The Entrepreneurial Process: Model of Competitive Forces Patterns of Entrepreneurship Analytical Tools

Model of Competitive Forces Michael Porter’s Competitive Advantage, 1985, outlines five forces determining segment structural attractiveness Potential Entrants Suppliers (Supplier Power) Buyers (Buyer Power) Industry Competitors to Potential Business (Segment Rivals) Substitutes (Threat of Substitutes)

Threats and Scenario-Based Questions Competitive analysis must examine not only current competitors but answer following questions from diagram: Threat of intense segment rivalry Worst case scenario: Intense competition in stable or declining industry Threat of new entrants Worst case scenario: Entry barriers are low and exit barriers are high Threat of substitute products Worst case scenario: Many actual/potential substitutes for product that compete on price Threat of buyers’ growing bargaining power Worst case scenario: Buyers possess strong or growing bargaining power and force down prices, demand more services Typically occurs with undifferentiated products and buyers’ switching costs are low Threat of suppliers’ growing bargaining power Worst case scenario: company’s suppliers can raise prices or reduce quantity supplied Typically occurs with products with few substitutes and when supplied product is a key input and when switching supplier costs are high

Barriers Effect on Risk and Profitability Exit Barriers Entry Barriers

Fundamentals of Industry Analysis Key points to include in an industry structure analysis: Number of sellers and degree of differentiation Is product homogenous or highly differentiated? Is industry structure monopolistic, oligopoly or fragmented? Cost structure What are the major cost drivers? Manufacturing costs? Distribution costs? Marketing costs? Shipping costs? Degree of vertical integration Are companies incented to vertically integrate in the proposed business’s industry? (Example: oil companies buying oil exploration firms or clothes retailers manufacturing their own brands) Degree of globalization Does company need to compete on global basis? What economies of scale are needed?

Analytical Inquiry Analyzing competitors: What is competitor seeking in marketplace? What drives their strategy? Share of market: What is competitor’s share of target market? Share of mind: What competitor has the highest name recall? Share of trust: What competitor did surveyed customers name as that from whom they would prefer to buy the product? Who are the closest competitors to the proposed business, e.g., competitors in the same sub markets offering direct substitutes, if any? What are the indirect competitors to the proposed business? Example: a magazine publisher’s indirect competitors are other entertainment products, including television, radio, Internet, films, DVDs and newspapers. They are competing for the consumer’s often limited leisure time and leisure dollars.

Formal Investigation of Competitors Additional Formal Analysis of Competitors Product description Market positioning (relative strength and weaknesses, as seen by customers) Market practices: channels, pricing, promotion, service Estimated market share (if relevant) Reactions to competition Implications for opportunity Mission and business objectives Management capabilities and limitations

“Best Practice” Gathering Benchmarking and Best Practice gathering can be helpful in determining competitive advantages of proposed business Benchmarking is the process of diagnosing how and why some companies perform tasks more efficiently or more effectively. Ultimate aim for firm is to improve its own practices Competitive benchmarking is costly but available from some consulting firms Non-competitive benchmarking (studying “best-in-class” companies in other industries) is less valuable but still can offer valuable insight A budding business can implement these “best-in-class” measures to beat competition Process for gathering best practices: a) Determine which function of proposed company to study b) Identify key variables to measure and “best-in-class” companies (start-ups or mature) c) Measure performance of companies versus projected performance of proposed business d) Specify programs to close gin business plan to close gap in building new business