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Study Guide in Tech101 Technopreneurship Module No. 5

STUDY GUIDE FOR MODULE NO. 5

INDUSTRY AND COMPETITOR ANALYSIS

MODULE OVERVIEW

This module focuses on industry analysis and competitor analysis. It discusses about industry
analysis, which is business research that focuses on the potential of an industry. Moreover, it also
tackles about competitor analysis, which is a detailed evaluation of a firm’s competitors. Once a firm
decides to enter an industry and chooses a market in which to compete, it must gain an
understanding of its competitive environment. Lastly, it covers at how a firm identifies its competition
and the importance of completing a competitive analysis grid.

MODULE LEARNING OBJECTIVES

At the end of this module, you will:

• Explain the purpose of an industry analysis;
• Identify the five competitive forces that determine industry profitability;
• Explain the role of “barriers to entry” in creating disincentives for firms to enter an industry;
• Identify the nontraditional barriers to entry that are especially associated with entrepreneurial
firms;
• List the four industry-related questions to ask before pursuing the idea for a firm;
• Identify the five primary industry types and the opportunities they offer;
• Explain the purpose of a competitor analysis;
• Identify the three groups of competitors a new firm will face;
• Describe ways a firm can ethically obtain information about its competitors;
• Describe the reasons for completing a competitive analysis grid.

LEARNING CONTENTS (Industry and Competitor Analysis)

What is Industry Analysis?

➢ An industry is a group of firms producing a similar product or service, such as airlines,
fitness drinks, furniture, or electronic games.
➢ An industry analysis is a business research that focuses on the potential of an industry.
What is Industry Analysis Important?
• 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 niche market it identified during feasibility analysis
is favorable for a new firm.

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• 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 is 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 avoid some of the negative attributes of
the industry as a whole?
Techniques Available to Assess Industry Attractiveness
➢ Study Environmental and Business 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
- 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.
- Figure 5.1 shows the Five Competitive Forces Model

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Figure 5.1: Five Competitive Forces Model

➢ Threat of Substitutes
- 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.
- 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.
➢ 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.

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- 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. Table 5.1 shows the different 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.
Cost advantages independent of Existing firm may have cost advantages not related
size to 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 Distribution channels are often hard to crack. This is
particularly true in crowded markets, such as the
convenience store market.
Government and legal barriers Some industries, such as broadcasting, require the
granting of a license by a public authority to
compete.
Table 5.1: Barriers to Entry

- Non Traditional 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. Table 5.2 shows the different Non
Traditional Barriers to Entry.
Barrier to Entry Explanation
Strength of management team If a start-up puts together a world-class
management team, it may give potential rivals
pause in taking on the start-up in its chosen

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industry.
First-mover advantage If a start-up pioneers an industry or a new concept
within an industry, the name recognition the start-up
establishes may create a barrier to entry.
Passion of the management team If the employees of a start-up are motivated by the
and employees unique culture of a start-up, and anticipate large
financial reward, this is a combination that cannot be
replicated by larger firms.
Unique Business Model If a start-up is able to construct a unique business
model and establish a network of relationships that
makes the business model work, this set of
advantages creates a barrier to entry.
Internet Domain Name Some Internet domain names are so “spot-on” that
they give a start-up a meaningful leg up in terms of
e-commerce opportunities.
Inventing a new approach to an If a start-up invents a new approach to an industry
industry and executes it in an exemplary fashion, these
factors create a barrier to entry for potential
imitators.
Table 5.2: Non Traditional Barriers to Entry

➢ 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.
- Table 5.3 shows the 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 likely it is
competitors that one or more will try to gain customers by cutting
its price.
Degree of difference between The degree to which products differ from one
products product to another affects industry rivalry.
Growth rate of an industry The competition among firms in a slow-growth
industry is stronger than among those in fast-growth

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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.
Table 5.3: Factors that determine the Intensity of Rivalry Among Existing Firms

➢ 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.
- Table 5.4 shows the factors that have an impact on the ability of suppliers to exert
pressure on buyers.
Supplier concentration When they are only a few suppliers that supply a
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.
Attractiveness of substitutes Supplier power is enhanced if there are no attractive
substitutes for the product or services the supplier
offers.
Threat of forward integration The power of a supplier is enhanced if there is a
credible possibility that the supplier might enter the
buyer’s industry.
Table 5.4: Factors on the ability of suppliers to exert pressure on buyers

➢ 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

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automakers to suppress the profitability of the industries from which they buy by
demanding price reductions.
- Table 5.5 shows the factors that have an impact on the ability of buyers to exert pressure
on suppliers.
Buyer group concentration If there are only a few large buyers, and they buy
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.
Degree of standardization of The degree to which a supplier’s product differs from
supplier’s products its competitors affect the buyer’s bargaining power.
Threat of backward integration The power of buyers is enhanced if there is a
credible threat that the buyer might enter the
supplier’s industry.
Table 5.5: Factors on the ability of buyers to exert pressure on suppliers

Industry Types and the Opportunities They Offer

• 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.
• 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.

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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 collect about its
competitors.
Identifying Competitors
• Figure 5.2 shows the types of competitors new ventures face.

Figure 5.2: Types of Competitors

Sources of Competitive Intelligence

• 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.
• Ethical ways to obtain information about competitors:
- Attend conferences and trade shows.
- Purchase competitor’s products.
- Study competitors’ Web sites.
- Set up Google and Yahoo! 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.
Completing a Competitive Analysis Grid
• A competitive analysis grid is a tool for organizing the information a firm collect about its
competitors.

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• 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.

LEARNING ACTIVITY 1

Application Questions:
1. Starbucks has been very successfully selling high-priced coffee despite the fact that consumers
could easily substitute Starbucks coffee for less expensive coffee or substitute its coffee for less
expensive drinks like soda, bottled water, or fitness drinks. Why do you think Starbucks has
historically been so successful avoiding substitutes? Do you think its advantage is eroding in this
area? If so why? If its advantage is eroding, what could the firm do to change this situation?
2. Mark Smith is thinking about starting a firm in the fitness drinks industry. When asked by a
potential investor if he had studied the industry, Mark replied, “The fitness drink industry is so full of
potential, it doesn’t need formal analysis.” Will Mark’s answer satisfy the investor? In what ways will
Mark limit his potential if his current attitude about the importance of industry analysis doesn’t
change?
EARNING ACTIVITY 2

LEARNING ACTIVITY 2

In your own words, answer the following questions:

1. What is the purpose of industry analysis?
2. What is meant by the term barrier to entry? Describe the six major sources of barriers to
entry that can restrict a firm’s entry into a market.
3. What is the purpose of a competitor analysis? Make your answer as complete as possible.

SUMMARY

❖ Industry analysis is business research that focuses on an industry’s potential. The

knowledge gleaned from this analysis helps a firm decide whether to enter an industry and if
it can carve out a position in that industry that will provide it a competitive advantage.
❖ Porter’s five forces model includes threat of substitutes, threat of new entrants, rivalry
among existing firms, bargaining power of suppliers and bargaining power of buyers.
❖ The five primary industry types include emerging industry, fragmented industry, mature
industry, declining industry and global industry.
❖ A competitor analysis is a detailed analysis of a firm’s competition. Direct competitors,
indirect competitors and future competitors are the three groups of competitors a new firm
faces.

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❖ A competitive analysis grid is a tool for organizing the information a firm collect about its
competitors.

REFERENCES

Barringer, B.R. & Ireland, R.D. (2013). Entrepreneurship: Successfully Launching New Ventures,
4th Ed. Pearson Education.

Scarborough, Norman M. (2011). Essentials of Entrepreneurship and Small Business Management,

6th Ed. Pearson.

Allen, Kathleen R. (2016). Launching New Ventures: An Entrepreneurial Approach, 7 th Ed. Cengage
Learning.

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