chapter 6- industry analysis

8/18/2019 Chapter 6- Industry Analysis

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Chapter6

Industry andCompetitor

AnalysisBruce R. Barringer

R. Duane Ireland

Instructor: Sara Aslam5-1


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Chapter Objectives1 of 2

1. Explain the purpose of an industry analysis.

2. Identify the five competitive forces that determine

industry profitability.

3. Explain the role of “barriers to entry in creatin!disincentives for firms to enter an industry.

". Identify the nontraditional barriers to entry that are

especially associated #ith entrepreneurial firms.$. %ist the four industry&related 'uestions to as(

before pursuin! the idea for a firm.

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Chapter Objectives2 of 2

). Identify the five primary industry types and the

opportunities they offer.

*. Explain the purpose of a competitor analysis.

+. Identify the three !roups of competitors a ne# firm#ill face.

,. -escribe #ays a firm can ethically obtain

information about its competitors.1. -escribe the reasons for completin! a competitive

analysis !rid.

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What is Industry Analysis?

• 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.

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Why is Industry Analysis Important?

Industry Analysis

Importance

• "nce it is determined that a

ne#

$enture is %easi&le inregard to the

industr' and mar(et in

#hich it

#ill compete) a more in-depth

anal'sis is needed to learn

the ins

and outs o% the industr'.•

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/he 0ey uestions

,hen stud'ing an industr') an entrepreneurmust at least ans#er the %ollo#ing uestions

&e%ore pursuing the idea o% starting a +rm.

Is the industr'accessi&lein other

#ords) is it is realisticplace %or a ne#

$enture to enter/

Does the industr'contain mar(ets that

are ripe %or inno$ationor are underser$ed/

Question 1 Question 2

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Techniques Available to Assess Industry

Attractiveness

Study Environmentaland Business Trends

The Five CompetitiveForces Model

Assessing IndustryAttractiveness

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Studying Industry Trends

• nvironmental Trends

– Include economic trends, social trends, technological

advances, and political and regulatory changes.

– !or e"ample, industries that sell products to seniors arebenefiting by the aging of the population.

• #usiness Trends

– $ther trends that impact an industry.

– !or e"ample, are profit margins in the industry

increasing or falling? Is innovation accelerating or

%aning? Are input costs going up or do%n?

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The !ive &ompetitive !orces 'odel( of )

• "planation of the !ive !orces 'odel

– The five competitive forces model is a frame%ork for

understanding the structure of an industry.

–The model is composed of the forces that determineindustry profitability.

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The !ive &ompetitive !orces 'odel) of )

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(* Threat of Substitutes

• Threat of Substitutes

– The price that consumers are %illing to pay for a

product depends in part on the availability of substitute

products. – !or e"ample, there are fe% if any substitutes for

prescription medicines, %hich is one of the reasons the

pharmaceutical industry is so profitable.

– In contrast, %hen close substitutes for a product e"ist,

industry profitability is suppressed, because consumers

%ill opt out if the price gets too high.

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+* Threat of e% ntrants( of -

• Threat of e% ntrants

– If the firms in an industry are highly profitable, the

industry becomes a magnet to ne% entrants.

–

nless something is done to stop this, the competition inthe industry %ill increase, and average industry

profitability %ill decline.

– !irms in an industry try to keep the number of ne%

entrants lo% by building barriers to entry.

• A barrier to entry is a condition that creates a disincentive for a

ne% firm to enter an industry.

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Threat of e% ntrants+ of -

Barrier to Entry Eplanation

Economies o! Scale

"roductdi#erentiation

Capitalre$uirements

Barriers to 4ntr'

Industries that are characteri%ed &y

large economies o! scale are di'cult !orne( )rms to enter* unless they are(illing to accept a cost disadvantage+

,&ul- production.Industries such as the so!t drin- industrythat are characteri%ed &y )rms (ith

strong &rands are di'cult to &rea- into

(ithout spending heavily on advertising+

The need to invest large amounts o!money to gain entrance to an industry is

another &arrier to entry+

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Threat of e% ntrants) of -


Cost advantages

independent o!si%e

Access todistri&ution

channels

/overnmentand legal&arriers

Barriers to 4ntr' continued

Eisting )rms may have cost advantagesnot related to si%e+ For eample* the

eisting )rms in an industry may havepurchased land (hen it (as less

epensive than it is today+0istri&ution channels are o!ten hard to

crac-+ This is particularly true in cro(dedmar-ets* such as the convenience store

mar-et+

Some industries* such as &roadcasting*re$uire the granting o! a license &y a

pu&lic authority to compete+

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Threat of e% ntrants/ of -

• ontraditional #arriers to ntry

– It is difficult for start*ups to e"ecute barriers to entry

that are e"pensive, such as economies of scale, because

money is usually tight.

– Start*ups have to rely on nontraditional barriers to

entry to discourage ne% entrants, such as assembling a

%orld*class management team that %ould be difficult

for another company to replicate.

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Threat of e% ntrants0 of -


7ontraditional Barriers to4ntr'

Strength o!

managementteam

I! a startup puts together a (orldclassmanagement team* it may give potentialrivals pause in ta-ing on the startup in

its chosen industry+

Firstmoveradvantage

I! a startup pioneers an industry or ane( concept (ithin an industry* the

name recognition the startup

esta&lishes may create a &arrier toentry+"assion o! themanagement

team andemployees

I! the employees o! a startup aremotivated &y the uni$ue culture o! a

startup* and anticipate a large )nancialre(ard* this is a com&ination that cannot

&e replicated &y larger )rms+

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/hreat of e# Entrants) of )


7ontraditional Barriers to 4ntr'continued

ni$ue

&usiness model

Inventing a ne(approach to an

industry

I! a startup is a&le to construct a uni$ue&usiness model and esta&lish a net(or-

o! relationships that ma-es the &usinessmodel (or-* this set o! advantages

creates a &arrier to entry+

I! a startup invents a ne( approach toan industry and eecutes it in an

eemplary !ashion* these !actors createa &arrier to entry !or potential

imitators+

Internet domainname

Some Internet domain names are so3spoton4 that they give a startup a

meaning!ul leg up in terms o! e

commerce opportunities+

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)*1ivalry Among "isting !irms( of )

• 1ivalry Among "isting !irms

– In most industries, the ma2or determinant of industry

profitability is the level of competition among e"isting

firms.

– Some industries are fiercely competitive, to the point

%here prices are pushed belo% the level of costs, and

industry*%ide losses occur

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1ivalry Among "isting !irms+ of )

8actors that determine the intensit' o% the ri$alr'among e9isting +rms in an industr'.

5um&er and

&alance o!competitors

0egree o!

di#erence&et(eenproducts

The more competitors there are* the

more li-ely it is that one or more (illtry to gain customers &y cutting its

price+

The degree to (hich productsdi#er !rom one product to another

a#ects industry rivalry+

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1ivalry Among "isting !irms) of )

8actors that determine the intensit' o% the ri$alr'among e9isting +rms in an industr' continued

/ro(th rate o!an industry

The competition among )rms in a

slo(gro(th industry is strongerthan among those in !astgro(th

industries+

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)* #argaining 3o%er of Suppliers( of )

• #argaining 3o%er of Suppliers

– Suppliers can suppress the profitability of the industries

to %hich 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 %ill suffer,

and the manufacturer %ill eventually have to lo%er its

price.

– If the suppliers are po%erful relative to the firms in the

industry to %hich they sell, industry profitability can

suffer.

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ar!ainin! 4o#er of 5uppliers2 of 3

8actors that ha$e an impact on the a&ilit' o%suppliers to e9ert pressure on &u'ers

Supplierconcentratio

n

Attractiveness o!

su&stitutes

Supplier po(er is enhanced i! there

are no attractive su&stitutes !or theproduct or services the supplier

o#ers+

6hen there are only a !e( suppliers

that supply a critical product to alarge num&er o! &uyers* the supplier

has an advantage+

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ar!ainin! 4o#er of uyers1 of 3

• ar!ainin! 4o#er of uyers

– uyers can suppress the profitability of the industries from

#hich they purchase by demandin! price concessions or

increases in 'uality.

– 6or example7 the automobile industry is dominated by a

handful of lar!e companies that buy products from

thousands of suppliers in different industries. /his allo#s

the automa(ers to suppress the profitability of the

industries from #hich they buy by demandin! price

reductions.

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ar!ainin! 4o#er of uyers2 of 3

8actors that ha$e an impact on the a&ilit' o%suppliers to e9ert pressure on &u'ers

Buyer group

concentration

0egree o!

standardi%ation o!

supplier7sproducts

The degree to (hich a supplier7s

product di#ers !rom its competitorsa#ects the &uyer7s &argaining po(er+

I! there are only a !e( large &uyers*and they &uy !rom a large num&er o!

suppliers* they can pressure thesuppliers to lo(er costs and thus

a#ect the pro)ta&ility o! theindustries !rom (hich they &uy+

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6irst 8pplication of the 6ive 6orces 9odel1 of 2

• 6irst 8pplication of the 9odel

– /he five forces model can be used to assess the

attractiveness of an industry by determinin! the level of

threat to industry profitability for each of the forces.

– If a firm fills out the form sho#n on the next slide and

several of the threats to industry profitability are hi!h7 the

firm may #ant to reconsider enterin! the industry or thin(

carefully about the position it #ould occupy.

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6irst 8pplication of the 6ive 6orced 9odel2 of 2

Assessing Industr' Attracti$eness sing the 8i$e 8orces;odel

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5econd 8pplication of the 6ive 6orces 9odel1 of 2

• 5econd 8pplication of the 9odel

– /he second #ay a ne# firm can apply the five forces model

to help determine #hether it should enter an industry is by

usin! the model to ans#er several (ey 'uestions.

– /he 'uestions are sho#n in the fi!ure on the next slide7 and

help a firm project the potential success of a ne# venture in

a particular industry.

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5econd 8pplication of the 6ive 6orces 9odel2 of 2

sing the 8i$e 8orces ;odel to


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Competitor 8nalysis

• :hat is a Competitor 8nalysis;

– 8 competitor analysis is a detailed analysis of a firm


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Identifyin! Competitors

*'pes o% Competitors 7e#>entures 8ace

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chapter 6- industry analysis

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