ANALYZING THE INDUSTRY AND MARKET CHAPTER Six

Some Definitions Industry: A group of companies with common interests along the value chain, such as manufactures, suppliers, distributors, retailers. Is the environment in which the business operates – its context Market: A grouping of customers that the entrepreneur targets Primary Customer: The most likely customer to purchase the product or service.

The Industry Life Cycle Birth Growth and adaptation Differentiation and competition Shakeout Maturity and decline

Figure 5.1: Industry Growth Cycle Inset Semiconductor industry on next slide

Changes in the Placement of the Window of Opportunity Need graphic

Microcomputer Industry: Cumulative Number of Startup Companies and Industry Shipments

Frameworks for Understanding Industries Starbuck Framework – Uncertainty, Complexity, Density Law’s and Postulates - Moore’s Law; Peter Drucker’s Postulate; Gilder's Law STEP analysis Strategic Management perspective Macro environment Industry: Porter’s Five Forces Competitive environment

STEP Analysis

Strategic Management Perspective of External Environment: Macro, Industry, Competitive 10

Components of the Macro Environment Demographic Segment ¨       Population size ¨       Age structure ¨       Geographic distribution ¨       Ethnic mix ¨       Income distribution Economic Segment ¨       Inflation rates ¨       Interest rates ¨       Trade deficits or surpluses ¨       Budget deficits or surpluses ¨       Personal savings rate ¨       Business savings rates ¨       Gross domestic product Political/Legal Segment ¨       Antitrust laws ¨       Taxation laws ¨       Deregulation philosophies ¨       Labor training laws ¨       Educational philosophies and policies Sociocultural Segment ¨       Women in the workforce ¨       Workforce diversity ¨       Attitudes about work life quality ¨       Concerns about the environment ¨       Shifts in work and career preferences ¨       Shifts in preferences regarding product and service characteristics Technological Segment ¨       Product innovations ¨       Applications of knowledge ¨       Focus of private and government-supported R&D expenditures ¨       New communication technologies Global Segment ¨       Important political events ¨       Critical global markets ¨       Newly industrialized countries ¨       Different cultural and institutional attributes 10

Porter’s Five Forces Model Industry Analysis Classifying industry structure so that a strategy for entry and sustained growth can be developed Barriers to entry Threat from substitute products Threat from buyers’ bargaining power Threat from suppliers’ bargaining power Rivalry among existing firms

Porter’s Five Forces Model (continued) Barriers to entry: Economies of scale Brand loyalty Capital requirements Switching costs for the buyer Access to distribution channels Proprietary factors Government regulations Industry hostility

Porter’s Five Forces Model (continued) Threats: Threats from substitute products: Products/services which accomplish the same function in a different way or at a different price. Threats from buyers’ bargaining power: The more large buyers understand the nature of the industry and the more products are standardized, the greater the likelihood that these buyers will have significant bargaining power.

Porter’s Five Forces Model (continued) Threat’s (continued) Threats from suppliers’ bargaining power: If the number of these suppliers is few relative to the size of the industry or the industry is not the primary customer of the suppliers, the suppliers’ potential power to raise prices or change the product quality of goods/services supplied to manufactures and distributors is greater.

Porter’s Five Forces Model (continued) Rivalry among existing firms In general, a highly competitive industry will drive down profits and ultimately the rate of return on investment. Determinants of cut-throat competition Slow industry growth Lack of Switching costs High fixed costs High storage costs Numerous or equally balanced competitors

Characterizing the Target Market Key questions to answer: Who is most likely to purchase the product or service at market introduction? What do these customers typically buy, how do they buy it, and how do they hear about it? How often do they buy? What is their buying pattern? How can the new venture meet customers’ needs?

Characterizing the Target Market (ctd) Steps in Market Research: Assess your information needs Research secondary sources first Measure the target market with primary research Forecast demand for the product/service

Conducting Industry Analysis (ctd.) Primary data sources: Industry observers Suppliers and distributors Customers Employees of key firms in the industry Professionals from service organizations Trade shows

Characterizing the Target Market (cntd) Primary research techniques Mail and phone surveys Interviews Focus groups The Internet Immediate-response surveys

Gathering Competitive Intelligence Elements of Competitive Intelligence analysis: Identify the competition Find information about competitors Look for the less obvious Employ a niche strategy to compete

Forecasting New Product/Service Demand Elements of forecasting: Use historical analogy or substitute products Interview prospective end-users and intermediaries Go into limited production Do a formal test market

STOP

Semiconductor Industry: Cumulative Number of Venture Capital Investments and Industry Shipments

Conducting Industry Analysis SECONDARY SOURCES and questions to address: Is the industry growing? Where are the opportunities? What is the status of any new technology? How much does the industry spend on research and development? Who are the major competitors? Are there young, successful firms in the industry? What does the future look like? Are there any threats to the industry? What are the typical margins in the industry?