Industry & Competitors Analysis -- Developing an Effective Business Model (Session 9-10) [Week 5]
Industry & Competitors 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.
What is
Industry Analysis Important?
Industry Analysis
Importance
Ø
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.
Ø
The analysis helps a firm determine if the niche market it identified
during feasibility analysis is favorable for a new firm.
How Industry and Firm-Level Factors Affect Performance
Firm Level Factors
Include a firm’s assets, products, culture, teamwork
among its employees, reputation, and other resources.
Industry Level Factors
Include threat of new entrants, rivalry among existing
firms, bargaining power of buyers, and related factors.
Conclusion
In various studies, researchers have found that from 8% to
30% of the variation in firm profitability is directly attributable to the
industry in which a firm competes.
Techniques
Available to Assess Industry Attractiveness
Studying
Industry Trends
Environmental Trends
Ø
Include economic trends, social trends,
technological advances, and political and regulatory changes.
Ø
For example, industries that sell products to
seniors are benefiting by the aging of the population.
Business Trends
Ø
Include economic trends, social trends,
technological advances, and political and regulatory changes.
Ø
For example, industries that sell products to
seniors are benefiting by the aging of the population
The Five
Competitive Forces Model
Explanation of the Five Forces Model
Ø
The five competitive forces model is a framework
for understanding the structure of an industry.
Ø
The model is composed of the forces that
determine industry profitability.
Ø
They help determine the average rate of return
for the firms in an industry.
Ø
Each of the five-forces impacts the average rate
of return for the firms in an industry by applying pressure on industry
profitability.
Ø
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.
Threat of Substitutes
Threat
of Substitutes
Ø
The price that consumers are willing to pay for
a product depends in part on the availability of substitute products.
Ø
For example, there are few if any substitutes
for prescription medicines, which is one of the reasons the pharmaceutical
industry is so profitable.
Ø
In contrast, when close substitutes for a
product exist, industry profitability is suppressed, because consumers will opt
out if the price gets too high.
Ø
The extent to which substitutes suppress the
profitability of an industry depends on the propensity for buyers to substitute
between alternatives.
Ø
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.
Ø
A customer could easily get a cup of coffee cheaper at one of Starbuck’s competitors.
Ø
To decrease the likelihood of this,
Starbucks offers high-quality fresh coffee, good service, and a pleasant atmosphere.
Ø
Starbucks has therefore reduced the threat of substitutes.
Threat of New Entrants
Threat of New Entrants
Ø If the firms in an industry
are highly profitable, the industry becomes a magnet to new entrants.
Ø Unless something is done to
stop this, the competition in the industry will increase, and average industry
profitability will decline.
Ø 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.
Non Traditional Barriers to Entry
Ø
It is difficult for start-ups to execute
barriers to entry that are expensive, such as economies of scale, because money
is usually tight.
Ø
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.
Rivalry
Among Existing Firms
Rivalry Among Existing Firms
Ø
In most industries, the major determinant of
industry profitability is the level of competition among existing firms.
Ø
Some industries are fiercely competitive, to the
point where prices are pushed below the level of costs, and industry-wide
losses occur.
Ø
In other industries, competition is much less
intense and price competition is subdued.
Factors that determine the intensity of the rivalry among
existing firms in an industry
Bargaining
Power of Suppliers
Bargaining Power of Suppliers
Ø
Suppliers can suppress the profitability of the
industries to which they sell by raising prices or reducing the quality of the
components they provide.
Ø
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.
Ø
If the suppliers are powerful relative to the
firms in the industry to which they sell, industry profitability can suffer.
Factors that have an impact on the ability of suppliers to
exert pressure on buyers
Bargaining
Power of Buyers
Bargaining Power of Buyers
Ø
Buyers can suppress the profitability of the
industries from which they purchase by demanding price concessions or increases
in quality.
Ø
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.
Factors that have an impact on the ability of suppliers to
exert pressure on buyers
First
Application of the Five Forces Model
First Application of the Model
Ø
The five forces model can be used to assess the
attractiveness of an industry by determining the level of threat to industry
profitability for each of the forces.
Ø
If a firm fills out the form shown on the next
slide and several of the threats to industry profitability are high, the firm
may want to reconsider entering the industry or think carefully about the
position it would occupy.
Assessing Industry Attractiveness Using the Five Forces
Model
Second
Application of the Five Forces Model
Second Application of the Model
Ø
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.
Ø
The questions are shown in the figure on the
next slide, and help a firm project the potential success of a new venture in a
particular industry.
Using the Five Forces Model to Pose Questions to Determine
the Potential Success of a New Venture in an Industry
Industry Types
and the Opportunities They Offer
Emerging Industries
Ø
Industries in which standard operating
procedures have yet to be developed.
·
Opportunity: First-mover advantage.
Fragmented Industries
Ø
Industries that are characterized by a large
number of firms of approximately equal size.
·
Opportunity: Consolidation.
Mature Industries
Ø
Industries that are experiencing slow or no
increase in demand.
·
Opportunities: Process innovation and after-sale
service innovation.
Declining Industries
Ø
Industries that are experiencing a reduction in
demand.
·
Opportunities: Leadership, establishing a niche
market, and pursuing a cost reduction strategy.
Global Industries
Ø
Industries that are characterized by a large
number of firms of approximately equal size.
·
Opportunity: Consolidation.
Competitor
Analysis
What is a Competitor Analysis?
Ø
A competitor analysis is a detailed analysis of
a firm’s competition.
Ø
It helps a firm understand the positions of its
major competitors and the opportunities that are available.
Ø
A competitive analysis grid is a tool for
organizing the information a firm collects about its competitors.
Identifying
Competitors
Types of Competitors New Ventures Face
Sources of
Competitive Intelligence
Collecting Competitive Intelligence
Ø
To complete a competitive analysis grid, a firm
must first understand the strategies and behaviors of its competitors.
Ø
The information that is gathered by a firm to
learn about its competitors is referred to as competitive intelligence.
Ø
A new venture should take care that it collects
competitive intelligence in a professional and ethical manner.
Sources of
Competitive Intelligence
Ø
Many companies attend trade shows to not only display
their products, but to see what their competitors are up to.
Ø
This is a photo of the 2008 Consumer Electronics
Trade Show in Las Vegas.
Completing
a Competitive Analysis Grid
Competitive Analysis Grid
Ø
A tool for organizing the information a firm
collects about its competitors
Ø
A competitive analysis grid can help a firm see
how it stakes up against its competitors, provide ideas for markets to pursue,
and identify its primary sources of competitive advantage.
Competitive
a Analysis Grid for Expresso Fitness
Developing an Effective Business Model
What is a
Business Model
Model
Ø
A model is a plan or diagram that’s
used to make or describe something
Business Model
Ø
A firm’s business model is its plan or diagram
for how it competes, uses its resources, structures its relationships,
interfaces with customers, and creates value to sustain itself on the basis of
the profits it generates.
Ø
The term “business model” is used to include all
the activities that define how a firm competes in the marketplace.
The
Importance of Business Models
Diversity
of Business Model
Ø
There is no standard business model for an
industry or for a target market within an industry.
Ø
However, over time, the most successful business
models in an industry predominate.
Ø
There are always opportunities for business
model innovation.
How
Business Models Emerge
The Value Chain
Ø
The value chain is the string of activities that
moves a product from the raw material stage, through manufacturing and
distribution, and ultimately to the end user.
Ø
By studying a product’s or service’s value
chain, an organization can identify ways to create additional value and assess
whether it has the means to do so.
Ø
Value chain analysis is also helpful in
identifying opportunities for new businesses and in understanding how business
models emerge.
Ø
Entrepreneurs look at the value chain of a
product or a service to pinpoint where the value chain can be made more
effective or to spot where additional “value” can be added.
Ø
This type of analysis may focus on:
·
A single primary activity such as marketing and
sales.
·
The interface between one stage of the value
chain and another, such as the interface between operations and outgoing
logistics.
·
One of the support activities, such as human
resource management.
Potential
Fatal Flaws in Business Models
Fatal Flaws
Ø
Two fatal flaws can render a business model
untenable from the beginning:
·
A complete misread of the customer.
·
Utterly unsound economics.
Components
of a Business Model
Core
Strategy
Core Strategy
Ø
The first component of a business model is the
core strategy, which describes how a firm competes relative to its competitors.
Primary Elements of Core Strategy
Ø
Mission statement.
Ø
Product/market scope.
Ø
Basis for differentiation.
Strategic
Resources
Strategic Resources
Ø
A firm is not able to implement a strategy
without resources, so the resources a firm has affects its business model
substantially.
Ø
For a new venture, its strategic resources may
initially be limited to the competencies of its founders, the opportunity they
have identified, and the unique way they plan to serve their market.
The two most important strategic resources are:
Ø
A firm’s core competencies.
Ø
Strategic assets.
Strategic
Resources
Importance of Strategic Resources
Ø
New ventures ultimately try to combine their
core competencies and strategic assets to create a sustainable competitive
advantage.
Ø
This factor is one that investors pay close
attention when evaluating a business.
Ø
A sustainable competitive advantage is achieved
by implementing a value-creating strategy that is unique and not easy to
imitate.
Ø
This type of advantage is achievable when a firm
has strategic resources and the ability to use them.
Partnership
Network
Partnership Network
Ø
A firm’s partnership network is the third
component of a business model. New
ventures, in particular, typically do not have the resources to perform key
roles.
Ø
In most cases, a business does not want to do
everything itself because the majority of tasks needed to build a product or
deliver a service are not core to a company’s competitive advantage.
Ø
A firm’s partnership network includes:
·
Suppliers.
·
Other key relationships.
Customer
Interface
Customer Interface
Ø
The way a firm interacts with its customer
hinges on how it chooses to compete.
·
For example, Amazon.com sells books over the
Internet while Barnes & Noble sells through its traditional bookstores and
online.
Ø
The three elements of a company’s customer
interface are:
·
Target customer.
·
Fulfillment and support.
·
Pricing model.
Recap: The
Importance of Business Models
Business Models
Ø
It is very useful for a new venture to look at
itself in a holistic manner and understand that it must construct an effective
“business model” to be successful.
Ø
Everyone that does business with a firm, from
its customers to its partners, does so on a voluntary basis. As a result, a firm must motivate its
customers and its partners to play along.
Ø
Close attention to each of the primary elements
of a firm’s business model is essential for a new venture’s success.
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