Week 3 - Entrepreneurship and start-ups

Conducting an Industry Analysis

Overview

• Focus on understanding the industry structure, analyzing competitive environments, and applying various frameworks for assessment.

Learning Objectives

• Analyze macro environment with PESTEL analysis.

• Understand demand and supply relationships.

• Analyze industry dynamics using Porter’s Five Forces model.

• Examine industry structure and competitive environment.

1. Environment Analysis

1.1 Layers of the Business Environment

• Industry: Group of firms producing similar products.

  • Example: Automobile vs. Airline.

• Market: Customer group for specific products.

  • Example: Luxury car market in Germany.

• Sector: Broad industry group, particularly in public sectors.

  • Example: Health sector.

• PEST(EL) Model: Used for macro-environment analysis.

• Porter’s Five Forces: Analyzes competition within a specific industry or sector.

1.2 Analyzing with PEST(EL)

• Political:

  • Government stability, taxation policy, foreign trade regulations, social welfare policy.

  • Concerns include the role of state, political risk, lobbying influence, and trade block changes (e.g., EU expansion, Brexit).

• Economic:

  • Business cycles, GNP trends, interest rates, inflation, unemployment, disposable income.

  • Economic environment impacts customer spending behavior and can lead to government-imposed economic incentives.

• Socio-Cultural:

  • Demographics, income distribution, social mobility, education.

  • Social shifts signal opportunities for businesses (e.g., healthcare demand, lifestyle changes).

• Technological:

  • Innovation, technology transfer, R&D efforts.

  • Influential changes through communication improvements and online retail trends.

• Environmental:

  • Green aspects, energy consumption, waste.

  • Businesses must adapt to environmental regulations and public sentiment about sustainability.

• Legal:

  • Competition law, safety regulations, health policy.

  • Legal frameworks dictate operational parameters and the extent of market competition.

1.3 Using the PESTEL Framework

• Helps identify industry threats and opportunities, focusing on external factors that affect market structure and competition.

1.4 Targets of the External Analysis

• Understand forces affecting industry structure related to technology and globalization, including market characteristics and costs.

2. Industry Analysis - Market and Competition

2.1 The Forces of Demand and Supply

• Demand: Customer willingness and ability to purchase products.

• Supply: Quantity provided by sellers at different price levels.

• Demand Curve: Represents how much of a product consumers will buy at varying prices.

• Supply Curve: Shows quantity suppliers are willing to provide at different prices.

2.4 Equilibrium Interaction

• Equilibrium Point: Where supply equals demand; dynamic based on changing environmental factors.

2.5 Competition in Free-Market Systems

1. Monopoly: One company dominates; significant pricing control.

2. Pure Competition: Many buyers/sellers; prices influenced minimally.

3. Monopolistic Competition: Differentiated products; firms have some pricing power.

4. Oligopoly: Few suppliers; can exert considerable price control.

5. Pure Monopoly: One supplier with absolute market control.

6. Regulated Monopoly: Government-mandated monopoly with price regulation.

2.6 Business Definition

• Profit-seeking organization aiming to meet customer needs. Key profitability factors include product value, competition intensity, and bargaining power.

2.7 The Five Forces Framework

• Bargaining Power of Buyers: High when buyers are concentrated or have switching costs.

• Bargaining Power of Suppliers: Strong when few suppliers exist or provide specialized inputs.

• Threat of Entry: Lower when barriers such as economies of scale and legal restrictions exist.

• Threat of Substitutes: Increased when alternatives offer better price-performance ratios.

• Rivalry Among Competitors: Heightened by equal-sized competitors in a mature market with high fixed costs.

2.8 Implications of Five Forces Analysis

• Assesses industry attractiveness and identifies strategic actions to influence the competitive landscape.

2.9 Spectrum of Industry Structure

• Understanding the nuances within industry classification is essential for proper application of strategies.

2.10 Issues in Five Forces Analysis

• Limitations include static modeling, defining industry boundaries, and considering technological convergence.

2.11 The Net Value

• Demonstrates value-creating cooperation and competition among firms, emphasizing complementors and competitors.

2.12 Industry Life Cycle and Five Forces Model

• Industry stages: Development, Growth, Shake-out, Maturity, Decline – each stage has distinct characteristics and competitive dynamics.