Chapter 5

Industry and
Competitor Analysis
Bruce R. Barringer
R. Duane Ireland

Copyright ©2016 Pearson Education, Inc. 5-1

 Chapter Objectives

1. Explain the purpose of an industry analysis.

2. Identify and discuss the five competitive forces that
determine industry profitability.
3. Explain the value that entrepreneurial firms create
by successfully using the five forces model.
4. Identify the five primary industry types and the
opportunities they offer.
5. Explain the purpose of a competitor analysis and a
competitive analysis grid.
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 What is Industry Analysis?

• Industry
– An industry is a group of firms producing a similar product
or service, such as music, Pilates and yoga studios, and
solar panel manufacturing.
• Industry Analysis
– Is business research that focuses on the potential of an
industry.

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 Why is Industry Analysis Important?

Importance
• Once it is determined that a new
venture is feasible in regard to the
industry and market in which it
Industry Analysis 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 target market it identified
during feasibility analysis is
favorable
Copyright ©2016 Pearson Education, Inc. for a new firm. 5-4
 Three Key Questions
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 a 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?

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 How Industry and Firm-Level Factors
Affect Performance
• Firm-Level Factors
– Include a firm’s assets, products, culture, teamwork among its
employees, reputation, and other resources.
• Industry-Level Factors
– Include threat of new entrants, rivalry among existing firms, bargaining
power of buyers, and related factors.
• Conclusion
– In various studies, researchers have found that from 8% to 30% of the
variation in firm profitability is directly attributable to the industry in
which a firm competes.
– Therefore, the overall attractiveness of an industry should be part of
the equation when an entrepreneur decides whether to pursue a
particular opportunity.

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Techniques Available to Assess Industry
Attractiveness

Assessing Industry Attractiveness

Study Environmental The Five Competitive

and Business Trends Forces Model

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 Studying Industry 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?

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 The Five Competitive Forces Model
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• Explanation of the 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.

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 The Five Competitive Forces Model
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• 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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The Five Competitive Forces Model
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 Threat of Substitutes
1 of 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.

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 Threat of Substitutes
2 of 3

• 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.

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 Threat of Substitutes
3 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.
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 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.

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 Threat of New Entrants
2 of 6

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.

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 Threat of New Entrants
3 of 6

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 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
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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.

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 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.

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 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.

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