Entrepreneurship and small business:Industry and Competitor

AnalysisMuhammad Shafiqforshaf@gmail.com

http://www.slideshare.net/forshafReferences:

• Entrepreneurship by Bruce R. Barringer• Marketing Strategy: A Decision-Focused Approach by Orville C Walker

• Strategic Management by Fred R David• Entrepreneurship by Hisrich

Industry and Competitor Analysis

Industry and Competitor Analysis

Example!

What is Industry Analysis?• Industry• An industry is a group of firms producing a similar product or

service, such as airlines, drinks, furniture, or electronic games.• Industry Analysis• A market assessment tool designed to provide a business with an

idea of the complexity of a particular industry. Industry analysis involves reviewing the economic, political and market factors that influence the way the industry develops. Major factors can include the power wielded by suppliers and buyers, the condition of competitors, and the likelihood of new market entrants.

Why is Industry Analysis Important?

Industry Analysis

Importance• Once it is determined that a new venture is feasible in regard to the industry and market in which it 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 for a new firm.

Key QuestionsTo develop a sound strategic plan for an existing or a new business it is necessary to understand the industry in which the business will operate and the competitive forces within that industry. Questions to be answered include the following:

Is the industry accessible—in other words, is it a realistic place for a new venture to enter? What is the current size and what are the major trends in the industry? What are the main competitive forces? Who are the competitors and what are their relative strengths?

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.

Techniques Available to Assess Industry Attractiveness

Study Environmentaland Business Trends

The Five CompetitiveForces Model

Assessing Industry Attractiveness

Industry Life Cycle

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?

Porter's Five Forces Analysis

• It is an outside-in business strategy tool that is used to make an analysis of the attractiveness (value...) of an industry structure developed by Michael E. Porter of Harvard Business School in 1979.

Threat of Substitute Products• The threat of substitute products increases when:• Buyers face few switching costs.• The substitute product’s price is lower.• Substitute product’s quality and performance are equal to or greater

than the existing product.• For example, there are few if any substitutes for prescription

medicines, which is one of the reasons the pharmaceutical industry is so profitable.

• Differentiated industry products that are valued by customers reduce this threat.

Firms often offer their customers amenities to reduce the likelihood that they will switch to a substitute product, even in light of a price increase. •A customer could easily get a cup of coffee cheaper at one of Starbuck’s competitors.• To decrease the likelihood of this, Starbucks offers high- quality fresh coffee, good service, and a pleasant atmosphere.• Starbucks has therefore reduced the threat of substitutes.

Threat of New Entrants

• 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.

Barrier to Entry Explanation

Economies of Scale

Product differentiation

Capital requirements

Barriers to Entry

Industries that are characterized by large economies 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 characterized by firms with strong brands are difficult to break into without spending heavily on advertising.

The need to invest large amounts of money to gain entrance to an industry is another barrier to entry.

Cost advantages independent of size

Access to distribution channels

Government and legal barriers

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

Distribution channels are often hard to crack. This is particularly true in crowded markets, such as the convenience store market.

Some industries, such as broadcasting, require the granting of a license by a public authority to compete.

• Non Traditional 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.

Barrier to Entry Explanation

Nontraditional Barriers to Entry

Strength of management team

If a start-up puts together a world-class management team, it may give potential rivals pause in taking on

the start-up in its chosen industry.

First-mover advantage

If a start-up pioneers an industry or a new concept within an industry, the name recognition the start-up

establishes may create a barrier to entry.

Passion of the management team

and employees

If the employees of a start-up are motivated by the unique culture of a start-up, and anticipate large

financial reward, this is a combination that cannot be replicated by larger firms.

Barrier to Entry Explanation

Nontraditional Barriers to Entry (continued)

Unique Business Model

Inventing a new approach to an

industry

If a start-up is able to construct a unique business model and establish a network of relationships that

makes the business model work, this set of advantages creates a barrier to entry.

If a start-up invents a new approach to an industry and executes it in an exemplary fashion, these factors

create a barrier to entry for potential imitators.

Internet Domain Name

Some Internet domain names are so “spot-on” that they give a start-up a meaningful leg up in terms of e-

commerce opportunities.

Rivalry Among Existing Firms

• 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.

Factors that determine the intensity of the rivalry among existing firms in an industry.

Number and balance of

competitors

Degree of difference

between products

The more competitors there are, the more likely it is that one or more will try to gain customers by

cutting its price.

The degree to which products differ from one product to another affects industry rivalry.

Factors that determine the intensity of the rivalry among existing firms in an industry

Growth rate of an industry

Level of fixed costs

The competition among firms in a slow-growth industry is stronger than among those in fast-

growth industries.

Firms that have high fixed costs must sell a higher volume of their product to reach the break-even

point than firms with low fixed costs.

Bargaining Power of Suppliers

• 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.

Factors that have an impact on the ability of suppliers to exert pressure on buyers

Supplier concentration

Switching costs

Switching costs are the fixed costs that buyers encounter when switching or changing from one supplier to another. If switching costs are high, a

buyer will be less likely to switch suppliers.

When they are only a few suppliers that supply a critical product to a large number of buyers, the

supplier has an advantage.

Factors that have an impact on the ability of suppliers to exert pressure on buyers

Attractiveness of substitutes

Threat of forward

integration

The power of a supplier is enhanced if there is a credible possibility that the supplier might enter

the buyer’s industry.

Supplier power is enhanced if there are no attractive substitutes for the product or services

the supplier offers.

Bargaining Power of Buyers• Buyer power increases when:• Buyers are large and few in number.• Buyers purchase a large portion of an industry’s total output.Wal*Mart is a powerful organization and bargains hard with its

suppliers to obtain better prices• Buyers can pose threat to integrate backward into the sellers’

industry.• Buyer has full information.

• Monopsony..?

Applications of the Five Forces Model

• First Application of the Model• The five forces model can be used to assess the attractiveness of an industry

by determining the level of threat to industry profitability for each of the forces.• If a firm fills out the form shown on the next slide and several of the threats to

industry profitability are high, the firm may want to reconsider entering the industry or think carefully about the position it would occupy.

First Application of the Five Forced Model

Low entry barriers

Interpreting Industry Analyses

UnattractiveIndustry

Suppliers and buyers have strong positions

Strong threats from substitute products

Intense rivalry among competitors Low profit potential

AttractiveIndustry

High entry barriers

Suppliers and buyers have weak positions

Few threats from substitute products

Moderate rivalry among competitors High profit potential

Applications of the Five Forces Model

• Second Application of the Model• The second way a new firm can apply the five forces model to help determine

whether it should enter an industry is by using the model to answer several key questions.• The questions are shown in the figure on the next slide, and help a firm project

the potential success of a new venture in a particular industry.

Second Application of the Five Forces Model

Industry Life Cycle• Reflects the changes that take place in an industry over time.

1. Birth stage: firms seek to develop a winning technology.• For example, in the personal computer industry, this stage

would have been in the early-to-mid 1980s as companies explored the possibilities of selling these devices.

2. Growth stage: Product gains customer acceptance and grows rapidly.• New firms enter industry, production improves, distributors

emerge.3. Shakeout stage: The stage between growth and maturity.

• Competitor rivalry increases. • Least efficient firms fail and leave industry.

When should I join an industry?• Joining an industry in the “Birth” or “Growth” stage has the

greatest potential to grow YET there are chances that the business you joined will fail.

• The best time to join an industry is in the Shakeout stage (Point X). The business concept is proven and markets are pioneered. This is when the strong companies strengthen their businesses and sales explode.

4. Maturity stage: most customers have bought the product, growth is slow.• Relationships between suppliers, distributors more stable.• Usually, industry dominated by a few, large firms.

5. Decline stage: falling demand for the product.• Prices fall, weaker firms leave the industry.

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• 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, geographic roll-up strategy, in which one firm

starts acquiring similar firms that are located in different geographic areas

Industry Types and the Opportunities They Offer

• 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

• Global Industries• Industries that are experiencing significant international sales.

• Opportunities: Multidomestic and global strategies

Industry Types and the Opportunities They Offer

Competitor Analysis

• 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

Types of Competitors New Ventures Face

Sources of Competitive Intelligence

• 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

Ethical ways to obtain information about competitors

• Attend conferences and trade shows.• Purchase competitors’ products.• Study competitors’ Web sites.• Set up Google and Yahoo! e-mail alerts.• 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.

Sources of Competitive Intelligence

• Many companies attend trade shows to not only display their products, but to see what their competitors are up to.

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Industrial/Business Espionage

• An illegal and unethical way to gain access to information about a company’s plans, products, clients or trade secrets. It involves obtaining information that is considered secret or confidential without the permission of the holder of the information.

Competitive Profile Matrix (CPM)- It compares the company with direct competitors and check whether company is doing well as compared to competitors or not. Competitive profile matrix is essential tool used in

strategic management process, it contain all the important critical success factors of industry. Success factor can vary form industry to industry, every industry consider different success factor, all the companies in CPM are measured on same scale by considering the same success factor.

The company’s current market share of 82.3% in the black oil market and 59.4% share in the white oil market.

The company is the only public sector entity in Pakistan that has been competing effectively with three foreign multinationals, Shell, Caltex and Total.

The Pakistani Government holds approximately 54% stake in Pakistan State Oil.

The company has retail coverage of over 3,800 outlets, representing 80% participation in total industry network.

PSO is the market leader in Pakistan’s energy sector. The company has the largest network of retail outlets to serve the automotive sector and is the major fuel supplier to aviation, railways, power projects, armed forces and agriculture sector.

The External Factor Evaluation (EFE) Matrix-

It is used to summarize and evaluate economic, social, cultural, demographic, environmental, political, legal, technological, and competitive information.

i. List factors: The first step is to gather a list of external factors. Divide factors into two groups: opportunities and threats.

ii. Assign weights: Assign a weight to each factor. The value of each weight should be between 0 and 1 (or alternatively between 0 and 100 if you use the 0 to 100 scale). Zero means the factor is not important. One or hundred means that the factor is the most influential and critical one. The total value of all weights together should equal 1 or 100.

iii. Rate factors: Assign a rating to each factor. Rating should be between 1 and 4. Rating indicates how effective the firm’s current strategies respond to the factor.

How to develop EFE Matrix?

1 = the response is poor. 2 = the response is below average. 3 = above average. 4 = superior. Weights are industry-specific. Ratings are company-specific.

• Multiply weights by ratings: Multiply each factor weight with its rating. This will calculate the weighted score for each factor.

• Total all weighted scores: Add all weighted scores for each factor. This will calculate the total weighted score for the company.

• Highest possible weighted score for the organization is 4.0; the lowest, 1.0. Average = 2.5

Total weighted score of 4.0 =Organization response is outstanding to threats & opportunities.

Total weighted score of 1.0 =Firm’s strategies not capitalizing on opportunities or avoiding threats

Internal Factor Evaluation Matrix

Five Step Process:1. List key internal factors (10-20)

Strengths & Weaknesses

2. Assign weight to each (0 to 1.0) Sum of all weights = 1.0

3. Assign 1-4 rating to each factor Firm’s current strategies response to the factor

4. Multiply each factor’s weight by its rating Produces a weighted score

5. Sum the weighted scores for each Determines the total weighted score for the organization.

Competitive StrategiesStrategies for dealing with

Competition• Aggressive Strategies• Defensive Strategies• Follower Strategies

Aggressive Strategies• Frontal attack• Encirclement attack• Bypass (Leapfrog) attack• Flanker Attack• Guerilla warfare

Frontal Attack• Frontal attack is one of the marketing

strategies inspired by war tactics. Frontal attack involves a head on attack on the competitor by matching the competitor in all aspects – product, price, place promotion. • In a pure frontal attack, the attacker

matches its opponent’s product, advertising, price, and distribution. A modified frontal attack, such as cutting price vis-a-vis convinces the market that it’s product is equal to the leaders product.• Examples: Zong, Olpers

Frontal Attack is recommended when:the market is relatively homogeneousbrand equity is lowcustomer loyalty is lowproducts are poorly differentiatedthe attacker enjoys strong resources

Encirclement Attack• This is a broader but subtle offensive strategy. It

involves encircling the targeted competitor. This is done by introducing a range of products that are similar to the competitor’s products. Each product will liberate some market share from the competitor, with the objective of leaving it weakened, demoralized, and in a state of siege.• It involves launching a grand offensive on several fronts

and finding the soft spot to enter the enemy’s territory.• Omore (against Walls); Toyota (against Ford & GM); Q-

Mobile (against Nokia)

Encirclement is recommended when:

the market is loosely segmentedsome segments are not being served well by the competitorthe attacker has strong product development resourcesthe attacker has enough resources to operate in multiple segments

simultaneously

Leapfrog Strategy/Bypass Strategy This strategy involves bypassing the

enemy’s forces altogether. In the business arena, this involves either developing new technologies, or creating new business models.

This strategy undertakes a challenger bypassing its opposition totally and capturing the competitor’s clients in one rapid action.

This is a revolutionary strategy that re-writes the rules of the game.

Leapfroging is possible when:A contender has the ability of budding new technologies

or creating new trade models. To be victorious, the challenger must have a exclusive

and inimitable and game-changing knowledge and technology that is superior and better in every way possible to that of all conventional competitors.

Further, the challenger must have the creation and development engineering capabilities to revolve that technology into a tempting offering.

Flanker Attack• Avoiding a head-on clash by targeting a segment where

competitor focus or commitment is weak• The idea is to catch the competitor by surprise and

establishing a “beach-head” by the time the competitor wakes up and reacts.• Usually this offensive strategy is used by a company that

does not have overwhelming superiority, but may have an advantage in one particular area.• E.g. Blackberry, Face Book

Types of Flanker Attack• Geographical flanking- Occurs when a firm attacks differentareas within

the world or countrywhere competitors are nonexistentor not very strong.• Segmented flanking- Potentiallycan be more powerful than geographical

flanking attacksbecause they satisfy market needsthe competitor has ignored.

Example- In the mid 1970's Xerox owned eighty-eight percent of the plain-paper copier market however, almost ten years later the Japanese basedCanon Copier took over half of Xerox's market. The main reason Canontook over such a large portion of Xerox's market was by use of the flankingstrategy. Canon focused on the small size copier market that could notafford Xerox's larger copiers. This attack was successful because it put theattackers strength against the defenders weakness.

Flanker Attack is recommended when:

• the market is well-segmented• there are some segments that are not well served

by the existing competitors• the attacker has moderate or limited resources

Guerrilla Marketing• Guerilla warfare basically involves winning small victories that

can over time amount to alarge gain in market share• Guerrilla challenger uses both conventional and unconventional

means of attack. These include selective price cuts, intense promotional blitzes, unexpected and unconventional interactive promotion and use of surprise & hit-and-run to attack in locations & at times where conditions are most favorable.• Consumers are targeted in unexpected places. The objective of

guerrilla marketing is to create a unique, engaging and thought-provoking concept to generate buzz, and consequently turn viral.• This attack works because it is very unconventional which makes

it difficult for thedefender to counter-attack, and because they are aimed at small, weak, and unprotectedmarket positions.• E.g. Road shows, In-mall events, unique promotion tactics etc.

TARGETCOMPETITOR

Flanking attack

Frontalattack

Encirclement strategy

Leapfrog strategy

CHALLENGERGuerrillaattacks

Defensive Strategies• Committed Defender/Position defense • Defensive Flank/Mobile Defence• Pre-emptive• Contraction• Counter-parry

Committed Defender/Position Defense • An old seasoned player in the

market, with strong commitment of resources.• Does not involve investing into

product development or innovations, but protecting and sustaining the market share.

This involves the defense of a fortified position. This tends to be a weak defense because you become a

“sitting duck”. It can lead to a siege situation in which time is on the side of the attacker, that is, as time goes by the defender gets weaker, while the attacker gets stronger.

In a business context, this involves setting up fortifications such as barriers to market entry around a product, brand, product line, market, or market segment. This could include increasing brand equity, customer satisfaction, customer loyalty, or repeat purchase rate.

It could also include exclusive distribution contracts, patent protection, market monopoly, or government protected monopoly status. It is best used in homogeneous markets where the defender has dominant market position and potential attackers have very limited resources.

Defensive Flanker/Mobile Defence• This involves constantly shifting resources and developing

new strategies and tactics. • involves the re-deployment of resources to deter a flank attack.

The defender strengthens its flank by deploying more resources. • The disadvantage of this defense is that it can distract the

company from its primary objective and divert resources away from where they are needed most. • In business terms, this involves the introduction of new products,

product lines, or brands, the defensive re-positioning of existing products, or additional promotional activity in a market niche.• This defense requires a very flexible organization with strong

marketing, entrepreneurial, product development, and marketing research skills.

Pre-emptive• “Attack is the best defense”• Muscle flexing• Signaling a strong whiplash to competitors• “We cannot direct the wind, but we can adjust the sails.” • Preemptive marketing builds professional relationships

with quality-minded consumers before they need your services.This introduces your company and builds loyalty so that consumers don’t look any further.

Contraction Defence • A competitive strategy in which a large organisation

withdraws from a market or market segment in which it is not strong in order to concentrate on another market or other segments in which it has greater strength; also referred to as Strategic Withdrawal.• Contraction strategies include divestiture, liquidation and

retrenchment.

• Example- TATA Motors has both Passenger and Commercial Vehicles in India. While it is the undisputed leader in commercial vehicles, its passenger vehicles division in India is running at quite a loss. At the same time the commercial vehicle space is heating up with foreign players such as MAN and Benz launching their trucks and also domestic players like Mahindra making a foray into the segment. So as a contraction defense strategy, TATA Motors may choose to withdraw from the passenger vehicles market and concentrate all its resources in the commercial vehicles segment to maintain its leadership position.

Counter-parry• Popular strategy for multinationals• Respond to attack by attacking competitor in another

country• Ex.: Kodak—When Fuji attacked Kodak in the U.S., Kodak

retaliated by attacking Fuji in Japan.• Goodyear also attacked Michelin in Europe as response to

attack in U.S.

• Counterfeiter: To counterfeit means to imitate something. Counterfeit products are fake replicas of the real product. Counterfeit products are often produced with the intent to take advantage of the superior value of the imitated product. Counterfeit products tend to have fake company logos and brands. In the case of goods, it results in patent infringement or trademark infringement. Counterfeit consumer products have a reputation for being lower quality (sometimes not working at all) and may even include toxic elements.

Market Follower Strategies

• Cloner: Makes similar, copy cat products.• Content Follower/Nicher: Remains confined to a limited

segment/niche considered unattractive by competitors.