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Definition: Industry Analysis
A tool designed to conduct the market assessment of a particular industry to identify the factors that influence the industry, is known as industry analysis. Factors such as social, economic, political, cultural etc. studied. This is generally done to give entrepreneurs an idea about the industry they are involved in or have decided to invest in.
Michael Porter mentioned in his book ‘Competitive strategy’, the techniques to analyse industries and competitors. He proposed that the attractiveness of an industry depends on these five forces. He also mentioned that these five forces are the reasons for the rivalry between competitors. The five forces are:
i)The potential for new competitors to enter the market: This determines the ease of entry for a new entrant. It determines how easy or difficult it is for a new investor to enter a certain market. Some of the barriers to the ease of entrant are economies of scale, huge capital requirements, cost of switching to the consumers, accessibility to the distribution channels, degree to which the product can be differentiated, customer’s brand loyalty, Government policies pertaining to the sector etc.
Example: It is very difficult to enter well established and capital intensive industries like Steel industries, heavy machinery etc. On the other hand, it is rather easy to enter electronics and technology based industries, since, customers will buy products that are more technologically advanced.
ii) The bargaining power of buyers: Often, the future of an industry is dependent on the buyers. Buyers sometimes, have the power to influence the industry by asking for more discount, better quality, additional features etc. Also, a single buyer is very important to some sectors of the market. The buyer has many options available, the cost of switching to other product is relatively less.
Example: The apparel industry is one such example. Buyers have all the power here. The industry has to change the products according to the buyer’s demands, choices, sizes etc. While, in industries like that of Oil or natural gas, the bargaining power of buyer almost does not exist.
iii) The bargaining power of suppliers: Just like buyers, suppliers also have a bargaining power. Pertaining to which, they may affect the overall industry. Supplier power exists when there are very few suppliers, there are no substitutes to the supplier’s products, the switching costs of suppliers is higher, when the suppliers are more resourceful etc.
Example: The PC, laptop industry is highly dependent on Intel for the supply of micro-processors. AMD also supplies micro- processors, but consumers generally do not prefer AMD. Thus, Intel has a greater bargaining power in the PC, laptop industry.
iv) The availability of substitutes: If a certain product of the same quality is available in the market, at a lower price, consumers tend to buy the product with lesser cost. This is how substitutes influence the industry. They tend to reduce costs and thus profits. The only way this effect can be encountered is by product differentiation.
Example: Apple products are one of a kind types. Once the consumer starts using Apple products, hardly do they switch to cheaper substitutes.
v) The competitors and nature of competition: The main factors affecting the competition in an industry are the number of well-established competitors in the industry, high fixed costs, no product differentiation, relatively slow rate of growth etc. The competition can be seen in the form of price competitions, ad campaigns, new products introduction, extra services being offered etc. The barriers to exit an industry along with high customer loyalty etc. also give rise to competition.
Example: The electronics industry has the highest competition.
These five forces can be used to develop competitive strategy to enter a new market or sustain in the existing markets.
b. Ratio analysis
Various ratios like ‘profit per employee’ can be determined using your own industry’s information and can be compared to the industries average as a whole. These ratios can help determine the progress of the individual unit.
Industry analysis is very important for an entrepreneur. Investing or diversifying without doing the industry analysis is like shooting a bird when one is blind folded.