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Why Is Industry Analysis

Important?
Small Business | Advertising & Marketing | Industry Analysis

By Nicky LaMarco Updated October 23, 2018

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."
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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

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1/24/22, 5:17 PM Why Is Industry Analysis Important?

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.
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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 Newsletters
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.
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1/24/22, 5:17 PM Why Is Industry Analysis Important?

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.

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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

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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.

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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

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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.

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Definition of Industry
Analysis
By Anne Johnson Updated November 13, 2020

MOST POPULAR

An industry analysis looks at how your company compares to others Marketing Environment & Competitor
1 Analysis
that are in the same niche. According to Inc., it's a tool that allows you
to understand your position among your competitors. When you
2 Why Is Industry Analysis Important?
conduct an industry analysis, you can better plan effective strategies
for your business.
3 Explanation of SWOT

What Is the Difference Between a SWOT

4 and a Five-Forces Analysis?

Do More Than Observe Market Forces

Observing market forces is one thing; falling victim to them is
another. Carefully evaluating your competition's strengths and
weaknesses allows you to be proactive with your plans.

Marketing91 points out that industry analysis allows your business to:

▪  Identify various opportunities

▪  Identify threats
▪  Gain a competitive advantage
▪  Understand your industry's environment

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To devise and implement a successful strategic plan, you must

understand the market forces at work in your industry.

Industry Analysis Methods

The Corporate Finance Institute explains that there are three
characteristics of industry analysis. They are:

▪ SWOT analysis
▪ Broad Factors Analysis (PEST analysis)
▪ Competitive Forces Model (Porter's Five Forces)

When you examine your company's strengths, weaknesses,

opportunities and threats, collectively referred to as a SWOT analysis,
you evaluate your business internally as well as outside factors that
affect it. The Broad Factors or PEST analysis is next. PEST – an
acronym for political, economic, social and technological – evaluates
external factors. The Competitive Forces Model, known as Porter's
Five Forces, has you looking at the market forces that affect your
business.

SWOT Requires a Realistic Internal Look

A SWOT analysis starts with your company's s
​ trengths​. Evaluate your
strengths from an internal view. Quickbooks suggests analyzing your
employees' attitudes to determine how they view the company. Take a
look at which processes are successful. Examine your physical
assets. These include:

▪ Equipment
▪ Customers
▪ Technology
▪ Cash

Do whatever you can to identify all the competitive edges you have
over your competition.

Determining your w
​ eaknesses​can be tricky. You want to evaluate
both your internal and external weaknesses. Take an honest and
thorough look at your company's management skills. Are there
difficulties the management has as a result of a lack of training or
experience? Are there organizational issues that interfere with the
effective functions of management? Look for any improvements you
can make.

Examine the necessity of additional tangible assets such as cash or

equipment. If location matters, determine whether you are in the best
area. Are customers happy with your products or services? Is there a
mechanism in place to monitor their satisfaction?

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Opportunities​are external factors that must be evaluated continually.

Taking advantage of identified opportunities can significantly
contribute to your success.

Monitor government regulation changes. There might be some that

positively affect your business. How do customers perceive you? Is
there an opportunity for repeat business? Identify events that are
happening in the marketplace that can positively affect you. Leave no
stone unturned.

And finally, LivePlan points out potential t​ hreats​to your business.

Some of these threats may include:

▪ New competitors
▪ Disrupted supply lines
▪ Changes in consumer behavior
▪ Changing market trends

Be ready to face them and determine a plan to deter them from

harming your business.

Looking Into PEST Analysis

Broad Factors Analysis or PEST is specifically used to analyze your
company's external environment. Understanding PEST – the political,
economic, social and technological factors that affect your business
– is important to plan and grow your company in any environment.

Political​factors can include:

▪ Specific policies
▪ Regulations
▪ Taxes
▪ Trade policies

Labor laws may also positively or adversely affect your business. The
overall political stability in the area you conduct operations influences
your business.

Economic​stability often goes hand in hand with politics, but

economic stability can be affected by growth rates and interest rates.
Inflation can also affect your business's stability.

The s
​ ocial​aspect can potentially influence your business. Population
growth, trends in fashion and health, and social movements may be
factors.

Historically, t​ echnological​advancement has proven to be a significant

influence across the entire business spectrum. Even if an
advancement doesn't immediately affect your business, new
technologies have far-reaching consequences, good or bad,
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depending on your business type. The way you do business could

change overnight based on one innovation. Keep on top of the
breakthroughs that are being made.

The Competitive Forces Model

The Competitive Forces Model, often referred to as Porter's Five
Forces, was developed by Michael Porter of the Harvard Business
School and describes the competitive forces that affect businesses.
The model includes:

▪ Industry rivalry
▪ Bargaining power of buyers
▪ Bargaining power of suppliers
▪ Threat of substitutes
▪ Threat of entry

These five forces influence your business's structure and how it

relates to your competition.

Industry Rivalry a Major Determinant

How profitable and competitive an industry is can help or hurt your
business. Strategic Management Insight explains that when an
industry has numerous competitors and slow growth, rivalry among
competitors can be fierce.

Not differentiating between products is another determinant, and low

customer loyalty can eat away at profits.

Bargaining Power of Buyers Influences Profit

Margins
Buyers can demand lower prices for better quality if they have market
power. This often happens when there are few buyers but many
competitors. The buyer is in a position to negotiate lower prices and
affect your profit margin.

Limited Supplies Equals Bargaining Power of

Suppliers
The bargaining power of suppliers is the opposite of the bargaining
power of buyers. If there are a limited number of suppliers, they have
the power. They can negotiate and charge what they want, which
potentially affects your product's price and quality.

Threat of Substitutes Affects Product

You'll always have competition, which keeps you from charging any
amount you want. If your customers can effectively find a product

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similar to the one they purchase from you – but at a lower price or
higher quality – the threat of substitutes affects your business.
However, there are ways to combat this threat and give your products
an edge.

▪ Produce the same product in a way that costs less.

▪ Produce a better quality product but charge the same.

Threat of Entry Always a Possibility

Threat of entry refers to the ease that a new company can enter an
industry. If you have a relatively easy industry to enter, you may
encounter a barrage of new competitors. It's rare not to have
competition, but be aware if you see new ones constantly emerging.

Reasons to Perform an Industry Analysis

Bizfluent reports that you can gain insights into your competition by
conducting an industry analysis. A weakness on the part of your
competitor could be a strength for you. This information can be
integrated into a marketing plan that makes it possible for you to
grow your business.

The results of industry analysis methods can offer insights into your
business's future. If you establish there are threats to your business,
you can be proactive in diminishing possible adverse outcomes.

If you are interested in attracting investors, a business analysis

confirms your credibility. It offers positive proof that you know your
competition and are aware of who your customers are and what they
want.

Importance of Conducting Industry Analysis

You should evaluate the internal and external forces that affect your
business. Always be cognitive of your immediate business
environment. The ability to understand your current position and
know when and how to pivot effectively protects and grows your
business. Once you have a solid understanding of those forces, you
can diagnose your strengths and weaknesses, which will ultimately
make your business more profitable.

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