How to do Industry Analysis?
By Contributing Author
Human beings are a substantial part of the universe at large. We do not exist in seclusion. In the same way, companies also do not function in isolation. They operate as part of a larger universe which is known as the industry or sector.
Now, to get an idea of industry analysis, it is imperative to get a proper understanding of Michael Porter’s five forces. Primarily, in industry analysis, there is a termcalled Porter’s five forces which refer to a corporate analysis model which is chiefly used by various industries to get a proper idea concerning the several levels of profitability.
To get accustomed to the whole idea of industry analysis, it is vital to understand what it refers to and how it is calculated to suit the needs and requirements of various business owners and members of the industry. This is what we will shed a light on in the following article.
What is meant by industry analysis?
Industry analysis is a business evaluation model that is used as a tool by market analysts as well as industry analysts to assess the different endeavours of an industry.
For a business owner or entrepreneur, industry analysis is done to get a better understanding of the position of the company concerning other members of the industry as a whole. This allows them to detect opportunities and predict any threats that may be coming their way.
Primarily, there are three methods of conducting industry analysis which is commonly used among analysts and strategists. These are namely the SWOT analysis method, the PEST analysis method, and the competitive forces analysis by Michael Porter.
In this article, we will talk about Porter’s five forces and understand how it helps in assessing different markets and industries.
How to perform industry analysis?
Let us first discuss how performing industry analysis benefits a market or industry. Now, a business analyst must carry out the process of industry analysis with an organized approach to yield the desired results.
- It is important for market analysts to get a proper understanding of the factors that control the prospects and threats that a company may be exposed to.
- It is vital to evaluate the company’s financial position about other companies.
- Industry analysis offers a strong idea of a company’s present as well as future trends in the industry.
Now, how is it done?
- The first step would be to recognize the appropriate industry after differentiating between industry and sector.
- The potencies of demand and supply should be properly comprehended.
- Ascertaining the life cycle of the industry is another vital step towards industry analysis.
- The specific performance metrics of the industry should be familiarized with to perform industry analysis.
- Finally, it is significant to analyze the competitive forces of the industry as put forth by Michael Porter.
Porter’s five forces
Michael Porter published his book about the five forces of industry analysis in the year 1980. Porter’s five forces have proved extremely useful in analyzing and evaluating the industrial structures of various companies. It also assists analysts in developing corporate strategies.
These five forces essentially help in determining the competitive strength, desirability, and profitability of an industry or sector.
Let us now learn more about the five forces devised by Porter.
- Degree of competitive rivalry in the industry:
The first force, as provided by Porter, is concerned with the number of competitors in the industry as well as their abilities. The number of entrants in the industry along with their market shares directly represents the competitiveness in the industry. The larger the number of contenders and their services, the lesser their dominance in the market would be.
- Intimidation of new entrants:
This essentially refers to the ease with which potential competitors can choose to participate in the market of the industry. If entering a market is easy, then it becomes unsafe for companies who will end up facing new entrants constantly. However, if the admission is difficult, then it is profitable for the companies that possess competitive dominance in that industry.
- Power of the suppliers:
This force mainly indicates the level of control that suppliers possess over the prices of goods, the quality of the raw materials along with their availability. This signifies the bargaining authority of the suppliers. If the number of suppliers in a particular industry is less, then the suppliers automatically enjoy superiority and benefits under that industry. However, if there are more suppliers in the market, then the companies can enhance their profits, and control their expenditures.
- Power of the buyers:
This pillar of the five forces of Porter refers to the level of influence that the customers can exert to get the best deals from the companies. Primarily, the power of the consumers is based on the number of buyers a company has, the significance of each consumer, and how much it would cost a company to develop a new clientele base. A smaller clientele means more benefits for the consumers while a larger client base would mean more profits for companies.
- The threat of alternative products:
This chiefly focuses on alternative products or substitutes. Alternative goods and services which can be used as substitutes for a company’s products pose a huge threat to that company. All companies in a particular industry have potential competitive rivals from other industries. This affects their viability and capacity to gain profit.
Industry analysis, as a form of market evaluation, is a significant process as it allows you to comprehend market conditions. It helps in predicting demand and supply as well as any threats that may come their way. It helps in regulating financial gains on the business. It also indicates competitiveness in the industry and gives you an idea about when entering the market would be most beneficial for you. Hence, it becomes extremely important to collect data and perform industry analysis with an organized approach.
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