Chapter 4 & 5

Industry and
Competitor Analysis
5-1
What is Industry Analysis?
5-2

Industry
An industry is a group of firms producing a
similar product or service, such as airlines,
fitness drinks, furniture, or electronic games.
Industry Analysis
Is business research that focuses on the
potential of an industry.
 Three Key Questions
5-3

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 is 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?
Techniques Available to Assess Industry
Attractiveness
5-4

Assessing Industry Attractiveness

Study Environmental Porter’s Five Competitive

and Business Trends Forces Model
Studying Industry Trends
5-5

Environmental Trends
Include economic trends, social trends, technological
advances, and political and regulatory changes.
For example, Amazon Go following Technological trends.
Business Trends
Other trends that impact an industry.
For example, are profit margins in the industry increasing
or falling? Is innovation accelerating or declining? Are
input costs going up or down?
The Five Competitive Forces Model
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3

Explanation of the Porter’s Five 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.
The Five Competitive Forces Model
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2 of 3

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.
The Five Competitive Forces Model
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3 of 3
Threat of Substitutes
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5-9 3

 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.
Threat of Substitutes
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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.
Threat of Substitutes
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of 3

• This independently owned

coffee shop doesn’t just sell
coffee.
• It also 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 this shop for less
expensive alternatives.
Threat of New Entrants
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 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.
Threat of New Entrants
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Barriers to Entry

Barrier to Entry Explanation

Industries that are characterized by large economies

Economies of Scale
of scale are difficult for new firms to enter, unless 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.
Threat of New Entrants
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Barriers to Entry (continued)

Barrier to Entry Explanation

Existing firms may have cost advantages not related
Cost advantages to size. For example, the existing firms in an industry
independent of size may have purchased land when it was less expensive
than it is today.

Distribution channels are often hard to crack. This is

Access to distribution particularly true in crowded markets, such as the
channels convenience store market.

Government and Some industries, such as broadcasting, require the

legal barriers granting of a license by a public authority to compete.
Threat of New Entrants
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Nontraditional 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.
Threat of New Entrants
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Nontraditional Barriers to Entry

Barrier to Entry Explanation

If a start-up puts together a world-class management

Strength of
team, it may give potential rivals pause in taking on
management team
the start-up in its chosen industry.

If a start-up pioneers an industry or a new concept

First-mover
within an industry, the name recognition the start-up
advantage
establishes may create a barrier to entry.

If the employees of a start-up are motivated by the

Passion of the
unique culture of a start-up, and anticipate a large
management team
financial reward, this is a combination that cannot be
and employees
replicated by larger firms.
Threat of New Entrants
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Nontraditional Barriers to Entry (continued)

Barrier to Entry Explanation

If a start-up is able to construct a unique business

Unique business model and establish a network of relationships that
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 they give a start-up a meaningful leg up in terms of e-
name commerce opportunities.

Inventing a new If a start-up invents a new approach to an industry

approach to an and executes it in an exemplary fashion, these factors
industry create a barrier to entry for potential imitators.
Rivalry Among Existing Firms
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 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.
 KFC & Mcdonalds
 Insurance Companies
Rivalry Among Existing Firms
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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.

Degree of The degree to which products differ from one

difference product to another affects industry rivalry.
between products
Rivalry Among Existing Firms
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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 is stronger than among those in fast-
industry
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.
Bargaining Power of Suppliers
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 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.
Bargaining Power of Suppliers
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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 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.
Bargaining Power of Suppliers
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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.
Bargaining Power of Buyers
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 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.
Bargaining Power of Buyers
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Factors that have an impact on the ability of suppliers to exert

pressure on buyers

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’s costs buyer, the more sensitive the buyer will be to the
price it pays.
Bargaining Power of Buyers
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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 vice versa
products

Threat of The power of buyers is enhanced if there is a

backward credible threat that the buyer might enter the
integration supplier’s industry.
 First Application of the Five Forces Model
Assessing Industry Attractiveness Using the Five Forces Model
Second Application of the Five Forces Model
Using the Five Forces Model to Pose Questions to Determine the Potential
Success of a New Venture in an Industry
Industry Types and the Opportunities They
Offer
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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
Industry Types and the Opportunities They
Offer
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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
Industry Types and the Opportunities They
Offer
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Global Industries
Industries that are experiencing significant international
sales.
Opportunities: Multidomestic and global strategies
Competitor Analysis
5-32

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.
Identifying Competitors
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Types of Competitors New Ventures Face

[Link]
Sources of Competitive Intelligence
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 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.
Sources of Competitive Intelligence
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Ethical ways to obtain information about competitors

• Attend conferences and trade shows.

• Purchase competitors’ products.
• Study competitors’ Web sites.
• 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 or vice versa.
Sources of Competitive Intelligence
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• Many companies attend

trade shows to not only
display their products,
but to see what their
competitors are up to.
• This is a photo of the
2011 Consumer
Electronics Trade Show
in Las Vegas.
5-37