Entrepreneurship Test 2 Entrepreneurs identify their primary customers by recognizing a need or pain in the market Constitute an industry analysis 1 How is the industry described 2 Is the industry growing Measured by sales volume of employees units produced of new companies entering industry etc 3 What are the opportunities 4 What is the status of any new technology 5 How much do industry companies spend on research and development 6 Who are the opinion leaders in the industry 7 Are there young successful firms in the industry 8 What does the future look like 9 Are there any threats to the industry 10 What are the typical margins in the industry It is generally wise to begin any research by looking at secondary sources of information to gather background information Today Google search engine and Wikipedia com are great places to get an introduction to the industry and pick up some trends by seeing what is being talked about Journals trade magazines industry analysis government publications and annual reports of public corporations are also excellent starting points but they also provide more targeted information and by experts For example a number of industry analysts offer excellent overviews of most of the major industries Trade magazines provide a good sense of key firms and of the direction the industry may be taking LexisNexis and STAT USA are fine sources of industry statistics The North American Industry Classification System NAICS the classification system that the US Canada and Mexico developed to identify industries and allow for common standards and statistics across North America is replacing the traditional US Standard Industrial Classification System SIC Stages of life cycle and what constitutes each section 1 Birth a new industry emerges that displaces previous technology and creates opportunities that didn t exist before Examples are YouTube MySpace and Wikipedia For entrepreneurs contemplating an industry entry at the earliest stage there are no rules and plenty of opportunities to try anything and everything With sufficient resources an entrepreneurial firm can position its technology to potentially become the industry standard without them the new venture s strategy will be influences by the standards set by more dominant players 2 Growth and adaption this is an expensive period for most companies because they need to use extensive resources and develop critical partnerships to establish their position in the industry 3 Differentiation and competition as more firms enter the industry intense product differentiation occurs because the industry s established standards and proprietary rights no longer provide the exclusivity they once did Entrepreneurial ventures that enter the industry at this point must either identify niches that have not been served or differentiate themselves significantly in order to attract enough customers to be successful One of the biggest threats of this stage is commoditization When price becomes the more important differentiator it signals to entrepreneurs that the time for innovation has arrived and that the new value must be created 4 Shakeout when competition is the most intense those companies that are unable to compete leave The remaining companies grow more rapidly as they pick up slack As an industry goes through shakeout the GDP increases firms in the industry become more productive Shakeouts also eliminate the possibility of competition and therefore contribute to a social loss from decreased market competition The shakeout period moves an industry from an oligopoly with many companies and high product costs to a more stable and mature industry with only a few efficient firms This is the period in the industry when the opinion leaders establish themselves 5 Maturity and decline in this stage the industry reaches a mature state in which several major players dominate Earnings and sales growth prospects decline Typically mature industries are described by high dividend yields and low price to earnings ratios and CEO s of companies in mature industries tend to focus on cost containment In general it takes the introduction of descriptive technology to turn a declining industry around Recent research has identified four major industry trajectories that signal how fast change occurs in a particular industry From most common least common Progressive Intermediating Radical and Creative Progressive change takes place as companies in the industry grow geographically and increase profits through innovations in operations processes distribution and technology Wal Mart and Jet Blue Intermediating change is industry change that comes about when there are major shifts in the value chain in the form of forward and backward integration strategic partnerships and developing new ways to transact business with customers auto industry Radical change occurs in industries when an innovation results in the obsolescence of previous technology and drives old line companies out of business Creative change is found in industries where resources turn over frequently and must continually be replaced film industry It is often helpful to put a framework around the concept of an industry to organize all the data collected and to be able to evaluate the industry The most commonly used framework is Porter s Five Forces Porter s work has been challenged on several levels most notably that a sixth force the government or public should be included and that the attractiveness of an industry cannot be evaluated independent of the resources the company brings to the industry Porter s framework provides an excellent exercise for entrepreneurs as they seek to characterize the industry and markets they will enter Economies of Scale costs to produce have declined relative to the price of their goods and services Know Figure 6 3 on page 110 Know what PEST analysis does and what areas it covers PEST or step analysis examines the environment in which the new venture will operate and ensures that the entrepreneur s strategies are aligned with the trajectory of the industry and the markets in which the new business will compete PEST analysis examines specific aspects of the macro envoronment its socialcultural demographics and cultural technological R D and Rate of change economic cost of capital inflation customer purchasing power employment rate and political factors government regulatory and legal It is important to remember that for a new company the goals of the