Why is industry analysis important

They have made this big decision of buying a new home. They have analyzed various areas and bungalows and buildings and flats. Finally, they have shortlisted a small home and are about to do the paperwork.

Luke has analyzed all the positives of that area and the amenities that are nearby. Daisy, on the other hand, is having a hard time. Since it is the biggest decision for her after her marriage, she has been going nuts. She is having nightmares of all the possible things that can go wrong with the house and the new place. But nothing went wrong in their case and they are living happily in the new home. Luke, being an intelligent person had done some proper analysis and predictions.

He made calculations of the possibilities and future prospects of that area and came with a positive outlook. Impressive right?

But do you want to know a little secret? Luke has some amazing analytical skills. So the question is that from where did he get such skills? Is it hereditary? Or has he developed it over time? The answer is that Luke is a big fan of Warren Buffet. He has been investing in the stock market for a long time and has been doing pretty good as well. How do you think was he able to buy such a magnificent new home?

Before investing in any company, he has done some good analysis of that sector and industry. He came up with his own industry analysis report and then decided on whether to invest in that sector or the company. The industry is a collection of Competitors producing a similar product or offering similar services to their customers. Industry analysis in a business plan is a tool which enables a company to understand its position relative to other companies that produce similar products or services like it.

While taking into account the strategic planning process, a company has to specifically understand the forces at work in the overall industry.

Thus the processes of Industry analysis in a business plan enables businesses to identify the threats and opportunities facing them. It helps them to focus their resources on developing unique capabilities which can help them to gain a competitive advantage. Understanding the industry and forecasting its future industry analysis trends and directions give the companies know they need to react and control their portion in the industry.

Understanding the critical industry analysis factors that determine success within the industry. Another important model for analyzing the industry was developed by Michael E. His model shows that rivalry among the firms in industry depends upon the following five forces:.

The threat of new entrants refers to the threat that the new competitors pose to existing market players in the industry. Naturally, a profitable industry will attract more competitors who are looking to achieve profits.

If the entry barriers in the industry are low, it may pose a great threat to the firms who are already competing in that market. Supplier power refers to the pressure that the suppliers can exert on businesses by raising prices or lowering quality or reducing product availability.

Strong suppliers can pressurize the buyers by raising product prices or lowering product quality or reducing product availability. Get on promotion fasstrack and increase tour lifetime salary. Explore A structured search through millions of jobs. Job Interview Training Skyrocket your resume, interview performance, and salary negotiation skills.

Find my next job. Resume Templates Choose resume template and create your resume. Cover Letter Templates Choose cover letter template and write your cover letter. Some of the major barriers to market entry include economies of scale, high capital requirements, switching costs for the customer, limited access to the channels of distribution, a high degree of product differentiation, and restrictive government policies.

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 the suppliers' product, 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 small business and its customers by influencing the quality and price of the final product. The reverse situation occurs when bargaining power rests in the hands of buyers. Powerful buyers can exert pressure on small businesses by demanding lower prices, higher quality, or additional services, or by playing competitors off one another. The power of buyers tends to increase when single customers account for large volumes of the business's product, when a 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.

Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge," Porter explained. Product substitution occurs when a small 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—or sudden—for example, compact disc technology has taken the place of vinyl record albums.

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. Competitive battles 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 restrictions, 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.

Understanding what industry forces are at work enables small business owners to develop strategies to deal with them. These strategies, in turn, can help small 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 first step is to determine whether or not the company possesses each success factor identified. Then the small business owner can decide whether the company can and should develop additional success factors.

A comprehensive industry analysis requires a small 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 small business owner to formulate an effective strategy, position the company for success, and make the most efficient use of the limited resources of the small business.

Clark, Scott.