Entrepreneurship and New Venture Creation Rui Baptista Masters in Engineering and Management of Technology Masters in engineering Design Entrepreneurship and New Venture Creation Rui Baptista

Market Research and Structural Analysis of Industries

Opportunity and Market Potential market: a significant group of people with a need that is not being satisfied adequately Potential for an opportunity: There is a technology that allows us to supply an effective solution to satisfy that need Alternatives being offered by competition are inferior or more costly It is possible to develop, produce and place the product in the market at a cost which is lower than what consumers are willing to pay Entrepreneurship - Rui Baptista

Drawing Industry Boundaries: Identifying the Relevant Market What industry is BMW in: World Auto industry? European Auto industry? World luxury car industry? Key criteria: GEOGRAPHY and SUBSTITUTABILITY On the demand side : Where are the buyers located? Are they willing to substitute across countries? Are buyers willing to substitute between types of cars? On the supply side : Where are the manufacturers located? Are they able to switch production across countries? Are manufacturers able to switch production between types of cars? Entrepreneurship - Rui Baptista 15

Entrepreneurship - Rui Baptista The Target Market Entrepreneurship - Rui Baptista

Questions Raised by Market Research What are the main differences between customer groups/market segments How to identify customers in each segment? What are the costs to make the product known and place it next to the relevant market? How much are the consumers willing to pay for the product? What is the minimum size required for the market to be profitable? Entrepreneurship - Rui Baptista

Existing market/product Market Assessment Existing market/product New market/product Market research philosophy Statistical analysis, segmentation Intuition Information gathering techniques Questionnaires, direct interviews, observation of relevant potential consumers Industry specialists, industry tendencies, Entrepreneurship - Rui Baptista

Entrepreneurship - Rui Baptista Concepts in Strategy Core Competencies resources and capabilities available to the firm that are indispensable to produce and commercialize its products and that are not easily replicated by competitiors Competitive Advantage distinct competencies held by a firm that allow it to attain a favorable position in the market - commercialize better and/or cheaper products Sustainable Competitive Advantage occurs when the distinct competencies held by a firm that allow it to attain a favorable position in the market are not easily replicated by competitiors Entrepreneurship - Rui Baptista

Sources of Competitive Advantage Competencies Efficiency – low costs per unit produced Innovation and product improvements Quality/reliability Diversification/customization, access to consumers Process innovation Establishment of a critical mass of consumers Examples Ryanair; easyJet; Ibis/Accor; Zara; Alcoa; Wal-Mart; Worten Intel, Nokia, Motorola; Pfizer; Eli Lilly; 3M; Apple; Audi; BMW Mercedes; IBM; JP Morgan Hewlett Packard; Disney; General Electric; Dell; Amazon.com Toyota; McDonald’s; Ikea Microsoft; Adobe; SAP; Oracle; Armani; Ralph Lauren Entrepreneurship - Rui Baptista

Defining the Business Model Target market Who are the customers? How important is our product in their total consumption expenditure? Value for the customer What benefits for the customer are offered exclusively by our product? Competitive advantage and differentiation How can we protect the distinct, key competencies and featires that make our product unique? How sustainable are those competencies? Product development and value chain analysis What are the activities required for the development and commercialization of our product and what is their cost? Which activities should be developed in-house and which can be outsourced? Competencies to develop What are the technical, market and professional abilities and experiences required to be successful? Organizational structure How should the activities to be carried out be organizes? How are activities and responsibilities divided? Revenue generation and profits How to generate revenues from commercialization? Which competencies allow the firm to charge prices above unit costs? How sustainable are those competencies Entrepreneurship - Rui Baptista

Entrepreneurship - Rui Baptista The Basic Framework of Strategy: the Link Between the Firm and Its Environment THE FIRM Goals & Values Resources & Capabilities Structure & Systems THE INDUSTRY ENVIRONMENT Competitors Customers Suppliers STRATEGY STRATEGY Entrepreneurship - Rui Baptista 5

Objectives of Industry analysis To understand how industry structure drives competition, which determines the level of industry profitability. To assess industry attractiveness To use evidence on changes in industry structure to forecast future profitability To identify opportunities to change industry structure to impose industry profitability To identify Key Success Factors Entrepreneurship - Rui Baptista 18 2

From Environmental Analysis to Industry Analysis The natural environment The national/ international economy THE INDUSTRY ENVIRONMENT Suppliers Competitors Customers Demographic structure Technology Government & Politics Social structure Social structure The Industry Environment lies at the core of the Macro Environment The Macro Environment impacts the firm through its effect on the Industry Environment Entrepreneurship - Rui Baptista 3

Determinants of Industry Profitability (Revenues-Costs) 3 key influences: The value of the product to customers The intensity of competition Relative bargaining power at different levels within the value chain Entrepreneurship - Rui Baptista 5

The Spectrum of Industry Structures Perfect Competition Oligopoly Duopoly Monopoly Concentration Many firms A few firms Two firms One firm Entry and Exit Barriers No barriers Significant barriers High barriers Product Differentiation Homogeneous Product Potential for product differentiation Information Perfect Information flow Imperfect availability of information Entrepreneurship - Rui Baptista 2 6

Porter’s 5 Competitive Forces Framework SUPPLIERS Bargaining power of suppliers INDUSTRY COMPETITORS Threat of substitutes POTENTIAL ENTRANTS Threat of new entrants SUBSTITUTES Rivalry among existing firms Bargaining power of buyers BUYERS Entrepreneurship - Rui Baptista 7

Threat of Potential Entrants New entrants’ threat to industry profitability depends upon the height of barriers to entry. The principal sources of barriers to entry are: Capital requirements Economies of scale Absolute cost advantages Proprietary product differentiation (e.g. brand identity) Access to channels of distribution Government Policies: legal and regulatory barriers Threat of retaliation Entrepreneurship - Rui Baptista 9

Threath of Substitutes Extent of competitive pressure from producers of substitutes depends upon: Switching costs Buyers’ propensity to substitute Price-performance characteristics of substitutes Network externalities Entrepreneurship - Rui Baptista 8

Bargaining Power of Buyers Buyer’s price sensitivity Relative bargaining power Switching Costs Cost of purchases as % of buyer’s total costs How differentiated is the purchased item? How intense is competition between buyers? How important is the item to quality of the buyers’ own output? Size and concentration of buyers vs. sellers Buyer volume Buyer’s information Ability to backward integrate Note: analysis of supplier power is symmetric Entrepreneurship - Rui Baptista 12

Rivalry Between Incumbents (Established Competitors) The extent to which industry profitability is depressed by aggressive price competition depends upon: Industry growth – product/technology life cycle Concentration (number and size distribution of firms) Diversity of competitors (differences in goals, cost structure, etc.) Product differentiation Excess capacity and exit barriers Cost conditions Extent of scale economies Ratio of fixed to variable costs Entrepreneurship - Rui Baptista 10

Applying 5 Forces Analysis Forecasting Industry Profitability Past profitability is a poor indicator of future profitability If we can create or foresee changes in industry structure we can induce changes on competition and profitability Strategies to Improve Industry Profitability What structural variables affect profitability? Which of those variables can be changed by individual or collective strategies? Entrepreneurship - Rui Baptista 14

Entrepreneurial Industry Evaluation Entrepreneurship - Rui Baptista

Entrepreneurship and Dynamic Competition Porter’s framework assumes: industry structure drives competitive behavior Industry structure is stable But competition also changes industry structure Schumpeterian Competition: A “perennial gale of creative destruction” where innovation overthrows established market leaders Hyper-competition: intense and rapid competitive moves, creating disequilibrium through continuously creating new competitive advantages and destroying, neutralizing or making obsolete opponents’ competitive advantages—overlapping product/technology life-cycles Entrepreneurship - Rui Baptista 14

Entrepreneurship - Rui Baptista Applying the 5 Forces to Digital/E-Business Markets The more unstable is industry structure—the less helpful is analysis based upon industry structure Taking account of time—willingness to endure losses today in order to reap profit tomorrow General structural features of digital, networked industries: Low Entry Barriers + Extreme Scale Economies + Network Externalities = Winner-take-all markets = Intense competition Entrepreneurship - Rui Baptista

Porter’s Framework in the Knowledge Economy Network externalities: the suppliers of complements create value for the industry and can exercise bargaining power SUPPLIERS Bargaining power of suppliers INDUSTRY COMPETITORS Threat of substitutes POTENTIAL ENTRANTS Threat of new entrants SUBSTITUTES Rivalry among existing firms Bargaining power of buyers BUYERS Entrepreneurship - Rui Baptista 7

Identifying Key Sucess Factors Pre-requisites for success Pre-requisites for success What do customers want? How may the firm survive competition? Analysis of competition What drives competition? What are the main dimensions of competition? How intense is competition? How can we obtain a superior competitive position? Analysis of demand Who are our customers? What do they want? What drives competition? What are the main dimensions of competition? How intense is competition? How can we obtain a superior competitive position? KEY SUCCESS FACTORS Entrepreneurship - Rui Baptista 17

Entrepreneurial Industry Evaluation Factors Attractiveness High Low Rivalry/Competition Costumer Power Supplier Power Barriers to Entry Substitute and Complementary Products Entrepreneurship - Rui Baptista