What is an Industry Analysis?
An industry analysis, also known as a market analysis, is used to provide information about an industry’s customers, competitors, financial characteristics, and other important variables that influence a company’s decision to enter the market. Using these insights, a company can make informed financial, operational, and marketing decisions.
The Importance of Industry Analysis
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. Entrepreneurs considering entering an industry should conduct their own industry report beforehand to ensure the industry activities align with their business’ long-term goals.
Something to consider is the consolidation trend of companies in your industry. Consolidation is the process in which a larger organization merges or purchases a smaller business and combines it into a single entity– operating under one organization and combining financials. If you are looking to eventually sell your company, an industry with a high consolidation trend might be a good fit.
Most Effective Strategies
One of the most effective strategies to understand your competition within an industry, along with that industry’s weaknesses and strengths, is Porter’s Five Forces. 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.
Steps To Take
Model out each of the factors that affect your business according to Porter's 5 Forces using this template.
Strategize on the ways that you can pivot your entity if factors change.
Key Questions to Consider
Threat of New Entrant
Are the barriers to entry in your industry high or easy to surpass?
Is profitability in your industry dependent on economies of scale?
Economies of scale are the cost advantages a company attains when increasing production. A company can enjoy a lower cost per unit as production increases because costs are spread out over more units.
Does entering your industry require a large investment?
How many suppliers are in your industry?
The fewer the suppliers in your industry, the more power they have over what they can charge for their products or services because they know you rely on them.
Are there any risks of suppliers joining the industry as producers?
What are the costs associated with switching suppliers?
Threat of Substitution
What are products/services that could compete with my product/service?
What are the steps that I can take to ensure that my product can be differentiated?
Having a product or service that cannot easily be replicated is key.
What is my competition doing that I am not doing?
Is there a competitor with a large portion of the market share at the moment?
Who are the customers that are purchasing your product or service?
How sensitive are customers to price changes?
Are customers brand loyal or are they willing to substitute with other competitors?
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