Industry analysis is crucial for those business who would like to enter into a new industry. For an established business in a industry, an on-going monitoring of the industry development, trends and situation can build up solid foundation for formulating strategies and make right business decisions.
Industry analysis can help business understand the critical factors and players to their business. There are many external factors impacting business, however, there are three critical players in the industry that may have dominate roles in determine the business profit and strategy. The three players are: customer, supplier and competitor. For the firm to make profit, it must create value for customers; During the value creating process, the firm acquires goods and services from suppliers. it must understand its suppliers and how to form business relationships with them; the ability to generate profitability from value-creating activity depends on the intensity of competition among firms that vie for the same value-creating opportunities; the firm must understand competition. Although there may be other external factors to consider such as political, technical etc, these three core factors should be give priorities when conducting industry analysis.
Industry Analysis Overview
Industry analysis needs to identify the key players and the structure of the industry. It requires identifying who are the main players – the producers, the customers, the suppliers, and the producers of substitute goods. When the key elements and players are determined, the researcher needs to go deep into the key structural characteristics of each of these groups that will determine competition and bargaining power. Depending on the characteristics and types of industry the business is in, the identification of the industry structure can be simple or complex. In general, the identification of the key players in manufacturing industry can be simple, however, the service industry can present a challenge for analyst.
Industry analysis needs to predict and forecast the future development of the industry. The key purpose of an industry analysis report is to understand industry attractiveness and profitability. om interest in industry analysis is not to explain the past, but to predict the future. In your industry analysis report, you need to answer the following key questions:
- What is the current level of competition in the industry?
- What is the trends and development of the industry?
- What is the future development and profitability of the industry in future?
Industry Analysis Tools and Framework
When conducting industry analysis, researchers are facing with so many elements and factors, an useful framework to combine all the factor together is Port’s Five Force Model. According to the Port, the key five factors will determine the industry attractiveness and profitability. The following diagram illustrate the model:
The threat of substitute: The price customers are willing to pay for a product depends, in part, on the availability of substitute products. The threat of the substitute product can threat the demand for the business products. If there are close substitute product for a company, it means that the business is hard to raise price as the customers may switch to their competitors.
The threat of entry: if the return of investment in an industry is higher compared with the average return of business, the industry will attract many new players if the entry barrier is low. If the entry barrier is low, you can expect the industry profitability return to average with the intensified competition.
The bargaining power of supplier: If the bargaining power of the supplier is high, the supplier may raise price or restrict the key input to the business which will post a significant challenge for business.
The bargaining power of customer: If the bargaining power of the customers is high, it means that the customers can exerting influence on prices, style or other factors.
The industry competition: For most industries, the major determinant of the general level of profitability is competition among the firms within the industry. An industry with many small player with similar products or service will face fierce competition. When analyzing the industry competition, you need to go deep into the aspect of industry concentration, product diversity, capacity and exit barriers etc.