Dr.
John Mensah
(Department of Supply Chain
and Information Systems)
KSB-KNUST
Copyright ©2012 Pearson Education
Entrepreneurship: Successfully
Launching New Ventures
Industry and Competitor Analysis
Lecture 5
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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
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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5.1 Industry Analysis (1 of 3)
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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5.1 Industry Analysis (2 of 3)
Some industries are simply more attractive than others in
terms of their annual growth rate and other factors.
• Researchers discovered that from 8 to 30 percent of the
variation in firm profitability is a function of the industry in
which a firm chooses to compete.
– As a result, entrepreneurs should consider the overall
attractiveness of an industry when they are deciding if
they will or will not pursue a particular opportunity.
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5.1 Industry Analysis (3 of 3)
• Studying industry trends and using the five forces model
are two techniques entrepreneurs have available for
assessing industry attractiveness.
– Study Environmental and Business Trends
– The Five Competitive Forces Model
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Studying Industry Trends (1 of 3)
• 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
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Studying Industry Trends (2 of 3)
• 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 3)
• 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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5.2 The Five Forces Model (1 of 2)
• Developed by Michael Porter, 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:
▪ The threat of substitutes
▪ The threat of new entrants
▪ Rivalry among existing firms
▪ The bargaining power of suppliers
▪ The bargaining power of buyers
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5.2 The Five Forces Model (2 of 2)
• 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.
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Figure 5.1 Forces That Determine
Industry Profitability
Threat of Threat of New Rivalry Among
Substitutes Entrants Existing Firms
Bargaining Power Bargaining
of Suppliers Power of Buyers
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Threat of Substitutes (1 of 2)
• In general, industries are more attractive when the threat
of substitutes is low.
– This means that products from other industries cannot
easily serve as substitutes for the products firms in a
certain industry are manufacturing and selling.
▪ 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.
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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.
– 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 experience
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Threat of New Entrants (1 of 6)
• 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 6)
Barriers to Entry
Barrier to Entry Explanation
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.
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.
Capital requirements The need to invest large amounts of money to gain
entrance to an industry is another barrier to entry.
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Threat of New Entrants (3 of 6)
Barriers to Entry (continued)
Barrier to Entry Explanation
Cost advantages Existing firms may have cost advantages not related to
independent of size size. For example, the existing firms in an industry may
have purchased land when it was less expensive than it is
today.
Access to Distribution channels are often hard to crack. This is
distribution particularly true in crowded markets, such as the
channels convenience store market.
Government and Some industries, such as banking and broadcasting,
legal barriers require the granting of a license by a public authority to
compete.
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Threat of New Entrants (4 of 6)
• Nontraditional Barriers to Entry
– It is difficult for startups to execute barriers to entry
that are expensive, such as economies of scale,
because money is usually tight.
– Startups 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 (5 of 6)
Nontraditional Barriers to Entry
Barrier to Entry Explanation
Strength of If a startup puts together a world-class management
management team team, it may give potential rivals pause in taking on
the startup in its chosen industry.
First-mover advantage If a startup pioneers an industry or a new concept
within an industry, the name recognition the startup
establishes may create a barrier to entry.
Passion of the If the employees of a startup are motivated by the
management team and unique culture of a startup, and anticipate a large
employees financial reward, this is a combination that cannot be
replicated by larger firms.
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Threat of New Entrants (6 of 6)
Nontraditional Barriers to Entry (continued)
Barrier to Entry Explanation
If a startup 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 startup a meaningful leg up in terms of e-
commerce opportunities.
If a startup invents a new approach to an industry and
Inventing a new
executes it in an exemplary fashion, these factors
approach to an industry
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 of The more competitors there are, the more
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
– 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 a
concentration critical product to a large number of buyers, the
supplier has an advantage.
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.
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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.
Threat of forward The power of a supplier is enhanced if there is
integration a credible possibility that the supplier might
enter the buyer’s industry.
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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.
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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
concentration 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.
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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
standardization of differs 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.
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5.3 The Value of the Five Forces
Model (1 of 2)
• 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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Table 5.2 Determining the Attractiveness of
an Industry Using the Five Forces Model
Threat to Industry Threat to Industry Threat to Industry
Profitability Profitability Profitability
Competitive Force Low Medium High
blank blank blank
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
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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5.3 The Value of the Five Forces
Model (2 of 2)
• 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, shown in the figure on the next slide,
help a firm project the potential success of a new
venture in a particular industry.
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Figure 5.2 Using the Five Forces Model to Pose
Questions to Determine the Potential Success of a
New Venture
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5.4 Industry Types and the
Opportunities They Offer (1 of 3)
• 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.
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5.4 Industry Types and the
Opportunities They Offer (2 of 3)
• 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.
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5.4 Industry Types and the
Opportunities They Offer (3 of 3)
• Global Industries
– Industries that are experiencing significant
international sales.
▪ Opportunities: Multidomestic and global strategies.
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5.5 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.
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Figure 5.3 Types of Competitors New
Ventures Face
Direct Indirect Future Competitors
Competitors Competitors
Businesses that are
Businesses Businesses not yet direct or
offering identical offering close indirect competitors
or similar substitute but could be at any
products products time
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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’ websites and social media sites
• Set up Google Alerts
• Read industry-related books, magazines, and websites
• 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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Table 5.5 Competitive Analysis Grid for
Allbirds
Name Allbirds Nike Brooks New Balance Sketchers
Price Even Even Even Even Even
Selection Disadvantage Advantage Even Even Even
Comfort Advantage Even Even Even Advantage
Performance Even Even Advantage Advantage Even
Design Advantage Even Even Even Disadvantage
Cost structure Disadvantage Advantage Even Even Even
Eco-friendly/
Advantage Disadvantage Disadvantage Disadvantage Disadvantage
sustainability
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