Entrepreneurship: Successfully Launching

New Ventures
Sixth Edition, Global Edition

Chapter 5
Industry and
Competitor Analysis

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Learning Objectives
5.1 Explain the purpose of an industry analysis.
5.2 Identify and discuss the five competitive forces that
determine industry profitability.
5.3 Explain the value that entrepreneurial firms create by
successfully using the five forces model.
5.4 Identify the five primary industry types and the
opportunities they offer.
5.5 Explain the purpose of a competitor analysis and a
competitive analysis grid.

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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 panels.
• Industry Analysis
– Is business research that focuses on the potential
of an industry.

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Why Is Industry Analysis Important?
Industry Analysis Importance
• Regardless of how eager entrepreneurs are to start a
business, they are not adequately prepared until they
understand the industry or industries they plan to enter and
in which they intend to compete.
• Once it is determined 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 and
outs of the industry.
• The analysis helps a firm determine if the target market it
identified during feasibility analysis is favorable for a new
firm.

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Three Key Questions
When studying an industry, an entrepreneur must answer
three questions before pursuing the idea of starting a firm.
• Question 1
– Is the industry accessible—in other words, is it a
realistic place for a new venture to enter?
• Question 2
– Does the industry contain markets that are ripe for
innovation or are underserved?
• Question 3
– Are there positions in the industry that will avoid some
of the negative attributes of the industry as a whole?
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Techniques Available to Assess Industry
Attractiveness
• Assessing Industry Attractiveness
– Study Environmental and Business Trends
– The Five Competitive Forces Model

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Studying Industry Trends (1 of 4)
• The first technique an entrepreneur has available to
discern the attractiveness of an industry is to study
industry trends.
• There are two types of trends:
– Environmental trends
– Business trends
• 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.

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Studying Industry Trends (2 of 4)
• Environmental Trends
– The strength of an industry often surges or wanes
because environmental trends shift in favor or against
the industry.
– Environmental trends include economic trends, social
trends, technological advances, and political and
regulatory changes.
– For example, companies in industries selling products
to seniors, such as the hearing aid industry, benefit
from the social trend of the aging of the population.

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Studying Industry Trends (3 of 4)
• An example: IBISWorld’s assessment of the future of the
gym, health, and fitness clubs industry in the United
States.
• The Gym, Health and Fitness Clubs industry has benefited from recent
marketing campaigns aimed at fighting obesity, as well as consumer
trends towards improved health. Further driving demand for industry
services, many health-conscious individuals have incorporated fitness
into their daily regimen. Additionally, the number of people aged 20 to
64, the largest gym-going demographic, has grown, spurring demand
for gym memberships over the period.

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Studying Industry Trends (4 of 4)
• Business Trends
– Other trends affect industries that aren’t environmental
trends per se but are part of the core nature of an
industry.
– For example, the firms in some industries 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.

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The Five Competitive Forces Model (1 of 3)
• Explanation of the 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.

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The Five Competitive Forces Model (2 of 3)
• Explanation of the Five Forces Model (continued)
– 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.
– As mentioned in previous chapters, industry reports,
produced by companies such as IBISWorld and Mintel,
provide substantive information for analyzing the
impact of the five forces on specific industries.

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The Five Competitive Forces Model (3 of 3)
Figure 5.1 Forces That Determine Industry Profitability

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Threat of Substitutes (1 of 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.
– Because 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 ifCopyright
the price gets too high.
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Threat of Substitutes (2 of 2)
• Threat of Substitutes (continued)
– The extent to which substitutes suppress the
profitability of an industry depends on the propensity
for buyers to substitute between alternatives.
– Consider the price of airplane tickets. If the price gets
too high, businesspeople will increasingly switch to
videoconferencing services such as Skype or Google
Hangouts as a substitute for travel.
– 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.

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Threat of New Entrants (1 of 7)
• Threat of New Entrants
– 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.

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Threat of New Entrants (2 of 7)
Barriers to Entry
Barrier to Entry Explanation
Industries that are characterized by large
economies of scale are difficult for new firms to
Economies of Scale
enter, unless they are willing to accept a cost
disadvantage.
Industries such as the soft drink industry that
are characterized by firms with strong brands
Product differentiation
are difficult to break into without spending
heavily on advertising.
The need to invest large amounts of money to
Capital requirements gain entrance to an industry is another barrier
to entry.

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Threat of New Entrants (3 of 7)
Barriers to Entry (continued)
Barrier to Entry Explanation
Existing firms may have cost advantages not
Cost advantages related to size. For example, the existing firms
independent of size in an industry may have purchased land when it
was less expensive than it is today.
Distribution channels are often hard to crack.
Access to distribution
This is particularly true in crowded markets,
channels
such as the convenience store market.
Some industries, such as banking and
Government and legal
broadcasting, require the granting of a license
barriers
by a public authority to compete.

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Threat of New Entrants (4 of 7)
• 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.
• There is a category of barriers to entry called nontraditional
barriers to entry, which are barriers particularly suited to
start-up firms.

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Threat of New Entrants (5 of 7)
• 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.

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Threat of New Entrants (6 of 7)
Nontraditional Barriers to Entry
Barrier to Entry Explanation
If a start-up puts together a world-class management
Strength of
team, it may give potential rivals pause in taking on
management team
the start-up in its chosen industry.
If a start-up pioneers an industry or a new concept
First-mover advantage within an industry, the name recognition the start-up
establishes may create a barrier to entry.
If the employees of a start-up are motivated by the
Passion of the
unique culture of a start-up, and anticipate a large
management team and
financial reward, this is a combination that cannot be
employees
replicated by larger firms.

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Threat of New Entrants (7 of 7)
Nontraditional Barriers to Entry (continued)
Barrier to Entry Explanation
If a start-up is able to construct a unique business
model and establish a network of relationships that
Unique business model
makes the business model work, this set of
advantages creates a barrier to entry.
Some Internet domain names are so “spot-on” that
Internet domain name they give a start-up a meaningful leg up in terms of
e-commerce opportunities.
If a start-up invents a new approach to an industry
Inventing a new
and executes it in an exemplary fashion, these
approach to an industry
factors create a barrier to entry for potential imitators.

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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.

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Rivalry Among Existing Firms (2 of 3)
Factors that determine the intensity of the rivalry among
existing firms in an industry

Number and balance The more competitors there are, the more
of competitors likely it is that one or more will try to gain
customers by cutting its price.
Degree of difference The degree to which products differ from one
between products producer to another affects industry rivalry.

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Rivalry Among Existing Firms (3 of 3)
Factors that determine the intensity of the rivalry among
existing firms in an industry (continued)

Growth rate of an The competition among firms in a slow-growth

industry industry is stronger than among those in fast-
growth industries.
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.

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Bargaining Power of Suppliers (1 of 3)
• Bargaining Power of Suppliers
– In general, industries are more attractive when the
bargaining power of suppliers is low.
– 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.
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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 that supply

concentration a critical product to a large number of buyers, the
supplier has an advantage. (ex, pharmaceutical
industry).

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.
(software providers of management solutions).

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Bargaining Power of Suppliers (3 of 3)
Factors that have an impact on the ability of suppliers to
exert pressure on buyers (continued)

Attractiveness of Supplier power is enhanced if there are no

substitutes attractive substitutes for the products or services
the supplier offers. (ex, Microsoft).
Threat of forward The power of a supplier is enhanced if there is a
integration credible possibility that the supplier might enter
the buyer’s industry. (ex, if Microsoft produces it
own PC).

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Bargaining Power of Buyers (1 of 3)
• Bargaining Power of Buyers
– In general, industries are more attractive when the
bargaining power of buyers (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, 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.
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Bargaining Power of Buyers (2 of 3)
Factors that have an impact on the ability of buyers to exert
pressure on suppliers

Buyer group If there are only a few large buyers, and they buy from
concentration 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.

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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 product differs

standardization of from its competitors affects the buyer’s
supplier’s products bargaining power.
Threat of backward The power of buyers is enhanced if there is a
integration credible threat that the buyer might enter the
supplier’s industry. (ex, Apple creating its own
processor chip).

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First Application of the Five Forces
Model (1 of 2)
• In summary, the five competitive forces help the founder
or founders of a new venture understand the structure of
the industry they are about to enter. Along with helping a
firm understand the dynamics of the industry it plans to
enter, the five forces model can be used in two ways:
• 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 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.
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First Application of the Five Forces
Model (2 of 2)
Assessing Industry Attractiveness Using the Five Forces Model
Threat to Industry Threat to Industry Threat to Industry
Profitability Profitability Profitability
Competitive Force Low Medium High
Threat of substitutes blank blank blank
Threat of new entrants blank blank blank
Rivalry among existing firms blank blank blank
Bargaining power of suppliers blank blank blank
Bargaining power of buyers blank blank blank

Instructions:
Step 1: Select in 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.

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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 are shown in the figure on the next slide,
answering them should help a firm project the potential
success of a new venture in a particular industry.
– 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 the figure increases the likelihood that the new
venture will be successful.
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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

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Industry Types and the Opportunities
They Offer (1 of 3)
• Along with studying the factors discussed previously, it is helpful for
a new venture to study industry types to determine the
opportunities they offer. The five most prevalent industry types,
are emerging industries, fragmented industries, mature industries,
declining industries, and global industries.
• Emerging Industries
– Industries in which standard operating procedures have yet to be
developed.
 Opportunity: First-mover advantage.
 May be short-lived, however, many new ventures enter emerging
industries because barriers to entry are usually low and there is no
established pattern of rivalry.
• Fragmented Industries
– Industries that are characterized by a large number of firms of
approximately equal size.
 Opportunity: Consolidation.
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Industry Types and the Opportunities
They Offer (2 of 3)
• Mature Industries
– Industries that are experiencing slow or no increase in
demand, has numerous repeat (rather than new)
customers, and has limited product innovation.
 Opportunities: Process innovation and after-sale
service innovation, surprising incumbents who
thought nothing new was possible in their industries.
Ex, Soymilk.
– The lure of mature industries, for start-ups, is that they’re often large
industries with seemingly vast potential if product and/or process
innovations can be effectively introduced and the industry can be
revitalized.

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Industry Types and the Opportunities
They Offer (3 of 3)
• Declining Industries
– Industries that are experiencing a reduction in demand.
 Opportunities: employ one of three different strategies in
declining industries:
– Leadership, establishing a niche market, and pursuing a
cost reduction strategy.
• Global Industries
– Industries that are experiencing significant international sales.
 Opportunities:
– Multidomestic, country-by-country basis and vary
their product or service offerings to meet the
demands of the local market. Ex, food companies.
– Global strategies, use the same basic approach in all
foreign markets. Ex, shoes producing companies.
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Competitor Analysis
• After a firm has gained an understanding of the industry
and the target market in which it plans to compete, the
next step is to complete a 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 primary
competitors.

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Identifying Competitors
Types of Competitors New Ventures Face

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Types of Competitors, (1 of 2)
• Direct competitors:
– They offer products or services that are identical or highly similar to those
of the firm wants to sell.
– They are the most important because they are going after the same
customers as the new firm.
• Indirect competitors:
– They offer close substitutes to the product the firm wants to sell.
– They target the same basic need that is being met by the new firm’s
product.
– Ex, Coca-Cola.

• Future competitors: These are companies that are not yet direct or indirect
competitors but could move into one of these roles at any time. Ex, Amazon

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Types of Competitors, (2 of 2)
• If a firm does not have a direct competitor, it shouldn’t forget that the
status quo can be the toughest competitor of all. So, 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 to or learning
something new, to motivate someone to buy a new product or service.

• Creating meaningful value and sharp differentiation from competitors

are actions small firms in crowded industries can take to remain
competitive and gain market share.

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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.

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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 product.

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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.

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Competitive Analysis Grid for Panera
Bread
Table 5.5 Competitive Analysis Grid for Panera Bread
McAlister’s Chipotle Panda
Name Panera Bread Deli Mexican Grill Express Qdoba
Price Even Even Even Advantage Even
Selection Even Even Disadvantage Disadvantage Disadvantage
Perception of
providing good, Advantage Even Even Disadvantage Even
wholesome food
Dining
Advantage Even Even Disadvantage Disadvantage
environment
Speed of service Even Even Advantage Advantage Advantage
Availability of
Gluten free, non-
Even Even Even Disadvantage Even
GMO, organic,
etc.
Social
Consciousness/ Advantage Even Advantage Even Even
Philanthropy

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