Chapter 8 Industry and Competitor Analysis Chapter Objectives

Chapter 8 Industry and Competitor Analysis

Chapter Objectives 1. 2. 3. 4. 5. 6. Industry analysis Five competitive forces Barriers to entry”. entry Competitor analysis. Three groups of competitors a new firm will face. Information about competitors

What is Industry Analysis? • Industry – An industry is a group of firms producing similar products or services, such as airlines, fitness drinks, furniture, or electronics. • Industry Analysis – Is a business research that focuses on the potential of an industry.

Two Key Questions When studying an industry, an entrepreneur must answer two questions before pursuing the idea of starting a firm. Question 1: Is the industry accessible? Question 2: Does the industry contain markets that are ready for innovation or not?

The Five Competitive Forces Model • Five Forces Model: – A framework for understanding the structure of an industry. – Composed of the forces that determine industry profitability. – Help determine the average rate of return for the firms in an 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. IF IF Few / No Substitute Close Substitute exist Difficult to switch when Price goes up customers might stop buying when Price goes up) – Firms in an industry always offer their customers features to reduce the chance of changing to a substitute product.

Example • A customer could easily get a cup of coffee cheaper at one of Starbuck’s competitors. • To decrease the chances of this, Starbucks offers highquality fresh coffee, good service, and a satisfying feeling. • 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 more attractive to new entrants. – The competition in the industry will increase unless something is done to stop this. – Firms in an industry to keep the number of new entrants low by creating barriers to entry. .

• A Barrier to entry: is a condition that discourage a new firm from entering an industry. Examples of barriers to entry : 1. 2. 3. 4. 5. Economic scale. Product differentiation. Capital requirements. Access to distribution channels. Government and legal barriers.

Rivalry Among Existing Firms Rivalry (competition) Among Existing Firms: – In most industries, the major determinant of industry profitability is the level of competition among existing firms. Factors that determine the intensity of the competition: 1. Number and balance of competitors: The more competitors there are, the more one or more will try to gain customers by cutting its price. 2. Degree of difference between products: The degree to which products differ from the others affects industry rivalry. 3. Growth rate of an industry : The competition among firms in a slow-growth industry is stronger than among those in fast-growth industries. 4. Level of fixed costs : Firms that have high fixed costs must sell a higher amount 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 affect the profitability of the industries by raising prices or reducing the quality of the components they provide. Factors that have an impact on the ability of suppliers to pressure on buyers: 1. Supplier concentration 2. changing from one supplier to another costs. 3. Attractiveness of substitutes.

Bargaining Power of Buyers • Bargaining Power of Buyers – Buyers can affect the profitability of the industries by negotiating prices or demanding increases in quality. Factors that have an impact on the ability of buyers to pressure on suppliers : 1. Buyer group concentration 2. Buyer’s costs. 3. Degree of standardization of supplier’s products

Application of the Five Forced Model Assessing Industry Attractiveness Using the Five Forces Model

Identifying Competitors Types of Competitors 5 -15

Sources of Competitive Intelligence ways to obtain information about competitors • Attend conferences and trade shows. • Purchase competitor’s 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 rather than your competitor’s product. 5 -16