Chapter
5
Industry and Competitor
Analysis
Opening prOFile
Greenvelope
occupying a unique position in an evolving industry—and thriving
• Web: www.greenvelope.com • Facebook: Greenvelope • Twitter: @Greenvelope
I
t was one of those moments in time when a business idea was born. Sam Franklin’s
family received a wedding invitation in the mail, which was printed on card stock.
Card stock is a type of paper that is thicker and more durable than normal writing
paper. Because most wedding invitations are ultimately thrown away,
that got Franklin thinking there might be a better way. At roughly the learning Objectives
same time, Franklin read an article in USA Today about wedding inviAfter studying this chapter you should be
tations. The article said that in the previous year, 1.2 million wedding ready to:
invitations were sent out by the free online service Evite. While Evite
1. Explain the purpose of an industry
is free, the invitations include ads, which to Franklin seemed a little
analysis.
unseemly. Franklin’s idea was to create a paid solution for sending
2.
Identify and discuss the five comwedding invitations online that didn’t include ads and would be a
petitive forces that determine industry
cleaner and a more elegant experience for everyone involved.
profitability.
That was mid-2008. Franklin took a year off from school so he
3. Explain the value that entrepreneurial
firms create by successfully using the
could build on his idea. He entered Washington University in St. Louis,
five forces model.
Missouri, as a freshman in 2009. He followed through with the idea and
4.
Identify the five primary industry types
launched Greenvelope, the name he chose for the company, literally
and the opportunities they offer.
from his dorm room. He invested $50,000 in start-up funds—half from
5. Explain the purpose of a competitor
a loan from a family member and half from savings he accumulated
analysis and a competitive analysis grid.
during high school—and created the back end of the company’s website and 20 templates for wedding invitations. He also developed software that mimicked
the experience of opening a traditional printed invitation. Greenvelope’s first customers
were secured by buying Google AdWords for people who were searching for terms like
“e-mail wedding invitations” or “e-mail save the date.” The company initially gave away
e-mail “save the date” messages and made money by encouraging people to upgrade
to paid invitations. An added benefit of Greenvelope’s offering was cost savings. At the
time, it cost couples about $650 (on average) to print and mail invitations for a 100-guest
wedding. Greenvelope offered template packages starting at $100 for up to 300 guests.
When Franklin started analyzing his initial sales data, he realized that engaged couples were only part of his customer base. To his surprise, businesses and individuals
were customizing the wedding templates to send invitations for a variety of purposes,
including corporate events. That realization prompted Franklin to widen his vision for
Greenvelope, adding business templates to the company’s offerings as a result.
Midway through his degree program at Washington University, Franklin returned
to Seattle, his hometown, to work on Greenvelope full time. The way the Greenvelope
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site works is that a customer creates an account, selects an invitation, and then loads
the e-mail invitation list into a spreadsheet. The invitations are then delivered via e-mail
in a personalized spinning envelope (with the guest’s name on the front) that emulates
the fun and excitement of opening a traditional paper invitation. The digital invitations
look like real paper. An advanced RSvP tracking system allows customers to see which
invites have been opened, which haven’t been opened, and which were undeliverable
for whatever reason. When guests RSvP, they can select meal options, make song
requests, write a note to the bride or groom, or respond to any question that the customer sets up. If someone is on the invitation list that doesn’t have an e-mail address
or never opens the electronic invitation, a paper version of the invitation can be printed
from the Greenvelope site. The invitation can then be sent by regular mail.
Greenvelope currently has five full-time employees with part-time employees used
as needed. An in-house design staff works with freelance designers and artists who
create the invitation and are paid a commission when their designs are picked. Many of
the designs are stylish and inviting and objectively rival handmade invitations. Currently,
roughly 60 percent of Greenvelope’s sales are for wedding invitations, with the remaining
40 percent being for graduation announcements, baby showers, birthdays, corporate
events, and a variety of other purposes.
An integral part of Greenvelope’s offering is the opportunity to participate in environmental sustainability. Sam Franklin grew up in Seattle, and spent his childhood camping, fishing, and hiking. Through those experiences, he gained a deep appreciation for
the outdoors. Greenvelope donates 1 percent of its revenue each quarter to Mountains
to Sound, a nonprofit organization that supports the greenway along the I-90 corridor
in northwest Washington State. These donations were made even before the firm was
earning profits. The fact that the company’s electronic invitations replace paper invitations, which is an environmental plus, is also a key facet of how it operates.
Greenvelope’s main competitors include Paperless Post, a recently launched
venture-capital-funded electronic invitation start-up, Evite, and old-fashioned snail mail.
The company feels that it has sufficiently differentiated itself through its diverse collection of designs, its outstanding customer service, and its brand. An interesting facet of
what Greenvelope does is the viral nature of its offering. Towards the bottom of each of
its invitations is an unobtrusive statement that says “Powered by Greenvelope” with the
Greenvelope logo. If recipients click on the logo, they are directed to the Greenvelope
website. This is the manner in which Greenvelope obtains many of its new customers.
Greenvelope envisions a bright future. As time moves on, the company believes
that people will become increasing comfortable performing the majority of their tasks
online—which bodes well for its online electronic invitation service. Greenvelope also
believes that sufficient barriers to entry have been put in place that will enable it to
maintain a leadership position in the invitation industry. The strength of its brand, its
network of freelance designers, its social mission, and the functionality of its website
are all factors that place Greenvelope in an enviable position in the invitation industry.
G
reenvelope is a success in part because of Sam Franklin’s ability to analyze the invitation industry and precisely position Greenvelope within it.
In this chapter, we’ll look at industry analysis and competitor analysis.
The first section of the chapter considers industry analysis, which is business
research that focuses on the potential of an industry. An industry is a group
of firms producing a similar product or service, such as music, pilates and
yoga studios, and solar panel manufacturing. Once it is determined that a new
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venture is feasible in regard to the industry and the target market in which it
intends to compete, a more in-depth analysis is needed to learn the “ins and
outs” of the chosen industry. The in-depth analysis helps a firm determine
if the niche or target markets it identified during its feasibility analysis are
accessible and which ones represent the best point of entry for the new firm.
We focus on competitor analysis in the chapter’s second section. A competitor analysis is a detailed evaluation of a firm’s competitors. Once a firm decides
to enter an industry and chooses a market in which to compete, it must gain an
understanding of its competitive environment. We’ll look at how a firm identifies
its competition and the importance of completing a competitive analysis grid.
industry analysis
When studying an industry, an entrepreneur must answer three questions before pursuing the idea of starting a firm. First, is the industry accessible—in
other words, is it a realistic place for a new venture to enter? Second, does the
industry contain markets that are ripe for innovation or are underserved? Third,
are there positions in the industry that will avoid some of the negative attributes
of the industry as a whole? It is useful for a new venture to think about its position at both the company level and the product or service level. At the company
level, a firm’s position determines how the company is situated relative to its
competitors, as discussed in Chapter 4. For example, Fresh Healthy Vending
has positioned itself as a vending machine provider that specializes in healthy
alternatives to traditional vending machine snack foods and beverages. The company’s refrigerated machines offer carrots, yogurt, smoothies, granola bars, and
beverages such as milk, juice, and teas. This is a much different position than
the vending machine providers that offer the standard fare such as chips, pretzels, salted peanuts, candy bars, sports drinks, and sodas.
The importance of knowing the competitive landscape, which is what an industry is, may have been first recognized in the fourth century bc by Sun Tzu, a
Chinese philosopher. Reputedly he wrote The Art of War to help generals prepare
for battle. However, the ideas in the book are still used today to help managers
prepare their firms for the competitive wars of the marketplace. The following
quote from Sun Tzu’s work points out the importance of industry analysis:
We are not fit to lead an army on the march unless we are familiar with the face of
the country—its pitfalls and precipices, its marshes and swamps.1
These words serve as a reminder to entrepreneurs that regardless of how eager they are to start a business, they are not adequately prepared until they
are “familiar with the face of the country”—that is, until they understand the
industry or industries they plan to enter and in which they intend to compete.
It’s also important to know that some industries are simply more attractive than others in terms of their annual growth rate and other factors. For
example, according to IBISWorld the industry for e-book publishing is expected
to grow at an annual rate of 7.5 percent over the next five years. For the same
period, the industry for traditional book publishing is expected to grow at an
annual rate of 0.7 percent. What this means is that the conditions for growing a company are significantly more favorable in the e-book industry than in
the traditional book publishing industry.2 These types of differences exist for
comparisons across other types of industries. The differences can be mitigated
some by firm-level factors, including a company’s products, culture, reputation, and other resources.3 Still, in various studies researchers have found that
from 8 to 30 percent of the variation in firm profitability is directly attributable
to the industry in which a firm competes.4 As a result, the overall attractiveness of an industry should be part of the equation when an entrepreneur
learning Objective
1. Explain the purpose of an
industry analysis.
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decides whether to pursue a particular opportunity. Studying industry trends
and using the five forces model are two techniques entrepreneurs have available for assessing industry attractiveness.
Studying industry trends
The first technique that an entrepreneur has available to discern the attractiveness of an industry is to study industry trends. Environmental and business
trends are the two most important trends for entrepreneurs to evaluate.
Environmental Trends As discussed in Chapter 2, environmental trends
are very important. The strength of an industry often surges or wanes not so
much because of the management skills of those leading firms in a particular
industry, but because environmental trends shift in favor or against the products or services sold by firms in the industry.
Economic trends, social trends, technological advances, and political and
regulatory changes are the most important environmental trends for entrepreneurs to study. For example, companies in industries selling products to
seniors, such as the eyeglasses industry and the hearing aid industry, benefit
from the social trend of the aging of the population. In contrast, industries
selling food products that are high in sugar, such as the candy industry and
the sugared soft-drink industry, suffer as the result of a renewed emphasis on
health and fitness. Sometimes there are multiple environmental changes at
work that set the stage for an industry’s future. This point is illustrated in the
following statement from IBISWorld’s assessment of the future of the motorcycle dealership and repair industry. After first reporting that motorcycle sales
are anticipated to increase at an annualized rate of 2.3 percent between 2014
and 2018 to reach a sales volume of $25.2 billion, the report goes on to say:
With more money in their pockets, consumers will head to motorcycle lots again;
with favorable consumer sentiment about the future of the economy, consumers
will resume purchasing industry products. Furthermore, the tight lending standards of the past are projected to dissipate and more financing will be available
for consumers to use when purchasing a motorcycle. High fuel prices will also
feed into industry demand as some consumers switch from cars to motorcycles.5
This short assessment about sales in the motorcycle industry illustrates the
degree to which environmental trends affect an industry’s prospects. Note that
nothing is said about improvements in the management of motorcycle dealerships or innovation in the motorcycle industry. The somewhat positive assessment of the motorcycle industry’s future is tied to an improved U.S. economy, a
loosening of tight credit standards, and high fuel prices. High fuel prices work to
the advantage of the motorcycle industry because motorcycles use less fuel than
cars. Similar forces are at work in all industries.
Business Trends Other trends affect industries that aren’t environmental
trends per se but are important to mention. For example, the firms in some industries benefit from an increasing ability to outsource manufacturing or service
functions to lower-cost foreign labor markets, while firms in other industries
don’t share this advantage. In a similar fashion, the firms in some industries are
able to move customer procurement and service functions online, at considerable cost savings, while the firms in other industries aren’t able to capture this
advantage. Trends such as these favor some industries over others.
It’s important that start-ups stay on top of both environmental and business
trends in their industries. One way to do this is via participation in industry trade
associations, trade shows, and trade journals, as illustrated in the “Partnering
for Success” feature.
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Partnering for SucceSS
Three Ts That Are Important for Becoming Active in an Industry: Trade
Associations, Trade Shows, and Trade Journals
O
ne thing that’s important for a start-up is to become
active in the industry it’s entering. Activity leads to
learning about and understanding the industry, finding business partners, and becoming recognized as an
industry leader. Three important Ts that lead to industry
activity are trade associations, trade shows, and trade
journals. Start-ups should consider utilizing these Ts as a
part of their early and ongoing activities.
trade associations
A trade association (or trade group) is an organization
that firms in the same industry form for the purpose of
collecting and disseminating trade information, offering
legal and technical advice, furnishing industry-related
training, and providing a platform for collective lobbying. In addition to promoting industry-related issues,
trade associations typically provide a variety of other
services to their members. For example, the American
Watchmakers-Clockmakers Institute, which is a trade
association of watchmakers and clockmakers, provides
its members with training, a database of hard-to-find
parts, technical support for watch and clock repair, bulletins with up-to-date product information, and an extensive library of industry-specific educational material.6
Trade associations are typically governed by a paid
staff and a volunteer board. Busy CEos and entrepreneurs
are motivated to serve on trade association boards, not
only to influence the direction of the associations but because their service provides them visibility and a platform
to network closely with other members of the association.
These types of interactions can lead to businesses forming
partnerships and working together in other ways.
There are 7,600 national trade associations in the
United States. The vast majority have websites that list
their activities and their members.
trade shows
A trade show (or a trade fair) is an exhibition organized
to create opportunities for companies in an industry to
showcase and demonstrate their products and services.
Some trade shows are open to the public, while others
can only be attended by company representatives and
members of the press. over 10,000 trade shows are
held annually in the United States. There are several online directories, such as the Trade Show news network
(www.tsnn.com), that help organizers, attendees, and
marketers identify the most appropriate trade shows to
attend. The largest trade show in the United States is the
International Consumer Electronics Trade Show, which is
held every January in Las vegas, and is not open to the
public. In 2014, it included more than 2,700 exhibitors,
150,000 attendees, and 5,000 tech journalists.
Along with displaying their products and services,
businesses attend trade shows to study their rivals, meet
members of the press, and network with industry participants. Companies must rent exhibit space at trade
shows. Some of the high-quality shows, which usually
last just under a week, cost upward of $20,000 to attend.
Small companies are often able to share exhibit space
and split the cost. Trade shows offer prime opportunities
for networking in order to generate business and to establish new relationships and nurture existing ones. In fact,
there are many articles and “how-to” guides published in
periodicals and posted on websites that teach businesses
how to maximize their time at trade shows and establish
business relationships.
trade journals
Trade journals or magazines are usually published by trade
associations and contain articles and advertising focused
on a specific industry. very little general-audience advertising appears in trade journals. They may also include
industry-specific job notices and classified advertising.
Some trade journals are available to the general public, while others are very specifically controlled—meaning that you must be an industry participant to receive
the journal. This practice ensures advertisers that their
ads will be viewed by people in their target audience.
Many of the articles in trade journals are written about
companies in the industry. It enhances the stature and
visibility of a company to have a favorable article written
about it in a premier industry trade journal.
Along with trade journals, some industries have peerreviewed journals that contain both technical articles
and heavy advertising content. The articles are often coauthored by people who work for vendors that advertise
in the journal. BioTechniques, which is concerend with the
life sciences area, is an example of an industry-specific
peer-reviewed journal that follows this format. These journals blur the distinction somewhat between trade journals
and peer-reviewed journals.
Although trade journals do not provide the direct networking opportunities that trade associations and trade
shows do, the visibility a company can obtain by being
featured in an article or by running ads can result in multiple positive outcomes.
Questions for Critical Thinking
1. Pick an industry in which you have an interest. Make a
list of the premier trade associations, trade shows, and
trade journals associated with that industry.
2. How can an entrepreneur assess whether offering to
serve in a leadership capacity in a trade association,
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on a voluntary basis, will be worth the time and effort?
Establish a set of criteria that you would follow if making this type of decision.
3. Spend some time looking at the organic Trade
Association. Make a list of networking opportunities
available via membership in this organization.
4. What are the risks involved with networking? For
example, are there risks involved with sharing information with industry participants about how your
firm competes? How can a company strike the
right balance between giving out enough information about itself to attract the attention of potential
partners without divulging too much proprietary
information?
Sources: American Watchmakers-Clockmakers Institute home
page, www.awci.com (accessed February 18, 2014); B. Barringer
and J. Harrison, “Walking a Tightrope: Creating value Through
Interorganizational Relationships,” Journal of Management 26, no.
3, 1999: 367–403; organic Trade Association home page, www.
craftandhobby.org (accessed February 18, 2014).
the Five Forces Model
learning Objective
2. Identify and discuss the
five competitive forces
that determine industry
profitability.
The five forces model is a framework entrepreneurs use to understand an
industry’s structure. Professor Michael Porter developed this important tool.
Shown in Figure 5.1, the framework is comprised of the forces that determine
industry profitability.7 These forces—the threat of substitutes, the threat of new
entrants (that is, new competitors), rivalry among existing firms, the bargaining
power of suppliers, and the bargaining power of buyers—determine the average
rate of return for the firms competing in a particular industry (e.g., the restaurant industry) or a particular segment of an industry (e.g., the fast-casual segment of the restaurant industry).
Each of Porter’s five forces affects the average rate of return for the firms
in an industry by applying pressure on industry profitability. Well-managed
companies try to position their firms in a way that avoids or diminishes these
forces—in an attempt to beat the average rate of return for the industry. For
example, the rivalry among existing firms in the wedding invitation industry is
high. Greenvelope has diminished the impact of this threat to its profitability
by selling customized wedding invitations online. Compared to traditional wedding invitation services, this approach lowers the cost to the consumer and
provides a high profit margin per order for Greenvelope.
In his book Competitive Advantage, Porter points out that industry profitability is not a function of only a product’s features. Although the book
was published in 1980 and the dynamics of the industries mentioned have
changed, Porter’s essential points still offer important insights for entrepreneurs such as the insight suggested by the following quote:
Industry profitability is not a function of what the product looks like or whether it
embodies high or low technology but of industry structure. Some very mundane
industries such as postage meters and grain trading are extremely profitable, while
some more glamorous, high-technology industries such as personal computers
and cable television are not profitable for many participants.8
The five competitive forces that determine industry profitability are described
next. As mentioned in previous chapters, industry reports, produced by
companies such as IBISWorld, Mintel, and Standard & Poor’s NetAdvantage,
FigurE 5.1
Forces That Determine
Industry Profitability
Threat of
Substitutes
Threat of
New Entrants
Bargaining Power
of Suppliers
Rivalry Among
Existing Firms
Bargaining Power
of Buyers
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provide substantive information for analyzing the impact of the five forces on
specific industries. All three of these resources are available free through many
university library websites and are highlighted in the Internet Resources Table
in Appendix 3.2.
threat of Substitutes
In general, industries are more attractive when the threat of substitutes is low.
This means that products or services from other industries can’t easily serve
as substitutes for the products or services being made and sold in the focal
firm’s industry. For example, there are few if any substitutes for prescription
medicines, which is one of the reasons the pharmaceutical industry has historically been so profitable. When people are sick, they typically don’t quibble
with the pharmacist about the price of a medicine. In contrast, when close
substitutes for a product do exist, industry profitability is suppressed because
consumers will opt not to buy when the price is too high. Consider the price
of airplane tickets. If the price gets too high, businesspeople will increasingly
switch to videoconferencing services such as Skype and GoToMeeting as a
substitute for travel. This problem is particularly acute if the substitutes are
free or nearly free. For example, if the price of express mail gets too high, people will increasingly attach documents to e-mail messages rather than sending
them via UPS or FedEx.
The extent to which substitutes suppress the profitability of an industry
depends on the propensity for buyers to substitute alternatives. This is why the
firms in an industry often offer their customers amenities to reduce the likelihood they’ll switch to a substitute product, even in light of a price increase. Let’s
look at the coffee restaurant industry as an example of this. The coffee sold at
Starbucks is relatively expensive. A consumer could easily find a less expensive
cup of coffee at a convenience store or brew coffee at home rather than pay
more at Starbucks. To decrease the likelihood that customers will choose either of these alternatives, Starbucks offers high-quality fresh coffee, a pleasant
atmosphere (often thought of as part of the “Starbucks experience”), and good
service. Starbucks doesn’t do this just so its customers don’t go to a different
Lucky Business/Shutterstock
This independently owned
coffee shop doesn’t just
sell coffee. It also offers
its patrons a convenient
and pleasant place to
meet, socialize, and
study. The shop offers
these amenities in part to
decrease the likelihood
that its customers will
“substitute” coffee at this
shop for a less expensive
alternative.
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coffee restaurant. It offers the service so its customers won’t switch to substitute products as well. Although this strategy is still working for Starbucks,
there have been times (such as during the recent economic slowdown) when
its effectiveness was reduced. Because of this, Starbucks is now experimenting
with offering less expensive coffees while maintaining its commitment to quality
and providing customers with what the firm believes is the unique Starbucks
experience.
threat of new entrants
In general, industries are more attractive when the threat of entry is low. This
means that competitors cannot easily enter the industry and successfully copy
what the industry incumbents are doing to generate profits. There are a number of ways that firms in an industry can keep the number of new entrants
low. These techniques are referred to as barriers to entry. A barrier to entry
is a condition that creates a disincentive for a new firm to enter an industry.9
Let’s look at the six major sources of barriers to entry:
■ Economies of scale: Industries that are characterized by large economies
of scale are difficult for new firms to enter, unless they are willing to accept
a cost disadvantage. Economies of scale occur when mass-producing a
product results in lower average costs. For example, Intel has huge microprocessor factories that produce vast quantities of computer chips, thereby
reducing the average cost of each chip produced. It would be difficult for a
new entrant to match Intel’s advantage in this area. There are instances in
which the competitive advantage generated by economies of scale can be
overcome. For example, many microbreweries have successfully entered
the beer industry by brewing their beer locally and relying on a local niche
market clientele. By offering locally brewed, high-quality products, successful microbreweries counter the enormous economies of scale (and the
lower price to consumers they permit) of major and often global brewers,
such as Anheuser-Busch InBev, which manages a portfolio of over 200
beer brands.10
■ Product differentiation: Industries such as the soft-drink industry
that are characterized by firms with strong brands are difficult to break
into without spending heavily on advertising. For example, imagine how
costly it would be to compete head-to-head against PepsiCo (owner of the
Pepsi brands) or Coca-Cola Company. Product innovation is another way
a firm can differentiate its good or service from competitors’ offerings.
Apple is an example of a company that has differentiated itself in laptop
computers by regularly improving the features on its line of MacBooks,
such as the MacBook Air, as well as the unqiuness of the accessories
customers can buy to enhance their experience as users. It does this to
not only keep existing customers and win new ones, but also to deter
competitors from making a big push to try to win market share from
Apple in the laptop computer industry.
■ Capital requirements: The need to invest large amounts of money to
gain entrance to an industry is another barrier to entry. The automobile
industry is characterized by large capital requirements, although Tesla,
which launched in 2003, was able to overcome this barrier and raise substantial funds by winning the confidence of investors through its expertise
and innovations in electric car technology. Current evidence suggests that
this firm may have potential to achieve long-term success. In early 2014
for example, Tesla reported results for the fourth quarter of 2013 that
exceeded analysts’ expectations and projected that sales of its Model S
electric sedan would increase by 55 percent in 2014 compared to 2013.11
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■ Cost advantages independent of size: Entrenched competitors may
have cost advantages not related to size that are not available to new
entrants. Commonly, these advantages are grounded in the firm’s history.
For example, the existing competitors in an industry may have purchased
land and equipment in the past when the cost was far less than new
entrants would have to pay for the same assets at the time of their entry.
■ Access to distribution channels: Distribution channels are often
hard to crack. This is particularly true in crowded markets, such as
the convenience store market. For a new sports drink to be placed on
a convenience store shelf, it typically has to displace a product that is
already there. If Greenvelope decided to start producing traditional wedding invitations and greeting cards, it would find it difficult to gain shelf
space in stationery stores where a large number of offerings from major
producers are already available to consumers.
■ Government and legal barriers: In knowledge-intensive industries,
such as biotechnology and software, patents, trademarks, and copyrights
form major barriers to entry. Other industries, such as banking and
broadcasting, require the granting of a license by a public authority.
When start-ups create their own industries or create new niche markets
within existing industries, they must create barriers to entry of their own to
reduce the threat of new entrants. It is difficult for start-ups to create barriers
to entry that are expensive, such as economies of scale, because money is usually tight. The biggest threat to a new firm’s viability, particularly if it is creating
a new market, is that larger, better-funded firms will step in and copy what it
is doing. The ideal barrier to entry is a patent, trademark, or copyright, which
prevents another firm from duplicating what the start-up is doing. Companies
like Greenvelope typically have trade secrets associated with the functionality of
their websites; in turn, trade secrets create a barrier to entry for a firm thinking about emulating the service provided by firms holding those secrets. The
strength of Greenvelope’s brand and the network of freelance designers and
artists that it has assembled to create its invitations are also aspects of its business model that would be difficult to copy. Apart from these types of options,
however, start-ups have to rely on nontraditional barriers to entry to discourage
new entrants, such as assembling a world-class management team that would
be difficult for another company to replicate. In Table 5.1, we provide a list of
nontraditional barriers to entry that are particularly suited to start-up firms.
rivalry among existing Firms
In most industries, the major determinant of industry profitability is the level of
competition among the firms already competing in the industry. Some industries are fiercely competitive to the point where prices are pushed below the level
of costs. When this happens, industry-wide losses occur. In other industries,
competition is much less intense and price competition is subdued. For example, the airline industry is fiercly competitive and profit margins hinge largely on
fuel prices and consumer demand. In contrast, the market for specialized medical equipment is less competitive, and profit margins are higher.
There are four primary factors that determine the nature and intensity of
the rivalry among existing firms in an industry:
■ Number and balance of competitors: With a larger number of competitors, it is more likely that one or more will try to gain customers by cutting
prices. Price-cutting causes problems throughout the industry and occurs
more often when all the competitors in an industry are about the same size
and when there is no clear market leader.
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TaBlE 5.1 nontraditional barriers to entry
Barrier to entry
explanation
example
Strength of management
team
If a start-up puts together a world-class management team,
it may give potential rivals pause in taking on the start-up in
its chosen industry.
Square
First-mover advantage
If a start-up pioneers an industry or a new concept within an
existing industry, the name recognition the start-up establishes
may create a formidable barrier to entry.
Facebook
Passion of management
team and employees
If the key employees of a start-up are highly motivated by its
unique culture, are willing to work long hours because of their
belief in what they are doing, and anticipate large financial gains
through stock options, this is a combination that cannot be
replicated by a larger firm. Think of the employees of a biotech
firm trying to find a cure for a disease.
Amgen
Unique business model
If a start-up is able to construct a unique business model and
establish a network of relationships that make the business
model work, this set of advantages creates a barrier to entry.
netflix
Internet domain name
Some Internet domain names are so “spot-on” in regard
to a specific product or service that they give a start-up a
meaningful leg up in terms of e-commerce opportunities.
Think of www.1800flowers.com, www.1800gotjunk.com, and
www.bodybuilding.com.
www.1800contacts.com
Inventing a new approach to
an industry and executing the
idea in an exemplary fashion
If a start-up invents a new approach to an industry and executes
it in an exemplary fashion, these factors create a barrier to entry
for potential imitators.
Cirque du Soleil
■ Degree of difference between products: The degree to which products
differ from one producer to another affects industry rivalry. For example,
commodity industries such as paper products producers tend to compete
on price because there is no meaningful difference between one manufacturer’s products and another’s.
■ Growth rate of an industry: The competition among firms in a slowgrowth industry is stronger than among those in fast-growth industries.
Slow-growth industry firms, such as insurance, must fight for market
share, which may tempt them to lower prices or increase quality to obtain
customers. In fast-growth industries, such as e-book publishing, there
are enough customers to satisfy most firms’ production capacity, making
price-cutting less likely.
■ Level of fixed costs: Firms that have high fixed costs must sell a higher
volume of their product to reach the break-even point than firms with low
fixed costs. Once the break-even point is met, each additional unit sold
contributes directly to a firm’s bottom line. Firms with high fixed costs are
anxious to fill their capacity, and this anxiety may lead to price-cutting.
Bargaining power of Suppliers
In general, industries are more attractive when the bargaining power of suppliers is low. In some cases, suppliers can suppress the profitability of the
industries to which they sell by raising prices or reducing the quality of the
components they provide. If a supplier reduces the quality of the components it
supplies, the quality of the finished product will suffer, and the manufacturer
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will eventually have to lower its price. If the suppliers are powerful relative to
the firms in the industry to which they sell, industry profitability can suffer.12
For example, Intel, with its Pentium chip, is a powerful supplier to the PC
industry. Because most PCs feature Pentium chips, Intel can command a
premium price from the PC manufacturers, thus directly affecting the overall
profitability of the PC industry. Several factors have an impact on the ability of
suppliers to exert pressure on buyers and suppress the profitability of the industries they serve. These include the following:
■ Supplier concentration: When there are only a few suppliers to provide
a critical product to a large number of buyers, the supplier has an advantage. This is the case in the pharmaceutical industry, where relatively few
drug manufacturers are selling to thousands of doctors and their patients.
■ Switching costs: Switching costs are the fixed costs that 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.
For example, suppliers often provide their largest buyers with specialized software that makes it easy to buy their products. After the buyer
spends time and effort learning the supplier’s ordering and inventory
management systems, it will be less likely to want to spend time and
effort learning another supplier’s system.
■ Attractiveness of substitutes: Supplier power is enhanced if there are
no attractive substitutes for the products or services the supplier offers.
For example, there is little the computer industry can do when Microsoft
and Intel raise their prices, as there are relatively few substitutes for these
firms’ products (although this is less true today than has been the case
historically).
■ Threat of forward integration: The power of a supplier is enhanced if
there is a credible possibility that the supplier might enter the buyer’s
industry. For example, Microsoft’s power as a supplier of computer operating systems is enhanced by the threat that it might enter the PC industry
if PC makers balk too much at the cost of its software or threaten to use
an operating system from a different software provider.
Bargaining power of Buyers
In general, industries are more attractive when the bargaining power of buyers (a start-up’s customers) is low. Buyers can suppress the profitability of
the industries from which they purchase by demanding price concessions
or increases in quality. For example, even in light of the problems it has encountered over the past several years, the automobile industry remains dominated by a handful of large automakers that buy products from thousands
of suppliers in different industries. This enables the automakers to suppress
the profitability of the industries from which they buy by demanding price
reductions. Similarly, if the automakers insisted that their suppliers provide better-quality parts for the same price, the profitability of the suppliers
would suffer. Several factors affect buyers’ ability to exert pressure on suppliers and suppress the profitability of the industries from which they buy.
These include the following:
■ Buyer group concentration: If the buyers are concentrated, meaning
that there are only a few large buyers, and they buy from a large number
of suppliers, they can pressure the suppliers to lower costs and thus affect
the profitability of the industries from which they buy.
■ Buyer’s costs: The greater the importance of an item is to a buyer,
the more sensitive the buyer will be to the price it pays. For example, if the
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component sold by the supplier represents 50 percent of the cost of the
buyer’s product, the buyer will bargain hard to get the best price for that
component.
■ Degree of standardization of supplier’s products: The degree to which
a supplier’s product differs from its competitors’ offering affects the buyer’s bargaining power. For example, a buyer who is purchasing a standard
or undifferentiated product from a supplier, such as the corn syrup that
goes into a soft drink, can play one supplier against another until it gets
the best combination of features such as price and service.
■ Threat of backward integration: The power of a buyer is enhanced if
there is a credible threat that the buyer might enter the supplier’s industry. For example, the PC industry can keep the price of computer monitors
down by threatening to make its own monitors if the price gets too high.
the value of the Five Forces Model
learning Objective
3. Explain the value that
entrepreneurial firms create
by successfully using the
five forces model.
Along with helping a firm understand the dynamics of the industry it plans to
enter, the five forces model can be used in two ways: (1) to help a firm determine whether it should enter a particular industry and (2) whether it can carve
out an attractive position in that industry. Let’s examine these two positive
outcomes.
First, the five forces model can be used to assess the attractiveness of an
industry or a specific position within an industry by determining the level of
threat to industry profitability for each of the forces, as shown in Table 5.2.
This analysis of industry attractiveness should be more in-depth than the less
rigorous analysis conducted during feasibility analysis. For example, if a firm
filled out the form shown in Table 5.2 and several of the threats to industry
profitability were high, the firm may want to reconsider entering the industry
or think carefully about the position it will occupy in the industry. In the restaurant industry, for example, the threat of substitute products, the threat of
new entrants, and the rivalry among existing firms are high. For certain restaurants, such as fresh-seafood restaurants, the bargaining power of suppliers
TaBlE 5.2 Determining the attractiveness of an industry Using
the Five Forces Model
threat to industry profitability
competitive Force
low
medium
high
Threat of substitutes
Threat of new entrants
Rivalry among existing firms
Bargaining power of suppliers
Bargaining power of buyers
instructions:
Step 1 Select an industry.
Step 2 Determine the level of threat to industry profitability for each of the forces
(low, medium, or high).
Step 3 Use the table to develop an overall feel for the attractiveness of the industry.
Step 4 Use the table to identify the threats that are most often relevant to industry profitability.
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may also be high (the number of seafood suppliers is relatively small compared
to the number of beef and chicken suppliers). Thus, a firm that enters the
restaurant industry has several forces working against it simply because of
the nature of the industry. To help sidestep or diminish these threats, it must
establish a favorable position. One firm that has accomplished this is Panera
Bread, as discussed in Case 5.1 at the end of this chapter. By studying the
restaurant industry, Panera found that some consumers have tired of fast food
but don’t always have the time to eat at a sit-down restaurant. To fill the gap,
Panera helped to pioneer a new category called “fast casual,” which combines
relatively fast service with high-quality food. Panera has been very successful
in occupying this unique position in the restaurant industry. You’ll learn more
about Panera Bread’s success while reading Case 5.1.
The second way a new firm can apply the five forces model to help determine
whether it should enter an industry is by using the model pictured in Figure 5.2
to answer several key questions. By doing so, a new venture can assess the
thresholds it may have to meet to be successful in a particular industry:
Question 1: Is the industry a realistic place for our new venture
to enter? This question can be answered by looking at the overall
attractiveness of an industry, as depicted in Table 5.2, and by assessing
whether the window of opportunity is open. It’s up to the entrepreneur to
determine if the window of opportunity for the industry is open or closed.
Question 2: If we do enter the industry, can our firm do a better job
than the industry as a whole in avoiding or diminishing the impact
of the forces that suppress industry profitability? Entering an
industry with a fresh brand, innovative ideas, and a world-class management team and performing better than the industry incumbents increases
the likelihood a new venture will be successful. This was the case when
Google entered the Internet search engine industry and displaced Yahoo
as the market leader. Outperforming industry incumbents can also be
achieved if a new venture brings an attractive new product to market that
is patented, preventing others from duplicating it for a period of time.
Question 3: Is there a unique position in the industry that avoids
or diminishes the forces that suppress industry profitability? As
we’ve described, this is the advantage that both Greenvelope and Panera
Bread have captured.
Question 4: Is there a superior business model that can be put
in place that would be hard for industry incumbents to duplicate? Keep in mind that the five forces model provides a picture of an
industry “as is,” which isn’t necessarily the way a new venture has to
approach it. Sometimes the largest firms in an industry are trapped by
their own strategies and contractual obligations, providing an opening
for a start-up to try something new. For example, when Dell started selling computers directly to consumers, its largest rivals—Hewlett-Packard,
Compaq, and IBM—were not able to respond quickly and effectively. They
were locked into a strategy of selling through retailers. If they had tried to
mimic Dell and sell directly to end users or customers, they would have
alienated their most valuable partners—retailers such as Sears and Best
Buy. However, with the passage of time, Dell’s competitors have learned
how to effectively and efficiently sell directly to consumers, largely erasing
Dell’s historic advantage in the process of doing so.
The steps involved in answering these questions are pictured in Figure 5.2.
If the founders of a new firm believe that a particular industry is a realistic place
for their new venture, a positive response to one or more of the questions posed
in Figure 5.2 increases the likelihood that the new venture will be successful.
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Is the industry
a realistic
place for a
new venture?
No
Reconsider
new venture.
Yes
Are there areas in
which we can avoid or
diminish the factors
that suppress industry
profitability?
Yes
A positive response to
any of these questions
increases the likelihood
of the new venture’s
success.
No
A negative response to
all three questions
indicates reconsidering
the new venture.
Is there a unique
position in the industry
that avoids or
diminishes the factors
that suppress industry
profitability?
Is there a superior
business model that
industry incumbents
would find hard to
duplicate?
FigurE 5.2
Using the Five Forces Model to Pose Questions to Determine the Potential Success of a new venture
industry types and the Opportunities
they Offer
learning Objective
4. Identify the five primary
industry types and the opportunities they offer.
Along with studying the factors discussed previously, it is helpful for a new venture to study industry types to determine the opportunities they offer.13 The five
most prevalent industry types, depicted in Table 5.3, are emerging industries,
fragmented industries, mature industries, declining industries, and global industries.14 There are unique opportunities associated with each type of industry.
Lisa S/Shutterstock
Home health care is an
example of a fragmented
industry. A fragmented
industry is fertile ground
for an entrepreneurial
start-up.
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163
TaBlE 5.3 industry structure and Opportunities
industry type
industry characteristics
opportunities
Emerging
industries
Recent changes in demand
or technology; new industry
standard operating procedures
have yet to be developed
First-mover
advantage
examples of entrepreneurial Firms
exploiting these opportunities
■ Brain Sentry’s device to help detect
sports-related concussions
■ Windspire in small-scale wind-generated power
■ Buzzy’s procedure that helps relieve the pain
and anxiety associated with getting a shot
Fragmented
industries
Large number of firms of
approximately equal size
Consolidation
■ Chipotle Mexican Grill in fast-casual
restaurants
■ 1-800-GoT-JUnK? in junk removal
■ Modcloth in women’s clothing
Mature
industries
Slow increases in demand,
numerous repeat customers,
and limited product innovation
Process and
after-sale service
innovation
■ Justin’s in peanut butter
■ Pure Fix Cycles in bicycles
■ Flings Bins in trash bags
Declining
industries
Consistent reduction in industry
demand
Leaders, niche,
harvest, and divest
■ nucor in steel
■ JetBlue in airlines
■ Cirque du Soleil in circuses
Global
industries
Significant international sales
Multinational and
global
■ PharmaJet in needleless injection systems
■ d.light in solar-powered lanterns
emerging industries
An emerging industry is a new industry in which standard operating procedures have yet to be developed. The firm that pioneers or takes the leadership
of an emerging industry often captures a first-mover advantage. A first-mover
advantage is a sometimes insurmountable advantage gained by the first company to establish a significant position in a new market.
Because a high level of uncertainty characterizes emerging industries, any
opportunity that is captured may be short-lived. Still, many new ventures enter
emerging industries because barriers to entry are usually low and there is no
established pattern of rivalry.
Fragmented industries
A fragmented industry is one that is characterized by a large number of firms
of approximately equal size. The primary opportunity for start-ups in fragmented
industries is to consolidate the industry and establish industry leadership as a
result of doing so. The most common way to do this is through a geographic rollup strategy, in which one firm starts acquiring similar firms that are located in
different geographic areas.15 This is an often observed path for growth for businesses such as auto repair shops and beauty salons. It is difficult for them to
generate additional income in a single location, so they grow by expanding into
new geographic areas via either organic growth or by acquiring similar firms.
mature industries
A mature industry is an industry that is experiencing slow or no increase
in demand, has numerous repeat (rather than new) customers, and has limited product innovation. Occasionally, entrepreneurs introduce new product
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innovations to mature industries, surprising incumbents who thought nothing
new was possible in their industries. An example is Steve Demos, the founder
of White Wave, a company that makes vegetarian food products. White Wave
introduced a new product—Silk Soymilk—into a mature industry—consumer
milk. Silk Soymilk became the best-selling soymilk in the country. Soymilk
isn’t really milk at all—it’s a soybean-based beverage that looks like milk and
has a similar texture. Still, it has made its way into the dairy section of most
supermarkets in the United States and has positioned itself as a healthy substitute for milk. Who would have thought that a major innovation was possible
in the milk industry?
The lure of mature industries, for start-ups, is that they’re often large
industries with seemingly vast potential if product and/or process innovations can be effectively introduced and the industry can be revitalized. This
is the hope for a company such as Beyond Meat, the subject of the You Be
the VC 5.1 feature. Beyond Meat is producing a plant-based substitute for
chicken strips, called Chichen-Free Strips, that replicate the look, taste,
and sensory experience of eating meat. The company is not targeting people
who are ultra careful about what they eat, but a more mainstream market
of people who are trying to eat healthier. Beyond Meat is now working on a
similarly healthy substitute for ground beef. Meat is a mature industry. If
Beyond Meat’s products can be effectively introduced into the marketplace
and it is successful in revitilizing the meat industry, the firm’s market potential is huge.
Declining industries
A declining industry is an industry or a part of an industry that is experiencing a reduction in demand. The renting of DVDs and video games by mail and
producing and distributing hard copy textbooks are examples of products associated with industries or segments of an industry that are in some state of
decline. Typically, entrepreneurs shy away from declining industries because
the firms in the industry do not meet the tests of an attractive opportunity as
we described in Chapter 2. There are occasions, however, when a start-up will
do just the opposite of what conventional wisdom would suggest and, by doing so, stakes out a position in a declining industry that isn’t being hotly contested. That is what Cirque du Soleil did in the circus industry.
Entrepreneurial firms employ three different strategies in declining industries. The first is to adopt a leadership strategy, in which the firm tries to
become the dominant player in the industry. This is a rare strategy for a startup in a declining industry. The second is to pursue a niche strategy, which
focuses on a narrow segment of the industry that might be encouraged to grow
through product or process innovation. The third is a cost reduction strategy,
which is accomplished through achieving lower costs than industry incumbents
through process improvements. Achieving lower costs allows a firm to sell its
product or service at a lower price, creating value for consumers in the process
of doing so. Initially a small firm but now quite large as a result of its success,
Nucor Steel revolutionized the steel industry through the introduction of the
“minimill” concept, and is an example of an entrepreneurially minded firm that
pursued this strategy. Historically, most steel mills in the United States used
large blast furnaces to produce a wide line of products; however, the scale of
these furnaces meant that firms had to produce and sell significant quantities
of their products in order to be profitable. In contrast, Nucor’s then-innovative
minimills were smaller and were used to produce a narrower range of products.
Of great importance too is the fact that minimills are energy efficient and make
high-quality steel.16 Nucor proved its concept and quickly found growth markets within the largely declining U.S. steel industry.
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165
global industries
A global industry is an industry that is experiencing significant international
sales. Many start-ups enter global industries and from day one try to appeal to
international rather than just domestic markets. The two most common strategies pursued by firms in global industries are the multidomestic strategy and
the global strategy. Firms that pursue a multidomestic strategy compete for
market share on a country-by-country basis and vary their product or service
offerings to meet the demands of the local market. In contrast, firms pursuing a global strategy use the same basic approach in all foreign markets.
The choice between these two strategies depends on how similar consumers’
tastes are from market to market. For example, food companies typically are
limited to a multidomestic strategy because food preferences vary significantly
from country to country. Firms that sell more universal products, such as athletic shoes, have been successful with global strategies. Entrepreneurial firms
can use both strategies successfully. The key to achieving success is gaining
a clear understanding of customers’ needs and interests in each market in
which the firm intends to compete.17
competitor analysis
After a firm has gained an understanding of the industry and the target market in which it plans to compete, the next step is to complete a competitor
analysis. A competitor analysis is a detailed analysis of a firm’s competition.
It helps a firm understand the positions of its major competitors and the opportunities that are available to obtain a competitive advantage in one or more
areas. These are important issues, particularly for new ventures.18 In the
words of Sun Tzu, quoted earlier in this chapter, “Time spent in reconnaissance is seldom wasted.”
First we’ll discuss how a firm identifies its major competitors. We’ll then
look at the process of completing a competitive analysis grid, which is a tool for
organizing the information a firm collects about its primary competitors.
identifying competitors
The first step in a competitive analysis is to determine who the competition is.
This is more difficult than one might think. For example, take a company such
as 1-800-FLOWERS. Primarily, the company sells flowers. But 1-800-FLOWERS
is not only in the flower business; in fact, because flowers are often given for
gifts, the company is also in the gift business. If the company sees itself in the
gift business rather than just the flower business, it has a broader set of competitors and opportunities to consider. In addition, some firms sell products or
services that straddle more than one industry. For example, a company that
makes computer software for dentists’ offices operates in both the computer
software industry and the health care industry. Again, this type of company has
more potential competitors but also more opportunities to consider.
The different types of competitors a business will face are shown in
Figure 5.3. The challenges associated with each of these groups of competitors
are described here:
■ Direct competitors: These are businesses that offer products or services
that are identical or highly similar to those of the firm completing the
analysis. These competitors are the most important because they are going
after the same customers as the new firm. A new firm faces winning over
the loyal followers of its major competitors, which is difficult to do, even
when the new firm has a better product.
learning Objective
5. Explain the purpose of a
competitor analysis and a
competitive analysis grid.
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FigurE 5.3
Types of Competitors
new ventures Face
Direct
Competitors
Indirect
Competitors
Future
Competitors
Businesses
offering identical or
similar products
Businesses
offering close
substitute
products
Businesses
that are not yet
direct or indirect
competitors but
could be at any time
■ Indirect competitors: These competitors offer close substitutes to the
product the firm completing the analysis sells. These firms’ products
are also important in that they target the same basic need that is being
met by the new firm’s product. For example, when people told Roberto
Goizueta, the late CEO of Coca-Cola, that Coke’s market share was at a
maximum, he countered by saying that Coke accounted for less than 2
percent of the 64 ounces of fluid that the average person drinks each day.
“The enemy is coffee, milk, tea [and] water,” he once said.19
■ Future competitors: These are companies that are not yet direct or indirect competitors but could move into one of these roles at any time. Firms
are always concerned about strong competitors moving into their markets. For example, think of how the world has changed substantially for
Barnes & Noble and other brick-and-mortar bookstores since Amazon.com
was founded. These changes are perhaps especially dramatic for Borders,
which filed for bankruptcy in 2011. Former competitor Barnes & Noble
bought Borders’s remaining assets (primarily its brand name) later in that
year. But this story has yet to reach a conclusion, in that in February of
2014, investment firm G Asset Management offered “to acquire a majority interest in Barnes & Noble Inc.” If this transaction takes place, G Asset
intends to split Barnes & Noble’s retail and e-reader businesses into separate operations.20 And, think of how smartphone technology continues to
change the nature of competition for a variety of firms, including those
selling entertainment services, telephone services, and the like.
It is impossible for a firm to identify all its direct and indirect competitors,
let alone its future competitors. However, identifying its top 5 to 10 direct competitors and its top 5 to 10 indirect and future competitors makes it easier for
the firm to complete its competitive analysis grid.
If a firm does not have a direct competitor, it shouldn’t forget that the status quo can be the toughest competitor of all. In general, people are resistant
to change and can always keep their money rather than spend it.21 A product
or service’s utility must rise above its cost, not only in monetary terms but also
in terms of the hassles associated with switching or learning something new,
to motivate someone to buy a new product or service.22
Creating meaningful value and sharp differentiation from competitors are
actions small firms in crowded industries can take to remain competitive and
gain market share. Three firms that have successfully accomplished this are
profiled in the “Savvy Entrepreneurial Firm” feature.
Sources of competitive intelligence
To complete a meaningful competitive analysis grid, a firm must first understand the strategies and behaviors of its competitors. The information that is
gathered by a firm to learn about its competitors is called competitive intelligence. Obtaining sound competitive intelligence is not always a simple task.
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167
Savvy entrePreneurial firm
Thriving in a Crowded Industry by Creating Meaningful Value and
Differentiation from Competitors
Hipmunk: Web: www.hipmunk.com; Facebook: Hipmunk; Twitter: @thehipmunk
Element Bars: Web: www.elementbars.com; Facebook: Element Bars; Twitter: @elementbars
BenchPrep: Web: www.benchprep.com; Facebook: BenchPrep; Twitter: @benchprep
F
irms do well in a crowded industry when two conditions exist: (1) they create meaningful value for
customers at a fair price and (2) they effectively
differentiate themselves from competitors. In fact, diminishing the impact of three of Porter’s five forces
rests largely on these factors. A firm is able to withstand rivalry among existing firms and is able to deter
substitutes and new entrants by creating value for its
customers and offering something that people can’t get
anywhere else.
The following are examples of three businesses that
are creating unique value in their industries and have differentiated themselves from their competitors. Each industry
is very competitive, yet these companies are growing and
thriving.
Hipmunk
Talk about a crowded industry, consider the options a
consumer has for booking an airline flight. Choices include tavel agents, airline websites, and online travel sites
like Travelocity or orbitz. never mind—Hipmunk, an online
travel service, launched in 2010, offering travelers what
they believe is an improved way to plan travel. Hipmunk’s
premise is that existing travel sites provide too much information in a less-than-optimal format. It differentiates
itself by tackling that problem and displaying results in a
more appealing manner.
Here’s how it works. For airline travel you go to
Hipmunk’s site and enter your departure airport, arrival location, departure date, and return date just like any other
travel site. Then things change. Instead of offering pages
of results, Hipmunk displays its results on a single page.
The flights are color coded—each color represents a
different airline. The flights are displayed as bars, and the
length of the flight corresponds to the width of the bar.
Flights can be sorted by price, time of day, and “agony,”
which is a score based on the best combination of price,
duration, and number of stops. The flights with the least
amount of agony are shown first. Flights that are similar
to the ones displayed, but are more expensive or have a
higher agony score, are automatically removed from the
results. Thus, the only results shown are the ones that
make the most sense to purchase.
Hipmunk doesn’t release booking numbers, but it
is reportedly gaining momemtum in the travel industry.
A similar easy-to-use interface is available for booking
hotel rooms. Hipmunk is aggressively moving into the
mobile market, and its app is highly ranked in the Apple
App Store.
element bars
Another tough industry is protien bars. Seriously, how
many choices does a consumer have for buying protein
bars at a store? In 2007 Element Bars launched with a
new twist in the energy bar market. The company would
differentiate itself by offering fresh, nutritious bars that
could be sold online and “customized” by its customers.
Here’s how Element Bars was orginally set up, and
how the company operates today. Customers log on
to Element Bars’s website, and in five steps they can
“build” their own energy bar. They are first asked to pick
a basic texture, with options such as Chewy, Crispy, and
Datey. They then add their choice of fruits, nuts, sweets,
and boosts (such as whey protein or fiber) to create their
customized bar. A nutrition label on the right portion of
the screen changes as ingredients are added, so the creator can see how different ingredients affect the calories
or the grams of saturated fat in the bar. After the bar is
built, the final step is for the consumer to name the bar
whatever he or she wants. once the order is placed, the
bar is made and is shipped in just a few days.
Along with selling customizable energy bars via the
Internet, Element Bars sells directly to speciality retailers who want to create their own branded energy bars.
Its difficlut for fitness centers, for example, to sell wellknown bars like Clif bars at a premium, when their members can buy the same bars at Walmart or a similar type
of outlet. By branding their own bar via Element Bars, a
fitness center can sell the bars for a premium and capture higher margins.
benchprep
BenchPrep is competing in the hyper-competitive test
prep industry. For standardized tests such as the SAT,
GRE, GMAT, LSAT, and MCAT, there are many print
test preparation guides, online courses, smartphone
apps, and face-to-face short courses taught on college and university campuses to help students prepare
for the tests. BenchPrep differentiates itself by selling
cross-platform test prep courses. What this means is
that not only can students access their courses on their
computers and mobile devices, they can also sync their
progresss so they can pick up right where they left off
regardless of what device they’re using. As a result, a
student could start a practice test on her/his laptop in
the morning, answer a few questions during the day on
an iPhone, and finish the test in the evening on a desktop computer.
(continued)
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BenchPrep differentiates itself in additional ways.
The company partners with the world’s top publishers,
authors, and subject matter experts in preparing its
courses. BenchPrep’s test preps give students progress
reports to show where they are excelling and where
performance needs to be improved. In addition, the test
preps have social features, and allow students to study
their progress and performance against other students
preparing for the same test.
Questions for Critical Thinking
1. What are the common attributes across the three companies in this feature? How do these attributes help the
companies thrive in otherwise competitive industries?
2. In what ways are each company’s features redefining
the customer experience in their industries?
3. of the three companies featured, which one do you think
has the most potential to remain competitive? Which
company do you think is the most vulnerable to increased
competition from competitors? Explain your answers.
4. Find an example of another company that is thriving
in a highly competitive industry. Analyze the company
and discern what sets it apart from its competitors.
Sources: Hipmunk, Hipmunk home page, www.hipmunk.com
(accessed February 19, 2014); Element Bars home page, www.
elementbars.com (accessed February 19, 2014); BenchPrep home
page, www.benchprep.com (accessed February 19, 2014); B. Sherr,
“App Watch: Making Test Preparation Mobile, Social,” Wall Street
Journal, november 1, 2010.
If a competitor is a publicly traded firm, a description of the firm’s business
and its financial information is available through annual reports filed with the
Securities and Exchange Commission (SEC). These reports are public records
and are available at the SEC’s website (www.sec.gov). If one or more of the
competitors is a private company, the task is more difficult, given that private
companies are not required to divulge information to the public. There are a
number of ways that a firm can ethically obtain information about its competitors. A sample of the most common techniques is shown in Table 5.4.
completing a competitive analysis grid
As we mentioned previously, a competitive analysis grid is a tool for organizing the information a firm collects about its competitors. It can help a
firm see how it stacks up against its competitors, provide ideas for markets to
TaBlE 5.4 sources of competitive intelligence
Source
Description/Benefit
Attend conferences and trade shows
Participants talk about the latest trends in the industry and display their most
current products.
Purchase competitors’ products
Purchasing and using a competitor’s products can provide insight into their
benefits and shortcomings. The purchase process itself can provide data about
how a competitor treats its customers.
Study competitors’ websites and
social media pages
Many companies put a lot of information on their websites, including product
information and the latest news about the company. The same goes for a
company’s pages on social media outlets, such as Facebook and Twitter.
Set up Google e-mail alerts
Google e-mail alerts are updates of the latest Google results, including press
releases, news articles, and blog posts, on any keywords of interest. you can set
up e-mail alerts using your company’s name or the name of a competitor.
Read industry-related books,
magazines, websites, and blogs
Many of these sources contain articles or features that have information about
competitors.
Talk to customers about what motivated
them to buy your product as opposed
to your competitor’s product
Customers can provide a wealth of information about the advantages and
disadvantages of competing products.
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pursue, and, perhaps most importantly, identify its primary sources of competitive advantage. To be a viable company, a new venture must have at least
one clear competitive advantage over its major competitors.
An example of a competitive analysis grid is provided in Table 5.5. This grid
is for Greenvelope, the online wedding invitation start-up featured at the beginning of the chapter. The main competitive factors in the industry, which include
online and traditional wedding invitation services, are cost, selection, customizable, presentation to invitee, turnaround time, no ads, green, and social consciousness/philanthropy. Some industry participants, such as Greenvelope,
also engage in philanthropy. (As highlighted previously, Greenvelope gives
1 percent of its revene each quarter to Moutains to Sound, a nonprofit organization that supports the greenway along the I-90 corridor of Northwest
Washington State.) These factors are placed on the vertical axis of Greenvelope’s
competitive analysis grid. The horizontal axis contains Greenvelope and its four
main competitors. In each box, Greenvelope rates itself against its main competitors. The purpose of this exercise is for a company to see how it stacks up
against its competitors and to illustrate the areas in which it has an advantage
(and has a disadvantage). For example, Greenvelope rates itself as superior to
its competitors in terms of presentation to invitee and social consciousness/
philanthropy. It will likely use this information in its advertising and promotions. An additional benefit of completing a competitive analysis grid is that it
helps a company fine-tune its offering. For example, Greenvelope rates itself as
“even” with its competitors on several criteria. It might use that knowledge to
look for ways to up its game on one or more of these criteria to increase its overall competitiveness in relation to its competitors.
As this discussion shows, analyzing competitors is a complex and challenging process. But, the link between understanding competitors and how
an entrepreneurial venture stacks up against them and the new firm’s success in both the short and long term is clear and strong. In the “What Went
Wrong?” feature, we describe the experiences of Digg. Once one of the hottest
Internet sites, this firm competed in a rapidly emerging industry. While reading about Digg, keep in mind the actions firms should take to understand
their competitors and to form a competitive analysis grid. In an overall sense,
might more effective work in terms of understanding its competitors and
their actions increase the likelihood of Digg’s competitive success?
TaBlE 5.5 competitive analysis grid for greenvelope
name
greenvelope
(electronic)
evite
(electronic)
paperless post
(electronic)
minted
(traditional)
local Stationery
Store (traditional)
cost
Even
Advantage
Even
Disadvantage
Disadvantage
Selection
Even
Even
Even
Even
Disadvantage
customizable
Even
Even
Even
Even
Even
presentation to invitee
Advantage
Even
Even
Even
Even
turnaround time
Even
Even
Even
Disadvantage
Disadvantage
no ads
Even
Disadvantage
Even
Even
Even
green
Even
Even
Even
Disadvantage
Disadvantage
Social consciousness/
philanthropy
Advantage
Disadvantage
Disadvantage
Disadvantage
Disadvantage
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What Went Wrong?
Digg: A Start-up That Lost Its Way and Its Place in Its Industry
a
t one time, Digg was one of the hottest sites on
the Internet. The site’s primary purpose was to
allow users to discover, share, and recommend
Web content. A user could submit an article or anything
posted on the Internet for consideration. other users either voted the article or page up (“dig”) or down (“bury”).
Although the voting took place on digg.com, many websites added “dig” buttons to their pages, allowing users
to vote as they surfed the Web. The end product was a
vibrant website with wide-ranging, constantly changing
lists of popular and trending content from around the
Internet.
Digg launched on December 4, 2004. At the height
of its popularity, 2007-2008, it was attracting over 236
million visitors annually. It had grown large enough that it
affected the traffic experienced by other websites. If an
article was submitted to Digg, and it made it to the front
page of digg.com (by enough users “digging” it), the site
the article was posted on would see a spike in traffic.
This phenomenon was referred to as the “Digg effect.”
In 2008, Digg was valued at more than $160 million. The
sky seemed to be the limit for Digg, its users, and its investors. Incredibly, by July 2012, Digg was a shadow of
its former self and was sold to Betaworks, a technology
development company, for pennies on the dollar. What
went wrong?
Several things went wrong with Digg, which caused
the firm to lose its way and its place in the Internet social media industry. First, at the same time Digg was
enjoying its height of popularity, Facebook and Twitter
were gaining momentum. Eventually, Facebook and
Twitter started eating away at Digg’s traffic, as they
morphed into places where people discovered the most
up-to-date news and Internet gossip, the main reason
for coming to Digg. Rather than remaining true to its
identity, Digg started emulating the best features of
Facebook, Twitter, and other social media websites.
To make matters worse, Digg started falling behind
Facebook and Twitter in terms of functionality. It took
several steps to post a link on Digg, whereas Facebook
and Twitter were simpler.
A second thing that hampered Digg was a poorly
executed relaunch. In early 2010 Digg announced that
its site would undergo an extensive overhaul, to freshen
it up and make it more user-friendly. Digg was losing
traffic and was desperate to win some back. The company was experiencing a technical problem concerning
the difficulty in scaling its MySQL database software,
so it decided to switch over to another open-source
system called Cassandra. Digg’s relaunch on August
25, 2010, was tarnished by site-wide bugs and glitches.
For weeks, the site frequently wasn’t available or was
unstable at best, and when users finally reached the
site, they complained about the new design and the
removal of many features that they liked. Reflecting on
this period in a 2012 Wall Street Journal article, Kevin
Rose, Digg’s founder and CEo, characterized the 2010
relaunch as botched and said that the company was
slow to respond to criticism.
A third problem Digg encountered was that while it
was supposedly “democratizing the Web” by allowing
users to vote on the articles that would appear on its
front page rather than editors selecting them, people
claimed that it was easy to game Digg’s system. Anyone
could submit an article, rally his friends, co-workers, and
others to vote up the story, and see the story rise to the
top of Digg’s rankings. once this practice became widely
known, users originally attracted to Digg thinking they
could submit an article and have it advance to Digg’s
front page strictly on its merits became disillusioned and
less interested in the site.
Questions for Critical Thinking
1. What lessons does Digg’s failure have for entrepreneurs who are studying entering the social media
industry?
2. Would you characterize the “Rivalry Among Existing
Firms” in the industry Digg competed in as high,
moderate, or low? To what degree was Digg able to
effectively diminish or suppress the negative effects
of the rivalry it experienced? What, if anything, should
Digg have done differently in this area?
3. If Digg had completed a competitive analysis grid
shortly before it relaunched in 2010, what factors
would you have placed on the vertical axis of the grid
and what companies would you have compared Digg
against? To what degree do you think Digg would have
favorably compared to its competitors?
4. What steps could Digg have taken, throughout the
life of its business, that may have enabled it to remain
competitive and still be a successful firm today?
Sources: S. E. Ante and J. Walker, “Digg Admits Missteps,” Wall
Street Journal, July 16, 2010, B7; M. Elgin, “Elgan: Why Digg
Failed.” Computerworld, March 19, 2011.
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Chapter Summary
lO1. To compete successfully, a firm needs
to understand the industry in which it
intends to compete. Industry analysis is
a business research framework or tool
that focuses on an industry’s potential.
The knowledge gleaned from this analysis
helps a firm decide whether to enter an
industry and if it can carve out a position
in that industry that will provide it a competitive advantage. Environmental trends
and business trends are the two main
components of “industry trends” that
firms should study. Environmental trends
include economic trends, social trends,
technological advances, and political and
regulatory changes. Business trends include other business-related trends that
aren’t environmental trends but are important to recognize and understand.
lO2. Firms use the “five forces model” to understand an industry’s structure. The parts
of Porter’s five forces model are threat
of substitutes, threat of new entrants,
rivalry among existing firms, bargaining
power of suppliers, and bargaining power
of buyers.
lO3. What entrepreneurs should understand
is that each individual force has the potential to affect the ability of any firm to
generate profits while competing in the
industry or a segment of an industry. The
challenge is to find a position within an
industry or a segment of an industry in
which the probability of the firm being
negatively affected by the five forces is
reduced. Additionally, successfully examining an industry yields valuable information to those starting a business. Armed
with the information it has collected, firms
are prepared to consider four industryrelated questions that should be examined before deciding to enter an industry.
These questions are: Is the industry a
realistic place for a new venture? If we
do enter the industry, can our firm do a
better job than the industry as a whole
in avoiding or diminishing the threats
that suppress industry profitability? Is
there a unique position in the industry
that avoids or diminishes the forces that
suppress industry profitability? Is there a
superior business model that can be put
in place that would be hard for industry
incumbents to duplicate?
lO4. There are five primary industry types entrepreneurial firms consider when choosing
the industry in which they will compete.
These industry types and the opportunities they offer are as follows: emerging industry/first-mover advantage; fragmented
industry/consolidation; mature industry/
emphasis on service and process innovation; declining industry/leadership, niche,
harvest, and divest; and global industry/
multidomestic strategy or global strategy.
lO5. A competitor analysis is a detailed analysis of a firm’s competition. It helps a firm
understand the positions of its major competitors and the opportunities that are
available to obtain a competitive advantage
in one or more areas. Direct competitors,
indirect competitors, and future competitors are the three groups of competitors a
new firm faces.
Successful competition demands that
a firm understand its competitors and the
actions they may take in the future. There
are a number of ways a firm can ethically
obtain the information it seeks to have
about its competitors, including attending
conferences and trade shows; purchasing
competitors’ products; studying competitors’ websites; setting up Google e-mail
alerts; reading industry-related books,
magazines, and websites; and talking to
customers about what motivated them to
buy your product as opposed to your competitor’s product.
A competitive analysis grid is a tool
for organizing the information a firm collects about its competitors. This grid can
help a firm see how it stacks up against
its competitors, provide ideas for markets
to pursue, and, perhaps most importantly,
identify its primary sources of competitive
advantage.
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Key Terms
barrier to entry, 156
competitive analysis grid, 168
competitive intelligence, 166
competitor analysis, 151
cost reduction strategy, 164
declining industry, 164
economies of scale, 156
emerging industry, 163
first-mover advantage, 163
fragmented industry, 163
geographic roll-up strategy,
163
global industry, 165
global strategy, 165
industry, 150
industry analysis, 150
leadership strategy, 164
mature industry, 163
multidomestic strategy, 165
niche strategy, 164
position, 151
Review Questions
5-1. What is an industry?
5-2. What is an industry analysis and why
is it important for a new firm to analyze
the industry in which it may choose to
compete?
5-3. What are the four primary categories of
environmental trends?
5-4. What are the five forces that determine an
industry’s profitability?
5-5. How can the threat of substitute products
suppress an industry’s profitability?
5-6. How can the threat of new entrants
suppress an industry’s profitability?
5-7. What are the six major sources of barriers to entry that can restrict a firm’s entry
into a market?
5-8. How does rivalry among existing firms
have the potential to suppress an industry’s profitability?
5-9. What are the four primary factors that play
a role in determining the nature and intensity of the bargaining power of suppliers?
5-10. How does the bargaining power of suppliers have the potential to suppress an industry’s profitability?
5-11. What are the four primary factors that
play a role in determining the nature
and intensity of the bargaining power of
buyers?
5-12. How does the bargaining power of buyers
have the potential to suppress an industry’s profitability?
5-13. What are the nontraditional barriers
to entry that are particularly suitable
5-14.
5-15.
5-16.
5-17.
5-18.
5-19.
5-20.
5-21.
5-22.
5-23.
5-24.
5-25.
5-26.
for entrepreneurial firms to study
when selecting an industry in which to
compete?
How can a start-up avoid or sidestep the
pressure applied by one of the five forces
on industry profitability by establishing a
unique “position” in an industry?
What are the characteristics of a fragmented industry?
What is the primary opportunity for new
firms in fragmented industries?
What are the characteristics of a mature
industry?
What is the primary opportunity for new
firms in a mature industry?
What is a global industry?
What are the two most common
strategies pursued by firms in global
industries?
What is the purpose of a competitor
analysis?
What are the differences among direct
competitors, indirect competitors, and
future competitors?
What is the meaning of the term competitive intelligence?
Why is it important for firms to collect
intelligence about their competitors?
What are three sources of competitive
intelligence that entrepreneurial firms
should feel comfortable using to better
understand their competitors?
What is the purpose of completing a
competitive analysis grid?
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Application Questions
5-27. Linda Henricks is thinking about starting
a firm in the home health care provider
industry. When asked by a potential investor if she had studied the industry, Linda
replied, “With the aging of the population
and the fact that people are living longer
than ever, the home health care provider
industry is so full of potential, it doesn’t
require formal analysis.” In what ways
will Linda limit her possibilities with the
potential investor if her current attitude
about the importance of industry analysis
doesn’t change?
5-28. The “You Be the VC 5.2” feature focuses
on Ubersense, a company in the sports
coaching industry. What environmental trends and business trends favor
Ubersense’s unique approach and
service?
5-29. Eric Andrews has been investigating the
possibility of starting a service that will
partner with grocery stores to provide a
delivery service for their customers. The
idea is that after purchasing their groceries, customers could go to a kiosk in
the store, pay a small fee, and have their
groceries delivered to their homes within
60 minutes. Which of the five forces in
Porter’s five forces model do you anticipate
will most strongly affect Eric’s potential
business and why?
5-30. Read Case 5.1, which focuses on Panera
Bread. What are some of the barriers
to entry a firm would have to deal with
and try to overcome if it tried to compete
against Panera Bread in the casual dining
segment of the restaurant industry?
5-31. As mentioned in this chapter, White Wave
Inc. produces Silk Soymilk, a product that
has done very well in the mature milk industry. Based on the material in this and
the first four chapters, why do you think
Silk Soymilk has been so successful?
5-32. Karen Sharp lives in a town of approximately 10,000 in Western Kentucky.
There isn’t a furniture store in the town;
Karen is thinking about opening one. She
has good business and marketing skills
based on previous work experience and
is confident she can operate the store
successfully. But, she isn’t certain that
a retail furniture store is an attractive
industry. What would you recommend
to Karen that she do to consider this
matter?
5-33. Trends in the motorcycle industry are
presented early in this chapter. Revisit
this issue by identifying the effects of
economic, demographic, and regulatory
changes that may affect the motorcycle
industry at the time you are reading
this book.
5-34. Your friend has developed what he believes is a novel floor cleaning product.
The advantage to this product, he tells
you, is that because of the unique chemicals used to create the cleaning fluid,
people are able to use a fraction of the
amount of fluid to clean floors compared
to the amount of fluid that is necessary
when using traditional, well-established
products. Your friend is convinced that
even Walmart will be willing to pay a
handsome amount to him in order to
stock and sell his product. Use your
knowledge about the power of buyers
to offer your friend a different perspective as to how Walmart might deal with
him as he tries to sell his product to this
giant firm.
5-35. Your friend, Lisa Ryan, is opening a
smoothie shop that will sell a variety of
smoothie drinks in the $5 to $7 price
range. When you ask her if she is worried that the steep price of her smoothies
might encourage prospective customers
to buy a soft drink or a sports drink instead of buying her product, Lisa says:
“You are right. This is a real concern I
have. Is there anything I can do to discourage potential customers from making
such a choice?” What information would
you provide to Lisa in response to her
question?
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you Be the vc 5.1 CoMPAny: Beyond Meat
• Web: www.beyondmeat.com • Facebook: Beyond meat • twitter: @Beyondmeat
Business idea: Provide consumers with plant-based
protein foods that take the animal out of meat—without
sacrificing the taste, chew, or satisfaction.
pitch: A number of factors motivate people to seek out
meat substitutes. Health benefits, animal welfare, lowering
greenhouse gas emissions, and bad press about the
poor conductions under which some animals raised for
slaughter are kept are some of these factors. Many of
the most common meat substitutes—tofu, bean burgers,
vegetable cutlets, and so on—lack bite, chew, juiciness,
and flavor. As a result, people try them for a while and then
return to traditional meat products. A parallel problem
exists regarding the demand for meat. Global demand for
meat has tripled in the last 40 years, driven by population
growth and an upward trend in per-capita consumption
of meat. Producing meat has significant environmental
implications. Animal agriculture is said to be responsible
for about 14.5 percent of human-induced greenhouse
gas emissions, more than the transportation sector. All
of these factors suggest that there is a big opportunity
for a company that can produce a tasty and affordable
plant-based substitute for meat, and can do it in a way
that is friendlier to the environment than traditional meat
production.
Beyond Meat is positioning itself to be that company. on
the taste and healthfulness side, the company’s first product line, Chicken-Free Strips, are made with plant-based
proteins that legitimately replicate the sensory experience
of eating meat. The product is also gluten-free and is free
of trans and saturated fat, cholesterol, dairy, eggs, hormones, and antibiotics, so it’s better for you than actual
chicken. on the cost and environmental side, Beyond
Meat’s Chicken-Free Strips require less land and water
to raise than real chickens and, when produced at a sufficient scale, cost less to make.
Beyond Meat’s products are the result of more than 15
years of research conducted by two scientists at the
University of Missouri-Columbia, Fu-Hung Hsieh and
Harold Huff. The company’s Chicken-Free Strips have
been precisely engineered to look like chicken, taste like
chicken, and especially to feel like chicken when you take
a bite. The company is presently working on a Beyond
Meat substitute for ground beef that can be worked
into tacos, lasagna, or any other meal in which beef is
included. Beyond Meat’s Chicken-Free Strips are being
introduced to the marketplace through Whole Foods
Markets and similar health-conscious food stores.
5-36. Based on the material covered in this chapter, what
questions would you ask the firm’s founders before
making your funding decision? What answers would
satisfy you?
5-37. If you had to make your decision on just the information provided in the pitch and on the company’s website, would you fund this company? Why or why not?
you Be the vc 5.2 CoMPAny: Ubersense
• Web: www.ubersense.com • Facebook: ubersense goal coach • twitter: @ubersense.com
Business idea: Coaches have long used video to
evaluate their athletes’ performances to try to help
make improvements. video equipment, however, is
cumbersome, and the equipment varies in regard to its
ability to replay videos in slow motion, whether a video
can be shown side by side against another athlete, or
whether the video can be easily e-mailed to someone
else to solicit feedback and advice.
pitch: Ubersense has created a smartphone and tablet
app that makes each of the tasks referred to above
seamless and easy, and adds additional functionality.
The app allows athletes, coaches, and parents to shoot
video of an athlete’s move or competition (e.g., golf
swing, tennis stroke, 100 meter dash, basketball shot,
high jump) and then analyze the video in a variety of
ways. The video can be analyzed in slow motion or frame
by frame. Drawing tools are included to allow coaches
to analyze form and posture and share their analysis
with their athletes. A timeline feature allows users to
look through videos that have been shot over time to
see where improvements have been made. A video
can also be placed side by side against a professional
athlete performing the same move or act, such as
a golf swing or a gymnastics routine. Ubersesense’s
most powerful feature is its innovative video-based
feedback tool called Uberview. An Uberview, which
can easily be shared with others, can contain a coach’s
audio critique, instructive drawings, alterations to video
playback, and even comparisons of the athlete that
is the focus of the evaluation with other athletes. For
example, a gymnastics coach could create an Uberview
of a balance beam routine of an aspiring female gymnast
and then compare the routine against a similar routine
performed by an olympic gymnast.
There are additional functionalities that make Uberview
useful. There is a note function that allows anyone to
comment on a video, so an athlete can distribute a video
to solicit written feedback. A video can be connected to
CHAPTER 5
a big screen so a group of people can benefit from an
evaluation or critique. Ubersense also includes a host
of social features. videos can easily be shared with others via e-mail and can be posted to Facebook, Twitter,
youTube, or Dropbox. An athlete can also create a profile, post videos of him or herself on the profile, and ask
for feedback from the broader Ubersense community. In
turn, an athlete can view videos posted by others and
offer feedback, encouragement, and support.
The Ubersense app can be downloaded for free. The
company has several ways of making money, including
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selling drill videos and connecting athletes with coaches
to get advanced help.
5-38. Based on the material covered in this chapter, what
questions would you ask the firm’s founders before
making your funding decision? What answers would
satisfy you?
5-39. If you had to make your decision on just the information provided in the pitch and on the company’s
website, would you fund this company? Why or
why not?
caSe 5.1
panera bread: Occupying a Favorable position
in a Highly competitive industry
• Web: www.panerabread.com • Facebook: Panera Bread • Twitter: @panerabread
Bruce R. Barringer, Oklahoma State University
R. Duane Ireland, Texas A&M University
introduction
If you analyzed the restaurant industry using Porter’s
five forces model, you wouldn’t be favorably impressed
with the results. Three of the threats to profitability—the
threat of substitutes, the threat of new entrants, and
rivalry among existing firms—are high. Despite these
threats to industry profitability, one restaurant chain is
moving forward in a very positive direction. St. Louis–
based Panera Bread, a chain of specialty bakery-cafés,
has grown from 602 company-owned and franchised
units in 2003 to 1,770 in early 2014. In 2013, systemwide sales reached $2.4 billion, up 12 percent from the
previous year. These numbers reflect a strong performance for a restaurant chain, particularly during a difficult economic period. So what’s Panera’s secret? How
is it that this company flourishes while its industry as a
whole is experiencing difficulty? As we’ll see, Panera
Bread’s success can be explained in two words: positioning and execution.
changing consumer tastes
Panera’s roots go back to 1981, when it was founded
under the name of Au Bon Pain Co. and consisted of
three Au Bon Pain bakery-cafés and one cookie store.
The company grew slowly until the mid-1990s, when
it acquired Saint Louis Bread Company, a chain of 20
bakery-cafés located in the St. Louis area. About that
time, the owners of the newly combined companies
observed that people were increasingly looking for products that were “special”—meaning that they differed
from run-of-the-mill restaurant food. Second, they noted
that although consumers were tiring of standard fastfood fare, they didn’t want to give up the convenience of
quick service. This trend led the company to conclude
that consumers wanted the convenience of fast food
combined with a higher-quality experience. In slightly
different words, they wanted good food served quickly
in an enjoyable environment.
the emergence of Fast casual
As a result of these changing consumer tastes, a new
category in the restaurant industry, called “fast casual,” emerged. This category provided consumers the
alternative they wanted by capturing the advantage
of both the fast-food category (speed) and the casual
dining category (good food), with no significant disadvantages. The owners of Au Bon Pain and Saint Louis
Bread Company felt that they could help pioneer this
new category, so they repositioned their restaurants
and named them Panera Bread. The position that
Panera moved into is depicted in the graphic titled
“Positioning Strategy of various Restaurant Chains.” A
market positioning grid provides a visual representation
of the positions of various companies in an industry.
About Panera’s category, industry expert T. J. Callahan
said, “I don’t think fast casual is a fad; I think it’s a
structural change starting to happen in the restaurant
industry.”
panera’s version of Fast casual
To establish itself as the leader in the fast-casual category and to distinguish itself from its rivals, Panera
(continued)
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High
Casual Dining
Food Quality
Positioning Strategy of
various Restaurant Chains
Fast Casual
Applebee’s
Red Lobster
Chili’s
Carrabba’s Italian Grill
Panera Bread
Bruegger’s
Chipotle
Cosi
Fast Food
Unfavorable Position for
Everyone
McDonald’s
Wendy’s
Burger King
Taco Bell
Low
Slow
(which is Latin for “time for bread”) added a bonus to
the mix—specialty food. The company has become
known as the nation’s bread expert and offers a variety
of artisan and other specialty breads, along with bagels, pastries, and baked goods. Panera Bread’s restaurants are open for breakfast, lunch, and dinner, and
also offer hand-tossed salads, signature sandwiches,
and hearty soups served in edible sourdough bread
bowls, along with hot and cold coffee drinks and other
beverages. The company also provides catering services. Its restaurants present customers with an inviting neighborly atmosphere and relaxing decor, adding
to their appeal. Panera even suggests a new time of
day to eat specialty foods, calling the time between
lunch and dinner “chill-out” time.
With high hopes for future expansion, Panera
Bread is an acknowledged leader in the fast-casual
category. Its unique blend of fast-casual service and
specialty foods also continues to gain momentum.
This sentiment is captured in the following quote from
Mark von Waaden, an investor and restaurateur who
signed an agreement to open 20 Panera Bread restaurants in the Houston, Texas, area early in the company’s recent growth spurt. Commenting on why he was
attracted to Panera Bread as opposed to other restaurant chains, von Waaden said, “My wife, Monica, and I
fell in love with the fresh-baked breads and the beautiful bakery-cafés. We think the Panera Bread concept
of outstanding bread coupled with a warm, inviting
environment is a natural fit with the sophistication that
the Houston market represents.”
The spirit of von Waaden’s statement captures the
essence of Panera’s advantage. It isn’t just another restaurant. By observing trends and listening to customers,
its leaders helped the firm carve out a unique and favorable position in a difficult industry.
Speed of Service
Fast
present Status and goal for the Future
Panera’s leadership in the fast-casual category and its financial performance have drawn considerable attention.
The company employs more than 75,000 people, serves
millions of customers a year, and is currently one of the
largest restaurant chains in the United States. It also continues to innovate and evolve. In 2012, Panera Bread introduced antibiotic-free roasted turkey, which both tastes
better and appeals to health-conscious consumers. other
recent introductions include it’s new Roasted Turkey &
Avocado BLT sandwich, Chopped Chicken Cobb Salad
with Avocado, and Roasted Turkey orchard Harvest
Salad. Panera Bread is counting on its unique positioning
strategy, its commitment to serving food that its customers feel good about eating and serving their families, and
savvy execution to continue its positive momentum.
Discussion Questions
5-40. How has Panera Bread established a unique position
in the restaurant industry?
5-41. How has Panera Bread’s unique position in the restaurant industry contributed to the firm’s success?
5-42. What barriers to entry has Panera Bread created for
potential competitors?
5-43. What are Panera Bread’s primary sources of competitive advantage?
5-44. What are the ways that Panera Bread can conduct
ethical and proper forms of competitive analysis to
learn about potential competitors entering the fastcasual category?
Sources: Panera Bread home page, www.panerabread.com,
(accessed February 20, 2014); Panera Bread Annual Report 2012;
“Industry by Industry: A Look at the Start, Their Stocks—and Their
Latest Picks,” Wall Street Journal, May 12, 2003, R8.
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caSe 5.2
How Warby parker broke through Formable barriers
to entry and Disrupted the eyeglasses industry
• Web: www.warbyparker.com • Facebook: Warby Parker • Twitter:@WarbyParker
Bruce R. Barringer, Oklahoma State University
R. Duane Ireland, Texas A&M University
introduction
It started in business school. In the fall of 2008, neil
Blumenthal and David Gilboa, both 28, were in the
first year of their MBA program at the University of
Pennsylvania’s Wharton School. They were in a computer lab kicking around business ideas with classmates
Andrew Hunt and Jeffrey Raider. The topic of eyeglasses
came up. Gilboa had recently lost his glasses, and was
shocked to learn that a replacement pair would cost $700.
He recalled thinking that his iPhone cost $200. He thought
how could an iPhone, that can do unimaginable things,
cost $200 and a simple pair of glasses cost $700?
Blumenthal thought he had the answer. He had
spent time working for visionSpring, a nonprofit that
distributes eyewear to low-income people in developing countries. While at visionSpring, he learned that the
global eyewear industry was dominated by a single company, Luxottica. Luxottica is the world’s largest eyewear
company, and controls over 80 percent of the world’s
major eyewear brands. It owns oakley, Persol, Ray-Ban,
Sunglass Hut, LensCrafters, and Pearle vision. It also
owns the eyewear stores located inside several major
retail chains, including Sears optical and Target optical.
Luxottica’s near-monopoly status was the reason for
the $700 glasses. That was the “aha” moment. The four
thought that if visionSpring could outfox Luxottica by
manufacturing its own glasses for people in developing
countries, why couldn’t four business students do the
same thing for people just like themselves?
industry analysis
Before jumping ahead, Blumenthal and his three friends
spent some time studying the eyewear industry. The term
“eyewear” includes glasses, contacts, and sunglasses.
They discovered four interesting characteristics about
the industry. First, the industry had experienced very little
innovation. Buying eyewear today isn’t much different
than it was 20 years ago. Second, there were virtually no
brands on the market that evoked passion or that people
were excited to be associated with. Third, only 1 percent
of eyeglasses were bought online. They figured this was
because people like to try on glasses before they buy
them. Finally, they learned that eyeglasses can do termendous good. The University of Michigan conducted a
study to evaluate the impact of visionSpring’s efforts to
provide eyeglasses to people who couldn’t afford them
in “Base of the Pyramid” countries. The study found that
a pair of visionSpring eyelgasses increased the monthly
income of the user by 20 percent and overall productivity
by 35 percent on average. These are staggeringly positive numbers for a social initiative.
Blumenthal and his classmates concluded that the
eyewear industry, which is projected to reach a total of
$95.5 billion in revenue by 2015, was ripe for disruption.
What was needed was a company that (1) had the courage to do an end-run around Luxottica by manufacturing
its own glasses, (2) could lower the price by selling online,
(3) knew how to create a brand that people could get
passionate about, and (4) was willing to give away a pair
of glasses to low-income people in the developing world
for every pair the firm sold. As emerging entrepreneurs,
they concluded that a company could earn money, inspire customers, and do good at the same time.
Warby parker
Warby Parker launched in 2010 as an online eyewear
company, based on the criteria shown above. All four
founders were involved at lauch, but soon afterward Hunt
and Raider moved on. Hunt joined a venture capital firm
and Raider founded a company called Harry’s, which
is trying to disrupt the online razor business. The name
Warby Parker comes from characters in Jack Kerouac
books, Warby Pepper and Zagg Parker. Here’s how the
company was set up.
Blumenthal and Gilboa secured Chinese manufacturers to produce frames and an Italian company to
make lenses, allowing them to make the glasses and
frames themselves. At the start, the glasses were sold
strictly online, for $95 a pair. The $95 price point was
possible because the glasses were designed in-house,
manufactured overseas, and sold via the Web, eliminating many of the costs associated with traditional glasses
manufacturing and retailing. Also, when traditional
glasses bear a brand name, such as Coach or Polo
Ralph Lauren, they include a licensing fee that can run
as high as 15 percent. Warby Parker’s approach to selling glasses works like this. A customer submits his/her
prescrption and begins browsing Warby Parker’s site. To
ensure a proper fit, the customer can upload a photo of
him or herself and “try on” frames through a virtual system. The company’s Home-Try-on program allows the
customer to pick five frames, which s/he then receives
to try on at home for five days, free of charge. The $95
includes the frame and the prescription lenses.
(continued)
178
PART 2
|
DEvELoPInG SUCCESSFUL BUSInESS IDEAS
From the beginning the company set out to create
a hip urban brand, targeting 18 to 34 year olds. They
wanted to pick a market and evoke excitement and passion. The website had (and still has) a distinct, funky tone,
with women who looked like grad students or magazine
editors and men who appeared to be architects, artists,
or jazz musicians. The company didn’t spend much on
promotions, with one exception. Early on they hired a
top fashion PR firm, Brandbury Lewis, to help them get
press coverage. Soon they were featured in Vogue and
GQ, which boosted Warby Parker’s visibility among its hip
target market. The glasses themselves were part of the
branding strategy. They had simple frames with slightly
chunky temples that feature subdued colors: gray, blue,
and burgundy. The glasses have preppy, country names
like Sibley, Winston, Ellsworth, and Ames. As shown
in the table below, the descriptions of Warby Parker’s
glasses are purposefully playful.
Sample of Warby parker men’s glasses
name of Frame
Description
Wilkie
There’s no reason to mess with a good
thing. Wilkie is our version of a never-fail
frame, with a sloped rectangular eyeframe
that flatters any face.
With a bold brow line and generous
width, Ames transitions easily from
mornings in the quad to nights on the
town.
A sleek architectural frame with contrast
temple arms, Greeley is an everyday
frame with dress-up potential.
A modern classic, Roosevelt is a large,
masculine frame with a keyhole bridge
that immediately inspires confidence.
With its slender temples and narrow
silhouette, Ellsworth is a bright, toanywhere frame that flatters all face
shapes.
Ames
Greeley
Roosevelt
Ellsworth
Warby Parker’s tone, product, and price resonated
with its target market, young urban hipsters, almost
immediately and the company experienced success.
Although the company doesn’t release sales figures, it
is estimated that it had sold more than 300,000 pairs of
glasses by the end of 2012.
Social mission
An important component of what Warby Parker stands
for is encompassed by its social mission. It gives away a
pair of glasses for each pair it sells. While the company’s
efforts appear to be heartfelt, it has also been good for
business. According to a recent study, about 80 percent
of Americans are likely to switch brands, if price and
quality are the same, if a company supports a compelling
social cause.
Companies that support social causes are also
more naturally viral. People generally feel good about
recommending a company that not only has an
attractive product but also supports a meaningful social
cause. A portion of Warby Parker’s website is dedicated to a section labeled “Do Good.” It has three parts
labeled “Buy a Pair, Give a Pair,” “Good Company,”
and “WP Stories.” The “WP Stories” section provides
hearthwearming stories of how Warby Parker and the
organizations the company partners with have changed
the lives of people in devleoping countries.
the road ahead
Warby Parker envisions an exciting future. At the time
this feature was written, in February 2014, the company’s
website indicated that it had given away 500,000 pairs of
glasses. Since the company gives away a pair of glasses
for every one it sells, that means it has sold 500,000 pairs
of glasses since 2010, which represents over $47.5 million in sales. The company has evolved since its 2010
beginnings. In the last two years, it has partnered with
boutiques to open “stores within stores” in cities such
as Los Angeles, nashville, and San Francisco. In 2013,
Warby Parker opened its first store in new york City. The
company acknowledgs that some people are skittish
about buying glasses online. The store is an experiment
to see if a physical store will bring in new buyers. The
store has the same quirky appeal as Warby Parker’s website. It’s 2,500-squre-foot space is lined with books and
old-school rolling library ladders. An in-store optometrist
is on hand to perform eye exams for $50. Shoppers can
track their appointments on an appointment board. A
second store is planned for Boston.
A question for Warby Parker is whether the company will expand to products beyond glasses, using its
distinct approach to business to do so. The company is
studying possibilities, but no decision has been made.
Discussion Questions
5-45. What environmental trends and business trends are
working both for and against Warby Parker?
5-46. How has Warby Parker’s social mission contributed
to the firm’s success?
5-47. What are some reasons that would support a decision by Warby Parker to expand into products beyond glasses?
5-48. What are some reasons that would support a decision by Warby Parker to not expand to products beyond glasses?
5-49. What actions has Warby Parker taken that have allowed the firm to at least in part successfully disrupt
a large industry that had been dominated by a single
company, Luxottica?
5-50. What can an entrepreneur learn, regardless of the
industry he or she is entering, by how Warby Parker
redefined the customer experience in its industry?
Sources: Warby Parker website, www.warbyparker.com (accessed
February 20, 2014); visionSpring website, www.visionspring.org
(accessed February 20, 2014); J. Pressler, “20/30 vision,” new
york Magazine, August 11, 2013; H. Bennett, “Social Commerce
Cast Study: Warby Parker,” available at http://insparq.com/socialcommerce.case.study-warby-parker, posted november 28, 2012
(accessed February 20, 2014).
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Endnotes
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14. P. G. Klein, D. S. Siegel, N. Wilson, and M.
Wright, “The Effects of Alternative Investments
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15. D. A. Aaker, Aaker on Branding: 20 Principles
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Witteloostuijn, “Joining the Pack or Going Solo? A
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Getting
Personal
with
temporun
Co-Founders
Josh Leider
Eli Broad College of Business,
Michigan State University, 2013
Benny eBert-Zavos
Eli Broad College of Business,
Michigan State University, 2013
adam Proschk
College of Engineering,
Michigan State University, 2014
PhiL GatZen
College of Engineering,
Michigan State University, 2014
dialogue with
Josh Leider
my Favorite smartPhone
aPP
Snapchat
Best advice i’ve received
Don’t postpone joy.
my advice For new
entrePreneurs
Take your time. Many entrepreneurs just want to get their product
out as soon as possible. But you
need time to test, not only your
idea, but your team.
my BiGGest surPrise
as an entrePreneur
The love and support you get from
other entrepreneurs.
Best Part oF BeinG
a student
Resources, resources, resources.
what i do when i’m not
workinG
I love to run, hike, and camp.