Brian Ghilliotti

Entrepreneurial Studies
BES 218
October 5, 2015
Week 5
Industry Analysis
Things to consider when doing an industry analysis include:
1) Is the industry accessible? Is it a realistic place for a new venture to enter?
2) Does the industry contain markets that are ripe for innovation or underserved?
3) Are there positions within the industry where a new venture can integrate and avoid the
negative attributes of the industry as a whole?
Studying Industry Trends
Environmental Trends: Industries succeed not so much on the capabilities of their managers. it is
also affected by environmental trends that shift for or against the products and services sold by
these firms of an industry. These trends include social trends, technological advances, political
and regulatory changes, and market shifts.
Business Trends: Changing ways of doing business also impacts success of a business. For
example, in an industry where the trend is moving toward tapping into overseas labor markets,
those businesses that can efficiently adjust to this trend will out compete those who cannot. In
another example, many firms are shifting their sales to an on-line format. Those business that can
make this adjustment efficiently will perform better than those who cannot.
The Five Forces Model
This is an analysis framework that entrepreneurs use to understand an industry's structure. These
include the threat of substitutes, the threat of new entrants, rivalry amongst existing firms,
bargaining power of suppliers, and bargaining power of buyers.
Threat of Substitutes: Industries perform better when the threat of lower cost substitutes is low,
with minimal risk of undermining the sales volume for products and services being made and
sold in the firm's industry. A good example of this is the textbook industry, as students cannot
always find cheaper alternatives to expensive textbooks.
Threat of New Entrants: Industries perform best when the threat of entry is low. Some of the
barriers of entry include economies of scale. This occurs when a firm is large enough to sell or
produce at a volume that creates competitive pricing. Another barrier to entry into an industry is
product differentiation. A good example of this can be found in the soft drink industry. There

really is very little difference between many types of soft drinks, so a new entrant would have to
spend considerable resources convincing new buyers that their new soft drink really does stand
out from the rest. Capital requirements is another barrier. In this case, the costs of initially buying
in the equipment required to start a new airline is very high, making new startups in this industry
nearly impractical.
There are other cost advantages independent of size. For example, a medium sized phone
company may have inherited communications infrastructure during the breakup of the Bell
system, giving it an advantage over another phone services that want to serve local customers but
would have to purchase and develop their own phone networks. Access to distribution channels
poses another problem, especially in crowded markets. A new soft drink venture would be hard
pressed to win shelf space in convenience stores, where there are literally dozens of other soft
drinks crammed into limited shelf space. There are also government and legal barriers. Someone
who is interested in entering the legalized marijuana market will have to face an obstacle course
of licensing, regulatory, and accountability requirements before fully establishing their business.
Rivalry Amongst Firms
In some industries competition is so fierce there is a situation where prices are pushed below
costs. This makes it impractical to establish a new venture in this industry. A good example of
this could be the mobile food truck industry, depending on the location.
Number and balance of competitors: Using the food truck example, in areas where there is a lot
of beach front, there could be so many people running food trucks that it is easy to initiate price
wars to generate sales volume. In this case, whoever gets the most initial sales volume wins.
Degree of difference between products: Using the sales truck example again, a hot dog is a hot
dog, and there is not much difference between the hot dog you are selling and the hot dogs being
sold at he other end of the beach boardwalk. The food truck vendor would have to think of where
people will get the most hungry while on the boardwalk, or initiate a price war to get beach
walkers to decide to hold out for the extra half mile to get their cheaper hot dogs.
Level of Fixed Costs: Some firms, such as an amusement park near the beach front, have very
high fixed costs. They are also competing with beach goers who would rather relax on the beach.
In order to break through this competition and meet basic fixed costs, the amusement park may
offer reduced entry tickets to lure some of the customers who would rather sunbathe on the
beach.
Bargaining Power of Suppliers
Industries can perform better when the bargaining power of suppliers is low.
Supplier concentration: When there is only one or a few suppliers of a product critical to an
industry, the bargaining power of that supplier is high. For example, the relatively few
pharmaceuticals can force very high prices on essential medications prescribed in the healthcare
industry.

Switching costs: If a doctor decides he wants to do his patient a favor and seek the same
medicine for his patient from another drug maker at less expense, there may be ramifications
with his contracts he agreed to regarding insurance providers he works with. This could extend to
financial penalties or loss of contract with the insurance network he or she is a part of. These are
forms of switching costs. In this case, seeking a cheaper alternative for a product generates
more expensive issues in the long run than it is really worth.
Threat of forward integration: Wal Mart may want to put some control over high prescription
costs by using its powerful economy of scale to make drug makers ease their pricing. If WalMart decided to produce medicines on their own, many pharmaceuticals would be alarmed by
this development, as Wal-Mart would most likely use is traditional strategy of selling goods at
price points lower than their market competitors.
Bargaining Power of Buyers
Buyers can suppress the profitability of industries by demanding price concessions or increases
in quality.
Buyer Group Concentrations: This happens in situations where there is a small group of buyers
generating the most demand for a good. A good example of this is government contracting,
where the government can take the lowest bidder when asking for a good or service from a
private entity.
Buyer Costs: If a buyer feels it really needs the good or service, the buyer may be willing to pay
above normal prices. For example, if the government needed to hire a group of linguists who
were familiar with languages spoken in Nepal, and there were only a few linguistic contracting
firms that had a solid understanding of these languages, the government may be willing to pay a
premium for the services of this linguistic firm.
Threat of backward integration: The government may also decide that is wants to avoid relying
on the Nepalese linguistics services contractor at premium prices and chose to train its own
personnel going to Nepal how to speak these languages. This threatens the Nepalese linguistics
services contractor, which is an example of the threat of backward integration.
Value of Five Forces Model
One way to integrate the Five Forces Framework is to establish a Table. The left most column,
"Competitive Force", lists the five competitive forces in a column. To the right, in a series of
columns collectively labeled "Threat to Industry Profitability", we have three columns labeled
"Low, Medium, and High", in that order. They are then marked off at the appropriate level as the
entrepreneur thinks is appropriate. A new venture idea that generates the highest tick marks in the
high category may need to careful consideration if they can feasibly establish themselves in that
industry.
Additionally, entrepreneurs could enhance their Five Forces Matrix Analysis by asking the
following questions:

A) Is the industry a realistic place for a new venture to establish itself?

B) If we do enter this industry, can the new firm do better than other firms in managing the five
forces that suppress industry profitability?
C) Is there a unique position that the new venture can establish itself in that diminishes the
effects of the five forces suppressing profitability?
D) Is there a superior business model for the new venture that would be hard to duplicate from
incumbents?
Industry Types and Opportunities They Offer:
An emerging industry is a new industry where operating procedures have not been fully
developed. These firms, if managed properly, can gain the advantage of being the first to
establish a large market share in the new industry.
A fragmented industry is one characterized with a large number of firms of approximately equal
size. An example of this is the fast food industry. For firms to increase market share in this
industry, they usually resort to buying up declining competitors in order to expand their economy
of scale. This is known as geographical roll up. Many record stores used this strategy in the
1990's, before the onset on on-line purchasing and internet downloading.
A mature industry is one that is established, is growing slowly, and does not see any real changes
in demand. An example of such an industry is the grocery industry. Expansion opportunities can
be found if an entrepreneur can find creative ways to sell a different product or service within
this industry environment.
A declining industry is one where technological, social, or economic trends are rendering the
value of the product and its market as obsolete. Firms can respond to this environment by
dominating this declining industry by buying up or merging with firms that are about to close
and expand economies of scale. The second strategy is to develop a niche strategy. For example,
since no one (theoretically) buys LP's anymore, but people who still have them still need to
service their LP players or replace their parts. A firm can develop a niche strategy in offering
repair services to LP players, while also offering LP's to consumers who still want to buy them. A
third strategy used in a declining market environment is to implment a cost reduction strategy.
For example, as cassette tapes were giving way to CD's, especially as they became less
expensive, some record stores were reducing cassette prices to even lower levels in order to keep
attracting budget music buyers.
A global industry is one that generates significant amounts if overseas sales. A multi-domestic
strategy is based on developing sales strategies on a nation by nation basis. In a global strategy,
the same sales strategy is applied to all global markets the firm operates in.

Competitor Analysis
Direct competitors: A competitor that offers identical or similar products. An example would be
Wendy's, selling burgers in an environment that is more like a traditional restaurant. This
contrasts with Burger King customers, who either want a cafeteria eating experience or eating on
the go.
Indirect Competitors: A competitor offering a substitute product. An example of this may be
Taco Bell and Burger King. They both offer on the go and cafeteria type eating, but Taco Bell
offers Mexican food for those who do not want hamburgers.
Future Competitor: A business that is neither direct or indirect, but can be either at any time in
the future. For example, if Wal-Mart decided to expand in the fast food industry, they would have
the economy of scale to viably challenge established firms.
Sources of competitive Intelligence: information gathered by a firm to learn about its
competitors. It uses a competitive analysis grid, which is a tool that organizes the information
gathered about competitors.