

 INDUSTRY & COMPETITIVE

ANALYSIS
 What is Industry Analysis?

 Industry
 An industry is a group of firms producing a similar
product or service, such as airlines, fitness drinks,
furniture, or electronic games.


 Industry Analysis
 Is business research that focuses on the potential of an
industry.

 Why is Industry Analysis Important?

 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.

 This analysis helps a firm determine if the target
markets it identified during feasibility analysis are
accessible and which ones represent the best point of
entry for a new firm.


 Three Key Questions

When studying an industry, an entrepreneur must answer

three questions before pursuing the idea of starting a firm

Question 1 Question 2 Question 3

Are there positions in
Is the industry Does the industry the
accessible—in other contain markets that industry that will
words, is it a realistic are ripe for avoid
place for a new innovation some of the negative
venture to enter? or are underserved? attributes of the
industry as a whole?
The Five Competitive Forces That Determine
Industry Profitability
(1 of 3)

 The five competitive forces model is a framework for

understanding the structure of an industry.
 The model is composed of the forces that determine
industry profitability.
 Each of the five forces impacts the average rate of
return for the firms in an industry by applying
pressure on industry profitability.
 Well-managed firms try to position their firms in a
way that avoids or diminishes these forces—in an
attempt to beat the average rate of return of the
industry.

 The Five Competitive Forces That Determine
Industry Profitability

Threat of potential Bargaining power of buyers.

entrants. Determined Determined by number of buyers, the
by attractiveness of firm’s degree of differentiation, the portion
industry, height of entry of a firm’s inputs sold to a particular buyer,
barriers (e.g., start-up Threat of Potential
the portion of a buyer’s purchases bought
costs, brand loyalty, Entrants
regulation, etc.) from a particular firm, switching costs, and
potential for vertical integration.

Bargaining Power of Degree of Existing Bargaining Power

suppliers Rivalry of Buyers

Bargaining power of suppliers. Threat of

Determined by number of suppliers
and their degree of differentiation, substitutes.
the portion of a firm’s inputs Determined by
obtained from a particular supplier, Threat of number of potential
the portion of a supplier’s sales sold Substitutes substitutes, their
to a particular firm, switching costs, closeness in function
and potential for vertical integration. and relative price.
Degree of existing rivalry. Determined by number of firms, relative size, degree of
differentiation between firms, demand conditions, exit barriers
 Rivalry Among Existing Firms
(1 of 3)
Rivalry Among Existing Firms
 In most industries, the major determinant of industry
profitability is the level of competition among existing
firms.
 Some industries are fiercely competitive, to the point where
prices are pushed below the level of costs, and industry-
wide losses occur.
 In other industries, competition is much less intense and
price competition is subdued.
 Rivalry Among Existing Firms
(2 of 3)
Factors that determine the nature and intensity of the
rivalry among existing firms in an industry

The more competitors there are, the more

likely it is that one or more will try to gain
Number and customers by cutting its price. Price-cutting
balance of occurs more often when all the competitors in
competitors an industry are about the same size and when
there is no clear market leader.

The degree to which products differ from

Degree of one product to another affects industry
difference rivalry. For example, the firms in
between commodity industries (such as paper
products products) tend to compete on price because
there is little difference between one
manufacturer’s products and another’s.
 Rivalry Among Existing Firms
(3 of 3)
Factors that determine the nature and intensity of the
rivalry among existing firms in an industry (continued)

The competition among firms in a slow-growth

industry is stronger than among those in fast-
Growth rate of an growth industries. Slow-growth industry firms
industry must fight for market share, which may tempt
them to lower prices to gain market share. In
fast-growth industries, there are enough
customers to go around, making price-cutting
less likely.
Firms that have high fixed costs must sell a
higher volume of their product to reach the
Level of fixed break-even point than firms with low fixed
costs costs. As a result, firms with high fixed costs
are anxious to fill their capacity, and this
anxiety may lead to price-cutting.
The Five Competitive Forces That Determine
Industry Profitability
Threat of Potential
Entrants

Bargaining Power of Degree of Existing Bargaining Power

suppliers Rivalry of Buyers

Bargaining power of suppliers.

Determined by number of suppliers
and their degree of differentiation,
the portion of a firm’s inputs Threat of
obtained from a particular supplier, Substitutes
the portion of a supplier’s sales sold
to a particular firm, switching costs,
and potential for vertical integration.
 Bargaining Power of Suppliers
(1 of 3)

Bargaining Power of Suppliers

 Suppliers can suppress the profitability of the industries to
which they sell by raising prices or reducing the quality of
the components they provide.
 If a supplier reduces the quality of the components it
supplies, the quality of the finished product will suffer, and
the manufacturer will eventually have to lower its price.
 If the suppliers are powerful relative to the firms in the
industry to which they sell, industry profitability can
suffer.
 Bargaining Power of Suppliers
(2 of 3)
Factors that have an impact on the ability of suppliers to
exert pressure on buyers

Supplier When there are only a few suppliers that supply

concentration a critical product to a large number of buyers,
the supplier has an advantage.

Switching costs are the fixed costs that buyers

encounter when switching or changing from
Switching costs one supplier to another. If switching costs are
high, a buyer will be less likely to switch
suppliers.
 Bargaining Power of Suppliers
(3 of 3)
Factors that have an impact on the ability of suppliers to
exert pressure on buyers (continued)

Supplier power is enhanced if there are no

Attractiveness attractive substitutes for the product or
of substitutes services the supplier offers. For example, there
is little the computer industry can do when
Intel or Microsoft raise their prices, as there
are simply no practical substitutes for their
products.

The power of a supplier is enhanced if there is a

Threat of credible possibility that the supplier might
forward enter the buyer’s industry.
integration
The Five Competitive Forces That Determine
Industry Profitability
Threat of Potential
Entrants
Bargaining Power of Buyers
Determined by number of buyers, the
firm’s degree of differentiation, the portion
of a firm’s inputs sold to a particular buyer,
the portion of a buyer’s purchases bought
from a particular firm, switching costs, and
potential for vertical integration.

Bargaining Power of Degree of Existing Bargaining Power

suppliers Rivalry of Buyers

Threat of
Substitutes
 Bargaining Power of Buyers
(1 of 3)

Bargaining Power of Buyers

 Buyers can suppress the profitability of the industries from
which they purchase by demanding price concessions or
increases in quality.
 For example, the automobile industry is dominated by a
handful of large companies that buy products from
thousands of suppliers in different industries. This allows
the automakers to suppress the profitability of the
industries from which they buy by demanding price
reductions.
 Bargaining Power of Buyers
(2 of 3)
Factors that have an impact on the ability of suppliers to
exert pressure on buyers

If the buyers are concentrated, meaning that

Buyer group there are only a few large buyers, and they buy
concentration from a large number of suppliers, they can
pressure the suppliers to lower costs and thus
affect the profitability of the industries from
which they buy.

The greater the importance of an item is to a

buyer, the more sensitive the buyer will be to
Buyer’s costs the price they pay. For example, if the
component sold by the supplier represents 50%
of the cost of the buyer’s product, the buyer will
bargain hard to get the best price for that
component.
 Bargaining Power of Buyers
(3 of 3)
Factors that have an impact on the ability of suppliers to
exert pressure on buyers (continued)

The degree to which a supplier’s product differs

from its competitors affects the buyer’s
Degree of bargaining power. For example, a buyer who is
standardization purchasing a standard product, like the corn
of supplier’s syrup that goes into soft drinks, can play one
products supplier against another until it gets the best
combination of price and service.

Threat of The power of buyers is enhanced if there is a

backward credible threat that the buyer might enter the
integration supplier’s industry.
The Five Competitive Forces That Determine
Industry Profitability
Threat of Potential
Entrants

Bargaining Power of Degree of Existing Bargaining Power

suppliers Rivalry of Buyers

Threat of
substitutes.
Threat of
Determined by
Substitutes number of potential
substitutes, their
closeness in function
and relative price.
 Threat of Substitutes
(1 of 2)

Threat of Substitutes
 The price that consumers are willing to pay for a product
depends in part on the availability of substitute products.
 For example, there are few if any substitutes for prescription
medicines, which is one of the reasons the pharmaceutical
industry is so profitable.
 In contrast, when close substitutes for a product exist,
industry profitability is suppressed, because consumers
will opt out if the price gets too high.
 Threat of Substitutes
(2 of 2)

Threat of Substitutes (continued)

 The extent to which substitutes suppress the profitability of
an industry depends on the propensity for buyers to
substitute between alternatives.
 This is why firms in an industry often offer their customers
amenities to reduce the likelihood that they will switch to
a substitute product, even in light of a price increase.
The Five Competitive Forces That Determine
Industry Profitability
Threat of potential
entrants. Determined
by attractiveness of Threat of Potential
industry, height of entry Entrants
barriers (e.g., start-up
costs, brand loyalty,
regulation, etc.)

Bargaining Power of Degree of Existing Bargaining Power

suppliers Rivalry of Buyers

Threat of
Substitutes
 Threat of New Entrants
(1 of 6)

Threat of New Entrants

 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 try 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 Entrants
(2 of 6)
Barriers to Entry

Barrier to Entry Explanation

Industries that are characterized by large

Economies of scale economies of scale are difficult for new firms to
enter, unless they are willing to accept a cost
disadvantage.
Industries such as the soft drink industry that are
Product characterized by firms with strong brands are
differentiation difficult to break into without spending heavily on
advertising.

The need to invest large amounts of money to gain

entrance to an industry is another barrier to entry.
Capital For example, it now takes about two years and $4
requirements million to develop an electronic game. Many new
firms do not have the capital to compete at this
level.
 Threat of New Entrants
(3 of 6)

Barrier to Entry Explanation

Entrenched competitors may have cost advantages

Cost advantages not related to size. For example, the existing
independent of size competitors in an industry may have purchased
property when it was much less expensive than a
new entrant would have to pay.
Distribution channels are often hard to crack. This
Access to is particularly true in crowded markets, such as the
distribution convenience store market. For a new sports drink to
channels be placed on the shelf, it has to displace a product
that is already there.

Government and In knowledge intensive industries, such as

legal barriers biotechnology and software, patents, trademarks,
and copyrights form major barriers to entry. Other
industries, such as broadcasting, require the
granting of a license by a public authority.
 Threat of New Entrants
(4 of 6)

Nontraditional Barriers to Entry

 It is difficult for start-ups to execute barriers to entry that are
expensive, such as economies of scale, because money is
usually tight.
 Start-ups have to rely on nontraditional barriers to entry to
discourage new entrants, such as assembling a world-class
management team that would be difficult for another
company to replicate.
 Threat of New Entrants
(5 of 6)
Nontraditional Barriers to Entry

Barrier to Entry Explanation

If a start-up puts together a world-class

Strength of management team, it may give potential rivals
management team pause in taking on the start-up in its chosen
industry.

If a start-up pioneers an industry or a new concept

First-mover within an existing industry, the name recognition
advantage that the start-up establishes may create a
formidable barrier to entry.
If the employees of a start-up are highly motivated
Passion of the by the unique culture of a start-up, and anticipate
management team large financial rewards through stock options, this
and employees is a combination that cannot be replicated by larger
firms. Think of the employees of a biotech firms
trying to find a cure for a disease.
 Threat of New Entrants
(6 of 6)
Nontraditional Barriers to Entry
(continued)
Barrier to Entry Explanation

If a start-up is able to construct a unique business

Unique business model and establish a network of relationships
model that makes the business model work, this set of
advantages creates a barrier to entry.

Some Internet domain names are so “spot-on” in

Internet domain regard to a specific product or service that they
name give a start-up a meaningful leg up in terms of e-
commerce opportunities.

Inventing a new If a start-up invents a new approach to an

approach to an industry and executes it in an exemplary fashion,
industry and these factors create a barrier to entry for
executing the idea in potential imitators.
an exemplary
fashion
 Difference between Competitive Advantage & Competitive
Analysis

 Competitive Advantage
 An advantage over competitors gained by offering
consumers greater value than competitors offer.

 Competitive Analysis
 The process of identifying key competitors; assessing
their objectives, strategies, strengths and
weaknesses, and reaction patterns; and selecting
which competitors to attack or avoid.

 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.
 Competitor Analysis

Steps in the Firms face a wide range

Process : of competition
Be careful to avoid
Identifying “competitor myopia”
Competitors or Avoid Methods of identifying
competitors:
Industry point-of-view
Market point-of-view
Competitor maps
can help

 Steps in the Determining

Process : competitors’ objectives

Identifying competitors’
 strategies
Strategic groups
Assessing Competitors
Assessing competitors’
strengths and
weaknesses
Benchmarking
Estimating competitors’
reactions

 Steps in the Strong or weak
Process : competitors
Customer value analysis
Close or distant

competitors
 Most companies
compete against close
Selecting Competitors competitors
to Attack or Avoid “Good” or “Bad”
competitors
The existence of
competitors offers
several strategic
benefits

Identifying Competitors
 Sources of Competitive Intelligence

Collecting Competitive Intelligence

 To complete a competitive analysis grid, a firm must first
understand the strategies and behaviors of its competitors.

 The information that is gathered by a firm to learn about its
competitors is referred to as competitive intelligence.

 A new venture should take care that it collects competitive
intelligence in a professional and ethical manner.
Sources of Competitive Intelligence

Two Primary Sources of Competitive Information

•Hire Competitors Employees

Sources of Competitive Intelligence

Two Primary Sources of Competitive Information

•Go to the Bar after the Trade Show

Sources of Competitive Intelligence

Other ways that a firm can ethically obtain

information about its competitors

•Attend conference and trade shows.

•Read industry-related books, magazines, and Web sites.
•Talk to customers about what motivated them to buy
your product
as opposed to your competitors.
•Purchase competitor’s products to understand their
features,
benefits, and shortcomings.
•Study competitor’s Web sites.
•Study Web sites that provide information about
companies.
 Completing a Competitive Analysis Grid
(1 of 2)
 Competitive Analysis Grid
 A tool for organizing the information a firm collects
about its competitors.

 A competitive analysis grid can help a firm see how it
stacks up against its competitors, provide ideas for
markets to pursue, and identify its primary sources of
competitive advantage.
Completing a Competitive Analysis Grid
(2 of 2)
Competitive Analysis Grid for Activision


 VALUE CHAIN ANALYSIS

 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Firm Infrastructure
M
Support
Human Resource Management A
R
Activities G
Technological Development IN
Procurement

M Service
Operations

Outbound

Marketing
Logistics
Inbound

Logistics

& Sales

IN
G
R
A
Primary Activities
 Primary Value Chain Activities

 The goal of these activities is to create value that

exceeds the cost of providing the product or service, thus
generating a profit margin.

 Inbound logistics include the receiving, warehousing,
and inventory control of input materials.

 Operations are the value-creating activities that
transform the inputs into the final product.

 Outbound logistics are the activities required to get the
finished product to the customer, including warehousing,
order fulfillment, etc.

 Marketing & Sales are those activities associated with
getting buyers to purchase the product, including channel
selection, advertising, pricing, etc.


 Service activities are those that maintain and enhance the

product's value including customer support, repair
services, etc.

 Support Activities



 The primary value chain activities described above are
facilitated by support activities. Porter identified four
generic categories of support activities, the details of which
are industry-specific
Procurement - the function of purchasing the raw
materials and other inputs used in the value-creating
activities.

Technology Development - includes research and
development, process automation, and other technology
development used to support the value-chain activities.

Human Resource Management - the activities
associated with recruiting, development, and
compensation of employees.

Firm Infrastructure - includes activities such as finance,
legal, quality management, etc



 STRATEGIC ALLIANCE
 STRATEGIC ALLIANCE

 A formal relationship between two or more parties to

pursue a set of agreed upon goals.

 Pooling of resources, investment & risks for mutual gain.

 Cooperation between two or more independent firms
involving shared control & continuing contributions by
all partners for mutual benefits.
 In order to be strategic, an alliance must satisfy one
of these criteria:-

It must be critical to the success of a core business goal or

objective.

It must be critical to the development or maintenance of a
core competency or other source of competitive
advantage.

It must enable blocking a competitive threat.

It must create or maintain strategic choices for the firm.

It must mitigate a significant risk to the business.

 Reasons for Strategic Alliance

 More Profits
 Risk Sharing
 Gaining Competitive Advantage
 Enhancing Organizational Capabilities
 Entering New Markets
 Reducing Manufacturing Costs
 Developing & Diffusing Technology
 Accelerate Product Introduction
 Types of Strategic Alliances
Low conflict

Low interaction High interaction

High conflict
 Procompetitive Alliances

 These are generally inter-industry, vertical value chain

relationships between manufacturers and suppliers or
distributors.

 These offer benefits of vertical integration, without firms
actually investing in resources for manufacturing
inputs or distributing semi-finished or finished goods.

 Supplier and buyer firms entering upon long term
contracts constitute procompetiive alliances
 Noncompetitive Alliances

 These are intra-industry partnerships between

Noncompetitive firms.

 These can be entered upon by firms that operate in the same
industry, yet do not perceive each other as rivals.

 Their areas of activity do not coincide and they are sufficiently
dissimilar to prevent feelings of competitiveness arising

 Firms that have carved out distinct areas in the industry-
geographically or otherwise- adopt these alliances
 Precompetitive Alliances

 These alliances bring 2 firms from different, often

unrelated industries, to work on well-defined activities
such as new technology development, new product
development or creating awareness about new products
or ideas for acceptance among the potential customers.

 Joint research and development activities and mass
awareness campaigns are examples of precompetitive
alliances activities.
 Competitive Alliances

 These are partnerships that bring two rival firms in a

cooperative arrangement where intense interaction is
necessary.

 These alliances may be intra or inter industry.

 Several cases of foreign companies operating independently in
India and also entering into cooperative arrangement with
local rival companies for specific purposes, have taken the
competitive alliances route.
 Managing Strategic Alliances

 Principles to manage alliances successfully (Walters,

Peters & Dess):-


ü Clearly define a strategy and assign responsibilities.

ü Phase in the relationship between the partners.
ü Blend the cultures of the partners.
ü Provide for an exit strategy
 Pitfalls in Strategic Alliances

 Lack of trust and commitment


 Perceived misunderstandings among partners

 Conflicting goals and interests

 Inadequate preparation for entering into partnership

 Hasty implementation of plans

 Focusing on controlling the relationship rather than on
managing it for mutual benefits.