Business Planning is the most important factor to consider for launching a successful startup business. Industry Analysis is that part of business planning which deals in determining which sectors of the market (industries) you will be dealing in. This brief article explains the basics of Industry Planning with a beginner’s in-depth approach.
What is Industry Analysis?
Before starting actual business processes it is important to find out where your business fits into the market, its growth and profit potential, and the state of competitors dealing in similar products and under similar circumstances. In other words, to target new potential customers, industry analysis can be used as a tool to break down important factors influencing your target market.
The Importance of Industry Analysis
Efficient Industry Analysis shows effective management and acts as a foundation for long-term growth and survival of the business. Industry Analysis defines the potential liquidity, solvency, and profitability for you and your competitors in the industry. It focuses on analyzing market trends and therefore also helps your business prepare for any future shift in economic patterns of the market.
Most effective industry analysis strategies (SWOT vs Porter’s Five Force Analysis)
SWOT (Strengths, Weaknesses, Opportunities, and Threats) and Porter’s Five Forces (Competitive Rivalry, Supplier Power, Buyer Power, Threat of New Entry, and Threat of Substitution) are the two most talked about Industry Analysis strategies.
It is evident by their definitions that SWOT analysis focuses more on internal factors while Porter’s Five emphasizes on external forces. SWOT analysis defines the potentials and capabilities of a business, what it can and cannot do and which chain of actions that it undertakes will be most lucrative. Under this an equity analyst is expected to jot down and deal with a business’ internal Strengths and Weakness in direct relationship to its external Opportunities and Threats. Hence it tells an entity about its own competitive advantages and disadvantages. Therefore it focuses on determining profitability, along with focusing and analyzing solvency and survival potential of the organization.
Porter’s Five Forces, on the other hand, tells an analyst about competition within their industry, along with an industry's weaknesses and strengths. Professor Michael E. Porter of Harvard Business School coined this strategy as part of his book "Competitive Strategy: Techniques for Analyzing Industries and Competitors."
This strategy can be used for a more comprehensive analysis of the external factors of the industry. Its main objective is determining profitability prospects for an organization.
The five industry analysis forces that make up the industry as identified by Porter are:
In the center of it all, Competitive Rivalry is the power of established businesses in an industry that your business needs to deal with. Effective and efficient analysis of Competitive Rivalry becomes a major force since such existing businesses already possess a greater fraction of market share and resources in the industry.
More supplier power is less desirable for your business. If there is greater demand for producer goods(1) in your industry than their availability, the suppliers are in a greater position to bargain for higher prices. Simultaneously acting forces of demand and supply, if negative, which is likely under such a scenario, leads to lower profitability prospect for the business
Buyer Power, aka demand, consists primarily of demand function:(2) variables such as the demographic distribution, number of customers, taste and preference, price sensitivity (price elasticity), etc.
If you are an established firm, industry analysis is still necessary since modern market is dynamic is nature, thus entering and existing in an industry is a repetitive occurrence. Such businesses look to acquire market share from you by offering greater value in their products or their presentation, by advertising implied superiority.
Substitution effect is the tendency of buyers to switch from one product or a similar product’s brand to another. A substitute product is one that may offer the same or similar benefits to a buyer as a product from another manufacturer/industry. An industry with a higher threat of substitution is less likely to yield higher rates of profitability.
Things to keep in mind while choosing your industry (Industry Analysis)
Three major variables to keep in mind before initialising an Industry Analysis are following-
Stakeholders(3) are parties that have something on stake with the business. For example, equity investors or the government. Their policies and preferences should be kept in interest while forming a business plan in the industry.
Your existing competitors and their policies/ business structures / producing or purchasing patterns greatly affect and define your own business model. For example, for a startup it is best to adhere to existing, fairly profitable practices than going overboard with experimentation. You can read more about startup marketing here.
Supplier power included, this defines the range of distribution, demographically targeted, and therefore the resulting buying patterns. Distribution patterns define the prospects of growth by showing the targeted market, effective distribution systems, and sales prospects.
Another factor under ‘distribution’ is the distribution of resources. How limited resources are distributed among your competitors and you, such that maximum profits could be yielded, is another factor to be kept in mind while performing Industry Analysis.
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