Chapter 5
Industry and
Competitor Analysis
Bruce R. Barringer
R. Duane Ireland
Copyright © 2016 Pearson Education Ltd. 5-1
Chapter Objectives
1. Identify and discuss the five competitive forces that
determine industry profitability.
2. Identify the five primary industry types and the
opportunities they offer.
3. Explain the purpose of a competitor analysis and
types of competitors
Copyright © 2016 Pearson Education Ltd. 5-2
What is Industry Analysis?
• Industry is a group of firms producing a similar product or service,
such as music, solar panel manufacturing.
• Industry Analysis is business research that focuses on the
potential of an industry. It helps determine if the target markets
identified during the feasibility analysis are accessible and which
ones represent the best point of entry for the new venture.
• Competitor Analysis is a detailed evaluation of a firm’s
competitors. Once a firm decides to enter an industry, it must gain
an understanding of its competitive environment.
Copyright © 2016 Pearson Education Ltd. 5-3
Why is Industry Analysis Important?
Importance
• 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
Industry Analysis
is needed to learn the ins and outs
of the industry.
• The analysis helps a firm determine
if the target market identified
during feasibility analysis is
favorable for a new firm.
Copyright © 2016 Pearson Education Ltd. 5-4
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?
Copyright © 2016 Pearson Education Ltd. 5-5
Why is Industry Analysis Important?
• A new venture should think about its position 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.
• Some industries are simply more attractive than others in
terms of their annual growth rate and other factors.
For example, the industry for e-book publishing is expected to
grow at an annual rate of 7.5 % 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% only.
Copyright © 2016 Pearson Education Ltd. 5-6
How Industry and Firm-Level Factors
Affect Performance
• What this means is that the conditions for growing a company are
significantly different across the various industries.
• Previous studies have found that from 8% to 30% of the variation
in firm profitability is directly attributable to the industry in
which a firm competes.
• Industry-Level Factors: threat of new entrants, rivalry among
existing firms, bargaining power of buyers, and related factors.
• Other factors include firm’s assets, products, culture, teamwork
among its employees, reputation, and other resources. These are
called Firm-Level Factors.
Copyright © 2016 Pearson Education Ltd. 5-7
Techniques Available to Assess Industry
Attractiveness
Assessing Industry Attractiveness
Study Environmental The Five Competitive
and Business Trends Forces Model
Copyright © 2016 Pearson Education Ltd. 5-8
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 (such as eyeglasses
and hearing aids) are benefiting by the aging of the population. But
Industries selling food products that are high in sugar (such as candy
and sugared soft-drink) suffer as the result of a renewed emphasis on
health and fitness.
• Business Trends are 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? Is outsourcing a cheaper option than
producing at home?
Copyright © 2016 Pearson Education Ltd. 5-9
The Five Competitive Forces Model
1 of 2
• 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.
• Industry profitability is not a function of what the product looks
like or whether it embodies high or low technology but of
industry structure.
• They help determine the average rate of return for the firms in an
industry (e.g., the restaurant industry) or a particular segment of
an industry (e.g., the fast-casual segment of the restaurant
industry) by applying pressure on industry profitability.
Copyright © 2016 Pearson Education Ltd. 5-10
The Five Competitive Forces Model
2 of 2
• 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.
Copyright © 2016 Pearson Education Ltd. 5-11
Threat of Substitutes
1 of 2
• In general, industries are more attractive when the threat of
substitutes is low.
• This means that products or services from other industries can not
easily serve as substitutes for the products or services being made
and sold in the focal firm’s industry.
• 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 (defeated), because consumers will opt
out if the price gets too high (e.g., prices of airplane tickets).
Copyright © 2016 Pearson Education Ltd. 5-12
Threat of Substitutes
2 of 2
• The extent to which substitutes suppress the profitability of an
industry depends on the propensity/tendency 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.
Starbucks, for example, 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 Starbucks for less
expensive alternatives.
Starbucks is also 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.
Copyright © 2016 Pearson Education Ltd. 5-13
Threat of New Entrants
1 of 6
• An industry is more attractive, if the threat of entry is low.
• 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 creating barriers to entry.
• A barrier to entry is a condition that creates a disincentive for a
new firm to enter an industry.
Copyright © 2016 Pearson Education Ltd. 5-14
Threat of New Entrants
2 of 6
Barrier to Entry Explanation
Economies of Scale Industries that are characterized by large economies
(occur when mass-
producing a product results of scale are difficult for new firms to enter, unless
in lower average costs) they are willing to accept a cost disadvantage.
Industries such as the soft drink industry that are
Product
characterized by firms with strong brands are difficult
Differentiation
to break into without spending heavily on advertising.
Capital The need to invest large amounts of money to gain
Requirements entrance to an industry is another barrier to entry.
Copyright © 2016 Pearson Education Ltd. 5-15
Threat of New Entrants
3 of 6
Barrier to Entry Explanation
Existing firms may have cost advantages not related
to size. For example, the existing firms in an industry
Cost Advantages may have purchased land when it was less expensive
Independent of Size than it is today, so the new entrants would have to pay
for the same assets at the time of their entry.
Distribution channels are often hard to crack. This is
Access to Distribution particularly true in crowded markets (e.g., convenience
Channels store market).
Some industries (e.g., banking, broadcasting,
Government and
biotechnology, software, patents, trademarks, and
Legal Barriers
copyrights) require the granting of a license by a
public authority to compete.
Copyright © 2016 Pearson Education Ltd.
5-16
Threat of New Entrants
4 of 6
• Nontraditional Barriers to Entry
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 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 (e.g., assembling a world-class
management team that would be difficult for another company to
replicate).
Copyright © 2016 Pearson Education Ltd. 5-17
Threat of New Entrants
5 of 6
Copyright © 2016 Pearson Education Ltd. 5-18
Threat of New Entrants
6 of 6
Copyright © 2016 Pearson Education Ltd. 5-19
Rivalry Among Existing Firms
1 of 3
• In most industries, the major determinant of industry
profitability is the level of competition among existing firms.
• Some industries are fiercely (aggressive) 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 (lowered).
For example, the airline industry is fiercely competitive and profit
margins hinge largely on fuel prices and consumer demand.
In contrast, the market for specialized medical equipment is less
competitive, and profit margins are higher.
Copyright © 2016 Pearson Education Ltd. 5-20
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 more likely it
Balance of is that one or more will try to gain customers by
Competitors cutting its price.
The degree to which products differ from one
Degree of product to another affects industry rivalry.
Difference For example, paper products producers tend
Between to compete on price because there is no
Products meaningful difference between one
manufacturer’s products and another’s
Copyright © 2016 Pearson Education Ltd. 5-21
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 slow-growth
Growth Rate of an
industry (e.g., insurance) is stronger than
Industry
among those in fast-growth industries.
Firms that have high fixed costs must sell a higher
Level of Fixed
volume of their product to reach the break-even
Costs
point than firms with low fixed costs. This may
eventually lead to price cutting.
Copyright © 2016 Pearson Education Ltd. 5-22
Bargaining Power of Suppliers
1 of 3
• 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.
Copyright © 2016 Pearson Education Ltd. 5-23
Bargaining Power of Suppliers
2 of 3
Factors that have an impact on the ability of suppliers to
exert pressure on buyers
When there are only a few suppliers that supply a
critical product to a large number of buyers, the
Supplier
supplier has an advantage (e.g., in the
Concentration
pharmaceutical industry, few drug manufacturers
are selling to thousands of doctors and patients).
Switching costs are the fixed costs that buyers
Switching Costs encounter when switching or changing from one
supplier to another. If switching costs are high, a
buyer will be less likely to switch suppliers.
Copyright © 2016 Pearson Education Ltd. 5-24
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 product or services
the supplier offers.
Threat of The power of a supplier is enhanced if there is a
Forward credible possibility that the supplier might enter
Integration the buyer’s industry.
Copyright © 2016 Pearson Education Ltd. 5-25
Bargaining Power of Buyers
1 of 3
• 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 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.
Similarly, if the automakers insisted that their suppliers provide
better-quality parts for the same price, the profitability of the
suppliers would suffer.
5-26
Copyright © 2016 Pearson Education Ltd.
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, and they buy
Buyer Group from a large number of suppliers, they can
Concentration pressure the suppliers to lower costs and thus
affect the profitability of the industries from which
they buy.
The greater the importance of an item is to a
buyer, the more sensitive the buyer will be to the
Buyer’s Costs price it pays. For example, if the component sold
by the supplier represents 50% of the cost of the
buyer’s product, the buyer will bargain hard to get
the best price for that component.
Copyright © 2016 Pearson Education Ltd. 5-27
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
Standardization differs from its competitors affects the buyer’s
of Supplier’s bargaining power.
Products
The power of buyers is enhanced if there is a
Threat of credible threat that the buyer might enter the
Backward supplier’s industry. For example, the PC industry
Integration can keep the price of computer monitors down by
threatening to make its own monitors if the price
gets too high.
Copyright © 2016 Pearson Education Ltd. 5-28
Industry Types and the Opportunities
They Offer
• Emerging Industries: New industries in which standard operating
procedures have yet to be developed.
• Opportunity: First-mover advantage gained by the first company 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.
Copyright © 2016 Pearson Education Ltd. 5-29
Industry Types and the Opportunities
They Offer
• Fragmented Industries: are characterized by a large number of
firms of approximately equal size.
• Opportunity: Consolidation, and establishing industry leadership .
• The most common way to do this is through a geographic rollup
strategy, in which one firm starts acquiring similar firms that are
located in different geographic areas.
For example: 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
Copyright © 2016 Pearson Education Ltd. 5-30
Industry Types and the Opportunities
They Offer
• 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.
• The temptation of mature industries, for start-ups, is that they are
often large industries with seemingly vast potential if product
and/or process innovations can be effectively introduced, and the
industry can be revitalized.
• Meat, for example, is a mature industry.
Copyright © 2016 Pearson Education Ltd. 5-31
Industry Types and the Opportunities
They Offer
• Declining Industries: are experiencing a reduction in demand.
The renting of DVDs and video games by mail and producing
and distributing hard copy textbooks are examples of products
associated with industries or segments of an industry that are in
some state of decline.
• Opportunities: Leadership: in which the firm tries to become the
dominant player in the industry. This is a rare strategy for a
startup in a declining industry.
Copyright © 2016 Pearson Education Ltd. 5-32
Industry Types and the Opportunities
They Offer
• Declining Industries
• Opportunities: establishing a niche market: which focuses on a
narrow segment of the industry that might be encouraged to
grow through product or process innovation.
• Finally, pursuing 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.
Copyright © 2016 Pearson Education Ltd. 5-33
Industry Types and the Opportunities
They Offer
• Global Industries: Industries that are experiencing
significant international sales. Many start-ups enter global
industries and from day one try to appeal to international
rather than just domestic markets.
• Opportunities: Multidomestic: 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 and global
strategies: 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.
Copyright © 2016 Pearson Education Ltd. 5-34
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.
Copyright © 2016 Pearson Education Ltd. 5-36
Identifying Competitors
Types of Competitors New Ventures Face
Copyright © 2016 Pearson Education Ltd. 5-37
