why is it important to include an industry analysis in a business plan

Why Is Industry Analysis Important?

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• What Characteristics Make an Industry Attractive to Entrepreneurs?
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Industry analysis is a tool that many businesses use to assess the market. It is used by market analysts, as well as by business owners, to figure out how the industry dynamics work for the specific industry studied. Industry analysis helps the analyst develop strong sense of what is going on in the industry. Think of it as a fancy way of “getting the lay of the land."

When it comes to business, industry analysis involves such things as assessing the competition in the industry; the interplay of supply and demand in the industry; how the industry holds up against other industries that are emerging and providing competitions; the likely future of the industry, especially in light of technological developments; how credit works in the industry; and the exact extent of the impact that external factors have on the industry.

The importance of industry analysis is manifold. As an entrepreneur trying to find your way in the industry of your choice, you can use industry analysis to understand what your position is, relative to the position that other players in the industry have. You can use industry analysis to your advantage to identify opportunities and threats within your environment, as well as to plan for the future of your business, in the context of the future of your industry. The only way you can survive in any competitive industry is that you will need to understand how you measure up against your competitors, and then use that information to your fullest advantage.

What Is the Purpose of Industry Analysis?

The importance of industry analysis for marketing capability cannot be overemphasized. Industry analysis and the associated skills used to carry out industry analysis are absolutely critical for your business, as they will help you gain an intimate understanding of the environment within which you’re operating. This importance has various facets to it, however, and they can each be discussed in some detail.

Industry Analysis Can Be Used to Predict Performance

One of the greatest indicators of how well your business will perform in an industry is the performance of the industry as a whole. If the industry is doing well, then your business is likely to do well within that industry, provided you run it well enough. By being able to foresee the changes that are likely to take place in the industry, this will help you see which changes that industry is likely to go through. For example, if there is a significant drop in the price of fuel, then manufacturers of products that require fuel to produce will enjoy better profit margins. Being able to predict such changes will give your business the opportunity to react in a strategic manner when doing industry-related projects.

Industry Analysis and Positioning of a Business

During the planning phase of your business, you will be better able to position yourself in the market if you understand how the market works. For example, if you understand the kind of products being sold in the market, as well as how saturated the market is, you will be better able to figure out how you can differentiate yourself from the competition.

Industry Analysis to Identify Threats and Opportunities

Throughout the process of industry analysis, you will be able to identify many different threats and opportunities. Threats are any phenomena that would impede the growth of your business, while opportunities are phenomena that would catalyze the growth of your business.

What Types of Industry Analyses Are There?

There are three main ways in which you can perform industry analysis. These are:

• The Competitive Forces Model, also known as Porter’s 5 Forces.
• The Broad Factors Analysis, also known as PEST Analysis.
• SWOT Analysis.

Porter’s 5 Forces/Competitive Forces Model

This is one of the most famous models of industry analysis that we have today. It was first used by Michael Porter in the book Competitive Strategy: Techniques for Analyzing Industries and Competitors .

The book lays out the theory that there are five forces, the analysis of which will give a business a proper impression of what is going on within the industry. The five forces are as laid out below:

The intensity of rivalry in the industry: The two factors you can use to gauge how competitive the industry is overall are the number of participants that take part in the industry and the market share that each industry player commands. A variety of factors determine this. If there isn’t much differentiation in the products sold in the industry, then typically, there will be very stiff competition. The same applies if there are such factors as labor unions, restrictions by the government, and high exit costs, due to the nature of fixed assets. All of these things will contribute to the intensity with which competitors will go at each other.

The threat of new entrants to the industry: How easy is it for a new firm to enter the industry? Can a new player just walk in and set up shop without too many things working against that player? If it is very easy for a new business to enter the market and set up shop, then the players already in the market are constantly facing the threat of new competition, in addition to the competition they already face from existing players. If entry costs are especially high and it is extremely difficult for new players to enter the market, then whichever company currently enjoys a competitive advantage gets to enjoy that competitive advantage for a little while longer. Also, as long as entry is difficult, then the company players will face the same competitors throughout, which makes it much easier for them to adjust.

The bargaining power enjoyed by suppliers: Does the industry you’re trying to get into have a small number of suppliers? If it does, then those suppliers will have a lot of bargaining power, since they enjoy a kind of oligopoly. If there are a lot of suppliers then the bargaining power will be shifted to the business instead. This can be crucial for a small business because dealing with difficult suppliers can have a direct influence on the price of a product, as well as its final quality.

The bargaining power enjoyed by buyers: It’s a little different when we consider the kind of bargaining power that buyers have. If the buyer enjoys most of the power in the market, then that buyer can demand lower prices on products, as well as better quality products and discounts, or after-sales services on those products. Typically, this is what happens in industries where there are a few buyers but a lot of businesses offering the same product. The few buyers will have the bargaining power in that industry.

The threat of substitute goods and services: Typically, industries do not experience competition solely within themselves; they also compete with each other. An industry will be in direct competition with another industry that offers substitute goods or services for that industry. By extension, all of the companies within an industry will be in competition with other companies in a competing industry. Their profitability will be affected by this, because there is a glass ceiling on the prices they can charge for their products and services. There are generally two kinds of substitutes: the first are products that have the same quality or function as the product in question, but are products are offered at a lower price, while the second are products that are offered at the same price as the product in question but are of a higher quality or greater utility.

PEST Analysis/ Broad Factors Analysis

This type of analysis stands for Political, Economic, Social, and Technological or PEST analysis. It is a highly useful framework with which we can gain an understanding of the environment within which we operate. In order to perform the complete PEST analysis, each of the four factors that make it up must be analyzed in detail:

Political factors: These are the factors that affect an industry, which are determined by the authorities. They include regulations and policies that affect the industry either directly or indirectly, such as trade policies, tariffs, environmental regulation, taxes, the ease of doing business, labor laws, and the political stability of the country or region within which the business and industry operate.

Economic factors: These are the economic forces that govern the industry and the country within which the business operates. They include such factors as the ability to access capital, the GDP growth rate, the interest rates, the exchange rates, and so on.

Social factors: These are prevalent trends in the society within which the business and industry operate. They include such aspects of society as social movements, fashion, health, demographics and population.

Technological factors: This includes all factors that have to deal with any developments or advancements in technology that could change the mode of operation of the industry or business, or even disrupt the industry entirely.

SWOT Analysis

The acronym SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. It is a framework that pretty much supersedes others already mentioned, in the sense that it can be used to evaluate those others. With SWOT analysis, you can figure out what your strengths are, according to your PEST analysis, what your weaknesses are, what opportunities your environment presents, and what threats you have to deal with.

Strengths are the characteristics your business has that give it some kind of advantage over competitors.

Weaknesses are the characteristics your business has that give it some kind of disadvantage, relative to its competitors.

Opportunities are the elements in your business’ external environment that allow you to form and implement strategies to make the business more profitable.

Threats are the elements in your business’ external environment that could potentially harm the integrity or profitability of your business.

Whenever you conduct any kind of analysis on the industry, you will come across two types of factors: internal and external.

Internal factors are those that already exist within the business and that have contributed to your business’ current position. These factors may or may not cease to exist in the near future.

External factors are those that exist outside of the control of the business; these are considered contingencies. They are assessed on the probability of their occurrence and on the kind of impact they would have on the business, if they happened. You should also consider whether or not the leadership of the business has the ability, as well as the intention of taking advantage of the opportunity, - or of avoiding the threat.

What Are Some Effective Industry Analysis Tactics?

Conducting industry analysis will take time and energy. This kind of analysis is not only time consuming, but is also quite complicated. If you miss any of the important stuff, then you have a faulty analysis in your hands. There are, however, some steps you can take to make it more effective and more likely to be accurate:

Look at What Has Already Been Documented

There will likely already be plenty of industry reports that are relevant to your analysis. Take your time to read all of them. See if digging deeper into these reports makes more sense. Some of these resources will be so in-depth that you won’t need to conduct industry analysis at all. That doesn’t mean that you should depend entirely on reports that were formulated on the past. Remember that any industry is constantly changing, and that some industries can be volatile. Do your best to select the most current report that will provide the most up-to-date view of things.

Be Choosy About the Industry You Analyze

Every industry has different sub-industries. Chemicals will be divided into organics, pesticides, and so on. When you select an industry, select the industry that is most relevant to you, and focus on that.

Study the Supply and Demand of the Industry

The interplay of supply and demand are the main factors that control a market. You should look into the scenario for these factors for a given product, doing trend analysis based on past trends and using the results of that analysis to forecast the future.

Study Your Competitors

You need to look at your competitors and what to expect from them. The best model to use here is the 5 Forces Model by Porter.

Study Recent Developments in the Industry

Look at factors influencing the industry on a macro level. These factors include new innovations, comparisons with similar industries across the globe, and so on.

• CFI: What is Industry Analysis?
• Finance Walk: How to Do Industry Analysis, Examples, Steps, Porter Model
• Cleverism: Industry Analysis
• SageWorks: What is the importance of industry analysis?
• Inc: Industry Analysis

Nicky is a business writer with nearly two decades of hands-on and publishing experience. She's been published in several business publications, including The Employment Times, Web Hosting Sun and WOW! Women on Writing. She also studied business in college.

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Industry analysis: why it’s important & how to analyze an industry.

Conducting an industry analysis is the best way to understand your competition and any opportunities in the market.

Think about a time when you put all your energy and effort into something, only for someone else to do it better or do it first. It’s discouraging, isn’t it? You then think back through your process to identify where you went wrong.

Did you overlook some external factors? Were you not up-to-date with industry trends? The degree of competition is important to recognize when developing a competitive strategy.

It’s always easier to look back and see what went wrong. You could have missed technological factors or competitive factors. Or your business plan and competitive analysis might not have taken into account the market size.

So how do you figure out the degree of competition and use that information to set your business apart? You perform an industry analysis! Here’s everything you need to know.

Here’s What We’ll Cover:

What Is an Industry Analysis?

The importance of analyzing an industry in business, what you need for industry analysis , different methods to perform industry analysis, key takeaways .

There’s no difference if you have been in business for decades or you’re new to the market. Performing an industry analysis is important to better understand your niche. Essentially, industry analysis is a look into your market to see how your business compares to your competition. 

An industry analysis looks into every element of your business and how it lines up with others. It’s important to fully understand your strengths and weaknesses to identify any opportunities or threats. When you know your market conditions and any financial factors, you get ahead of your competition.

By taking a look into what makes your industry tick you get a better sense of your company’s position. Industry analysis can assess demand and supply and technological changes. It can also find external factors that influence the competition. 

You’re able to better forecast your growth rate and plan for evolving industry dynamics. The result is the best possible strategy to increase your market power. If you don’t take the steps to understand how you stack up compared to your competition and gain a competitive edge, they definitely will. 

Conducting an industry analysis requires more than doing a simple search. You need to find and understand any competitive advantages, and there are a few different ways you can do it. 

Some businesses hire outside firms to use mathematical forecasting for quantitative analysis. Others use qualitative analysis to come to make business decisions based on the information they gather. Whatever route you go, it will include specific market research and competitive analysis. 

Here is everything you need to know to conduct your own in-depth industry analysis and get ahead of the competition!

Understand the competition:

• When you know your competitor’s products and services, you know how you can differentiate
• Are you targeting similar audiences? 
• What products and services are your competition offering?

Use market research:

• Look into the demand of your market, the market size, and any economic indicators
• Where do your customers live? How saturated is the market? What do your customers usually pay for similar products and services?

Analyze the data that you have collected:

• Knowing your own strengths and weaknesses is important. But knowing the strengths and weaknesses of your competition is equally as important
• Assess what your competition offers and compare it against your own
• Are the features and benefits that you offer meeting the demands and needs of your consumer base?

Evaluate your position in the market:

• What’s your market share compared to your competitors?
• Understand if you need to adjust the price of your product or service 
• Find any advantages that you have and identify possible threats in the future
• Similarly, find any weaknesses your company has and address how you can turn them into advantages

When you compile all of this information into an industry analysis, you can make better business decisions moving forward. You can identify any gaps in the market and how you can fill them. Plus, knowing what your competition is doing is the best way to know how to beat them.

The points outlined above are an excellent starting block to understand your business and where it stands in the market. But there are some industry research and analysis models designed to take it even further. 

Competitive Forces Model (Porter’s 5 Forces)

The main purpose of using this model is to formulate a strategy and understand the competitive landscape. It consists of the Five Forces of Analysis.

• Industry rivalry and the amount of competition in the market
• The threat of new products or services entering the market 
• The bargaining power of buyers and how they can influence pricing
• The bargaining power of suppliers and how they can limit your profit
• The threat of new competition potentially entering the market

SWOT Analysis

The SWOT Analysis is commonly used across many different industries. It represents identifying and understanding any strengths, weaknesses, opportunities, and threats.

• Identify the strengths of your business and what currently sets up apart from the competition
• Recognize the weaknesses that may be present and where you have any disadvantages compared to your competitors
• Find the opportunities that are available in the market and how you can develop a strategy to increase profitability
• Determine any threats to your business, both internal and external. How could they affect the way you operate, your profits, or overall integrity?

It’s one thing to find information and conduct an industry analysis, but it’s another thing to understand the data you collect. Markets are constantly fluctuating and can change at the snap of a finger. It can be overwhelming!

But the power and influence that you can generate from understanding how your industry and competition work can set you apart. You will be more knowledgeable and better prepared to leverage opportunities and stop any threats in their tracks.

Find more relevant articles for your small business on our resource guide .

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Industry Analysis

What is an industry analysis.

An industry analysis is a marketing process that provides statistics about the market potential of your business products and services. This section of your plan needs to have specific information about the current state of the industry, and its target markets. An industry analysis may contain reference materials such as spreadsheets, pie charts, and bar graphs in order to represent the data.

Navigation:

Step-by-step checklist.

• Library Business Research Resources
• Government Websites, Including Labour Market Information Sources

Identify your industry and provide a brief overview. You may need to explore your industry on a local, regional, provincial, national, and/or global level. Be sure to define relevant industry codes. Provide statistics and historical data about the nature of the industry and growth potential for your business, based on economic factors and conditions.

Summarize the nature of the industry. Include specific information about growth patterns, fluctuations related to the economy, and income projections. Be sure to document recent developments, news, and  innovations. Also, discuss marketing strategies, and the industry's prevalent operational and management trends.

Provide a forecast for your industry. Compile economic data and industry predictions at different time intervals (5, 10, 20 years). Be sure to cite sources. Note: the type and size of the industry will determine how much information you will be able to find about a particular industry. Define if it is new and emerging, growing, maturing or declining.

Identify government regulations that affect the industry. Include any recent laws pertaining to your industry, and any licenses or authorizations you would need to conduct business in your target market. This section may include information about fees and costs involved.

Explain your unique position within the industry. Once you have completed your Competitive Analysis (in the next section) you can list the leading companies in the industry, and compile an overview of data of your direct and indirect competition. This will help you communicate your unique value proposition.

List potential limitations and risks. Write about factors that might negatively impact your business and what you foresee in the short-term and long-term future.  Outline what you know about the driving forces: new regulations, technology, globalization, competitors, changing customer needs.

Talk to people! Go to tradeshows, do cold calls, talk to people in relevant associations and go to business events.

Tip: How to generate keywords to search databases

Before you access the resources and databases below, it is best practice to consider the key words you can use as search terms to find information about your industry. Follow the steps below: 

• Pinpoint the main words/phrases that describe your industry.  (i.e. "bar")
• Brainstorm several alternative words/phrases that will bring you additional search results. These may be direct synonyms, or tangentially related.  (i.e. "pub," "nightclub," "drinking place," "tavern," "restaurant.")

Tip: How to use NAICS codes

At the start of your research, it may not be clear what specific industry you should be examining. A good strategy is to find out if your business idea is classified in an industrial classification system. These systems organize industries by assigning them a numeric code. The most commonly used system is the North American Industry Classification System (NAICS).  Once you know your Industry Classification Code you can use this number to :

• Find industry-specific statistics on government websites or in library databases
• Generate lists of competitors in company directories

Another common classification system is the Standard Industry Code (SIC). NAICS have most replaced the SIC, but the SIC is still used by some commercial databases. Finding and using these classification systems to effectively search can be tricky, so don't hesitate to ask a librarian for help.

You can keyword search for your industry NAICS code here:

Search or browse all NAICS or SIC codes on the  NAICS Association website . Some NAICS codes are different in Canada — you can search by keyword or browse Canadian NAICS codes at  Statistics Canada  or  Canadian Industry Statistics. To search for a SIC code using a NAICS code and vice versa, use the NAICS & SIC Crosswalks.   

For more information about planning your industry research, including identifying your industry codes, check out the video tutorial for  Module 3: Planning Your Industry Research .

Don't forget to take a look at our Industry Guides for detailed industry-specific market research resources!

Library Business Research Resources:

Business resources at academic libraries .

Colleges and Universities with business programs will have useful business collections you may be able to get access to through their academic library. Often these academic libraries can provide the general public with access to their collections, which include electronic resources like databases and e-books. For example, they could have alumni or community cards, and can provide temporary "guest" passes in certain situations. Contact your local college or university library to see what they can provide. Please note: you probably will not get access to their electronic resources with remote access.

UBC Library Business Databases

How to access: If you are a UBC student, staff, faculty or in-person library visitor you may have access to business databases through the David Lam Management Research Library and Canaccord Learning Commons through the links below.

Full Listing By Title or Full Listing By Subject

There are two different ways to identify databases: Use "by title" if you already know the name; otherwise you can search the list "by subject" to find starting places for undertaking market research, finding articles or researching companies. To learn more about how you can access library resources if you are a community user or temporary visitor, check out the UBC Library  Community Users & Visitors Guide . Community users and temporary visitors may have additional access restrictions to specific databases because of license agreements.

Discovering where you can access the information you need to complete your research can be tricky. Below, we have a few examples of potential sources that collect the type of information you will need.

Ibis World Industry Reports

Business Source Complete

Canadian Business and Current Affairs

Canadian Newsstream

Trade Publications, Journals, and Magazines:

Industry and trade associations work to keep people within an industry informed about the industry through newsletters, magazines, and trade fairs. The information can range from a detailed focus on a specific product line, to general coverage of an industry or key business risk and trends. Industry and professional association websites can be excellent sources of free information whether or not you are a member of that organization. In addition, you can find news about industries via government websites, news databases, as well as news directories and search engines.

Ulrichsweb Provides publisher information on more than 300,000 periodicals of all types. Use this to create a list of relevant ones to check out in your industry. Search by keyword, publisher or geographic location.

Trade Associations:

Trade associations often publish free industry newsletters that are excellent sources of information for your business plan. Such newsletters often have articles that cover in-depth topics on business management, manufacturing practices, how-tos, current industry news and much more. One good reason to create a list of relevant associations is to see if any of them publish a monthly industry newsletter on their website.

ASAE Gateway to Associations Directory Use this directory to search for an association by name, interest area, or international geographic location (including Canada and BC). You can also search using a combination of various fields.

Associations Canada This library database covers Canadian, as well as some international, industry, professional or special interest associations. Searchable by type or keyword. You can use this to  identify key associations' websites and search for freely available newsletters, blogs or reports they they may publish on your industry. Please contact your local public or research library for access. Use of your library card may be required for online access to this resource. Print copies may also be available for in-person users.

Web searching tip: Use Google or another search engine to search for industry associations relevant to your industry in your location. If you don't find a relevant industry association, try broadening your geographic area (e.g. from Vancouver to British Columbia, or from Canada to the U.S. or international). If your industry is very specialized or new, look for associations for broader or similar industries.

Government Websites, Including Labour Market Information Sources:

BC Stats |  Current reports and statistics from British Columbia's central statistical agency including labour market information, economic statistics and bankruptcies. Start by searching their Industry section  and narrowing by industry type or go to the Business, Industry & Trade page to skim all the different business-related topics.

WorkBC  |  Find current employment outlooks, labour market information, relevant links, and a geographic representation of the BC workforce. Start by searching your  Industry Profile .

Innovation, Science, and Economic Development Canada Provides market research, industry statistics, licensing information for intellectual property, and information about doing business internationally. The Industry Canada site features interactive applications such as customizable trade reports, cost calculators, and online business planning guides. You can also search broad Canadian industry statistics .

Entrepreneurship Indicators Database This database is intended to provide comprehensive business demography statistics and performance indicators for enterprises in Canada. This information is available upon request.

What Is an Industry Analysis and Trends Business Plan?

An industry analysis and trends business plan is a component of a business plan that provides a comprehensive insight into industry conditions and trends. 3 min read

An industry analysis and trends business plan is a component of a business plan that provides a comprehensive insight into industry conditions and trends that can impact a company's success and growth. A thorough analysis of your industry and its trends can give you and other people a clearer idea of the feasibility and relevance of your business idea or goals.

Elements of a Business Plan

There are many different types of business plans. When you are creating your business plan, the information you choose to include will depend on your audience and personal preferences, as well as the questions you wish to answer and problems you seek to solve. While business plans may vary greatly, most of them contain the following elements:

• Executive summary
• Business description
• Analysis of business environment analysis
• Industry analysis
• Market analysis
• Competitive analysis
• Marketing plan
• Management plan
• Operations plan
• Financial projections
• What Is an Industry Analysis?

An industry analysis enables you to gain a better understanding of the industry and market in which you will be conducting business. By conducting an industry analysis before you start writing your business plan , you will be able to:

• Identify industry trends, such as potentially problematic aspects of the industry
• Identify trends and opportunities in products and services
• Calculate capital requirements
• Determine business risks and find ways to reduce them

An industry analysis must be specific to the industry in which you are conducting or are planning to conduct business. With the information you obtain from the analysis, you can devise a long-term strategy to mitigate risks and take full advantage of growth opportunities.

It is important not to confuse an industry analysis with a competitor or market analysis. An industry analysis seeks to describe the products or services offered in a specific industry and the boundaries of the marketplace in relation to economic, political, and regulatory issues. In other words, it defines the scope of the marketplace. A market analysis , on the other hand, helps you determine whether or not a market within your industry will be profitable for your products or services.

Conducting an Industry Analysis

The most widely used method for evaluating any industry was devised by Michael E. Porter from Harvard University. This method can help you create an effective strategy for competing in your industry. According to Porter, all industries and markets are influenced by five forces, which include:

• Ease of entry — Companies that are already operating in an industry will enjoy a competitive advantage over newcomers. However, their profits will be reduced unless they find a way to slow down or block the new entries. As for new businesses, they will face a variety of barriers, including government regulations, patents and copyrights, and customer loyalty.
• Suppliers' power — Suppliers of materials, products, or services can have a significant impact on a business' ability to compete. In the event that there are few suppliers offering the products or materials or few alternative products, the suppliers have the power to dictate quantities, prices, and delivery times for companies that have no choice but to buy from them.
• Buyers' power — In an industry where buyers can choose from many competing products, consumers will have strong bargaining power. This can affect the ability of a company to price its products or services without being afraid of losing customers.
• Availability of alternative products — In the situation where two businesses with similar products are competing within an industry, both of them will benefit as their marketing efforts will generally increase demand for their products. However, their market share will be reduced if there is another company selling a different kind of products that can serve as a substitute for theirs.
• Competitive rivalry — Competitive rivalry takes into account the number of competitors present in a particular industry, as well as their relative strength. In an industry where many companies are selling similar products, there is little opportunity for one company to control consumers' or suppliers' tendency to go elsewhere.

There are many free industry analysis tools and resources available to business owners who are preparing to create a business plan, such as:

• Securities and Exchange Commission
• U.S. Census Bureau
• Hoover's Online
• Thomas Register
• Library of Congress Legislative Information
• Websites of trade associations and companies

If you need help creating an industry analysis and trends business plan, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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THE IMPORTANCE OF INDUSTRY ANALYSIS

Industry analysis is a tool that facilitates a company’s understanding of its position relative to other companies that produce similar products or services. Understanding the forces at work in the overall industry is an important component of effective strategic planning. Industry analysis enables business owners to identify the threats and opportunities facing their business, and to focus their resources on developing unique capabilities that could lead to a competitive advantage.

Many business owners and executives consider themselves as worst victims, and at best observers of what goes on in their industry. They sometimes fail to perceive that understanding your industry directly impacts your ability to succeed. Understanding your industry and anticipating its future trends and direction gives you the knowledge you need to react and control your portion of that industry.

However, your analysis of this is significant only in a relative sense. Since both you and your competitors are in the same industry, the key is in finding the differing abilities between you and the competition in dealing with the industry forces that impact you. If you can identify abilities you have that are superior to competitors, you can use that ability to establish a competitive advantage. 

An industry analysis consists of three major elements: the underlying forces at work in the industry; the overall attractiveness of the industry; and the critical factors that determine a company’s success within the industry. The premier model for analyzing the structure of industries shows that rivalry among firms in industry depends on five forces: the potential for new competitors to enter the market; the bargaining power of buyers and suppliers; the availability of substitute goods; and the competitors and nature of competition. These factors are outlined below.

INDUSTRY FORCES

The first step in performing an industry analysis is to assess the impact of the five forces. The collective strength of these forces determines the ultimate profit potential in the industry, where profit potential is measured in terms of long term return on invested capital. The goal of competitive strategy for a business unit in an industry is to find a position in the industry where the company can best defend itself against these competitive forces or can influence them in its favor. 

Understanding the underlying forces determining the structure of the industry can highlight the strengths and weakness of a business, show where strategic changes can make the greatest difference, and illuminate areas where industry trends may turn into opportunities or threats.

Ease of Entry

Easy of entry refers to how easy or difficult it is for a new firm to begin competing in the industry. The ease of entry into an industry is important because it determines the likelihood that accompany will face new competitors. In industries that are easy to enter, sources of competitive advantage tend to wane quickly. On the other hand, in industries that are difficult to enter, sources of competitive advantage last longer, and firms also tend to benefit from having a constant set of competitors.

The ease of entry into an industry depends upon two factors: the reaction of existing competitors to new entrants; and the barriers to market entry that prevail in the industry. Existing competitors are most likely to react strongly against new entrants when there is a history of such behavior, when competitors have invested substantial resources in the industry, and when the industry is characterized by slow growth. Some of the major barriers to market entry include economies of scale, high capital requirements, switching costs for the customer, a high degree of product differentiation, and restrictive government policies.

Power of Suppliers

Suppliers can gain bargaining power within an industry through a number of different situations. For example, suppliers gain power when an industry relies on just a few suppliers, when there are no substitutes available for suppliers’ products, when there are switching costs associated with changing suppliers, when each purchaser accounts for just a small portion of the suppliers’ business, and when suppliers have the resources to move forward in the chain of distribution and take on the role of their customers.

Supplier power can affect the relationship between a business and its customers by influencing the quality and price of the final product. 

All of these factors combined will affect your ability to compete. They will impact your ability to use your supplier relationship to establish competitive advantages with your customers.

Power of Buyers

The reverse situation occurs when bargaining rests in the hands of buyers. Powerful buyers can exert pressure on businesses by demanding lower prices, higher quality, or additional services, or by playing competitors off one another. The power of buyers tend to increase  when single customers account for large volumes of the business’s product, when substitutes  are available for the product, when the costs associated with  switching suppliers  are low, and when buyers possess the resources  to move backward in the chain of distribution.

Availability of Substitutes

All firms in an industry are competing, in a broad sense, with industries producing substitute products. Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge. Product substitution occurs when a business’s customer comes to believe that a similar product can perform the same function at a better price.  Substitution can be subtle – for example, insurance agents have gradually moved into the investment field formerly controlled by financial planners.  The main defense available against substitution is product differentiation. By forming a deep understanding of the customer, some companies are able to create demand specifically for their products. 

Competitors

The battle you wage against competitors is one of the strongest industry forces with which you contend. Competitive battle can take the form of price wars, advertising campaigns, new product introductions, or expanded service offerings – all of which can reduce the profitability of firms within an industry. The intensity of competition tends to increase when an industry is characterized by a number of well-balanced competitors, a slow rate of industry growth, high fixed costs, or a lack of differentiation between products.

Another factor increasing the intensity of competition is high exit barriers – including specialized assets, emotional ties, government or social restriction, strategic interrelationships with other business units, labor agreements, or other fixed costs – which make competitors stay and fight even when they find the industry unprofitable.

Industry Attractiveness and Success Factors

Industry attractiveness is the presence or absence of threats exhibited by each of the industry forces. The greater the threat posed by an industry force, the less attractive the industry becomes. Small businesses, in particular, should attempt to seek out markets in which the threats are low and the attractiveness is high. Understanding what industry forces are at work enables small business owners to develop strategies to deal with them. These strategies, in turn, can help businesses to find unique ways to satisfy their customers in order to develop a competitive advantage over industry rivals. 

Success factors are those elements that determine whether a company succeeds or fails in a given industry. They vary greatly by industry. Some examples of possible success factors include quick response to market changes, a complete product line, fair prices, excellent product quality or performance, knowledgeable sales support, a good record for deliveries, solid financial standing, or a strong management team.

The reason for identifying success factors is that it will help lead you to areas where you can establish competitive advantages. The first step is to determine whether or not the company possesses each success factor identified. Then the business owner can decide whether the company can and should develop additional success factors.

Importance of Industry Analysis

A comprehensive industry analysis requires a business owner to take an objective view of the underlying forces, attractiveness, and success factors that determine the structure of the industry. Understanding the company’s operating environment in this way can help the business owner to formulate an effective strategy, position the company for success, and make the most efficient use of the limited resources of the business.

Once the forces affecting competition in an industry and their underlying causes have been diagnosed, the firm is in a position to identify its strengths and weaknesses relative to the industry. An effective competitive strategy takes offensive or defensive action in order to create a defendable position against the five competitive forces. Some of the possible strategies include positioning the firm to use its unique capabilities as defense, influencing the balance of outside forces in the firm’s favor, or anticipating shifts in the underlying industry factors and adapting before competitors do in order to gain a competitive advantage.

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Bernard Taiwo

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