Competitive industry analysis examines market elements to determine if a company can profitably enter. The analysis includes threats to entry, bargaining power of buyers and suppliers, and availability of substitute goods.
Competitive industry analysis looks at specific elements of a market and helps a company determine whether it can make a profit by entering that market. The analysis usually has four elements: threats to entry, bargaining power of buyers, availability of substitute goods, and bargaining power of suppliers. Each element can make it difficult for a company to enter a highly competitive industry. The company’s management team often conducts competitive industry analysis to see if it finds a niche in the market.
Threats to entry into a competitive industry analysis include startup costs, government regulation, distribution channels, and the strength of current competitors. This is usually the first step in the analysis, because any one of these factors can quickly kill the idea of entering a new market. In some cases, a company may rank them in terms of importance. For example, the lack of distribution channels may not be as important as the excessive government regulation found in the new market.
The bargaining power of buyers represents the ability of individual buyers to control the market. This occurs when there are a few dominant buyers and the predominant products purchased are fairly standard. An example of this is found in the computer industry, where there are only a few buyers for certain computer parts, which are standard materials. In a competitive industry analysis, this can result in lower market share for all companies in the industry. In some cases, a supplier may try to limit this power by setting up its own outlets to sell goods, reducing buyers’ power.
Substitutes in a market indicate that buyers can find alternative goods. In a competitive industry analysis, this indicates that consumers are not tied to a specific type of good. When prices rise or other factors make it difficult for them to purchase a particular item, consumers buy a substitute that provides sufficient resemblance to the original. This can make it difficult to sell all of your inventory in a market.
Like buyers, suppliers also have some bargaining power in a competitive industry analysis. This occurs when there are few suppliers and the products offered on the market present specific differences when compared to each other. Vendors can use this as a natural barrier to entry as their products are often more favored in the market compared to a new competitor. This occurs when buyers prefer one vendor’s products as they have features that are not easily replicated by another vendor.
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