Entrepreneurship:

Successfully Launching
New Ventures, 2/e
Bruce R. Barringer
R. Duane Ireland

Chapter 4

5-1
Chapter Objectives
(1 of 2)

1. Explain the purpose of an industry analysis.

2. Identify the five competitive forces that
determine industry profitability.
3. Explain the role of “barriers to entry” in
creating disincentives for firms to enter an
industry.
4. Identify the nontraditional barriers to entry
that are especially associated with
entrepreneurial firms.
5. List the four industry-related questions to ask
before pursuing the idea for a firm.

5-2
Chapter Objectives
(2 of 2)

6. Identify the five primary industry types and

the opportunities they offer.
7. Explain the purpose of a competitor analysis.
8. Identify the three groups of competitors a new
firm will face.
9. Describe ways a firm can ethically obtain
information about its competitors.
10. Describe the reasons for completing a
competitive analysis grid.

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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.

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Why is Industry Analysis Important?
Why is this Topic 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 niche
markets it identified during feasibility analysis are
accessible and which ones represent the best point of
entry for a new firm.

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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

Is the industry Are there positions in the

Does the industry
accessible—in other industry that will avoid
contain markets that
words, is it a realistic some of the negative
are ripe for innovation
place for a new attributes of the
or are underserved?
venture to enter? industry as a whole?

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Industry Versus Firm-Specific Factors
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.

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The Five Competitive Forces That Determine
Industry Profitability
(1 of 3)

Explanation of the Five Forces Model

◦ 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.
◦ The forces—the threat of substitutes, the threat of new
entrants, rivalry among existing firms, the bargaining power
of suppliers, and the bargaining power of buyers— help
determine the average rate of return for the firms in an
industry.

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The Five Competitive Forces That Determine
Industry Profitability
(2 of 3)

Explanation of the Five Forces Model (continued)

◦ 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.

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The Five Competitive Forces That Determine
Industry Profitability
(3 of 3)

Five-Forces Model

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10
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.

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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.

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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.

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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 differentiation characterized by firms with strong brands are 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. For example, it
Capital requirements
now takes about two years and $4 million to develop an
electronic game. Many new firms do not have the capital to
compete at this level.

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Threat of New Entrants
(3 of 6)

Barriers to Entry (continued)

Barrier to Entry Explanation

Entrenched competitors may have cost advantages not

Cost advantages related to size. For example, the existing competitors in an
independent of size 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 is

Access to distribution particularly true in crowded markets, such as the convenience
channels store market. For a new sports drink to be placed on the shelf,
it has to displace a product that is already there.

In knowledge intensive industries, such as biotechnology and

Government and software, patents, trademarks, and copyrights form major
legal barriers barriers to entry. Other industries, such as broadcasting,
require the granting of a license by a public authority.

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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.

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Threat of New Entrants
(5 of 6)

Nontraditional Barriers to Entry

Barrier to Entry Explanation

If a start-up puts together a world-class management team, it

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

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

First-mover advantage existing industry, the name recognition that the start-up
establishes may create a formidable barrier to entry.

If the employees of a start-up are highly motivated by the

Passion of the unique culture of a start-up, and anticipate large financial
management team and rewards through stock options, this is a combination that
employees cannot be replicated by larger firms. Think of the employees
of a biotech firms trying to find a cure for a disease.

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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 model and

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

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

Internet domain name a specific product or service that they 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 industry and

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

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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.

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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 customers by cutting its
Number and balance
price. Price-cutting occurs more often when all the
of competitors
competitors in an industry are about the same size and
when there is no clear market leader.

The degree to which products differ from one

Degree of product to another affects industry rivalry. For
difference between example, the firms in commodity industries (such as
products paper products) tend to compete on price because
there is little difference between one manufacturer’s
products and another’s.

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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 industries. Slow-
Growth rate of an growth industry firms must fight for market share, which
industry 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 break-even point
Level of fixed costs
than firms with low fixed costs. As a result, firms with
high fixed costs are anxious to fill their capacity, and this
anxiety may lead to price-cutting.

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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.

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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 a critical
concentration 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 one supplier to
Switching costs
another. If switching costs are high, a buyer will be less
likely to switch suppliers.

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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 attractive

Attractiveness of substitutes for the product or services the supplier offers.
substitutes 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 credible

Threat of forward possibility that the supplier might enter the buyer’s
integration industry.

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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.

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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 there are

Buyer group only a few large buyers, and they buy from a large
concentration 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 the price they pay.
Buyer’s costs
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.

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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 bargaining power. For
Degree of example, a buyer who is purchasing a standard product,
standardization of like the corn syrup that goes into soft drinks, can play
supplier’s products one 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 credible

backward threat that the buyer might enter the supplier’s industry.
integration

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The Value of the Five Forces Model
(1 of 4)

First Application of the Model

◦ 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, as shown on the next slide.
◦ If a firm filled out the form shown on the next slide
and several of the threats to industry profitability were
high, the firm may want to reconsider entering the
industry or think carefully about the position it would
occupy.

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The Value of the Five Forces Model
(2 of 4)

Determining the Attractiveness of an Industry Using the Five Forces Model

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The Value of the Five Forces Model
(3 of 4)

Second Application of the Model

◦ 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.
◦ 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.

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The Value of the Five Forces Model
(4 of 4)

Using the Five Forces Model to Pose Questions to Determine the Potential
Success of a New Venture in a Particular Industry

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Industry Types and the
Opportunities They Offer
(1 of 3)

Emerging Industries
◦ Industries in which standard operating procedures have yet
to be developed.
 Opportunity: First-mover advantage.
Fragmented Industries
◦ Industries that are characterized by a large number of firms
of approximately equal size.
 Opportunity: Consolidation.

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Industry Types and the
Opportunities They Offer
(2 of 3)

Mature Industries
◦ Industries that are experiencing slow or no increase in
demand.
 Opportunities: Process innovation and after-sale service innovation.
Declining Industries
◦ Industries that are experiencing a reduction in demand.
 Opportunities: Leadership, establishing a niche market, and pursuing
a cost reduction strategy.

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Industry Types and the
Opportunities They Offer
(3 of 3)

Global Industries
◦ Industries that are experiencing significant international
sales.
 Opportunities: Multidomestic and global strategies.

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Competitor Analysis

What is a 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.

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Identifying Competitors
Types of Competitors New Ventures Face

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Sources of Competitive Intelligence
(1 of 2)

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.

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Sources of Competitive Intelligence
(2 of 2)

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.

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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.

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Completing a Competitive Analysis Grid
(2 of 2)

Competitive Analysis Grid for Activision

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