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Entrepreneurship: Successfully Launching New Ventures

Front Cover: Entrepreneurship: Successfully Launching New Ventures Sixth Edition by Barringer and Ireland.

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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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Factors that determine the intensity of the rivalry among existing firms in an industry

Number and balance of competitors The more competitors there are, the more likely it is that one or more will try to gain customers by cutting its price.  Degree of difference between products The degree to which products differ from one producer to another affects industry rivalry.

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Factors that determine the intensity of the rivalry among existing firms in an industry (continued)

Growth rate of an industry The competition among firms in a slow-growth industry is stronger than among those in fast-growth industries.   Level of fixed costs Firms that have high fixed costs must sell a higher volume of their product to reach the break-even point than firms with low fixed costs.

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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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Factors that have an impact on the ability of suppliers to exert pressure on buyers

Supplier concentration When there are only a few suppliers that supply a critical product to a large number of buyers, the supplier has an advantage.   Switching costs Switching costs are the fixed costs that buyers encounter when switching or changing from one supplier to another. If switching costs are high, a buyer will be less likely to switch suppliers.

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Factors that have an impact on the ability of suppliers to exert pressure on buyers (continued)

Attractiveness of substitutes Supplier power is enhanced if there are no attractive substitutes for the products or services the supplier offers. Threat of forward integration The power of a supplier is enhanced if there is a credible possibility that the supplier might enter the buyer ’ s industry.

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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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Factors that have an impact on the ability of buyers to exert pressure on suppliers

Buyer group concentration If there are only a few large buyers, and they buy 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. Buyer ’ s costs The greater the importance of an item is to a buyer, the more sensitive the buyer will be to the price it pays.

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Factors that have an impact on the ability of buyers to exert pressure on suppliers (continued)

Degree of standardization of supplier ’ s products  The degree to which a supplier ’ s product differs from its competitors affects the buyer ’ s bargaining power. Threat of backward integration The power of buyers is enhanced if there is a credible threat that the buyer might enter the supplier ’ s industry.

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First Application of the Five Forces Model  (1 of 2)

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. 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.

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First Application of the Five Forces Model  (2 of 2)

Assessing Industry Attractiveness Using the Five Forces Model

Competitive Force Threat to Industry Profitability Low Threat to Industry Profitability Medium Threat to Industry Profitability High Threat of substitutes blank blank blank Threat of new entrants blank blank blank Rivalry among existing firms blank blank blank Bargaining power of suppliers blank blank blank Bargaining power of buyers blank blank blank

Instructions: Step 1 : Select in industry. Step 2 : Determine the level of threat to industry profitability for each of the forces (low, medium or high). Step 3 : Use the table to develop an overall feel for the attractiveness of the industry. Step 4 : Use the table to identify the threats that are most often relevant to industry profitability.

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Second Application of the Five Forces Model  (1 of 2)

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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Second Application of the Five Forces Model  (2 of 2)

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

A flow chart using the five forces model. A flowchart starts with a box reading, is the industry a realistic place for a new venture? if no, then reconsider new venture. If the answer from the initial question is yes, then consider three questions: 1, are there areas in which we can avoid or diminish the factors that suppress industry profitability? 2, is there a unique position in the industry that avoids or diminishes the factors that suppress industry profitability? 3, Is there a superior business model that industry incumbents would find hard to duplicate? If yes, then a positive response to any of these questions increases the likelihood of the new venture’s success. If no, then a negative response to all three questions indicates reconsidering the new venture, an arrow returns to the box labeled, Reconsider new venture.

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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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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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Three types of competitors. Direct competitors are businesses offering identical or similar products. Indirect competitors are businesses offering close substitute products. Future competitors are businesses that are not yet direct or indirect competitors but could be at any time.

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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)

Ethical ways to obtain information about competitors Attend conferences and trade shows. Purchase competitors ’  products. Study competitors ’  Web sites and social media sites. Set up Google e-mail alerts. Read industry-related books, magazines, and Web sites. Talk to customers about what motivated them to buy your product as opposed to your competitor ’ s product.

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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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Competitive Analysis Grid for Panera Bread

Table 5.5  Competitive Analysis Grid for Panera Bread

Name Panera Bread McAlister’s  Deli Chipotle Mexican Grill Panda Express Qdoba Price Even Even Even Advantage Even Selection Even Even Disadvantage Disadvantage Disadvantage Perception of  providing good, wholesome food Advantage Even Even Disadvantage Even Dining  environment Advantage Even Even Disadvantage Disadvantage Speed of service Even Even Advantage Advantage Advantage Availability of  Gluten free, non- GMO, organic, etc. Even Even Even Disadvantage Even Social Consciousness/ Philanthropy Advantage Even Advantage Even Even

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Entrepreneurship: Successfully Launching New Ventures

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