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 -
Barrier to Entry Eplanation
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$uire the granting o! a license &y a
pu&lic authority to compete+
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Threat of e% ntrants/ of -
• ontraditional #arriers to ntry
– It is difficult for start*ups to e"ecute barriers to entry
that are e"pensive, such as economies of scale, because
money is usually tight.
– Start*ups have to rely on nontraditional barriers to
entry to discourage ne% entrants, such as assembling a
%orld*class management team that %ould be difficult
for another company to replicate.
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Threat of e% ntrants0 of -
Barrier to Entry Eplanation
7ontraditional Barriers to4ntr'
Strength o!
managementteam
I! a startup puts together a (orldclassmanagement team* it may give potentialrivals pause in ta-ing on the startup in
its chosen industry+
Firstmoveradvantage
I! a startup pioneers an industry or ane( concept (ithin an industry* the
name recognition the startup
esta&lishes may create a &arrier toentry+"assion o! themanagement
team andemployees
I! the employees o! a startup aremotivated &y the uni$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 )
Barrier to Entry Eplanation
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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