Gies College of Business at Illinois

Department of Business Administration

Industry Analysis

Module 2 Lesson 3

Tom Parkinson
Module 2 Lesson 3

Industry Analysis
Industry Analysis

Market opportunity is about more than

market size
• How does the industry operate?
• Is it an attractive market in which to
compete?
• What part of the industry value chain
should you target?
Tools for Analysis

PEST analysis
Five forces
Industry mapping
PEST Analysis
A framework for identifying factors in an
industry that will affect how your
business operates
• Political, Economic, Social, and
Technological factors
• External factors – outside of your
control
• May lead to opportunities, or may
stifle innovation
Political Factors

Government regulations
Tax policies
Patent and copyright law
Employment laws
International trade restrictions
Political stability
Economic Factors

Economic growth
Interest rates
Inflation
Economic stability
Consumer confidence
Stage of the business cycle
Social Factors

Demographics
Population growth
Education
Lifestyle/fashion trends
Health consciousness
Work/career attitudes
Technological Factors

Govt./industry research spending

New inventions
Rate of technology transfer
Energy use and cost
Changes in internet/mobile usage
Technology life cycles
PEST Analysis Process
Consider how these trends affect your
business.
• Positive or negative?
• Immediate or future?
• Strongly or weakly?
• Can you adapt your
business/business model to take
advantage?
PEST Limitations

External only – does not consider

internal environment or competition
Factors can change – sometimes
rapidly
Best when used in conjunction with
other analyses
Five Forces Framework

Michael Porter’s tool for determining the

attractiveness of an industry
The focus is on potential profitability
Driven by bargaining power of suppliers and
customers, threats from new entrants and
substitutes, and the competitive rivalry within
an industry
Five Forces Framework
An attractive industry for a startup is one
where the the company can be expected to
have the maximum ability to generate good
profit margins
• The more powerful the force, the more
pressure it will put on prices, costs, or both
• Not necessarily driven by industry growth
rates, regulation, technology adoption rates,
etc.
Five Forces Framework

Reminder: the reason for being in business is

not to beat your competition or to make sales
It’s to earn profits!
Bargaining Power of Buyers

If buyers (customers) are powerful, they will

drive profits down:
• By demanding lower prices
• By demanding more value
Bargaining Power of Buyers
Buyer power is likely to be highest when what
they’re buying is:
• Undifferentiated
• Expensive relative to their other inputs
• Not a major contributor to their own
performance
Bargaining Power of Suppliers

If suppliers are powerful, they will drive profits

down:
• By charging higher prices
• By insisting on more favorable terms
Bargaining Power of Suppliers
Supplier power is likely to be highest when:
• They are large and concentrated relative to
a fragmented industry
• The industry needs them more than they
need the industry
• Their customers are undifferentiated
• They can threaten to vertically integrate
Threat of Substitutes

Products or services that meet the same basic

need in a different way. Caps prices when the
threat is real and switching costs are low
• Coal vs. natural gas
• Streaming video vs. DVD rentals
• Energy drinks vs. coffee
Threat of New Entrants

High prices attract competition. A realistic

threat of new entrants forces the company to
cap prices and/or add value to remain
differentiated
Threat of New Entrants

Limited by barriers to entry:

• Economies of scale
• First-mover advantage
• Cost of admission (capital investment)
• Proprietary technology
• Government regulations
Competitive Rivalry

If rivalry is intense, competitors often compete

away value through:
• Price competition
• Advertising spending
• Increased customer service
Competitive Rivalry
Competitive rivalry is likely to be most intense
when:
• The industry is fragmented
• Industry growth is slow
• High exit barriers
• Competitors are undifferentiated
• Products are “perishable”
Five Forces Framework
Threat of new
entrants

Bargaining Bargaining
power of Competitive power of
suppliers rivalry buyers

Threat of
substitutes
Porter, Michael E., 2008. “The Five Competitive Forces that Shape Strategy,” Harvard
Business Review
Industry Mapping

Plot the entire (or relevant part of) the value

chain from supplier to end consumer
Examine the relationships of each link in the
chain
Identify how your value proposition could be
designed for maximum advantage at various
points
Industry Map

Fertilizer

Wholesalers
Growers
Retailers
Seeds Consumers

Co-ops
Wholesalers

Equipment Processors Restaurants/

caterers
Market Entry Point

Growers Restaurants/
caterers
Value Drivers

Product selection

Shipping

Purchasing/payment
processing
Growers Restaurants/
Bookkeeping caterers

Quality control

Health/safety
regulations

Re-order
management
Value Proposition

Value Map Customer Profile

Fit

Osterwalder, A., Y. Pigneur, A. Smith, G. Bernarda and P. Papadakos2014. Value Proposition Design.
John Wiley & Sons