Chapter 4 Learning an industry
An industry is a grouping of similar businesses that interact in a common environment
A framework for understanding industries
Starbuck and colleagues – factors that define whether new or established businesses
have the upper hand in an industry:

Carrying capacity or degree of saturation: How much can an industry support growth?
Can it support expansion or is already saturated. The only way of entering a saturated
industry is through the introduction of a new technology or the discovery of a niche.
Established firms have the upper hand in the more saturated industries.

Uncertainty: ability to understanding what is coming down the road. Levels the field
between new and established businesses. There is high risk and high rewards for
everyone.

Complexity: companies are facing a diversity of inputs and outputs. Industries with
high degree of complexity, such as the electronics industry, are by their very nature
difficult for new businesses to enter (established players have an advantage). They
are also extremely competitive

Industry evolution: emerging, birth, growth and adaptation, differentiation and
competition, shakeout; maturity and decline. New ventures have the upper hand in
emerging and will be welcome in the birth and growth stages. You want to enter
before standards have been established.
The five forces model (Porter’s model) + technology—Factors that define what kind of
margin you can derive
Margin is the difference between what it cost you to operate and what you can charge for
your product. It changes by industry. The higher the margin in an industry, the larger the
space for failure, and the higher the chances for success.

Barriers of entry: You will have to face them to enter but once inside they will also
protect you. Econ of scale, brand loyalty, capital requirements, switching costs for
the buyer, access to distribution channels, proprietary factors, government
regulations, industry hostility

Threat of substitute products: A new venture must compete not only with products
and services in its own industry but also with those that are logical substitutes in other
industries.

Threat of buyers’ bargaining power” and threat from suppliers’ bargaining power. In
industries where the buyers or suppliers have bargaining power, it is more difficult for
a new entrant to gain a foothold and grow.

Rivalry among existing firms. Margins will be really low since competition is
intense.

Technology: a new product or service; a new production method; a new form of
organizing changes the margin equation.
Competitive analysis (see competitive grid in page 86)
We need to understand not only whether or not new companies have an advantage over
old or what is the general sense we have of margin in an industry but also how the
competition is competing. Can we do better than them? Studying the history and
management style of major competitors will give insight into what motivates them and
how they may react to your strategy. It will help you to build a competitive grid (see
page 86). Start by listing competitors in the first column. Subsequent columns will
depend on your needs, but in general you will want to compare product or service,
benefit, distribution, and marketing strategy.

Identifying the competition. Who your competitors are depends on how you define
the business you are in:

Direct competitors

Indirect competitors

Emerging competitors (potential competition)
Gathering competitive intelligence: While it is easy to gain superficial information from
the competitor’s advertising, web site, or facility, the less obvious types of information
like revenues, operating strategies, and the like are another matter. If your competitors
are public companies, you will find much of this information in annual reports and other
filings required by the Securities and Exchange Commission (SEC).


Data you want to gather:

Current market strategies

Management style and culture

Pricing strategy

Customer mix

Promotional mix
Plan for gathering information:

Visit the competitor’s web sites or the outlets where their products are sold.
Evaluate appearance, number of customers coming and going, what they buy,
how much, and how often. Talk to customers and employees alike.

Buy your competitors’ products. You can see the features and benefits of the
products and also learn about how they treat their customers.

Search the internet

Find information on public companies to serve as benchmarks for the industry
(www.hoovers.com; www.sec.gov; www.onesource.com).

Search government web sites (www.doc.gov; www.sec.gov/edgardhp.htm;
www.thomasregister.com:8000/).
Competitive entry strategies

Cost superiority;

Differentiation;

Niche strategy
Conducting industry analysis
1. Identify the industry
2. Examine secondary resources
3. Conduct primary research, including talking with people in the industry
4. Analyze the data and draw conclusions
Identifying the Industry: North American Industry Classification System (NAICS)
NAICS is replacing the traditional U.S. Standard Industrial Classification System (SIC).
You can learn the new coding for industry you’re interested in by going to the U.S.
Department of Commerce National Technical Information Service (NTIs)--www.fedworld.gov/ntis/.
NAICS industries are identified by a six-digit code. The first 2 digits designate a major
economic sector such as Agriculture or Manufacturing. The 3rd digit designates an
economic subsector such as crop production or apparel manufacturing. The 4th digit
designates an industry group, such as grain and oil seed farming or fiber, yarn, and thread
mills. The 5th digit designates the NAICS Industry such as Wheat Framing or
Broadwoven Fabric Mills. The last digit is used for industrial classification in other
countries when necessary. With the NAICS code, you can find statistics about size of the
industry, sales, number of employees, and so forth.
Secondary sources of industry information
With the industry identified you can begin a search of secondary data sources—journals,
trade magazines, reference books, government publications, and annual reports of public
corporations—available in a university or community library and on the internet.
Historical data, such as annual reports over a 10 or 15-year period, can often help you
spot trends, cycles, and seasonal variations in the industry. Trade magazines provide a
good sense of key firms and of the directions the industry may be taking.
Analyze and organize the data collected to answer the following key questions:
1. Is the industry growing?
2. Where are the opportunities?
3. What is the status of any new technology?
4. How much does the industry spend on research and development?
5. Who are the major competitors?
6. Are there young, successful firms in the industry?
7. What does the future look like?
8. Are there any threats to the industry?
9. What are the typical margins in the industry? You derive margins by dividing gross
profit by sales
Primary data
Provides the most current information and it is extremely important so “pound the
pavement” and talk to: Industry observers, suppliers and distributors, customers,
employees of key firms in the industry, professionals from service organizations; trade
shows. How to access them:

Where possible secure and introduction

Seek out individuals who regularly deal with the media

Allow sufficient lead-time

Offer something that might be of value (a summary of the results?)

Be honest about your affiliation

Gain credibility by showing that you have done your homework

If possible take a colleague or business partner with you.

Carefully observe the surroundings

Be sure the opening questions are easy and nonthreatening.
The ideal industry (for a high growth venture)

Has over $50 billion in sales and niches with sufficient size to allow for the
attainment of an adequate market share.

Growing at a rate greater than the GNP

Allows for after tax profits over 5 percent of sales within 3 to 5 years

Socially and environmentally in-sync with societal and political trends