Chapter 5: Industry and Competitor Analysis
5-8.
How does rivalry among existing firms have the potential to suppress an
industry’s profitability?
Answer: 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.
5-9.
What are the four primary factors that play a role in determining the nature and
intensity of the bargaining power of suppliers?
Answer: The four factors that play a role in determining the nature and intensity
of the bargaining power of suppliers are:
Supplier concentration: When there are only a few suppliers that supply a critical
product to a large number of buyers, the supplier has an advantage.
Switching costs: If switching costs are high, a buyer will be less likely to switch
suppliers.
Attractiveness of substitutes: Supplier power is enhanced if there are no attractive
substitutes for the products or services the supplier offers.
Threat of forward integration: The power of a supplier is enhanced if there is a
credible possibility that the supplier might enter the buyer’s industry.
5-10.
How does the bargaining power of suppliers have the potential to suppress an
industry’s profitability?
Answer: In some cases, suppliers can suppress the profitability of the industries to
which they sell by raising prices or reducing quality of the components they
provide.
5-11.
What are the four primary factors that play a role in determining the nature and
intensity of the bargaining power of buyers?
Answer: The four factors that play a role in determining the nature and intensity
of the bargaining power of buyers are:
Buyer group concentration: If the buyers are concentrated, meaning that there are
only a few large buyers, and they buy from a large number of suppliers, they can
pressure the suppliers to lower costs.
Buyer’s costs: The greater the importance of an item to a buyer, the more
sensitive the buyer will be to the price it pays.
Degree of standardization of supplier’s products: The degree to which a
supplier’s products differ from its competitors affects the buyer’s bargaining
power.
Chapter 5: Industry and Competitor Analysis
Buyers can suppress the profitability of the industries from which they purchase
by demanding price concessions or increases in quality.
5-12.
How does the bargaining power of buyers have the potential to suppress an
industry’s profitability?
Answer: Buyers can suppress the profitability of the industries from which they
purchase by demanding price concessions or increases in quality.
5-13.
What are the nontraditional barriers to entry that are particularly suitable for
entrepreneurial firms to study when selecting an industry in which to compete?
Answer: Strength of management team, first-mover advantage, passion of
management team and employees, unique business model tied together by a
network of relationships, unique or “spot on” Internet domain names, and
inventing a new approach to an industry and executing the idea in an exemplary
fashion. These nontraditional barriers to entry are important for firms to consider
and utilize when appropriate.
5-14.
How can a start-up avoid or sidestep the pressure applied by one of the five forces
on industry profitability by establishing a unique “position” in an industry?
Answer: A company’s position determines how it is situated relative to its rivals.
An example of a company that has positioned itself in a favorable manner is
Panera Bread, the subject of Case 5.1. By establishing a new category in the
restaurant industry, which Panera Bread calls “fast–casual,” Panera diminishes the
“rivalry among existing firms,” by avoiding direct head–to-head competition with
the fast-food and the casual dining segments of the restaurant industry.
5-15.
What are the characteristics of a fragmented industry and why are these important
for entrepreneurs?
MyLab Question.
5-16.
What is the primary opportunity for new firms in fragmented industries?
Answer: 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.
5-17.
What are the characteristics of a mature industry?
Answer: A mature industry is an industry that is experiencing slow or no increase
in demand, has numerous repeat customers, and has limited product innovation.
Chapter 5: Industry and Competitor Analysis
5-18.
What is the primary opportunity for new firms in a mature industry?
Answer: The primary opportunity for start-ups in mature industries is to introduce
new product innovations.
5-19.
What is a global industry?
Answer: A global industry is an industry that is experiencing significant
international sales.
5-20.
What are the two most common strategies pursued by firms in global industries?
Answer: The two most common strategies pursued by firms in global industries
are the multidomestic strategy and the global strategy. 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.
5-21.
What is the purpose of a competitor analysis?
Answer: A competitor analysis is a detailed analysis of a firm’s competitors. It
helps a firm understand the positions of its major competitors and the
opportunities that are available to obtain a competitor advantage in one or more
areas.
5-22.
What are the differences among direct competitors, indirect competitors, and
future competitors?
Answer: The three different types of competitors referred to above are as follows:
Direct competitors: These are businesses that offer products identical or similar to
the products of the firm completing the analysis.
Indirect competitors: These competitors offer close substitutes to the product the
firm completing the analysis sells.
Future competitors: These are companies that are not yet direct or indirect
competitors but could move into one of these roles at any time.
5-23.
What is meant by the term competitive intelligence?
Answer: The information that is gathered by a firm to learn about its competitors
is referred to as competitive intelligence.
Chapter 5: Industry and Competitor Analysis
5-24.
Why is it important for firms to collect intelligence about their competitors?
Answer: All companies benefit by knowing as much as is ethically possible about
their competitors.
5-25.
Identify three sources of competitive intelligence that entrepreneurial firms
should feel comfortable using to better understand their competitors.
Answer: Attending conferences and trade shows; reading industry-related books,
magazines, and Web sites; and talking to customers about what motivated them to
buy your product as opposed to your competitors. Another choice includes setting
up Google and Yahoo! e-mail alerts.
5-26.
What is the purpose of completing a competitive analysis grid?
Answer: A competitive analysis grid is a tool for organizing the information a
firm collects about its competitors. It can help a firm see how it stacks up against
its competitors in key areas and illustrates a firm’s primary sources of competitive
advantage. To be a viable competitor, a new venture must have at least one clear
competitive advantage over its major rivals.
APPLICATION QUESTIONS
5-27.
Linda Henricks is thinking about starting a firm in the home health care provider
industry. When asked by a potential investor if she had studied the industry,
Linda replied, “With the aging of the population and the fact that people are
living longer than ever, the home health care provider industry is so full of
potential it doesn’t require formal analysis.” In what ways will Linda limit her
possibilities with the potential investor if her current attitude about the importance
of industry analysis doesn’t change?
Answer: Linda’s answer will not satisfy the investors. Although it may be true
that the home health care industry is full of potential, that doesn’t mean that the
potential is available to start-ups. The window of opportunity for new entrants
may be closed, or one or more of the five forces that determine industry
profitability may be decidedly against new entrants. For example, the threat of
new entrants in the industry is high, given the number of businesses that are
entering the industry. Linda needs to determine specifically how serious of an
issue the threat of new entrants is, and demonstrate to investors that her start-up
of any new venture.
5-28.
The “You Be the VC 5.1” feature focuses on Prynt, a company in the smartphone
industry. What environmental trends and business trends favor Prynt’s unique
approach and service?
Answer: Two environmental trends that work to Prynt’s advantage are (1) an
increased interest in social networking, which may encourage people to take
pictures and share them in ways other than simply viewing them on a phone, and
(2) an increased interest in chronicling one’s experiences.
5-29.
Eric Andrews has been investigating the possibility of starting a service that will
partner with grocery stores to provide a delivery service for their customers. The
idea is that after purchasing their groceries, customers could go to a kiosk in the
store, pay a small fee, and have their groceries delivered to their homes in 60
minutes. Which of the five forces in Porter’s five forces model do you anticipate
will most strongly affect Eric’s potential business and why?
Answer: It will most likely be the threat of substitute products. For people who
want their groceries delivered directly to their homes, a growing number of online
grocery services are popping up, particularly in urban areas. In addition,
companies such as Uber have in the works plans to deliver items such as
groceries, picking the items up at grocery stores and delivering them to their
customers’ homes.
5-30.
Read Case 5.1, which focuses on Panera Bread. What are some of the entry
barriers a firm would have to deal with and try to overcome if it tried to compete
against Panera Bread in the casual dining segment of the restaurant industry?
Answer: There are several “barriers to entry” that a firm entering the casual
dining segment of the restaurant industry would have to deal with or try to
overcome if they wanted to compete against Panera Bread. The entry barriers
include:
Economies of scale. Panera Bread has 1,770 restaurants, which allows it
to negotiate discounts when buying food and nonfood products for its
restaurants.
Product differentiation. Panera Bread has a strong brand with food and
bakery products people like.
Capital requirements. Panera Bread restaurants are not large but are stylish
and are often located in premier locations, suggesting that considerable
capital would have to be accumulated to build even a handful of
competing restaurants.
Cost advantages independent of size. Panera Bread may have purchased
Chapter 5: Industry and Competitor Analysis
5-31.
As mentioned in this chapter, White Wave Inc. produces Silk Soymilk, a product
that has done surprisingly well in the mature milk industry. Based on the material
we’ve covered so far, why do you think Silk Soymilk has been so successful?
Answer: Answers will vary to this question. Possible answers include:
The passion that the founders of White Wave have for their product
The environmental trends that made the introduction of Silk Soymilk
possible and has made the product attractive to a growing group of
consumers
The fact that the founders of White Wave have successfully introduced a
new product innovation in a mature industry
The fact that the founders of White Wave overcame the barriers to entry in
the milk industry (even though White Wave isn’t technically a milk
product)
• The nontraditional barriers to entry that White Wave has now erected to
prevent a proliferation of competitors
5-32.
Karen Sharp lives in a town of approximately 10,000 in Western Kentucky. There
isn’t a furniture store in the town. Karen is thinking about starting one. She has
good business and marketing skills and is confident she can operate the store
successfully. But, she isn’t certain that a retail furniture store is an attractive
industry. What would you recommend Karen do to consider this matter?
Answer: This is a good individual or group assignment. Karen should first study
environmental and business trends to assess the strength of the furniture market in
general and in her trade area specifically. Next, she should conduct a five forces
analysis. The five forces model for the furniture industry in general looks
something like this:
Furniture industry
Threat to Industry Profitability
Threat of substitutes
X
Threat of new entrants
X
Rivalry among existing firms
X
Bargaining power of suppliers
X
Bargaining power of buyers
X
Chapter 5: Industry and Competitor Analysis
and make a judgment call regarding the attractiveness of starting a furniture store
in her town.
5-33.
Think about and find some information about trends in the motorcycle industry.
In particular, identify the effects of economic, demographic, and regulatory
changes that may affect the motorcycle industry at the time you are reading this
book. Write a paragraph or two to describe the trends, and their implications for
entrepreneurial firms, that you located while searching for information.
Answer: This answer was written in late 2017. At that time, an “economic” factor
affecting the motorcycle industry was the low price of gasoline. An incentive to
buy a motorcycle, as opposed to a car, is to save money on gas. As the price of
gas goes down, the strength of that incentive diminishes. A “demographic” trend
affecting the motorcycle industry was the increasing number of women
purchasing and riding motorcycles. There were no significant regulatory trends
affecting the motorcycle industry in late 2017.
5-34.
Your friend has developed what he believes is a novel floor cleaning product. The
advantage of this product, he tells you, is that because of the unique chemicals
used to create the cleaning fluid, people are able to use a fraction of the amount of
fluid to clean floors compared to the amount of fluid that is necessary when using
traditional, well-established products. Your friend is convinced that even Walmart
will be willing to pay a handsome amount to him in order to stock and sell his
product. Use your knowledge about the power of buyers to offer your friend a
different perspective as to how Walmart might deal with him as he tries to sell his
product to this giant firm.
Answer: Although there are many retail stores in the United States, there are only
a handful of big box stores such as Walmart, Target, and Costco. These stores
stock products from thousands of suppliers. As a result of the sheer size of
Walmart, it is able to suppress the profitability of the suppliers it uses by
demanding price reductions. Your friend might think that he has the upper hand
as a result of the strength of his product. But Walmart sells thousands of
products—having or not having a single product will not measurably affect
Walmart as a whole. As a result, Walmart has a strong bargaining position—a
reality your friend will likely encounter when he starts negotiating with Walmart.
5-35.
Your friend, Lisa Ryan, is opening a smoothie shop that will sell a variety of
smoothie drinks in the $5 to $7 price range. When you ask her if she was worried
that the steep price of smoothies might encourage prospective customers to buy a
soft drink or a sports drink instead of her product, Lisa says, “You’re right. This
is a real concern I have. Is there anything I can do to discourage potential
customers from making such a choice?” What information would you provide to
Lisa in response to her question?
Chapter 5: Industry and Competitor Analysis
this, Linda might want to think about how she can create a fun, inviting
atmosphere in her restaurant that would be appealing to her customers. If her
customers value the atmosphere of her restaurant, the $5 to $7 price tag on the
smoothies might not be as much of a concern.
YOU BE THE VC 5.1
Company: Prynt (www.prynt.co)
Business Idea: Build a smartphone case that allows iPhone and Android users to print
photos directly from their smartphones.
You Be the VC Scorecard
Prynt
(www.prynt.co)
Item
Score/Comments
Strength of New-Venture
Team
1 2 3 4 5
Clement Perrot and David Zhang co-founded Prynt in
Paris, France. In October 2017, the company has a
20-member team of technical and administrative
people. Not much is known about the two founders.
Prynt’s investors include a number of venture capital
firms such as GGV Capital, Root Ventures, and
Greycroft Partners.
Strength of the Opportunity
1 2 3 4 5
It is hard to fully evaluate this opportunity. Perhaps
students will have a different take, but the general
thinking is that people like to share their photos
digitally from their phone to the phones of others.
How many want to share the printed version of
photos remains to be seen, which is why it is hard to
determine the opportunity here.
Strength of the Industry
1 2 3 4 5
It appears that Prynt is the pioneer in this line of
business. Of course, they would be competing, as the
Chapter 5: Industry and Competitor Analysis
107
case says, with Walgreens and CVS. While the
market size is likely to be big, as said earlier, it is
hard to evaluate this opportunity.
Strength of Business Model
1 2 3 4 5
Prynt sells the case (a one-time transaction for the
customer) and ZINK photo paper which is a recurring
revenue item. The revenue model appears attractive
although the customer value proposition does not
appear to be compelling.
Average Score
3.00/5.00
Decision: We would not fund this firm. It is not clear how many smartphone users
want to print their pictures when they share pictures digitally. In addition, not much
is known about the co-founders although they have been successful in raising a fair
amount of capital.
YOU BE THE VC 5.2
Company: ZUtA Labs (www.zutalabs.com)
Business Idea: Develop and deploy a small, easy-to-use mobile robotic printer that will
enable people to print anywhere and on any size paper.
You Be the VC Scorecard
ZUtA Labs
(www.zutalabs.com)
Item
Score/Comments
Strength of New-Venture
Team
1 2 3 4 5
Tuvia Elbaum and Matan Caspi co-founded ZUtA
Labs in Jerusalem, Israel. As of October 2017 its
only source of capital is via crowdfunding. An
Internet search did not reveal any details about the
co-founders and so it is hard to evaluate the strength
of the new-venture team.
Strength of the Opportunity
1 2 3 4 5
The opportunity seems to be promising because
mobile printing fills an important need. As the case
Chapter 5: Industry and Competitor Analysis
108
points out, people working outside their offices and
homes (such as in a trade show) sometimes need to
print. An example is car rental drop off sites where
the customer requires a receipt.
Strength of the Industry
1 2 3 4 5
Computer printing is a large industry, although the
industry is focused on office or home-based printers.
As the world becomes more mobile (enabled by
smartphones), mobile printing is an important need.
Strength of Business Model
1 2 3 4 5
While the customer value proposition is compelling,
we don’t know much about the business side of the
start-up, such as product price, etc. This makes it
hard to fully evaluate the strength of the business
model.
Average Score
3.5/5.0
Decision: We would not fund this firm, although the decision was not made quickly.
There is a lot to like about ZUtA Labs’ product. It is perhaps too early to make an
informed judgment about whether this is an attractive start-up to invest in.
CASES
Case 5.1
Panera Bread: Occupying a Favorable Position in a Highly Competitive Industry
DISCUSSION QUESTIONS
5-40.
How has Panera Bread established a unique position in the restaurant industry?
Answer: Panera Bread has established a unique position in the restaurant industry.
As explained in the case, the “fast–casual” position that Panera has established
allows it to capture the advantages of both fast food and casual dining.
5-41.
How has Panera Bread’s unique position in the restaurant industry contributed to
the firm’s success?
provides Panera a distinct point of differentiation between itself and many of its
Chapter 5: Industry and Competitor Analysis
competitors, and allows the company to sell a fairly large volume of high-margin
food products. Most students will say that Panera Bread will reach its goal of
becoming a leading national brand in the restaurant industry.
5-42.
What barriers to entry has Panera Bread created for potential competitors?
Answer: Panera has created barriers to entry in the following areas:
Economies of scale. Panera Bread has 1,770 restaurants, which allows it
to negotiate discounts when buying food and nonfood products for its
restaurants.
Product differentiation. Panera Bread has a strong brand with food and
bakery products people like.
Capital requirements. Panera Bread restaurants are not large but are stylish
and are often located in premier locations, suggesting that considerable
capital would have to be accumulated to build even a handful of
competing restaurants.
Cost advantages independent of size. Panera Bread may have purchased
some of the real estate it owns when real estate prices were lower and
built some of the buildings that its restaurants are housed in when
construction costs were lower.
5-43.
What are Panera Bread’s primary sources of competitive advantage?
Answer: Panera’s primary sources of competitive advantage are: (1) its position
in the restaurant industry, (2) its brand strength, (3) the atmosphere of its
restaurants, and (4) the distinctive nature of its bakery products. Most students
will argue that these sources of competitive advantage are sustainable.
5-44.
What are the ways that Panera Bread can conduct ethical and proper forms of
competitive analysis to learn about potential competitors entering the fast-casual
industry?
Answer: Panera can utilize all of the techniques listed in Table 5.4, including:
Attend conferences and trade shows.
Purchase its competitors’ products (and eating at their restaurants).
Study competitors’ Web sites and social media pages.
Set up Google e-mail alerts (to track news about itself and its
competitors).
Read industry-related books, magazines, Web sites, and blogs.
Talk to customers about what motivated them to dine at Panera Bread as
Chapter 5: Industry and Competitor Analysis
Case 5.2
How Casper Woke Up the “Sleepy” Mattress Industry
DISCUSSION QUESTIONS
5-45.
To what degree do you think Casper has disrupted the mattress industry? To
what degree did Casper’s research about the mattress buying process resonate
with you? Would you buy a Casper mattress? Why or why not?
Answer: Casper disrupted the mattress industry both in its product and in its
selling method. In contrast to the myriad varieties of mattresses sold by a brand,
Casper had just one. Instead of selling it through retail stores, Casper sells online.
Student responses will vary with respect to the other parts of the question.
5-46.
How has Casper established a unique position in the mattress industry? To what
degree do you think its unique position is the basis of its early success?
Answer: Casper occupies a unique position because of its product and channel
disruption. This unique position is because the market has accepted Casper’s
business model as evidenced both by its sales and by the influx of imitators.
5-47.
Are you surprised that Casper was able to generate so much excitement
surrounding the process of buying a mattress? How did the company do that? Do
you think the level of excitement and passion for buying a mattress could be
translated to other non-tech industries?
Answer: Casper has a strong brand, strong management, and a growing clientele.
They disrupted the mattress market and have generated tremendous excitement
even for the mundane act of buying a mattress. It is likely to extend to non-tech
industries as shown by Warby Parker in eyeglasses.
5-48.
Why do you think Casper added a dog mattress? What other sleep-related
products do you think Casper has in its pipeline?
Answer: Students who have pets (particularly dogs) would likely respond
positively to Casper’s dog mattress, while others may have differing opinions on
this.
It is a good exercise to get the class to brainstorm on other products that Casper
can launch – pajamas? The brainstorming activity can generate a lot of
excitement and fun in the class because now students are forced to think of
products that are related to mattresses and sleeping. It would be interesting to get
students to stretch their thinking!