Chapter 5. Industry and Competitor Analysis

Industry Analysis

Industry analysis is a business research that focuses on the potential of an industry. An industry is a group of firms producing a similar product or service, such as music, pilates, yoga studios, and solar panel manufacturing. Once it is determined that a new venture is feasible in regard to the industry and the target market in which it intends to compete, a more in depth analysis is needed to learn the "ins and outs" of the chosen industry.

It is useful for a new venture to think about its position at both the company level and the product or service level. At the company level, a firm's position determines how the company is situated relative to its competitors.

It's also important to know that some industries are simply more attractive than others in terms of their annual growth rate and other factors. The overall attractiveness of an industry should be part of the equation when an entrepreneur decides whether to pursue a particular opportunity. Here are two techniques entrepreneurs have available for accessing industry attractiveness:

Studying Industry Trends

 Environmental and business trends are the two most important trends for entrepreneurs to evaluate.
Environmental trends →  Economic trends, social trends, technological advances, and political and regulatory changes are the most important environmental trends for entrepreneurs to study.
Business trends → Business trends include other business-related trends that aren't environmental trends but are important to recognize and understand.
It's important that start-ups stay on top of both environmental and business trends in their industries. One way to do this is via participation in industry trade associations, trade shows, and trade journals.

The Five Forces Model

The five forces model is a framework entrepreneurs use to understand an industry's structure. Each of the five forces affects the average rate of return for the firms in an industry by applying pressure on industry profitability.

Threat of Substitutes

In general, industries are more attractive when the threat of substitutes is low. This means that products or services from other industries can't easily serve as substitutes for the products or services being made and sold in the focal firm's industry. The extent to which substitutes suppress the profitability of an industry depends on the propensity for buyers to substitutes alternatives.

Threat of New Entrants

In general, industries are more attractive when the threat of entry is low. This means that the competitors cannot easily enter the industry and successfully copy what the industry incumbents are doing to generate profits. A barrier to entry is a condition that creates a disincentive for a new firm to enter an industry. Here are six major sources of barriers to entry:

• Economic of scale
• Product differentiation
• Capital Requirements
• Cost advantages independent of size
• Access to distribution channels
• Government and legal barriers

When start-ups create their own industries or create new niche markets within existing industries, they must create barriers to entry of their own to reduce the threat of new entrants. The ideal barrier to entry is a patent, trademark, or copyright, which prevents another firm from duplicating what the start-up is doing.

Rivalry Among Existing

In most industries, the major determinant of industry profitability is the level of competition among the firms already competing in the industry. Some industries are fiercely competitive to the point where prices are pushed below the level of costs. When this happens, industry-wide losses occur.

Here are the four primary factors that determine the nature and intensity of the rivalry among existing firms in an industry:

• Number and balance of competitors
• Degree of difference between products
• Growth rate of an industry
• Level of fixed costs

Bargaining Power of Suppliers

In general, industries are more attractive when the bargaining power of suppliers is low. Several factors have an impact on the ability of suppliers to exert pressure on buyers and suppress the profitability of the industries they serve. These include the following:

• Supplier concentration
• Switching costs
• Attractiveness of substitutes
• Threat of forward integration

Bargaining Power of Buyers

In general, industries are more attractive when the bargaining power of buyers (a start-up's customers) is low. Buyers can suppress the profitability of the industries from which they purchase by demanding price concessions or increases in quality. Several factors affect buyer's ability to exert pressure on suppliers and suppress the profitability of the industries from which they buy. These include the following:

• Buyer group concentration
• Buyer's costs
• Degree if standardization of supplier's products
• Threat of backward integration

The Value of the Five Forces Model

The five forces model can be used in two ways. First, the five forces model can be used to assess the attractiveness of an industry or a specific position within an industry by determining the level of threat to industry profitability for each of the forces. The second way is using the five forces model to pose questions to determine the opportunities they offer. Here are the most prevalent industry types:

Emerging Industries

An emerging industry is a new industry in which standard operating procedures have yet to be developed. The firm that pioneers or takes leadership of an emerging industry often captures a first-mover advantage. A first-mover advantage is a sometimes insurmountable advantage gained by the first company to establish a significant position in a new market.

Fragmented Industries

A fragmented industry is one that is characterized by a large number of firms of approximately equal size. The primary opportunity for start-ups in fragmented industries is to consolidate the industry and establish industry leadership as a result of doing so. The most common way to do this is through a geographic roll-up strategy, in which one firm starts acquiring similar firms that are located in different geographic areas.

Mature Industries

A mature industry is an industry that is experiencing slow or no increase in demand, has numerous repeat (rather than new) customers, and has limited product innovation. Occasionally, entrepreneurs introduce new products innovations to mature industries, surprising incumbents who thought nothing new was possible in their industries.

Declining Industries

A declining industry is an industry or a part of an industry that experiencing a reduction in demand. Typically, entrepreneurs shy away from declining industries because the firms in the industry do not meet the tests of an attractive opportunity.

Entrepreneurial firms employ three different strategies in declining industries. The first is to adopt a leadership strategy, in which the firm tries to become the dominant player in the industry. The second is to pursue a niche strategy, which focuses on a narrow segment of the industry that might be encouraged to grow through product or process innovation. The third is a cost reduction strategy, which is accomplished through achieving lower costs than industry incumbents through process improvements.

Global industries

A global industry is an industry that is experiencing significant international sales. Firms that pursue a multidomestic strategy compete for market share on a country-by-country basis and vary their product or service offerings to meet the demands of the local market. In contrast, firms pursuing a global strategy use the same basic approach in all foreign markets. The choice between these two strategies depends on how similar customers' tastes are from market to market.

The key to achieving success is gaining a clear understanding of customers' needs and interests in each market in which the firm intends to compete.

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 to obtain a competitive advantage in one or more areas.

Identifying Competitors

The first step in a competitive analysis is to determine who the competition is. There are different types of competitors a business will face. The challenges associated with each of these groups of competitors are described here:

• Direct competitors → Business offering identical or similar products
• Indirect competitors → Business offering close substitute product
• Future competitors → Business that are not yet direct or indirect competitors but could be at any time

In general, people are resistant to change and can always keep their money rather than spend it. A product or service's utility must rise above its cost, not only in monetary terms but also in terms of the hassles associated with switching or learning something new, to motivate someone to buy a new product or service. Creating a meaningful value and sharp differentiation from competitors are actions small firms in crowded industries can take to remain competitive and gain market share.

Sources of Competitive Intelligence

Competitive intelligence is the information that is gathered by a firm to learn about its competitors. If a competitor is a publicly traded firm, a description of the firm's business and its financial information is available through annual reports filled with the Securities and Exchange Commission (SEC). If one or more of the competitors is a private company, the task is more difficult, given that private companies are not required to divulge information to the public.

Completing a Competitive Analysis Grid

A competitors analysis grid is a tool for organizing the information a firms 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. To be a viable company, a new venture must have at least one clear competitive advantage over its major competitors. Analyzing competitors is a complex and challenging process. But, the link between understanding competitors and how an entrepreneurial venture stacks up against them and the new firm's success in both the short and long term is clear and strong.