Entrepreneurship and

Innovation
Chapter 5: Industry And Competitor Analysis
 1. The purpose of an industry analysis.
2. The five competitive forces that determine industry
profitability.
Chapter's Learning
3. The value that entrepreneurial firms create by
objectives successfully using the five forces model.
4. Five primary industry types and the opportunities
they offer
5. The purpose of a competitor analysis and a
competitive analysis grid.
Chapter 5: Industry And
Competitor Analysis
The Purpose Of An Industry Analysis
What is Industry Analysis?
• An industry is a group of firms producing a similar product or service.
• Industry Analysis Is business research that focuses on the potential of an industry.
• The importance of Industry analysis:
 Once it is determined that a new venture is feasible, 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 is favorable for a new firm.
• A new venture to think about its position at both the company level and the product or
service level.
• The entrepreneurs have to understand the industries that they are aiming for before entering
the competition
Three Key Questions in studying an industry
• When studying an industry, an entrepreneur must answer three questions:
1. Is the industry accessible—in other words, is it a realistic place for a new venture to
enter?
2. Does the industry contain markets that are ripe for innovation or are underserved?
3. Are there positions in the industry that will avoid some of the negative attributes of the
industry as a whole?
What is Industry Analysis?
• To assess an industry attractiveness, entrepreneurs will use two techniquest, which are:

Studying
Industry Trends The Five Forces
Model
Studying Industry Trends
• The first technique an entrepreneur has available to discern the attractiveness of an industry is
to study industry trends:
• Environmental Trends
 Include economic trends, social trends, technological advances, and political and
regulatory changes.
 The P-E-S-T model (or its extensions PESTLE and STEEPLE)
 For example, industries that sell products to seniors are benefiting by the aging
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?
 Chapter 5: Industry And
Competitor Analysis
The Five Competitive Forces That Determine Industry Profitability
The Five Forces Model
• A framework for understanding the structure of an industry.
• These five forces determine industry profitability.
• To determine the average rate of return for the firms in an
industry.
• Each of the five forces applies pressure on industry profitability.
• Well managed firms try to position themselves to avoid or
diminish these forces.
The Five Forces Model
The Five 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.
• Profitability is suppressed if buyers choose to substitute between
alternatives.
• This is why firms in an industry often offer their customers amenities to
• An independently
reduce the likelihood that they owned will switch todoesn’t
coffee shop a substitute product, even in
just sell coffee.
• It also offers its patrons a convenient and pleasant place to meet, socialize, and study.
light of a price increase.
• It provides these amenities to decrease the likelihood that its customers will
“substitute” coffee at this shop for less expensive alternatives.
The Five Forces Model
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.
The Five Forces Model
Threat of New Entrants
• Traditional Barriers to Entry includes:
Economies of Scale: Industries Product differentiation: Capital requirements: The
that are characterized by large Industries such as the soft drink need to invest large amounts of
economies of scale are difficult industry that are characterized money to gain entrance to an
for new firms to enter. by firms with strong brands are industry is another barrier to
difficult to break into without entry
spending heavily on
advertising.

Cost advantages: Existing firms Access to distribution Government and legal barriers:
may have cost advantages such channels: Distribution channels Some industries, such as
as having purchased land when are often hard to crack. This is banking and broadcasting,
it was cheaper. particularly true in crowded require the granting of a license
markets, such as the by a public authority to
convenience store market. compete.
The Five Forces Model
Threat of New Entrants
• 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.
The Five Forces Model
Threat of New Entrants
• Non-Traditional Barriers to Entry includes:
Strength of management team: If First-mover advantage: If a start- Passion of the management team
a start-up puts together a world- up pioneers an industry or a new and employees: If the employees
class management team, it may concept within an industry, the of a start-up are motivated by the
give potential rivals pause in name recognition the start-up unique culture of a start-up, and
taking on the start-up in its chosen establishes may create a barrier to anticipate a large financial reward,
industry. entry this is a combination that cannot
be replicated by larger firms

Unique business model: If a start- Internet domain name: Some Inventing a new approach to an
up is able to construct a unique Internet domain names are so industry: If a start-up invents a
business model and establish a “spot-on” that they give a start-up new approach to an industry and
network of relationships that a meaningful leg up in terms of e- executes it in an exemplary
makes the business model work commerce opportunities fashion, these factors create a
barrier to entry for potential
imitators
The Five Forces Model
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.
The Five Forces Model
Rivalry Among Existing Firms
• There are four primary factors that determine the nature and intensity of the rivalry among
exiting firms in an industry
Number and balance of Degree of difference
competitors: The more between products: The
competitors there are, the degree to which products
more likely it is that one or differ from one product to
more will try to gain another affects industry
customers by cutting its price rivalry

Growth rate of an industry: Level of fixed costs: Firms

The competition among that have high fixed costs
firms in a slow-growth must sell a higher volume of
industry is stronger than their product to reach the
among those in fast-growth break-even point than firms
industries with low fixed costs
The Five Forces Model
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 the quality is compromised, the quality of the finished product will suffer, and
the prices have to be lowered.
• If the suppliers are powerful, the industry profitability of the buyers will suffer.
The Five Forces Model
Bargaining Power Of Suppliers
• Several factors have an impact on the ability of suppliers to exert pressure on buyers and
suppress the profitability of the industries they serve
Supplier concentration: When Switching costs: Switching costs
there are only a few suppliers that are the fixed costs that buyers
supply a critical product to a large encounter when switching or
number of buyers, the supplier has changing from one supplier to
an advantage another. If switching costs are
high, a buyer will be less likely to
switch

Attractiveness of substitutes: Threat of forward integration: The

Supplier power is enhanced if power of a supplier is enhanced if
there are no attractive substitutes there is a credible possibility that
for the product or services the the supplier might enter the
supplier offers buyer’s industry.
The Five Forces Model
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.
The Five Forces Model
Bargaining Power of Buyers
• Factors that have an impact on the ability of buyers to exert pressure on suppliers
Buyer group concentration: If there Buyer’s costs: The greater the
are only a few large buyers, and they importance of an item is to a buyer,
buy from a large number of suppliers, the more sensitive the buyer will be to
they can pressure the suppliers to the price it pays
lower costs and thus affect the
profitability of the industries from
which they buy

Degree of standardization of Threat of backward integration: The

supplier’s products: The degree to power of buyers is enhanced if there is
which a supplier’s product differs from a credible threat that the buyer might
its competitors affects the buyer’s enter the supplier’s industry.
bargaining power
Chapter 5: Industry And
Competitor Analysis
Applications of The Five Forces Model
The Five Forces Model
Assessing Industry Attractiveness
The Five Forces Model
To Pose Questions to Determine the Potential Success of a New Venture in an Industry
Question 2

Question 1

Question 3

Question 4
 Chapter 5: Industry And
Competitor Analysis
Five primary industry types and the opportunities they offer
Emerging industries
• An emerging industry is a new industry in which standard operating procedures
have yet to be developed
• The firm that pioneers or takes the leadership of an emerging industry often
captures a first-mover advantage
• A first-mover advantage is a sometimes insurmountable 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
Fragmented industries
• A fragmented industry is one that is characterized by a large number of firms of
approximately equal size
• The primary opportunity for start-ups in fragmented industries is to consolidate
the industry and establish industry leadership
• The most common way to do this is through a geographic roll-up strategy, in
which one firm starts acquiring similar firms that are located in different
geographic areas
• 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
Mature industries
• A mature industry is an industry that is experiencing slow or no increase in
demand, has numerous repeat (rather than new) customers, and has limited
product innovation
• 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
Declining industries
• A declining industry is an industry or a part of an industry that is experiencing a reduction in
demand
• Typically, entrepreneurs shy away from declining industries because the firms in them are not
finding the types of attractive opportunities
• Sometime, start-up trying to jump in to stakes out a position in a declining industry that isn’t
being hotly contested.
• Entrepreneurial firms employ three different strategies in declining industries:
 Leadership strategy: the firm tries to become the dominant player in the industry
 Niche strategy: focuses on a narrow segment of the industry that might be encouraged to
grow through product or process innovation
 Cost reduction strategy: trying to achieve lower costs than industry incumbents through
process improvements
Global industries
• A global industry is an industry that is experiencing significant international sales: trying to
achieve lower costs than industry incumbents through process improvements
• Many start-ups enter global industries and from day one try to appeal to international as well as
to domestic markets.
• The two most common strategies pursued by firms in global industries are:
• Multidomestic strategy: 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
• Global strategy: use the same basic approach in all foreign markets
Chapter 5: Industry And
Competitor Analysis
Competitor analysis
Competitors 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
• Types of competitors are detailed as follows:

Direct Competitors Indirect Competitors Future Competitors

• Busiesses offering • Businesses offering • Businesses that are
identical or similar close substitue note yet direct or
products products indirect competitors
but could be at any
time
Collecting of 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 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.
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.
• The table below represents an example of the Competitive Analysis Grid for the Panera Bread
brand.
Thank you!