Unit 5: Industry and Environmental Analysis of Identifying Business Opportunities

Lesson 5.3
Industry Analysis of Local Businesses
Contents
Introduction 1

Learning Objectives 2

Let’s Connect 2

Discover 3
Porter’s Five Forces Model 4
Competition in the Industry 4
Potential for New Entrants into the Industry 4
Power of Suppliers 5
Power of Consumers 5
Threat of Substitute Products 5
Evaluating Porter’s Five Forces model 6

Wrap-Up 7

Try This! 7

Challenge Yourself 8

Bibliography 10
Unit 5: Industry and Environmental Analysis of Identifying Business Opportunities

Lesson 5.3

Industry Analysis of Local

Businesses

Introduction
In the past two lessons, we discussed ways to expand businesses. In this lesson, we will
further delve into the topic. Another key step in the process of establishing a business
organization is the recognition of the different competitive forces that may affect the
operations and success of a business. Analyzing a prospective industry is key toward
determining whether or not the venture will be successful. This is an important step that
will help guide entrepreneurs in their decision-making on venturing into a specific market.

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Unit 5: Industry and Environmental Analysis of Identifying Business Opportunities

DepEd Learning Competency

Learning Objectives At the end of this lesson, you should be able to

In this lesson, you should be able to do the distinguish the different services/products of
business and industry in the locality
following:
(ABM_AE12-IIa-d-10).
● Identify and differentiate the
different factors in conducting an
industry analysis.
● Apply the tools in realistic
situations.

Let’s Connect

Competition 10 minutes
In almost every competitive environment, participants have to factor in different forces
that may affect their ability to succeed.

Instructions
1. Imagine being a participant in a specific competition. The competition can be
academic (spelling bees, debates, hackathons, etc.) or athletic (basketball, football,
e-sports, etc.) in nature.
2. After identifying in which competition you imagine yourself in, list down three factors
that might prevent you from winning.
3. Rank the three identified factors from 1 to 3, with Rank 1 having the most impact and
Rank 3 having the least.

Guide Questions
1. What is the nature of these factors? Are they primarily external or internal forces?
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Unit 5: Industry and Environmental Analysis of Identifying Business Opportunities

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2. Under which of the components of the SWOT analysis would the factors fall?

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3. Would you be discouraged from participating in the competition based on the factors

you identified?

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Discover
Aside from the evaluation of a business idea, the success of a business organization is also
anchored on the characteristics of the industry in which it plans to enter and compete. The
conduction of an industry analysis helps business organizations lower the uncertainty they
face.

By doing industry analysis, organizations are able to evaluate their position relative to other
organizations. This provides deeper insight that can guide them in their decision-making
and formulation of strategies. It can also provide organizations with information that can
help them assess the viability of entering a particular industry.

What characteristics of industry might affect the

success of a business organization?

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Unit 5: Industry and Environmental Analysis of Identifying Business Opportunities

Porter’s Five Forces Model

The primary tool used by businesses in conducting an industry analysis is the Porter’s Five
Forces model. It was developed by Harvard Business School professor Michael Porter in
1979. This model, sometimes called the Competitive Forces Model, looks into five particular
characteristics of an industry in determining whether or not it is profitable to venture into.
These characteristics are competition in the industry, the potential for new entrants
into the industry, the power of suppliers, the power of consumers, and the threat of
substitute products.

Competition in the Industry

Competition in the industry is measured by the number and strength of competitors. An
industry characterized by a higher number of competitors makes it difficult for a business to
stand out and gain significant market share and power. This can also be true for industries
whose products are not highly differentiated or are very similar.

The presence of numerous and strong competition may force firms to offer lower prices in a
bid to attract more customers. On the other hand, in instances where there is minimal or no
competition, the power of a firm increases substantially and they might find themselves in a
position where they can charge higher prices with minimal consequences.

Potential for New Entrants into the Industry

Beyond the competition that exists in an industry, another consideration that business
organizations have to make are the potential new entrants. A company’s ability to profit can
be affected by the ease or difficulty with which new competitors can enter the market.

Competing in an industry that has few or no barriers to entry means that an organization’s
position could easily be affected by others looking to enter the same industry. For industries
with strong barriers to entry, these are more attractive to already established organizations
as it will be easier for them to maintain power despite the threat of new competitors.

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Unit 5: Industry and Environmental Analysis of Identifying Business Opportunities

Power of Suppliers
The power of a supplier can affect the long-term viability of a business venture through the
cost of input. Firms that require unique input end up becoming dependent on few
suppliers that are able to provide those. This gives suppliers power over the business,
allowing them to charge higher prices and take advantage of other aspects of a business
transaction.

If an industry requires input that is not unique and can be sourced from a large number of
suppliers, there is less dependence on a single supplier. Businesses have the opportunity to
purchase input at a lower cost as they can expect a multitude of suppliers willing to
undercut one another in order to make the sale.

Power of Consumers
Buyers also play a role in shaping the industry. The power of consumers affects the level of
profit a business can make through its power to negotiate prices.

Buyers have more power in the market when they are consuming goods that are not highly
differentiated. When goods can be easily purchased from multiple sources or easily
substituted, consumers have the best chance of being able to negotiate for a lower price.
Businesses are also forced to lower prices based on the buyer's size of the order, the larger
the order is, the less power the business has in terms of negotiation. When buyers are
characterized as independent from one another and high in number, they are less likely to
have power in the market and businesses can drive prices up.

Threat of Substitute Products

Similar to how product differentiation can affect the viability of an industry, firms must also
recognize the potential threat of substitute products. Substitute products offer
consumers options when making purchases. Rather than buying something costly, they
can opt for substitutes that offer similar experiences but at cheaper prices. When buyers
can easily find substitutes in the market, it will be difficult for businesses to increase their
prices, which then affects the business’ profitability.

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Unit 5: Industry and Environmental Analysis of Identifying Business Opportunities

Businesses that offer products with no close substitutes have more power over consumers,
allowing them to charge higher prices without worrying that their consumers will switch to a
substitute.

Evaluating Porter’s Five Forces model

Similar to the SWOT analysis, Porter’s Five Forces model is a useful tool that helps
organizations in properly formulating their strategies. The key strength of the model is its
ability to characterize the industry’s profitability through categorizing external factors.

However, the model also has a weakness as it relies on providing a static image of the
industry. As such, there is a need to constantly reevaluate the industry relative to the
constantly evolving factors.

Another weakness of the model is how it is used. The model was developed specifically to
assess industries as a whole. However, there is a tendency for some businesses to use the
model to make an assessment at the organizational level. These organizations are better off
using the SWOT or TOWS analysis to provide them better insight into situations specific to
their businesses. Using Porter’s Five Forces model for an organizational-level evaluation may
generate information or insights that are misleading.

Check Your Progress

Which previously discussed economic concept would you relate to
the power of consumers?
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Unit 5: Industry and Environmental Analysis of Identifying Business Opportunities

Wrap-Up
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● Conducting an industry analysis is another key step in the planning process. It
allows businesses to evaluate whether or not entry into a particular industry will
be profitable.
● Porter’s Five Forces Model is one of the most popular tools used in conducting
these industry analyses. This model considers the following external forces:
○ Competition in the industry
○ Potential for new entrants
○ Power of suppliers
○ Power of consumers
○ Threat of substitute products.
● Porter’s Five Forces Model is widely used as it provides a strong foundation from
which business organizations can decide whether to pursue a venture.
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Try This!
A. True or False. Write true if the statement is correct. Otherwise, write false.

_____________ 1. Porter’s Five Forces model takes into consideration internal forces
that may affect an organization’s compatibility with an industry.

_____________ 2. An increase in the power of consumers decreases the profitability of

a specific industry.

_____________ 3. Industries with more competitors are more attractive to firms.

_____________ 4. New entrants represent an external threat to organizations.

_____________ 5. Requiring a specific input increases the power that suppliers have
over the firms in an industry.

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Unit 5: Industry and Environmental Analysis of Identifying Business Opportunities

_____________ 6. An increase in the power of suppliers increases the likelihood of

success for a firm in an industry.

_____________ 7. Industry analyses are conducted by looking first at the firm and then
at the larger market.

_____________ 8. The Competitive Forces model takes a dynamic look at the industry.

_____________ 9. Consumers would want more bargaining power when dealing with
firms and businesses.

_____________ 10. An industry with multiple barriers to entry is enticing for incoming
businesses.

B. Fill in the Blanks. Fill in the blanks with the correct answer.

1. The Competitive Forces model was developed by _____________.

2. One of the external forces considered is the _____________ of consumers.
3. _____________ is the force that refers to the presence of industry competitors that may
affect the profitability of a firm.
4. Similar to the SWOT analysis, one of the major weaknesses of Porter’s Five Forces
model is that it is sometimes used by businesses to evaluate at the _____________
level.
5. The model provides a _____________ view of the industry. As such, there is a need to
reevaluate the model, especially with evolving factors.

Challenge Yourself
Answer the following questions in no more than five sentences each.

1. How does the presence of complementary products affect an industry?

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