Chapter 5: Industry and Competitor Analysis
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CHAPTER 5
INDUSTRY AND COMPETITOR ANALYSIS
LEARNING 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.
CHAPTER OVERVIEW
Chapter 5 focuses on industry analysis. A critical aspect of any start-up’s chances for
success is the industry it enters and how it positions itself relative to its industry rivals.
The WriteLab feature at the beginning of the chapter provides an example of how a start-
up positioned itself in a savvy manner in a difficult industry.
The chapter examines industry dynamics by first talking about the importance of studying
industry trends and then by walking through Porter’s five forces that determine industry
profitability. This discussion concludes with an explanation of the four industry-related
questions that a new firm should ask before proceeding. The five industry types and the
opportunities they offer are explained and discussed.
The chapter concludes with a discussion of competitor analysis. The three groups of
competitors a new firm must face are introduced and discussed. A description of how
firms collect competitive analysis is provided. The chapter concludes with a description
of how to complete a competitive analysis grid.
CHAPTER OUTLINE
I. Industry Analysis
A. Studying Industry Trends
1. Environmental Trends
2. Business Trends
II. The Five Forces Model
A. Threat of Substitutes
B. Threat of New Entrants
1. Barriers to Entry
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a. Economies of Scale
b. Product Differentiation
c. Capital Requirements
C. Rivalry Among Existing Firms
1. Number and Balance of Competitors
2. Degree of Difference Between Products
D. Bargaining Power of Suppliers
1. Supplier Concentration
2. Switching Costs
3. Attractiveness of Substitutes
4. Threat of Forward Integration
E. Bargaining Power of Buyers
1. Buyer Group Concentration
2. Buyer’s Costs
3. Degree of Standardization of Supplier’s Products
4. Threat of Backward Integration
III. The Value of the Five Forces Model
IV. Industry Types and the Opportunities They Offer
A. Emerging Industries
B. Fragmented Industries
C. Mature Industries
D. Declining Industries
E. Global Industries
V. Competitor Analysis
A. Identifying Competitors
B. Sources of Competitive Intelligence
C. Completing a Competitive Analysis Grid
CHAPTER NOTES
I. Industry Analysis
Industry analysis is 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, fitness drinks, or electronic games.
• Once it is determined that a new venture is feasible in regard to the industry and
market in which it will compete, a more in-depth analysis is needed to learn the
ins and outs of the industry the firm plans to enter.
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A. Studying Industry Trends
1. Environmental Trends—Economic trends, social trends, technological
advances, and political and regulatory changes are the most important
environmental trends for entrepreneurs to study.
2. Business Trends—Other trends impact industries that aren’t environmental
trends per se but are important to mention. For example, the firms in some
industries benefit from an increased ability to outsource manufacturing or
service functions to lower-cost labor markets, whereas firms in other
industries don’t share this advantage.
II. The Five Forces Model
The five competitive forces model is a framework for understanding the structure
of an industry and was developed by Harvard professor Michael Porter.
Shown in Figure 5.1 in the textbook, the framework is comprised of the forces
that determine industry profitability.
These forces—the threat of substitutes, the entry of new competitors, rivalry
A. Threat of Substitutes
1. The price that consumers are willing to pay for a product depends in part on
the availability of substitute products.
2. For example, there are few, if any, substitutes for prescription medicines,
which is one of the reasons the pharmaceutical industry is so profitable.
3. In contrast, when close substitutes for a product do exist, industry profitability
is suppressed because consumers will opt not to buy when the price is too
high.
B. Threat of New Entrants
1. If the firms in an industry are highly profitable, the industry becomes a
magnet to new entrants.
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2. Unless something is done to stop this, the competition in the industry will
increase, and average industry profitability will decline.
3. There are a number of ways that firms in an industry can keep the number of
new entrants low. These techniques are referred to as barriers to entry. The six
major sources of barriers to entry are shown below:
a. Barriers to Entry
i. Economies of scale
ii. Product differentiation
iii. Capital requirements
C. Rivalry Among Existing Firms
1. In most industries, the major determinant of industry profitability is the level
of competition among the firms already competing in the industry.
2. Some industries are fiercely competitive to the point where prices are pushed
below the level of costs. When this happens, industry-wide losses occur.
3. There are four primary factors that determine the nature and intensity of the
rivalry among existing firms in an industry.
a. Number and balance of competitors
D. Bargaining Power of Suppliers
1. In some cases, suppliers can suppress the profitability of the industries to
2. If a supplier reduces the quality of the components it supplies, the quality of
3. If the suppliers are powerful relative to the firms in the industry to which they
sell, industry profitability can suffer.
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4. 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:
a. Supplier concentration
E. Bargaining Power of Buyers
2. For example, the automobile industry is dominated by a handful of large
3. Several factors affect buyers’ ability to exert pressure on suppliers and
suppress the profitability of the industries from which they buy. These include
the following:
a. Buyer group concentration
b. Buyer’s costs
c. Degree of standardization of supplier’s products
d. Threat of backward integration
III. The Value of the Five Forces Model
Along with helping a firm understand the dynamics of the industry it plans to
enter, the five forces model can be used in two ways to help a firm determine
whether it should enter a particular industry and whether it can carve out an
attractive position in that industry.
• 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 five forces, as shown in Table 5.2 in the
textbook.
• For example, if a firm filled out the form shown in Table 5.2 and several of
the threats to industry profitability were high, the firm may want to reconsider
entering the industry or think carefully about the position it will occupy in the
industry.
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• The second way a new firm can apply the five forces model to help determine
whether it should enter an industry is by using the model to answer several key
questions. By doing so, a new venture can assess the thresholds it may have to
meet to be successful in a particular industry. These questions are:
Question 1: Is the industry a realistic place for our new venture to enter?
Question 2: If we do enter the industry, can our firm do a better job than the
industry as a whole in avoiding or diminishing the impact of the forces that
suppress industry profitability?
Question 3: Is there a unique position in the industry that avoids or diminishes
the forces that suppress industry profitability?
• Question 4: Is there a superior business model that can be put in place that
would be hard for industry incumbents to duplicate?
IV. Industry Types and the Opportunities They Offer
A. Emerging Industries
1. An emerging industry is a new industry in which standard operating
procedures have yet to be developed.
2. The firm that pioneers or takes the leadership of an emerging industry often
captures a first-mover advantage.
B. Fragmented Industries
2. The primary opportunity existing for start-ups in fragmented industries is to
consolidate the industry and establish industry leadership as a result of doing
so.
C. Mature Industries
1. A mature industry is an industry that is experiencing slow or no increase in
demand, has numerous repeat customers, and has limited product innovation.
2. Occasionally, entrepreneurs introduce new product innovations to mature
industries, surprising industry incumbents who thought nothing new was
possible in their industries.
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D. Declining Industries
1. A declining industry is an industry that is experiencing a reduction in demand.
2. Typically, entrepreneurs shy away from declining industries because the firms
in the industry don’t meet the tests of an attractive opportunity described in
Chapter 2.
E. Global Industries
1. A global industry is an industry that is experiencing significant international
sales.
2. Many start-ups enter global industries and from day one try to appeal to
international rather than just domestic markets.
3. The two most common strategies pursued by firms in global industries are the
multidomestic strategy and the global strategy.
a. Firms that pursue a multidomestic strategy compete for market share on a
V. Competitor Analysis
After a firm has gained an understanding of the industry and markets in which it
plans to compete, the next step is to complete 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 to obtain a competitive advantage in one or more areas.
A competitive analysis grid is a tool for organizing the information a firm collects
about its primary competitors.
A. Identifying Competitors
1. The different types of competitors a business will face are shown in Figure 5.3
in the textbook.
Chapter 5: Industry and Competitor Analysis
a. Direct competitors
b. Indirect competitors
c. Future competitors
B. Sources of Competitive Intelligence
1. To complete a meaningful competitive analysis grid, a firm must first
understand the strategies and behaviors of its competitors.
3. The following are examples of ways a firm can ethically obtain information
about its competitors:
a. Attend conferences and trade shows
b. Purchase competitors’ products
c. Study competitors’ Web sites
d. Set up Google e-mail alerts
C. Completing a Competitive Analysis Grid
1. An example of a competitive analysis grid is provided in Table 5.5.
BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING
What Went Wrong?
SharpScholar: Lessons Learned from a Failed EdTech Start-Up
1.
What lessons does SharpScholar’s failure have for entrepreneurs who are
considering entering the EdTech industry?
Answer: The main lessons are to avoid the things that sunk SharpScholar. As the
founder points out in his post-failure blog, entrepreneurs have to have a clear focus
on who their customer is. While there are industries where the customer pays for a
product that he/she does not choose (like a textbook for a class), this split does
cause challenges. The most important thing, though, is to identify who the decision
maker is (in SharpScholar’s case it is likely the teacher) and go after him/her.
2.
We studied business models in chapter 4. Would you classify SharpScholar’s
business model as standard or disruptive? What types of execution-related
Chapter 5: Industry and Competitor Analysis
challenges are associated with the type of business model you believe
SharpScholar sought to implement?
Answer: Arguably SharpScholar disrupted the education industry via technology.
In disruption, a key challenge is educating the market on what benefit your
product/service can offer. This is the biggest implementation challenge in
implementing a business model such as that of SharpScholar.
3.
As explained in this feature, SharpScholar did not have a precise image of who
was the firm’s target customer. Examine the “bargaining power of buyers” from
the perspective of the different customers mentioned in the feature who may have
been SharpScholar’s target customer. Which of the potential target customers
would possess the greatest amount of buyer power relative to SharpScholar and
why?
Answer: The teacher makes the adoption decision which is then paid for either by
the school or the student. The key “buyer” is the teacher and teachers in this case
have considerable bargaining power.
4.
What actions could SharpScholar have taken, throughout the life of its business,
that may have enabled it to remain competitive and still be a successful firm
today?
Answer: Students will vary in terms of their answers to this question. Most
students will point to the mistakes that SharpScholar made and suggest that had
they avoided the mistakes and spent more time listening to their users, they would
have significantly increased their chances of success.
Savvy Entrepreneurial Firm
Thriving in a Crowded Industry by Creating Meaningful Value and Differentiation from
Competitors
1.
What are the common attributes across the three companies in the feature? How do
these attributes help the companies thrive in otherwise competitive industries?
Answer: The common attribute is that all three companies differentiate themselves
from competitors in unique ways. The distinct attribute enables each company to
correctly position itself given the context of its industry.
2.
In what ways are each companies’ features redefining the customer experience in
their industries?
Answer: Raden produces travel bags that integrate technology with comfort. Suja
Juice sells healthy juices. Finally, The Muse is a job placement site. In each case,
the company and the product in question address a customer pain point – Raden’s
Chapter 5: Industry and Competitor Analysis
bags help charge smartphones and allow users to find out where they are in a
baggage carousel. Suja provides “cold pressed” juices that offer a healthy
alternative to regular juices. The Muse provides job seekers with more information
about an employer.
3.
Of the three companies featured, which one do you think will have the most
profound impact on its industry? Describe what you think the impact or impacts
will be.
Answer: Students will vary in terms of their answers to this question. A case could
be made for each of the three companies featured.
4.
Find an example of another company that is thriving in a highly competitive
industry. Analyze the company and discern what sets it apart from its competitors.
Answer: This is a good question for an individual or group assignment.
Partnering for Success
Three Ts That Are Important for Becoming Active in an Industry: Trade Associations,
Trade Shows, and Trade Journals
1.
Pick an industry in which you have an interest. Make a list of the premier trade
associations, trade shows, and trade journals associated with the industry.
Answer: This is a good question for an individual or a group assignment.
2.
How can an entrepreneur assess whether offering to serve in a leadership capacity
in a trade association, on a volunteer basis, will be worth the time and effort?
Establish a set of criteria that you would follow if making this type of decision.
Answer: It’s a judgment call. A reasonable set of criteria for determining whether
or not to become involved might be:
The extent of the entrepreneur’s desire to help his or her industry.
The degree to which the entrepreneur thinks he or she could help move the
industry in the right direction.
The visibility the entrepreneur would obtain by taking on a leadership
position.
The potential benefits the entrepreneur might glean from “networking”
with other industry participants that are involved.
3.
Spend some time looking at the Web site of the Organic Trade Association. Make
a list of networking opportunities made available via membership in this
organization.
Chapter 5: Industry and Competitor Analysis
Answer: The networking opportunities made available via membership in this
organization include (but may not be limited to) the following:
Attend the association’s trade shows.
Participate in weekly Webinars.
Attend local chapter events.
Join the “Section” within the organization that represents your specific
interest.
Serve on the association’s board of directors.
Take advantage of networking events that are periodically offered.
Participate in the social media platforms the association utilizes, including
Twitter and Facebook.
Take advantage of the educational resources that are made available via the
Association and interact with the people providing the education.
4.
What are the risks involved with networking? For example, are there risks
involved with sharing information with industry participants about how your firm
competes? How can a company strike the right balance between giving out enough
information about itself to attract the attention of potential partners without
divulging too much proprietary information?
Answer: The risks associated with networking include (1) devoting too much time
and energy to networking, at the expense of other activities, and (2) inadvertently
revealing trade secrets to other industry participants (who may be competitors).
Striking the right balance is a combination of practice and common sense.
REVIEW QUESTIONS
5-1.
What is an industry?
Answer: An industry is a group of firms producing a similar product or service.
An example of an industry is the airline industry. A partial list of the firms in the
airline industry includes: Southwest Airlines, JetBlue, Delta, American, and
Frontier Airlines.
5-2.
What is an industry analysis and why is it important for a new firm to analyze the
industry in which it may choose to compete?
MyLab Question.
5-3.
What are the four primary categories of environmental trends?
