industry analysis, which is business research that focuses on the

potential of an industry. 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

An industry is a group of firms producing a similar product or service,

such as music, pilates and yoga studios, and solar panel
manufacturing.

A competitor analysis is a detailed evaluation of a firm’s competitors

When studying an industry, an entrepreneur must answer three questions

before pursuing the idea of starting a firm.

• Question 1
• Is the industry accessible—in other words, is it a realistic place for a
new venture to enter?
• Question 2
• Does the industry contain markets that are ripe for innovation or
are underserved?
• Question 3
• Are there positions in the industry that will avoid some of the
negative attributes of the industry as a whole?

At the company level, a firm’s position determines how the company

is situated relative to its competitors.

The first technique that an entrepreneur has available to discern the

attractiveness of an industry is to study industry trends.
Environmental and business trends are the two most important
trends for entrepreneurs to evaluate.
Environmental Trends:

• The strength of an industry often surges or wanes because

environmental trends shift in favor or against the industry.
Environmental trends include economic trends, social trends,
technological advances, and political and regulatory changes.
For example, companies in industries selling products to seniors,
such as the hearing aid industry, benefit from the social trend of the
aging of the population.

Business Trends:

Other trends affect industries that aren’t environmental trends perse

but are part of the core nature of an industry.

For example, the firms in some industries benefit from an increasing

ability to outsource manufacturing or service functions to lower-cost
foreign labor markets, while firms in other industries don’t share this
advantage.

A trade association (or trade group) is an organization that firms in

the same industry form for the purpose of collecting and
disseminating trade information, offering legal and technical advice,
furnishing industry-related training, and providing a platform for
collective lobbying

A trade show (or a trade fair) is an exhibition organized to create

opportunities for companies in an industry to showcase and
demonstrate their products and services. Trade shows offer prime
opportunities for networking in order to generate business and to
estab lish new relationships and nurture existing ones.
Trade journals or magazines are usually published by trade
associations and contain articles and advertising focused on a
specific industry

• The five forces model is a framework entrepreneurs use to

understand an industry’s structure. the framework is
comprised of the forces that determine industry profitability.
They help determine the average rate of return for the firms
in an industry.

• industries are more attractive when the threat of substitutes

is low.This means that products or services from other
industries can’t easily serve as substitutes for the products
or services being made and sold in the focal firm’s
industry.The extent to which substitutes suppress the
profitability of an industry depends on the propensity for
buyers to substitute alternatives. For example, there are
few, if any, substitutes for prescription medicines, which is
one of the reasons the pharmaceutical industry is so
profitable.

In general, industries are more attractive when the threat of entry is

low.This means that competitors cannot easily enter the industry
and successfully copy what the industry incumbents are doing to
generate profits.
A barrier to entry is a condition that creates a disincentive for a new
firm to enter an industry. Let’s look at the six major sources of
barriers to entry:
1) Economies of scale occur when mass-producing a product results
in lower average cost.
2) Product differentiation
3) Capital requirements- The need to invest large amounts of money
to gain entrance to an industry is another barrier to entry.
4) Cost advantages independent of size:Entrenched competitors may
have cost advantages not related to size that are not available to
new entrants. Commonly, these advantages are grounded in the
firm’s history
5) Access to distribution channels. Distribution channels are often
hard to crack.
6) Government and legal barriers(The ideal barrier to entry is a
patent, trademark, or copyright, which prevents another firm from
duplicating what the start-up is doing)
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
There are four primary factors that determine the nature and
intensity of the rivalry among existing firms in an industry:
1)Number and balance of competitors
2)Degree of difference between products
3)Growth rate of an industry
4)Level of fixed costs
In general, industries are more attractive when the bargaining power
of suppliers is low.
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.

Several factors have an impact on the ability of suppliers to exert

pressure on buyers and suppress the profitability of the in dustries
they serve.

These include the following:

Supplier concentration-When there are only a few suppliers to

provide a critical product to a large number of buyers, the supplier
has an advantage.

Switching costs-Switching costs are the fixed costs that buyers

ecounter when switching or changing from one supplier to another

Attractiveness of substitutes-: Supplier power is enhanced if there

are no attractive substitutes for the products or services the supplier
offers.

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.

In general, industries are more attractive when the bargaining power

of buyers (a start-up’s customers) is low. Buyers can suppress the
profitability of the industries from which they purchase by
demanding price concessions or increases in quality.

Several factors affect buyers’ ability to exert pressure on sup pliers

and suppress the profitability of the industries from which they buy.
These include the following:

Buyer group concentration-If the buyers are concentrated, meaning

that there are only a few large buyers, and they buy from a large
number of suppliers.
Buyer’s costs: The greater the importance of an item is to a buyer,
the more sensitive the buyer will be to the price it pays.

Degree of standardization of supplier’s products: The degree to

which a supplier’s product differs from its competitors’ offering
affects the buyer’s bargaining power.

Threat of backward integration: The power of a buyer is enhanced if

there is a credible threat that the buyer might enter the supplier’s
industry

the five forces model can be used in two ways: (1) to help a firm
deter mine whether it should enter a particular industry and (2)
whether it can carve out an attractive position in that industry.

The five most prevalent industry types re emerging industries,

fragmented industries, mature industries, declining industries, and
global in dustries.
An emerging industry is a new industry in which standard operating
procedures have yet to be developed

The firm that pioneers or takes the leadership of an emerging

industry often captures a first-mover advantage. A first-mover
advantage is a sometimes insurmountable advantage gained by the
first com pany to establish a significant position in a new market.

A fragmented industry is one that is characterized by a large number

of firms of approximately equal size

a geographic roll up strategy, in which one firm starts acquiring

similar firms that are located in different geographic areas.
A mature industry is an industry that is experiencing slow or no
increase in demand, has numerous repeat (rather than new)
customers, and has lim ited product innovation. The lure of mature
industries, for start-ups, is that they’re often large industries with
seemingly vast potential if product and/or process innova tions can
be effectively introduced and the industry can be revitalized

A declining industry is an industry or a part of an industry that is

experienc ing a reduction in demand

Etrepreneurial firms employ three different strategies in declining

indus tries. The first is to adopt a leadership strategy, in which the
firm tries to become the dominant player in the industry. This is a
rare strategy for a start up in a declining industry. The second is to
pursue a niche strategy, which focuses on a narrow segment of the
industry that might be encouraged to grow through product or
process innovation. The third is a cost reduction strategy, which is
accomplished through achieving lower costs than industry
incumbents through process improvements. Achieving lower costs
allows a firm to sell its product or service at a lower price, creating
value for consumers in the process of doing so.

A global industry is an industry that is experiencing significant

international sales

The two most common strat egies pursued by firms in global

industries are the multidomestic strategy and the global strategy.
Firms that pursue a multidomestic strategy compete for market
share on a country-by-country basis and vary their product or service
offerings to meet the demands of the local market. In contrast, firms
pursu ing a global strategy use the same basic approach in all foreign
markets. The choice between these two strategies depends on how
similar consumers’ tastes are from market to market.

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 op portunities that are available to obtain a competitive
advantage in one or more areas.

The first step in a competitive analysis is to determine who the

competition is.

Direct competitors: These are businesses that offer products or

services that are identical or highly similar to those of the firm
completing the analysis. These competitors are the most important
because they are going after the same customers as the new firm. A
new firm faces winning over the loyal followers of its major
competitors, which is difficult to do, even when the new firm has a
better product

Inirect competitors: These competitors offer close substitutes to the

product the firm completing the analysis sells. These firms’ products
are also important in that they target the same basic need that is
being met by the new firm’s product.

futurecompetitors: These are companies that are not yet direct or

indi rect competitors but could move into one of these roles at any
time. Firms are always concerned about strong competitors moving
into their mar kets.
identifying its top 5 to 10 direct com petitors and its top 5 to 10
indirect and future competitors makes it easier for the firm to
complete its competitive analysis grid.

To complete a meaningful competitive analysis grid, a firm must first

under stand the strategies and behaviors of its competitors. The
information that is gathered by a firm to learn about its competitors
is called competitive intelligence. Obtaining sound competitive
intelligence is not always a simple task

a competitive analysis grid is a tool for or ganizing the information a

firm collects about its competitors. It can help a firm see how it
stacks up against its competitors, provide ideas for markets to
pursue, and, perhaps most importantly, identify its primary sources
of com petitive advantage. To be a viable company, a new venture
must have at least one clear competitive advantage over its major
competitors.
SUMMARY:
1) compete successfully, a firm needs to understand the industry in
which it intends to compete. Industry analysis is a business research
framework or tool that focuses on an industry’s potential. The
knowledge gleaned from this analysis helps a firm decide whether to
enter an industry and if it can carve out a position in that industry
that will provide it a com petitive advantage. Environmental trends
and business trends are the two main components of “industry
trends” that firms should study. Environmental trends include
economic trends, social trends, technological advances, and political
and regulatory changes. Business trends in clude other business-
related trends that aren’t environmental trends but are im portant to
recognize and understand.
2) Firms use the “five forces model” to under stand an industry’s
structure. The parts of Porter’s five forces model are threat of
substitutes, threat of new entrants, rivalry among existing firms,
bargaining power of suppliers, and bargaining power of buyers
3)What entrepreneurs should understand is that each individual
force has the po tential to affect the ability of any firm to generate
profits while competing in the industry or a segment of an industry.
The Callenge is to find a position within an industry or a segment of
an industry in which the probability of the firm being negatively
affected by the five forces is reduced. Additionally, successfully exam
ining an industry yields valuable informa tion to those starting a
business. Armed with the information it has collected, firms are
prepared to consider four industry related questions that should be
exam ined before deciding to enter an industry. These questions are:
Is the industry a realistic place for a new venture? If we do enter the
industry, can our firm do a better job than the industry as a whole in
avoiding or diminishing the threats that suppress industry
profitability? Is there a unique position in the industry that avoids or
diminishes the forces that suppress industry profitability? Is there a
superior business model that can be put in place that would be hard
for industry incumbents to duplicate?
4) There are five primary industry types entre preneurial firms
consider when choosing the industry in which they will compete.
These industry types and the opportuni ties they offer are as follows:
emerging in dustry/first-mover advantage; fragmented
industry/consolidation; mature industry/emphasis on service and
process innova tion; declining industry/leadership, niche, harvest,
and divest; and global industry/multidomestic strategy or global
strategy.
5) A competitor analysis is a detailed analy sis of a firm’s
competition. It helps a firm understand the positions of its major
com petitors and the opportunities that are available to obtain a
competitive advantage in one or more areas. Direct competitors,
indirect competitors, and future competi tors are the three groups of
competitors a new firm faces. uccessful competition demands that a
firm understand its competitors and the actions they may take in the
future. There are a number of ways a firm can ethically obtain the
information it seeks to have about its competitors, including
attending conferences and trade shows; purchasing competitors’
products; studying competi tors’ websites; setting up Google e-mail
alerts; reading industry-related books, magazines, and websites; and
talking to customers about what motivated them to buy your
product as opposed to your com petitor’s product.A competitive
analysis grid is a tool for organizing the information a firm col lects
about its competitors. This grid can help a firm see how it stacks up
against its competitors, provide ideas for markets to pursue, and,
perhaps most importantly, identify its primary sources of competitive
advantage