Chapter 5

1. Entrepreneurship: Successfully Launching New Ventures, 2/e Bruce R. Barringer R. Duane Ireland Chapter 5

2. Case Study • www.drz.com.my • ‘Awesome’ anti-aging product – ‘The Body Shop’ • 1) sell serum 2) offer an online/offline business opportunity • Launch in December 2013 • Anti-aging industry

3. Case Study • Four extremes: • Cheap serum – risk - will not work effectively is high • Luxury serum – too expensive – RM 300 < • Surgery-based • Non-halal products • Middle position – affordable luxury, same level of performance, natural, Halal

4. 1. Industry Types and Opportunities • Emerging Industries • Standard operating procedures have yet to be developed (pioneer) • Opportunity: First-mover advantage E.g. TuttiFrutti

5. Fragmented Industries • A number of companies of approximately equal size (Celcom, Telekom, Maxis, Digi) • Opportunity: Consolidation to synergiseCelcom and Telekom.

6. Mature Industries • Experiencing slow or no increase in demand. • Opportunities: Process innovation and after-sale service innovation. E.g. Innovative pricing strategy - Airasia

7. Declining Industries • Experiencing a reduction in demand. • Opportunities: Leadership / niche market / cost reduction strategy. • E.g groceries – Online RM 5

8. Global Industries • Experiencing significant international sales. • Opportunities: Multidomestic (competing for market share on a country-by-country basis and vary their product offerings to meet the local demands) and global strategies. • Tesco, IKEA, Carrefour

9. 2. What is Industry Analysis? • A business research -focuses on potential of an industry • Industry • A group of companies producing a similar product or service

10. Why is Industry Analysis Important? • Once determined - a new venture is feasible – enter into an industry / market - a more in-depth analysisis needed • To learn ins and outs • To reduce unknown unknowns

11. If niche markets identified during feasibility analysis • Helps to determine which point of entry - accessible and the best ones • E.g. • Businessatoz.com? Web-hosting services • drz.com.my?

12. Three Key Questions When studying an industry - must answer three questions Question 1 Question 2 Question 3 Is it accessible— is it a realistic place for a new venture? Does it contain markets - are ripe (matured) for innovation Or underserved? Are there positions it can avoid some negative attributes of the Industry? (e.g. crowded)

13. 3. Techniques to Assess IndustryAttractiveness Study Environmental and Business Trends Five Competitive Forces Model

14. a. Studying Industry Trends • Environmental Trends • Not so much because management skills • P E S T E L • Political, Environmental, Social, Technological, Economic, Law • In favor NOT against your product / service

15. Business Trends • Other trends - impact an industry – not environmental trends. • E.g. • are profit margins in the industry increasing or falling? • Is innovation accelerating or declining? • Are input costs going up or down?

16. b. Studying Five Competitive Forces • Developed by Professor Porter, Harvard Univ. • A framework for understanding structure of an industry. • Composed of FIVE forces - S, N, R, B-S and B-B • Each - impacts average rate of return - by applying pressure on industry profitability.

17. Well-managed companies – Position in a way that avoids or diminishes the forces—why? To beat average rate of return. • E.g. Drz diminished impact on profitability – avoiding head-to-head competition with major players – online purchase, no sales force, easy set up, utilizing ‘distributor’s talent, time and energy

18. Five Competitive Forces – Determine Industry Profitability

19. i. Threat of Substitutes • Price and Propensity • PRICE- willing to pay for a product depends - availability of substitute products. • Halal anti-aging industry - few substitutes - profitable.

20. When close substitutes for a product exist, profitability is suppressed - because consumers will opt out if price gets too high.

21. PROPENSITY for buyers - alternatives. • Also suppress profitability of an industry. • What other companies do? • Companies in the same industry - offer their customers value added services to reduce likelihood - switch to a substitute product – despite relatively expensive price.

22. ii. Threat of New Entrants • If companies in an industry are highly profitable - becomes a magnet to new entrants. E.g. IT industry in 1990s, Islamic Banking, stem cell • Unless something is done to stop – competition will increase - average industry profitability will decline.

23. Companies in an industry - keep number of new entrants low by erecting barriers to entry. • A barrier to entry - a condition that creates a disincentive for a new company to enter an industry.

24. Traditional Barriers to Entry (G E C C A P) • Government and legal barriers • Economies of scale • Cost advantages independent of size • Capital requirements • Access to distribution channels • Product differentiation

25. Government and legal barrier: Some industries – require a license by a public authority e.g Education • Economies of scale: Occurs when mass-producing a product results in lower average cost e.gSimplysiti

26. Capital requirements: Need to invest large amount of money to gain entrance to an industry. E.gAirasia • Cost advantages independent of size: Grounded on the company’s history such as cost of land, equipment, building in the past. E.gJakel

27. Access to distribution channels: Often hard to crack especially in crowded markets - convenience store market. E.g Colgate • Product differentiation: companies with strong brands are difficult to break into - without spending heavily on advertising. E.g Oral-B

28. Nontraditional Barriers to Entry • Difficult for start-ups to execute traditional barriers to entry - expensive - economies of scale because capital is tight. • Start-ups - rely on nontraditional barriers to entry to discourage new entrants. • ‘Passion First – IIUM’ 

30. Passion: If management team / employees - highly motivated • First Mover Advantage: If start-up pioneers an industry or a new concept - name recognition

31. Internet Domain Name: “spot-on” - to a specific product or service - give a start-up a meaningful advantage in terms of e-commerce opportunities. • Inventing A New Approach: If start-up invents a new approach to an industry and executes it in an exemplary fashion

32. Unique Business Model: Establish a network of relationships – makes business model work. • Management Team: World-class management team - may give potential rivals a pause before competing.

33. iii. Rivalry Among Existing companies • In most industries - major determinant of industry profitability - level of competition. • Some industries - fiercely competitive to point - prices are pushed below level of costs - industry-wide losses occur. • In other industries, competition is much less intense - price competition is controlled.

34. Factors affecting the intensity • Number and Balance of Competitors: More competitors - more likely will gain customers by cutting its price. Occurs more often - all competitors are about the same size - no clear market leader. E.g ??? • Degree of Difference Between Products: Commodity industries - tend to compete on price because little difference between one manufacturer’s products and another. E.g ???

35. Growth Rate of An Industry: Competition among companies in a slow-growth industry - stronger than among those in fast-growth industries. Slow-growth industry - must fight for market share - tempt them to lower prices. E.g ??? Fast-growth industries - enough customers to go around, making price-cutting less likely. E.g ???

36. Level of Fixed Cost: Companies – have high fixed costs must sell a higher volume of product to reach break-even point than companies with low fixed costs. Why? Anxious to fill capacity - this anxiety may lead to price-cutting.

37. iv. Bargaining Power of Suppliers • Can suppress profitability of the industries - by raising prices or reducing quality of the components. E.g. Proton parts • If a supplier: Reduces quality of components - quality of finished product will suffer - manufacturer will have to lower its price. • Powerful relative to companies / manufacturers

38. Supplier Concentration: Only a few suppliers - supply a critical product to a large number of buyers - supplier has an advantage. E.g ??? • Switching Cost: Fixed costs 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. E.g. ???

39. Attractive of Substitutes: Supplier power is enhanced - no attractive substitutes for product or services the supplier offers. E.g. What PC industry can do when Microsoft raise prices - no practical substitutes. • Threat of Forward Integration: Supplier power is enhanced - a credible possibility – supplier might enter buyer’s industry. E.g. Microsoft’s power as a supplier – enter PC industry

40. v. Bargaining Power of Buyers • Can suppress the profitability – by demanding price concessions or increases in quality. • Automobile industry is dominated by a handful of large companies - buy products from thousands of suppliers. • Allows automakers (e.g. Proton, Perodua) to suppress profitability - by demanding price reductions.

41. Buyer Group Concentration: Only a few large buyers - can pressure the suppliers to lower costs (e.g. Proton, Perodua) • Buyer’s Cost: The greater the importance of an item - the more sensitive - to the price. E.g. If component sold represents 50% of cost - Proton will bargain hard to get the best price.

42. Degree of Standardisation: Degree to which a supplier’s product differs from its competitors affects buyer’s bargaining power. E.g. DayaBersih - purchasing a standard product - ‘chemical product’, can play one supplier against another until it gets the best - price and service.

43. Factors affecting the ability of buyers to exert pressure on suppliers • Threat of Backward Integration: Power of buyers is enhanced - a credible threat - buyer might enter supplier’s industry. E.g. PC manufacturers can threaten to make their own monitors if price gets too high.

44. 4. Value of Five Forces Model • First Application • Can be used to assess the industry attractiveness by determining the level of threat to its profitability for each force. • Result - if a company filled out the form and several of the threats to industry profitability were high - need to reconsider

45. Determining the Attractiveness of an Industry Using Five Forces Model

46. Second Application • Can apply to help determine whether it should enter an industry by answering several key questions. • Questions - help to project the potential success of a new venture

47. Pose Questions to Determine the Potential Success

48. 5. Competitor Analysis • What? • A detailed analysis of a company’s competition. • Helps understand positions of major competitors + opportunities available. • How? 2 ways – competitive intelligence exercise and competitive analysis grid

49. Identifying Competitors Types of Competitors New Ventures Face

50. a. Competitive Intelligence • Information gathered by a company to learn about its competitors • Collects competitive intelligence in a professional and ethical manner.