Industry analyses aim to appraise the economic, political, sociological, environmental, technological, and market factors influencing industries and are the cornerstone of the formulation of strong and stable national industrial policy. Indeed, any of the foregoing factors can affect the ability to start and maintain a successful business in a specific industry within a country. An industry analysis is also an essential component of a business plan as it enables the formation of a strategy to support business growth and helps planners to position their business in the market for their products and services.
An industry analysis contains three key elements: the underlying forces working in the industry, the industry’s outlook and general attractiveness, and the critical factors determining a companies’ success within the industry. The most widely-used model to analyse industry structure was developed by Michael E. Porter in 1980. Porter’s model demonstrates that competition among companies in industry depends on five forces:
- The Possibility For New Competitors To Enter The Market – the easier it is for a firm to enter the industry, the harder it is for the other firms competing in the same industry to maintain their competitive advantage, and vice-versa. The ease of entry into an industry is contingent on:
- the response of the current competitors to new entrants;
- the barriers to entry in the market that exist in the industry; and
- market conditions in competing jurisdictions
Market incumbents (i.e. present competitors) are most likely to respond strongly in opposition to new competitors in the industry when they have invested a considerable amount of resources within the industry, and when the industry suffers from slow growth. Some of the barriers to entry in the market comprise scale economies, high capital requirements, customer switching costs, limited access to distribution channels, product differentiation, and government statute and policies.
- Buyer Bargaining Power – powerful buyers can exert pressure on businesses by demanding lower prices, better quality and/or additional services at the same price. Buyer bargaining power tends to rise when single customers account for large quantities of the business’ product, when alternatives for the product are available, when the costs relating to switching suppliers are low, and when buyers have the means to move backward in the distribution chain and take on their suppliers’ role. The relative ease with which product features and prices are compared online today, despite not being an increase in buyer bargaining power as conventionally defined, has greatly contributed to increasing buyer information and this has, in turn, had the same effect of increasing buyer bargaining power.
- Supplier Bargaining Power – this is the opposite of Buyer Bargaining Power. Suppliers gain power when an industry depends on a small number of them, when no close substitute for their product exists, when there are switching costs related to substituting suppliers, when each buyer accounts for only a small part of the suppliers’ sales and cannot, on that account, threaten to withdraw their custom thereby denting the supplier’s profitability, and when suppliers possess the resources to move forward in the distribution chain and take on their clients’ role.
- The Possibility for Product Substitution – substitutes limit industry returns by placing a ceiling on the prices firms in the industry can successfully charge without their customers switching for substitutes.
- Competitors and the Nature of Competition – firms can compete through price cuts, branding (advertisements, brand positioning and public relations), and saturation (new products and the provision of more services). Competition tends to intensify when an industry is characterised by slow growth, high fixed costs, or high exit barriers such as specialised capital assets and government restrictions.
Industry attractiveness depends on the level of threat exhibited by each industry force. The larger the threat posed by one of these, the less attractive the industry becomes, and vice versa. The overall industry attractiveness does not imply that each firm in the industry will have the same level of profits as firms are able to utilise their competencies and business model to gain a competitive advantage and attain a profit above the industry average. Indeed, understanding the underlying forces determining the industry’s structure can emphasise the strengths and weaknesses of a firm, demonstrate where strategic alterations can make the most difference, and clarify the areas where industry trends may turn into opportunities or threats. A successful competitive strategy aims to generate a defendable position in contestable markets against the five competitive forces identified above.
Although Porter’s model set out some important foundations for analysing industry structures, today an acknowledgement has to be made that this paradigm is not enough to analyse an industry comprehensively. For one thing, looking at things statically in an environment that is evolving over time necessitates that we look at these forces within their temporal and geographic dimensions after the relevant product / service market(s) have been defined, rather than looking at these forces statically. For another, the paradigm misses some important elements, or forces, like:
- industry cost structure;
- regulatory compliance burdens and jurisdictional issues such as policy stability, health costs, labour costs, specialised labour force availability, utility prices and the availability of supporting infrastructure;
- input-output, dependency and value chain insights;
- innovation and innovation potential; and
- industry risks.
Systematic industry analyses are usually presented in the form of a Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis. SWOT analyses have been applied at the macro- and micro- economic levels of industry analyses. Nevertheless, despite the popularity of SWOT analyses, SWOT cannot by any stretch of imagination be said to be an analytical framework, insofar as it is merely a way of presenting the findings of analyses undertaken using other paradigms or no paradigms at all.
Industry analyses can be carried out using both quantitative and qualitative methods. The former utilises mathematical forecasting techniques to analyse the industry, establish statistical relationships between important variables and simulate the evolution of the industry in the future under different scenarios. Among others, decision trees, game theory and probabilistic forecasts are frequently used in carrying out industry analyses. On the other hand, qualitative analysis involves subject matter experts with their ears to the ground evaluating industry information and making judgments from the information they possess.
Our Industry Analyses Services
The team at Equinox Advisory can assist you in a number of areas in relation to industry analyses. These include:
- Provision of analytical documentation for corporate strategy and industrial policy purposes;
- Provision of key industry-specific data and benchmarks;
- Industry trends and industry growth forecasts;
- Analysis of industry specific competition features within the industry;
- Determination of industry attractiveness for prospective entries and exits; and
- Business strategy and industry penetration strategy formulation;
Assessment of the likely effects of government regulations, policies and incentives on industries.