Entrepreneurship

Lecture Number 9 and 10

Talha Zubair Ahmad Khan
Faculty of Management Sciences
UCP, Business School
 Chapter Objectives

1. Explain the purpose of an industry analysis.

2. Identify and discuss the five competitive forces that
determine industry profitability.
3. Explain the value that entrepreneurial firms create
by successfully using the five forces model.
4. Identify the five primary industry types and the
opportunities they offer.
5. Explain the purpose of a competitor analysis and a
competitive analysis grid.
 What is Industry Analysis?

• Industry
– An industry is a group of firms producing a similar product
or service, such as music, Pilates and yoga studios, and
solar panel manufacturing.
• Industry Analysis
– Is business research that focuses on the potential of an
industry.
 Why is Industry Analysis Important?

Importance
• Once it is determined that a new
venture is feasible in regard to the
industry and market in which it
Industry Analysis 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.
 Three Key Questions
When studying an industry, an entrepreneur must answer
three questions before pursuing the idea of starting a firm.

Question 1 Question 2 Question 3

Is the industry Are there positions in

Does the industry
accessible—in other the industry that avoid
contain markets that
words, is it a realistic some of the negative
are ripe for innovation
place for a new attributes of the
or are underserved?
venture to enter? industry as a whole?
 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.
– Therefore, the overall attractiveness of an industry should be part of
the equation when an entrepreneur decides whether to pursue a
particular opportunity.
Techniques Available to Assess Industry
Attractiveness

Assessing Industry Attractiveness

Study Environmental The Five Competitive

and Business Trends Forces Model
 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?
 The Five Competitive Forces Model

• Explanation of the Five Forces Model

– The five competitive forces 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.
 The Five Competitive Forces Model

• Explanation of the Five Forces Model (continued)

– 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.
The Five Competitive Forces Model
 Threat of Substitutes

• 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.
 Threat of Substitutes
2 of 3

• Threat of Substitutes (continued)

– 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

• 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.
 Threat of New Entrants
Barriers to Entry
Barrier to Entry Explanation

Industries that are characterized by large economies of

Economies of Scale
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

Product differentiation
characterized by firms with strong brands are difficult to
break into without spending heavily on advertising.

Capital The need to invest large amounts of money to gain

requirements entrance to an industry is another barrier to entry.
 Threat of New Entrants
Barriers to Entry (continued)
Barrier to Entry Explanation
Existing firms may have cost advantages not related to
Cost advantages size. For example, the existing firms in an industry may
independent of size have purchased land when it was less expensive than it
is today.

Distribution channels are often hard to crack. This is

Access to distribution particularly true in crowded markets, such as the
channels convenience store market.

Government and Some industries, such as banking and broadcasting,

legal barriers require the granting of a license by a public authority to
compete.
 Threat of New Entrants

• Nontraditional 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.
 Threat of New Entrants
Non-traditional Barriers to Entry
Barrier to Entry Explanation

If a start-up puts together a world-class management

Strength of
team, it may give potential rivals pause in taking on the
management team
start-up in its chosen industry.

If a start-up pioneers an industry or a new concept

First-mover advantage
within an industry, the name recognition the start-up
establishes may create a barrier to entry.

If the employees of a start-up are motivated by the

Passion of the
unique culture of a start-up, and anticipate a large
management team
financial reward, this is a combination that cannot be
and employees
replicated by larger firms.
 Threat of New Entrants
Nontraditional Barriers to Entry (continued)
Barrier to Entry Explanation

If a start-up is able to construct a unique business

Unique business model and establish a network of relationships that
model makes the business model work, this set of advantages
creates a barrier to entry.

Some Internet domain names are so “spot-on” that

Internet domain they give a start-up a meaningful leg up in terms of e-
name commerce opportunities.

Inventing a new If a start-up invents a new approach to an industry and

approach to an executes it in an exemplary fashion, these factors
industry create a barrier to entry for potential imitators.
 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.
 Rivalry Among Existing Firms
Factors that determine the intensity of the rivalry among
existing firms in an industry

Number and
balance of The more competitors there are, the more likely it
competitors is that one or more will try to gain customers by
(Perfect cutting its price.
Competition)

Degree of The degree to which products differ from one

difference product to another affects industry rivalry.
between products
(Monopolistic
Competition)
 Rivalry Among Existing Firms
Factors that determine the intensity of the rivalry among existing
firms in an industry (continued)

The competition among firms in a slow-growth

Growth rate of an
industry is stronger than among those in fast-
industry
growth industries.

Firms that have high fixed costs must sell a higher

Level of fixed
volume of their product to reach the break-even
costs
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.
 Bargaining Power of Suppliers
Factors that have an impact on the ability of suppliers to
exert pressure on buyers

Supplier When there are only a few suppliers that supply a

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

Switching costs are the fixed costs that buyers

Switching costs encounter when switching or changing from one
supplier to another. If switching costs are high, a
buyer will be less likely to switch suppliers.
 Bargaining Power of Suppliers
Factors that have an impact on the ability of suppliers to exert
pressure on buyers (continued)

Attractiveness of Supplier power is enhanced if there are no attractive

substitutes substitutes for the product or services the supplier
offers.

Threat of forward The power of a supplier is enhanced if there is a

integration credible possibility that the supplier might enter the
buyer’s industry.
 Bargaining Power of Buyers

• Bargaining Power of Buyers

– Buyers can suppress the profitability of the industries from
which they purchase by demanding price concessions or
increases in quality.
– For example, the automobile industry is dominated by a
handful of large companies that buy products from
thousands of suppliers in different industries. This allows
the automakers to suppress the profitability of the
industries from which they buy by demanding price
reductions.
 Bargaining Power of Buyers
Factors that have an impact on the ability of buyers to exert
pressure on suppliers

If there are only a few large buyers, and they buy

Buyer group from a large number of suppliers, they can pressure
concentration the suppliers to lower costs and thus affect the
profitability of the industries from which they buy.

The greater the importance of an item is to a buyer,

Buyer’s costs the more sensitive the buyer will be to the price it
pays.
 Bargaining Power of Buyers
Factors that have an impact on the ability of buyers to exert
pressure on suppliers (continued)

Degree of
The degree to which a supplier’s product differs
standardization of
supplier’s products
from its competitors affects the buyer’s
bargaining power.
(Product
Differentiation)

Threat of The power of buyers is enhanced if there is a

backward credible threat that the buyer might enter the
integration supplier’s industry.
First Application 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 Forces Model
Assessing Industry Attractiveness Using the Five Forces Model
 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
2 of 2

Ethical ways to obtain information about competitors

• Attend conferences and trade shows.

• Purchase competitors’ products.
• Study competitors’ Web sites and social media sites.
• Set up Google 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.

Copyright ©2016 Pearson Education,

5-37
Inc.
 Assignment Number 2: Application of
Potter’s 5 Forces Model
• Use the Potter's 5 forces model to perform an industry analysis of the
product/service your group has selected for you class project.
Remember, the goal here is to understand whether the chosen industry
is characterized by high level of competitive intensity or vice versa. It
would be appreciated if student groups could create a chart highlighting
the competitive intensity of each force in Potter's 5 forces model.

• Hint: A competitive intensity determine the attractiveness of an

Industry. Attractiveness in this context refers to the overall industry
profitability. An "unattractive" industry is one in which the combination
of these five forces acts to drive down overall profitability.