Engineering B-Plan Development

Ram Babu Roy, RMSoEE

IIT Kharagpur
References:
1. Entrepreneurship: Successfully launching New ventures, Bruce R Barringer, R Duane
Ireland, 3rd Edition, Pearson (2010).

2. Technology Ventures: From Idea to Enterprise, 2nd Edition, Richard C Dorf and Thomas
H B (2008)

& Various web pages on internet

Note: This study material has been prepared for the purpose of classroom discussions
only.
 What is Industry Analysis?

• Industry
– An industry is a group of firms producing a similar product or
service, such as airlines, fitness drinks, furniture, or electronic
games.
• Industry Analysis
– Is business research that focuses on the potential of an industry.
– A more in-depth analysis is needed to learn the ins and outs of
the industry.
– The analysis helps a firm determine if the niche market it
identified during feasibility analysis is favorable for a new firm.
 Industry Analysis
• Which industry (industries) are you in?
• What is its size and growth rate?
• How mature is the industry?
• How sensitive is it to economic cycles?
• How affected is it by seasonal factors?
• How affected is it by technological change?
• Assess Industry Growth
– Total revenue
– Total number of units/volume sold
– Total employment
 Stages of Industry Evolution
• Industry life cycle
Maturity Decline

Growth

Development

Growth
Rate Profits

4
 Three Key Questions
When studying an industry, an entrepreneur must answer
three questions before pursuing the idea of starting a firm.

Question 1 Question 2 Question 3

Is the industry Are there positions in

Does the industry
accessible—in other the industry that avoid
contain markets that
words, is it is realistic some of the negative
are ripe for innovation
place for a new attributes of the
or are underserved?
venture to enter? industry as a whole?
 How Industry and Firm-Level Factors
Affect Performance

• Firm Level Factors

– Include a firm’s assets, products, culture, teamwork among its
employees, reputation, and other resources.
• Industry Level Factors
– Include threat of new entrants, rivalry among existing firms,
bargaining power of buyers, and related factors.
• Conclusion
– In various studies, researchers have found that from 8% to 30%
of the variation in firm profitability is directly attributable to
the industry in which a firm competes.
– Techniques Available to Assess Industry Attractiveness
• Study Environmental and Business Trends
• The Five Competitive Forces Model
 Studying Industry Trends

• Environmental Trends
– Include economic trends, social trends, technological
advances, and political and regulatory changes.
– For example, industries that sell products to seniors are
benefiting by the aging of the population.
• Business Trends
– Other trends that impact an industry.
– For example, are profit margins in the industry increasing
or falling? Is innovation accelerating or waning? Are input
costs going up or down?
 The Five Competitive Forces Model

• Explanation of the Five Forces Model

– The five competitive forces model is a framework for
understanding the structure of an industry.
– The model is composed of the forces that determine
industry profitability.
– They help determine the average rate of return for the firms
in an industry.
 The Five Competitive Forces Model

• Explanation of the Five Forces Model (continued)

– Each of the five-forces impacts the average rate of return
for the firms in an industry by applying pressure on
industry profitability.
– Well managed firms try to position their firms in a way that
avoids or diminishes these forces—in an attempt to beat the
average rate of return of the industry.
The Five Competitive Forces Model
 Threat of Substitutes

• Threat of Substitutes
– The price that consumers are willing to pay for a product
depends in part on the availability of substitute products.
– For example, there are few if any substitutes for
prescription medicines, which is one of the reasons the
pharmaceutical industry is so profitable.
– In contrast, when close substitutes for a product exist,
industry profitability is suppressed, because consumers will
opt out if the price gets too high.
 Threat of Substitutes

• Threat of Substitutes (continued)

– The extent to which substitutes suppress the profitability of
an industry depends on the propensity for buyers to
substitute between alternatives.
– This is why firms in an industry often offer their customers
amenities to reduce the likelihood that they will switch to a
substitute product, even in light of a price increase.
– Starbucks offers high- quality fresh coffee, good service,
and a pleasant atmosphere.
 Threat of New Entrants

• Threat of New Entrants

– If the firms in an industry are highly profitable, the industry
becomes a magnet to new entrants.
– Unless something is done to stop this, the competition in
the industry will increase, and average industry profitability
will decline.
– Firms in an industry try to keep the number of new entrants
low by erecting barriers to entry.
• A barrier to entry is a condition that creates a disincentive for a new
firm to enter an industry.
 Threat of New Entrants
Barriers to Entry

Barrier to Entry Explanation

Industries that are characterized by large economies of

Economies of Scale
scale are difficult for new firms to enter, unless they are
willing to accept a cost disadvantage.

Industries such as the soft drink industry that are

Product differentiation
characterized by firms with strong brands are difficult to
break into without spending heavily on advertising.

Capital The need to invest large amounts of money to gain

requirements entrance to an industry is another barrier to entry.
 Threat of New Entrants
Barriers to Entry (continued)

Barrier to Entry Explanation

Existing firm may have cost advantages not related to
Cost advantages size. For example, the existing firms in an industry may
independent of size have purchased land when it was less expensive than it
is today.

Distribution channels are often hard to crack. This is

Access to distribution particularly true in crowded markets, such as the
channels convenience store market.

Government and Some industries, such as broadcasting, require the

legal barriers granting of a license by a public authority to compete.
 Threat of New Entrants

• Non Traditional Barriers to Entry

– It is difficult for start-ups to execute barriers to entry that
are expensive, such as economies of scale, because money
is usually tight.
– 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.
 Threat of New Entrants
Nontraditional Barriers to Entry

Barrier to Entry Explanation

If a start-up puts together a world-class management

Strength of
team, it may give potential rivals pause in taking on the
management team
start-up in its chosen industry.

If a start-up pioneers an industry or a new concept

First-mover advantage
within an industry, the name recognition the start-up
establishes may create a barrier to entry.

If the employees of a start-up are motivated by the

Passion of the
unique culture of a start-up, and anticipate large
management team
financial reward, this is a combination that cannot be
and employees
replicated by larger firms.
 Threat of New Entrants
Nontraditional Barriers to Entry (continued)

Barrier to Entry Explanation

If a start-up is able to construct a unique business
Unique Business model and establish a network of relationships that
Model makes the business model work, this set of advantages
creates a barrier to entry.

Some Internet domain names are so “spot-on” that

Internet Domain they give a start-up a meaningful leg up in terms of e-
Name commerce opportunities.

Inventing a new If a start-up invents a new approach to an industry and

approach to an executes it in an exemplary fashion, these factors
industry create a barrier to entry for potential imitators.
 Rivalry Among Existing Firms

• Rivalry Among Existing Firms

– In most industries, the major determinant of industry
profitability is the level of competition among existing
firms.
– Some industries are fiercely competitive, to the point where
prices are pushed below the level of costs, and industry-
wide losses occur.
– In other industries, competition is much less intense and
price competition is subdued.
 Rivalry Among Existing Firms
Factors that determine the intensity of the rivalry among
existing firms in an industry.

Number and The more competitors there are, the more likely it
balance of is that one or more will try to gain customers by
competitors cutting its price.

Degree of The degree to which products differ from one

difference product to another affects industry rivalry.
between products
 Rivalry Among Existing Firms
Factors that determine the intensity of the rivalry among existing
firms in an industry (continued)

The competition among firms in a slow-growth

Growth rate of an
industry is stronger than among those in fast-
industry
growth industries.

Firms that have high fixed costs must sell a higher

Level of fixed
volume of their product to reach the break-even
costs
point than firms with low fixed costs.
 Bargaining Power of Suppliers

• Bargaining Power of Suppliers

– 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 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.
 Bargaining Power of Suppliers
Factors that have an impact on the ability of suppliers to
exert pressure on buyers

Supplier When they are only a few suppliers that supply a

concentration critical product to a large number of buyers, the
supplier has an advantage.

Switching costs are the fixed costs that buyers

Switching costs encounter when switching or changing from one
supplier to another. If switching costs are high, a
buyer will be less likely to switch suppliers.
 Bargaining Power of Suppliers
Factors that have an impact on the ability of suppliers to exert
pressure on buyers (continued)

Attractiveness of Supplier power is enhanced if there are no attractive

substitutes substitutes for the product or services the supplier
offers.

Threat of forward The power of a supplier is enhanced if there is a

integration credible possibility that the supplier might enter the
buyer’s industry.
 Bargaining Power of Buyers

• Bargaining Power of Buyers

– Buyers can suppress the profitability of the industries from
which they purchase by demanding price concessions or
increases in quality.
– For example, the automobile industry is dominated by a
handful of large companies that buy products from
thousands of suppliers in different industries. This allows
the automakers to suppress the profitability of the
industries from which they buy by demanding price
reductions.
 Bargaining Power of Buyers
Factors that have an impact on the ability of suppliers to exert
pressure on buyers

If there are only a few large buyers, and they buy

Buyer group from a large number of suppliers, they can pressure
concentration the suppliers to lower costs and thus affect the
profitability of the industries from which they buy.

The greater the importance of an item is to a buyer,

Buyer’s costs the more sensitive the buyer will be to the price it
pays.
 Bargaining Power of Buyers
Factors that have an impact on the ability of buyers to exert
pressure on suppliers (continued)

Degree of The degree to which a supplier’s product differs

standardization of from its competitors affect the buyer’s
supplier’s bargaining power.
products

Threat of The power of buyers is enhanced if there is a

backward credible threat that the buyer might enter the
integration supplier’s industry.
First Application of the Five Forced Model
Assessing Industry Attractiveness Using the Five Forces Model

If several of the threats to industry profitability are high, the firm may reconsider
entering the industry or think carefully about the position it would occupy
Second Application of the Five Forced Model
Using the Five Forces Model to Pose Questions to Determine the Potential
Success of a New Venture in an Industry
 Creating New Market Space
HBR, Kim & Mauborgne

Reduce

What factors might be reduced well below industry standards?

Eliminate Create

What factors might be What factors might be

New
eliminated that the created that the
Market
industry has taken for Space industry has never
granted? offered?

What factors might be raised well beyond industry standards?

Raise
 Industry Types and the Opportunities They
Offer

• Emerging Industries
– Industries in which standard operating procedures have yet
to be developed.
• Opportunity: First-mover advantage.
• Fragmented Industries
– Industries that are characterized by a large number of firms
of approximately equal size.
• Opportunity: Consolidation.
 Industry Types and the Opportunities They
Offer

• Mature Industries
– Industries that are experiencing slow or no increase in demand.
• Opportunities: Process innovation and after-sale service innovation.
• Declining Industries
– Industries that are experiencing a reduction in demand.
• Opportunities: Leadership, establishing a niche market, and pursuing a
cost reduction strategy.
• Global Industries
– Industries that are experiencing significant international sales.
• Opportunities: Multidomestic and global strategies.
 Competitor Analysis

• What is 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.
• Competitive analysis grid
– A tool for organizing the information a firm collects about
its competitors.
– Can help a firm see how it stakes up against its competitors
– Provides ideas for markets to pursue, and identify its
primary sources of competitive advantage.
Competitive a Analysis Grid for Expresso
Fitness
 Identifying Competitors

Types of Competitors New Ventures Face

5-35
 Sources of Competitive Intelligence

• Collecting Competitive Intelligence

– To complete a 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 referred to as competitive intelligence.
– A new venture should take care that it collects competitive
intelligence in a professional and ethical manner.
 Sources of Competitive Intelligence

Ethical ways to obtain information about competitors

• Attend conferences and trade shows.

• Purchase competitor’s products.
• Study competitors’ Web sites.
• Set up Google and Yahoo! e-mail alerts.
• Read industry-related books, magazines, and Web sites.
• Talk to customers about what motivated them to buy your
product as opposed to your competitor’s product.

5-37
Sources of Competitive Intelligence

• Many companies attend

trade shows to not only
display their products,
but to see what their
competitors are up to.
• This is a photo of the
the 2008 Consumer
Electronics Trade Show
in Las Vegas.

5-38
 Building a Competitive Advantage
• How do successful entrepreneurs create a
compelling business design for their
new ventures?

• Success in any enterprise requires the right

product, methods, and workers, and each
must complement the others.
Joseph Burger
 Competitive Advantage
• Identify and State the Firm’s Core Competencies
– Example: The core competency of Google is the design and
operation of an internet search engine.

• The competitive advantage of a firm is its distinctive factors

that give it a superior or favorable position in relation to its
competitors.

• A sustainable competitive advantage is a competitive

advantage that can be maintained over a period of time –
hopefully, measured in years.

• The market value of a firm is: MV = CA x D

– CA = competitive advantage
– D = duration
Sources of Competitive Advantage
Source Example

Efficiency, Low Costs Alcoa

Product Innovation Intel

Quality, Reliability Mercedes

Customer Responsiveness Dell

Manufacturing Toyota
Innovation
 Vision
• An informed and forward-looking statement of
purpose that defines the long-term destiny of the
firm
• States highest value and aspirations - what you
want to become, should inspire and excite people
• Elements of a vision
– Clarity: Easily understood, focused
– Consistency: Holds constant over a time period, but
adjustable as conditions warrant
– Uniqueness: Special to this enterprise
– Purposeful: Provides reason for being and others to
care
 Example of a Vision
• We strive to preserve and improve life through
the innovation of biomedical devices while
supporting, training, and inspiring our
employees so that individual ability and
creativity is released and rewarded.
 Mission
• Description of specific course of actions to implement
the vision
• Describes the company’s goals and customers,
incorporating the basic tenets of vision
• States – what you do, for whom do you do, and how
will you get it done
• Possible elements of a mission statement
– Core Values
– Customers and/or Stakeholders
– Products
– Competitive Advantage
– Values Provided to Customer
– Markets or Industry
 Goal
• Broad statement of something the firm
expects to achieve
• May be short, intermediate, and long term
• Believable, attainable and based on identified
needs
• Above all, the goal of a business is to make a
profit
 Objectives
• Statements of specific, measurable and
attainable outcomes that contribute to the
achievement of a particular goal
• Focus on
– Changing people’s behavior or circumstances
– Changing something about the community
– Changing the process for achieving a particular
goal
Execution