Entrepreneurship Feasibility Analysis IndustryMarket feasibility Course Instructor Asra

Entrepreneurship Feasibility Analysis (Industry/Market feasibility) Course Instructor : Asra Farooq Qazi

Industry and Target Market • Industry – An industry is a group of firms producing a similar product or service, such as airlines, computers, fitness drinks, furniture, or electronic games. • Target Market – A firm’s target market is the limited portion of the industry that it goes after or to which it wants to appeal such as diet coke.

Three key questions When studying an industry, an entrepreneur must answer three questions before pursuing the idea of starting a firm – Is the industry accessible-in other words, is it a realistic place for a new venture to enter? – Does the industry contain markets that are ripe for innovation or are underserved? – Are there positions in the industry that will avoid some of the negative attributes of the industry as a whole?

Types of industries and opportunity they offer Industry type Industry characteristics Opportunities Examples of entrepreneurial firms exploiting these opportunities Emerging Recent changes in demand or technology; new industry standard operating procedures have yet to be developed First-mover advantage • Apple with its i. Tunes music store • Mariah power in wind-generated power • My. Space. com with its online social networking website Fragmented Large number of firms of approximately equal size Consolidation • Starbucks in coffee restaurant • Clean Air Lawn Care in lawn service • Greeks on call in home computer repair Mature Slow increases in demand, numerous repeat customers, and limited product innovation Process and after-sale service innovation • Tesla Motors in automobiles • Sprig Toys in toys • Daisy Rock Guitars in guitars Declining Consistent reduction in industry demand Leaders, niche, harvest, and divest • Nucor in steel • Jet. Blue in airlines • Cirque due Soleil in circuses Global Significant international Multinational • Nike in athletic shoes

Industry/Target Market feasibility analysis The analysis helps a firm determine if the target market identified during feasibility analysis is favorable for a new firm.

Why industry/market feasibility analysis? Every industry is different in – Size (revenues, quantity) – Structure – Distribution channel – Customer needs and wants – Profitability – Growth – Product life cycle – Alternatives for the consumer

Components of Industry/Target Market feasibility analysis 1. Industry attractiveness 2. Target market attractiveness

1. Industry attractiveness It is the degree to which environmental and business trends are moving in favor rather than against the industry. Once need to answer following question – Are changing economic and societal trends helping or hurting industry incumbents? – Are profit margins increasing or falling? – Are input costs going up or down? – Is market for the industry staple products opening up or are current markets being shut down by competing industries?

Cont… Characteristics of industry attractiveness Are young rather than old Are early rather than late in their life cycle Are fragmented rather than concentrated Are growing rather than shrinking Are selling products and services that customers “must have” rather than “want to have” – Are not crowded – Have high rather than low operating margins – Are not highly dependent on the historically low price of key raw materials – – –

Cont… Tools for assessing industry attractiveness a. Trends in industry attractiveness b. Five competitive forces model – Value of five competitive forces

Cont… Trends analysis – 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?

Cont… b. Five competitive forces model It is a framework for understanding the structure of an industry

Cont… Threat to substitute – A substitute product can be regarded as something that meets the same need – A substitute product is produced in a different industry-but crucially satisfy the same need • For example, public-transportation is a substitute for driving a car, and e-mail is a substitute for writing letters. Online sources of news is a substitute of printed newspaper – If there are substitutes to a firm’s product, they will limit the price that can be charged and will reduce profits

Cont… Threat to substitute – Generally, an industry is more attractive when the following conditions hold: • Quality substitute products are not readily available. • The prices of substitute products are not significantly lower than those of the industry’s products. • Buyers’ cost of switching to substitute products is high.

Cont… Threat of new entrant – 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 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 entrant – Generally, an industry is more attractive to new entrants when the following conditions hold: • The advantages of economies of scale are absent. Economies of scale exist when companies in an industry achieve low average costs by producing huge volumes of items (e. g. , computer chips). • Capital requirements to enter the industry are low. • Cost advantages are not related to company size. • Buyers are not extremely brand-loyal, making it easier for new entrants to the industry to draw customers away from existing businesses. • Governments, through their regulatory and international trade policies, do not restrict new companies from entering the industry.

Rivalry among existing firms – If there is intense rivalry in an industry, it will encourage businesses to engage in • Price wars (competitive price reduction) • Investment in innovation and new products • Intensive promotion (sales promotion and higher spending on advertising) – All these are likely to increase costs and lower profits • For example: telecommunication industry

Rivalry among existing firms – Generally, an industry is more attractive when the following conditions hold: • The number of competitors is large or, at the other extreme, quite small (fewer than five). • Competitors are not similar in size or capability. • The industry is growing at a fast pace. • The opportunity to sell a differentiated product or service is present.

Bargaining power of suppliers – If firm suppliers have bargaining power they will • Exercise that power • Sell their products at higher price • Squeeze industry profits – The greater the leverage that suppliers of key raw materials or components have, the less attractive is the industry

Bargaining power of suppliers – Generally, an industry is more attractive when the following conditions hold: • Many suppliers sell a commodity product to the companies in it. • Substitute products are available for the items suppliers provide. • Companies in the industry find it easy to switch from one supplier to another or to substitute products (i. e. , “switching costs” are low). • The items suppliers provide the industry account for a relatively small portion of the cost of the industry’s finished products.

Bargaining power of buyer – When the number of customers is small and the cost of switching to competitors’ products is low, buyers’ influence on companies is high. – Just as suppliers to an industry can be a source of pressure, buyers also have the potential to exert significant power over a business, making it less attractive.

Bargaining power of buyer – Generally, an industry is more attractive when the following conditions hold: • Industry customers’ “switching costs” to competitors’ products or to substitutes are relatively high. • The number of buyers in the industry is large. • Customers demand products that are differentiated rather than purchase commodity products that they can obtain from any supplier (and subsequently can pit one company against another to drive down price). • Customers find it difficult to gather information on suppliers’ costs, prices, and product features— something that is becoming much easier for customers in many industries to do by using the World Wide. Web. • The items companies sell to the industry account for a relatively small portion of the cost of their customers’ finished products.

Application of five forces 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.

Industry profit variation in porter’s 5 forces model

2. Target Market Attractiveness • The challenge in identifying an attractive target market is to find a market that’s large enough for the proposed business but is yet small enough to avoid attracting larger competitors. • Assessing the attractiveness of a target market is tougher than an entire industry. • Often, considerable ingenuity must be employed to find information to assess the attractiveness of a specific target market.

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 • There are three types of competitor analysis:

Competitive analysis grid A competitor analysis grid is a valuable tool to compare competitors from a number of perspectives— – company information, product/service information, customer information, and sources of competitive advantage. Product features Comp 1 Comp 2 Comp 3 Your brand

Example 1: Mobile Phone competitive analysis Name Nokia Samsung Q-Mobile Product features Even Advantage Disadvantage user engagement Even Advantage Warranty Even Advantage Even Durability Advantage Even Price Even Disadvantage Advantage Customer feedback Even Advantage Even