Unit 5 Industry and Competitor Analysis PDF

Unit 5 Industry and Competitor Analysis Unit Objectives 1. Explain the purpose of an industry analysis. 2. Identify and discuss the five competitive forces that determine industry profitability. 3. Explain the value that entrepreneurial firms create by successfully using the fiv...

Unit 5 Industry and Competitor Analysis Unit Objectives 1. Explain the purpose of an industry analysis. 2. Identify and discuss the five competitive forces that determine industry profitability. 3. Explain the value that entrepreneurial firms create by successfully using the five forces model. 4. Identify the five primary industry types and the opportunities they offer. 5. Explain the purpose of a competitor analysis and a competitive analysis grid. What is Industry Analysis? 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. Industry Analysis Is business research that focuses on the potential of an industry. Why is Industry Analysis Important? Importance Once it is determined Industry Analysis that a new venture is feasible in regard to the industry and market in which it will compete, a more in- depth analysis is needed to learn the ins  Three Key Questions When studying an industry, an entrepreneur must answer three questions before pursuing the idea of starting a firm. Question 1 Question 2 Question 3 Is the industry Are there positions in Does the industry accessible—in other the industry that avoid contain markets that words, is it a realistic some of the negative are ripe for innovation place for a new attributes of the or are underserved? venture to enter? industry as a whole? How Industry and Firm- Level Factors Affect Performance Firm-Level Factors Include a firm’s assets, products, culture, teamwork among its employees, reputation, and other resources. Industry-Level Factors Include threat of new entrants, rivalry among existing firms, bargaining power of buyers, and related factors. Conclusion In various studies, researchers have found that from 8% to 30% of the variation in firm profitability is directly attributable to the industry in which a firm competes. Techniques Available to Assess Industry Attractiveness Assessing Industry Attractiveness Study Environmental The Five Competitive and Business Trends Forces Model Studying Industry Trends Environmental Trends Include economic trends, social trends, technological advances, and political and regulatory changes. For example, industries that sell products to seniors are benefiting by the aging of the population. Business Trends Other trends that impact an industry. For example, are profit margins in the industry increasing or falling? Is innovation accelerating or waning? Are input costs going up or down? The Five Competitive Forces Model Porter’s Five Forces Model The five competitive forces model is a framework for understanding the structure of an industry. The model is composed of the forces that determine industry profitability. They help determine the average rate of return for the firms in an industry. Each of the five forces impacts the average rate of return for the firms in an industry by applying pressure on industry profitability. Well managed firms try to position their firms in a way that avoids or diminishes these forces—in an attempt to beat the average rate of return of the industry. The Five Competitive Forces Model Threat of Substitutes 1 The price that consumers are willing to pay for a product depends in part on the availability of substitute products. For example, there are few, if any, substitutes for prescription medicines, which is one of the reasons the pharmaceutical industry is so profitable. In contrast, when close substitutes for a product exist, industry profitability is suppressed, because consumers will opt out if the price gets too high. Threat of Substitutes 2 The extent to which substitutes suppress the profitability of an industry depends on the propensity for buyers to substitute between alternatives. This is why firms in an industry often offer their customers amenities to reduce the likelihood that they will switch to a substitute product, even in light of a price increase. 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. It provides these amenities to decrease the likelihood that its customers will “substitute” coffee at this shop for less expensive alternatives. Threat of New Entrants 1 of 6 If the firms in an industry are highly profitable, the industry becomes a magnet to new entrants. Unless something is done to stop this, the competition in the industry will increase, and average industry profitability will decline. Firms in an industry try to keep the number of new entrants low by erecting barriers to entry. A barrier to entry is a condition that creates a disincentive for a new firm to enter an industry. Threat of New Entrants 2 of 6 Barriers to Entry Barrier to Entry Explanation Industries that are characterized by Economies of Scale large economies of scale are difficult for new firms to enter, unless they are willing to accept a cost disadvantage. Industries such as the soft drink industry Product that are characterized by firms with differentiation strong brands are difficult to break into without spending heavily on advertising. Capital The need to invest large amounts of requirements money to gain entrance to an industry is another barrier to entry. Threat of New Entrants 3 of 6 Barriers to Entry (continued) Barrier to Entry Explanation Existing firms may have cost advantages Cost advantages not related to size. For example, the independent of existing firms in an industry may have size purchased land when it was less expensive than it is today. Distribution channels are often hard to Access to crack. This is particularly true in crowded distribution markets, such as the convenience store channels market. Government Some industries, such as banking and and legal broadcasting, require the granting of a barriers license by a public authority to compete. Threat of New Entrants 4 of 6 Nontraditional Barriers to Entry It is difficult for start-ups to execute barriers to entry that are expensive, such as economies of scale, because money is usually tight. 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. Threat of New Entrants 5 of 6 Nontraditional Barriers to Entry Barrier to Entry Explanation If a start-up puts together a world-class Strength of management team, it may give potential management rivals pause in taking on the start-up in team its chosen industry. If a start-up pioneers an industry or a First-mover new concept within an industry, the advantage name recognition the start-up establishes may create a barrier to If the employees of a start-up are entry. Passion of the motivated by the unique culture of a management start-up, and anticipate a large financial team and reward, this is a combination that cannot employees be replicated by larger firms. Threat of New Entrants 6 of 6 Nontraditional Barriers to Entry (continued) Barrier to Entry Explanation If a start-up is able to construct a unique Unique business model and establish a network business model of relationships that makes the business model work, this set of advantages creates a barrier to entry. Some Internet domain names are so Internet domain “spot-on” that they give a start-up a name meaningful leg up in terms of e- commerce opportunities. Inventing a new If a start-up invents a new approach to approach to an an industry and executes it in an industry exemplary fashion, these factors create a barrier to entry for potential imitators. Rivalry Among Existing Firms 1 of 3 Rivalry Among Existing Firms In most industries, the major determinant of industry profitability is the level of competition among existing firms. Some industries are fiercely competitive, to the point where prices are pushed below the level of costs, and industry- wide losses occur. In other industries, competition is much less intense and price competition is subdued. Rivalry Among Existing Firms 2 of 3 Factors that determine the intensity of the rivalry among existing firms in an industry Number and The more competitors there are, the balance of more likely it is that one or more will competitors try to gain customers by cutting its price. Degree of The degree to which products difference differ from one product to another between affects industry rivalry. products Rivalry Among Existing Firms 3 of 3 Factors that determine the intensity of the rivalry among existing firms in an industry (continued) The competition among firms in a Growth rate of slow-growth industry is stronger an industry than among those in fast-growth industries. Firms that have high fixed costs must Level of sell a higher volume of their product fixed costs to reach the break-even point than firms with low fixed costs. Bargaining Power of Suppliers 1 of 3 Bargaining Power of Suppliers 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 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. Bargaining Power of Suppliers 2 of 3 Factors that have an impact on the ability of suppliers to exert pressure on buyers Supplier When there are only a few suppliers concentratio that supply a critical product to a n large number of buyers, the supplier has an advantage. Switching costs are the fixed costs Switching that buyers encounter when switching costs or changing from one supplier to another. If switching costs are high, a buyer will be less likely to switch suppliers. Bargaining Power of Suppliers 3 of 3 Factors that have an impact on the ability of suppliers to exert pressure on buyers (continued) Attractivene Supplier power is enhanced if there ss of are no attractive substitutes for the substitutes product or services the supplier offers. Threat of The power of a supplier is enhanced if forward there is a credible possibility that the integration supplier might enter the buyer’s industry. Bargaining Power of Buyers 1 of 3 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. Bargaining Power of Buyers 2 of 3 Factors that have an impact on the ability of buyers to exert pressure on suppliers If there are only a few large buyers, Buyer group and they buy from a large number of concentratio suppliers, they can pressure the n suppliers to lower costs and thus affect the profitability of the industries from which they buy. The greater the importance of an item Buyer’s is to a buyer, the more sensitive the costs buyer will be to the price it pays. Bargaining Power of Buyers 3 of 3 Factors that have an impact on the ability of buyers to exert pressure on suppliers (continued) Degree of The degree to which a supplier’s standardizati product differs from its on of competitors affects the buyer’s supplier’s bargaining power. products Threat of The power of buyers is enhanced if backward there is a credible threat that the integration buyer might enter the supplier’s industry. First Application of the Five Forces Model 1 of 2 First Application of the 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 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.  First Application of the Five Forces Model 2 of 2 Assessing Industry Attractiveness Using the Five Forces Model Second Application of the Five Forces Model 1 of 2 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 help a firm project the potential success of a new venture in a particular industry. Second Application of the Five Forces Model 2 of 2 Using the Five Forces Model to Pose Questions to Determine the Potential Success of a New Venture in an Industry Industry Types and the Opportunities They Offer 1 Emerging Industries Industries in which standard operating procedures have yet to be developed. Opportunity: First-mover advantage. Fragmented Industries Industries that are characterized by a large number of firms of approximately equal size. Opportunity: Consolidation. Industry Types and the Opportunities They Offer 2 Mature Industries Industries that are experiencing slow or no increase in demand. Opportunities: Process innovation and after-sale service innovation. Declining Industries Industries that are experiencing a reduction in demand. Opportunities: Leadership, establishing a niche market, and pursuing a cost reduction strategy. Global Industries Industries that are experiencing significant international sales. Opportunities: Multidomestic and global strategies 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. Identifying Competitors Types of Competitors New Ventures Face Sources of Competitive Intelligence 1 of 2 Collecting Competitive Intelligence To complete a competitive analysis grid, a firm must first understand the strategies and behaviors of its competitors. The information that is gathered by a firm to learn about its competitors is referred to as competitive intelligence. A new venture should take care that it collects competitive intelligence in a professional and ethical manner. Sources of Competitive Intelligence 2 of 2 Ethical ways to obtain information about competitors Attend conferences and trade shows. Purchase competitors’ products. Study competitors’ Web sites and social media sites. Set up Google e-mail alerts. Read industry-related books, magazines, and Web sites. Talk to customers about what motivated them to buy your product as opposed to your competitor’s 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 stacks up against its competitors, provide ideas for markets to pursue, and identify its primary sources of competitive advantage. Competitive Analysis Grid Example