Competitor+and+Industry+Analysis

= Introduction to Competitor and Industry Analysis =

Porter's Five Forces Model


The "five forces" model is an industry-level form of analysis to determine the attractiveness or unattractiveness of an industry. The attractiveness is determined by the power of suppliers and customers, threat of substitutes, threat of new entrants, and competitive rivalry within the industry. A common example of an unattractive industry is the airline industry. Flyers have few switching costs, there are only a few suppliers of airplanes, and competitive rivalry is fierce. To their advantage, however, it's quite difficulty for new entrants because of the need for specialized and expensive human capital (pilots, mechanics...), capital assets (planes and terminal ports), and compliance costs (FAA, Homeland Security, etc.). Airlines try to reduce the leverage of customers by increasing their switching costs between airlines with frequent flyer miles and superior service. Example: The U.S. Commercial Passenger Airlines Industry **Video: Michael Porter discusses the five forces model** media type="custom" key="26957238"
 * Threat of substitute products: owned autos, rental autos, trains,
 * Threat of new entrants: Low because of the large fixed asset (airplanes, rights to airport gates, etc.) and human capital investments (pilots, mechanics, flight attendants, schedulers, marketing and sales, etc.) unless someone comes up with Uber for air travel
 * Bargaining power of suppliers
 * Bargaining power of customers: High bargaining power because of low switching costs and generally undifferentiated service offerings from airlines. Airlines try to "lock in' customers with frequent flyer miles and other differentiated amenities.
 * And finally, competitive rivalry. Do airlines tend to raise or lower ticket prices based on short-term economics and competition? Of course they do. There are few industries in which competitive rivalry is more fierce than the commercial passenger airline industry.

= Value Chain Analysis =

A value chain is a chain of activities that a firm operating in a specific industry performs in order to deliver a valuable product or service for the market. The concept comes from business management and was first described and popularized by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.

Image: A common visualization of the value chain


= Clay Christensen's Disruptive Innovation =  Video: Clay Christensen's Disruptive Innovation in Two Minutes - Harvard Business Review, November, 2013  media type="youtube" key="mbPiAzzGap0" width="560" height="315"  So this video fails to explain how new entrants use new technologies to enter the bottom portion of the value chain while incumbents focus on serving their higher-margin product offerings (this is typical of HBS promoting its hype without backing it up with substance). Imagine a mature industry where incumbents (i.e,, industry leaders) identify higher-value, higher-margin product offerings. Most will likely abandon their lower-margin, lower value-creating product lines in the pursuit of higher product margins. New entrants will tend to enter the lower end offerings of a product market with a "disruptive" new technology that the incumbents aren't using, leading to a pathway toward disruptive innovation and displacement.