CHAPTER 5: INDUSTRY AND COMPETITOR ANALYSIS
Industry: 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. Helps
a firm determine if the niche or target markets it identified during its feasibility analysis
are accessible and which ones represent the best point of entry for the new firm.
What is the fundamental nature, characteristics, drivers, makes it work or the business.
Who are the competitors, ratios, Gathers information about something you don’t know.
You want to know what you’re getting into.
Competitor analysis: detailed evaluation of a firm’s competitors. Once a firm enters an
industry, it must understand its competitive environment.
Three Key Questions
Is the industry accessible—in other words, is it is realistic place for a new venture to
Does the industry contain markets that are ripe for innovation or are underserved?
Are there positions in the industry that avoid some of the negative attributes of the
industry as a whole?
Industry trends: Strength of an industry depends on if environmental trends shift in
favor or against the products or services sold by firms in the industry. (its not because
managers didn’t do well their job)
• 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?
Five Forces Model: To determine the industry profitability.
Each of the five forces impacts the average rate of return for the firms in an industry by
applying pressure on industry profitability. Well managed firms try to position their firms
in a way that avoids or diminishes these forces—in an attempt to beat the average rate
of return of the industry.
1 Threat of substitutes:
– The price that consumers are willing to pay for a product depends in part on
the availability of substitute products.
– For example, there are few if any substitutes for prescription medicines,
which is one of the reasons the pharmaceutical industry is so profitable.
– In contrast, when close substitutes for a product exist, industry profitability is
suppressed, because consumers will opt out if the price gets too high.
– Elasticity of demand: If a price of a product goes up too high, people will look to
alternative, other opportunities.
– Switching costs: the costs to switch,
– ALWAYS important variables
– Framework: help us to get through maze of knowledge, that’s why we use concept
– Industry is more attractive when this threat is low, meaning that product and
services from other industries cant easily serves as substitutes for the products
and services being made and sold in the focal (center, main point of interest) firm’s
industry. Very acute if the substitute is free.
– EX: airplanes tickets a are too high, business people will use
videoconference, skype etc
– UPS, mailing becomes too expensive people will attach documents in
– The extent to which substitutes suppress the profitability of an industry
depends on the propensity for buyers to substitute between alternatives.
– This is why firms in an industry often offer their customers amenities to
reduce the likelihood that they will switch to a substitute product, even in
light of a price increase.
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.
– More attractive when threat of new entrants is low. Competitors cannot easily enter
the industry to copy what other businesses are doing.
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.
Occurs when mass-producing a product results in lower average cost. (ex producing vast
quantities of things thereby reducing the average cost of one single thing)
2 Product differentiation: Industries such as the soft drink industry that are characterized
by firms with strong brands are difficult to break into without spending heavily on
Capital requirements: The need to invest large amounts 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. For example, the existing firms in an industry may have purchased land
when it was less expensive than it is today. (Others company have bought land and
equipment years ago when it was cheaper than what new entrants have to pay for the
same assets at the time of their entry.)
Access to distribution channels : Distribution channels are often hard to crack. This is
particularly true in crowded markets, such as the convenience store market. (Ex for a
new sport drink to be placed in a convenience store, it has to displace an already
existing product to get shelf space.)
Some industries, such as broadcasting, require the granting of a license by a public
authority to compete. (Patents, copyrights, trademark, wich prevents anther firm from
duplicating what the start-up is doing. )
NON TRADITIONAL BARRIERS TO ENTRY :
3 Rivalry Among Existing Firms: 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