growth in buyer/supplier power through acquisitions or merger October 21, 2024 SERVICE EXCELLENCE 25  First Application of the Five Forces Model The five forces model can be used to assess the attractiveness of an industry by determining the level of threat to industry profitability for each of the forces. If a firm fills out the form shown on the next slide and several of the threats to industry profitability are high, the firm may want to reconsider entering the industry or think carefully about the position it would occupy. October 21, 2024 SERVICE EXCELLENCE 1  First Application of the Five Forces Model COMPETITIVE FORCES 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. October 21, 2024 SERVICE EXCELLENCE 1  Second Application of the Five Forces Model Second Application of the Model 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 to answer several key questions. The questions are shown on the next slide, and help a firm project the potential success of a new venture in a particular industry. October 21, 2024 SERVICE EXCELLENCE 1  Second Application of the Five Forces Model 1. Is the industry a realistic place for our new venture to enter? 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? 3. Is there a unique position in the industry that avoids or diminishes the forces that suppress industry profitability? 4. Is there a superior business model that can be put in place that would be hard for industry incumbents to duplicate? October 21, 2024 SERVICE EXCELLENCE 1  Industry Types and the Opportunities They Offer Emerging Industries Fragmented Industries Industries in which standard Industries that are characterized by a operating procedures have yet to be large number of firms of developed. approximately equal size. Opportunity: First-mover Opportunity: Consolidation.-mergers advantage. and acquisitions October 21, 2024 SERVICE EXCELLENCE 1  Industry Types and the Opportunities They Offer Mature Industries Declining Industries Industries that are experiencing Industries that are experiencing a slow or no increase in demand. reduction in demand. Opportunities: Process innovation Opportunities: Leadership, and after-sale service innovation. establishing a niche market, and pursuing a cost reduction strategy. October 21, 2024 SERVICE EXCELLENCE 1  Industry Types and the Opportunities They Offer Global Industries Industries that are experiencing significant international sales. Opportunities: Multi-domestic and global strategies. October 21, 2024 SERVICE EXCELLENCE 1  Competitor Analysis What is a Competitor Analysis? A competitor analysis is a detailed analysis of a firm’s competition. It helps a firm understand the positions of its major competitors and the opportunities that are available. A competitive analysis grid is a tool for organizing the information a firm collects about its competitors. October 21, 2024 SERVICE EXCELLENCE 1  Types of Competitors New Ventures Face October 21, 2024 SERVICE EXCELLENCE 1  Sources of Competitive Intelligence Collecting Competitive Intelligence A new venture should take care To complete a competitive analysis that it collects competitive grid, a firm must first understand the intelligence in a professional and strategies and behaviours of its ethical manner. competitors. The information that is gathered by a firm to learn about its competitors is referred to as competitive intelligence. October 21, 2024 SERVICE EXCELLENCE 1  Sources of Competitive Intelligence 1. Attend conferences and trade shows. 2. Purchase competitor’s products. 3. Study competitors’ Web sites. 4. Set up Google and Yahoo e-mail alerts. 5. Read industry-related books, magazines, and Web sites. 6. Talk to customers about what motivated them to buy your product as opposed to your competitor’s product. October 21, 2024 SERVICE EXCELLENCE 1  Completing a Competitive Analysis Grid Competitive Analysis Grid A tool for organizing the information a firm collects about its competitors A competitive analysis grid can help a firm see how it stakes up against its competitors, provide ideas for markets to pursue, and identify its primary sources of competitive advantage. October 21, 2024 SERVICE EXCELLENCE 1  A Competitive Analysis Grid for Expresso Fitness October 21, 2024 SERVICE EXCELLENCE 1  Questions to Practice Identify and discuss the five competitive forces that determine industry profitability. What is an industry analysis and why is it important for a new firm to analyse the industry in which it may want to compete? Identify and discuss the six major sources of barriers that can restrict a firm’s entry into a competitive market? Discuss the four primary factors that play a role in determining the nature and intensity of the bargaining power of buyers in a competitor market? October 21, 2024 SERVICE EXCELLENCE 1 October 21, 2024 SERVICE EXCELLENCE 40