CH # 05 “(Industry and Competitor Analysis)”

 Industry:
 It is a group of firms producing a similar product or service, such as music, fitness drinks, or
electronic games.
 Industry Analysis:
 It is business research that focuses on the potential of an industry.
 Before starting a business, an entrepreneur should consider three key questions about the
industry.
 Is the industry accessible for a new venture?
 Does the industry contain markets that are ripe for innovation or are underserved?
 Are there positions in the industry that can avoid some of the negative attributes of
the industry as a whole?
 How Industry and Firm level factors affect Performance:
 Firm Level Factors:
 It include a firms assets, products, cultures, teamwork among its employees,
reputation and other resources.
 Industry Level Factors:
 It include threats 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
firms profitability is directly attributable to the industry in which a firm competes.
 Studying Industry Trends:
1. Environmental Trends:
 Environmental trends play a significant role in the success or decline of industries, often
more than management skills.
 Key trends include “(Economic shifts, Social changes, Technological advancements, and
political or regulatory changes)”.
 E:g; [Industries targeting seniors, like eyeglasses and hearing aids, benefit from the aging
population, while industries selling sugary products, like candy and soft drinks, struggle due
to growing health concerns].
2. Business Trends:
 Some trends, not related to the environment, also affect industries.
 E:g; Some businesses can save costs by outsourcing manufacturing or services to countries
with cheaper labor, while others cannot.
 The Five Competitive Forces Model:
 This 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.
 Threats of Substitutes:
 Industries are more attractive when there are fewer substitutes for their
products or services.
 E:g; [There are few substitutes for prescription medicines, which makes the
pharmaceutical industry profitable].
 However, when substitutes exist, they can hurt profitability. For instance, if
airplane ticket prices are too high, business people might choose
videoconferencing instead.
 Substitutes are a bigger problem if they are cheap or free, like using email
instead of expensive express mail.
 To reduce the risk of customers switching to substitutes, companies often offer
extras.
 For example, Starbucks offers high-quality coffee, a nice atmosphere, and good
service to make customers less likely to switch to cheaper alternatives, like
convenience store coffee.
 Threats of New Entrants:
 Industries are more attractive when it's hard for new competitors to enter.
Companies can create barriers to entry, which are conditions that make it
difficult for new businesses to start and compete in the industry.
 These are the six major sources of barriers to entry.
 Economies of Scale:
 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.
 Product Differentiation:
 Industries such as soft drinks industry that are characterized by firms
with strong brands are difficult to break into without spending heavily
on advertisement.
 Capital Requirements:
 The need to invest large amount of money to gain entrance to an
industry is another barrier to entry.
 Cost Advantages Independent of Size:
 Existing firms may have cost advantages not related to size.
 E:g; The existing firms in an industry may have purchased land where it
was less expensive than it is today.
 Access to Distribution Channels:
  Distribution channels are often hard to crack. This is particularly true in
crowded markets, such as the convenience store market.
 Govt; and Legal Barriers:
 Some industries, such as (Broadcasting), require the granting of a
licence by public authority to compete.

 Rivalry Among Existing Firms:

 In most industries, the level of competition between existing firms affects
profitability.
 In highly competitive industries, like personal computers, prices can drop so low
that companies struggle to make a profit.
 For example, ASUSTeK sold its Eee PC laptop for just $350 in 2011. On the other
hand, industries like specialized medical equipment are less competitive, so
companies can earn higher profits.
 The intensity of competition depends on four main factors.
 Number and Balance of Competitors:
 The more competitors there are, the more likely it is that one or more
will try to gain customers by cutting its price.
 Degree of Difference between Products:
 The degree to which products differ from one product to another
affects industry rivalry.
 Growth rate of an Industry:
  The competition among firms in a slow-growth industry is stronger
than among those in fast-growth industries.
 Level of Fixed Cost:
 Firms that have higher 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:
 Industries are more attractive when suppliers have low bargaining power.
 If suppliers can raise prices or lower the quality of their products, it can reduce
the profitability of the industry.
 E:g; Intel, which supplies Pentium chips for most PCs, has strong power over the
PC industry and can charge high prices, affecting the industry's profits.
 These include the following;
 Supplier Concentration:
 When there are only a few suppliers that supply a critical product to a
large number of buyers, the supplier has an advantage.
 Switching Costs:
 These 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 supplier.
 Attractiveness of Substitutes:
 Supplier power is enhanced if there are no attractive substitutes for
the product 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.
 Bargaining Power of Buyers:
 Industries are more attractive when buyers have low bargaining power.
 If buyers can demand lower prices or better quality, it can hurt the profitability of
the industry.
 E:g; Large automakers can pressure suppliers to lower prices or provide better
parts at the same cost, reducing suppliers' profits.
 These include the following;
 Buyer Group Concentration:
 If there are only a few large buyers, and they buy from a large number
of suppliers, they can pressure the suppliers to lower costs and thus
affect the profitability of the industries from which they buy.
 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 Product:
 The degree to which a supplier’s product differs from its competitors
affects the buyer’s bargaining power.
 Threat of Backward Integration:
 The power of buyers is enhanced if there is a credible threat that the
buyer might enter the supplier’s industry.
 First Application of Five Forces Model:
 This model can be used to assess the attractiveness of an industry by determining the level
of threat to the industry profitability for each of the forces.
 If a firm fills out the form shown below, the several threats to industry profitability are high,
the firm may want to reconsider entering the industry or think carefully about the position
it would occupy.

 Second Application of Five Forces Model:

 The second way a new firm can apply this model to help determine whether it should enter
an industry is by using the model to answer several key question.
 Industry Types and the Opportunities they offer:
 Emerging Industry;
 It is a new industry in which standard operating procedures have yet to be developed.
 The opportunity in this industry is “(First Mover Advantage)”
 Fragmented Industry:
 Industries that are characterized by a large number of firms of approximately equal
size.
 The opportunity in this industry is “(Consolidation)”
 Mature Industry:
 Industries that are experiencing slow or no increase in demand.
 The opportunity in this industry is “(Process innovation and after-sale service
innovation)”
 Declining Industry:
 Industries that are experiencing a reduction in demand.
 The opportunity in this industry is “(Leadership, Establishing a niche market, and
Pursuing a cost reduction strategy)”
 Global Industry:
 Industries that are experiencing significant international sales.
 The opportunity in this industry is “(Multi domestic and global strategies)”
 Competitor Analysis:
 It 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:
  Following are the competitors new venture face;
 Direct Competitors;
 Business offering identical or similar products
 Indirect Competitors;
 Businesses offering close substitute products
 Future Competitors;
 Businesses that are not yet direct or indirect competitors but could be at anytime
 Sources Of Competitive Intelligence:
 The information gathered about competitors is called competitive intelligence.
 This can be tricky to obtain. For publicly traded companies, details about their business and
finances are available through annual reports filed with the SEC, which are public and can
be accessed on their website.
 However, for private companies, it's harder to gather information since they don't have to
share details with the public.
 Still, there are ethical ways for a company to gather information about its competitors.
 Ethical Ways to Obtain info; 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.

 Completing a Competitive Analysis Grid:

 It is a tool for organizing the info; 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 competitive
advantage.