You guys must be thinking about what industry analysis is? As this concept might sound alien to many of you reading this article. So don’t worry about it. We’ve got it all covered here in this article for you.
This step-by-step guide will walk you through all the nitty-gritty of conducting an industry analysis while also understanding its applied significance in today’s dynamic industrial environment.
So, Let’s begin!
Industry analysis is a business technique. It is used by companies to analyze their current market position or the industry as a whole.
It also provides an overview of the industry by highlighting the existing competitors of a company in the same industry.
It also sheds light on how technology and other factors will affect the industry in the near future.
Business analysts working in every company rely on industry analysis for future forecasting since it provides insight into the demand and supply dynamics of the industry and past trends.
In today’s dynamic business world, all companies need to use this helpful analysis to stay ahead of the curve.
Through Industry analysis, companies can avail opportunities at the right time and gain maximum benefit since it gives prominence to the opportunities in the industry. Moreover, industry analysis identifies the threats that lie within the industry. It helps companies to make useful strategies to counter the threats they may face in the future.
Having provided an insight into what industry analysis is, we will proceed further and discuss the importance of industry analysis.
Do you remember back in the early 2000s how Nokia was dominating the mobile phone industry? But what went wrong? Why today, in 2022, no one remembers Nokia?
Nokia was once ruling the mobile industry, but it went downhill due to its wrong management decisions, which resulted from its incorrect assessment of the industry.
Today, if companies want to avoid the mistakes Nokia made, they have to closely monitor and proactively adjust accordingly to the industry trends, by using industry analysis.
Using Industry analysis provides companies a competitive advantage and helps them stay relevant in the industry.
Before we start off with Industry analysis, there are a few things that are to be done. First, to carry out an Industry analysis, it is essential to conduct detailed market research and competitive analysis so that the outcomes of industry analysis are helpful.
To carry out the industry analysis accurately, it is necessary to gather relevant reports, statistics, and data about the industry.
The collection of data will provide information about the past trends of the industry, and it will help in forecasting the future of the industry.
Forecasting, be it financial or strategic, will help the company to make strategies timely which will help the company to earn a competitive advantage over its competitors.
Moreover, past reports can be used to reflect the strengths and weaknesses of the company as they will provide insight into the company. Other than that, past reports will also give an overview of the competitors that could give a tough time to the company in the future.
Selecting the right industry is not enough to carry out the industrial analysis. Every industry has sub-parts. To get accurate and helpful results from the industry analysis, it is essential to choose the right industry and the right sub-industry.
For example, a company that manufactures jackets wants to conduct an industrial analysis of its company.
To do that, identifying that the jacket manufacturing company is a part of the manufacturing industry would be vague since the manufacturing industry has a lot of sub-industries. So the jacket manufacturing company has to identify that it’s a part of the apparel industry, a sub-industry of the manufacturing industry.
In this section, we will tell you how to write an industry analysis. There are three major components that are to be included while writing an industry analysis.
Every industry has a life over a specific period. An industry life cycle describes a business’s stages within its specific industry.
It is divided into five stages. Each stage represents a different period in which businesses grow and develop or shrink and fall out of existence.
● Startup Stage
The very first stage of the industry life cycle is the startup stage. This stage is the first stage of the industry life cycle.
At this stage, firms are busy creating awareness about the product or service and educating consumers since they are unfamiliar with it. Since competition is usually low at this point, innovation and investment in distribution channels and marketing are high.
● Growth Stage
The second and critical stage of the Industry life cycle is the growth stage. At this stage, the market share and growth rate accelerate. The quality of the products or services offered by the firms is ensured by regulatory authorities.
While the actual innovation process is looking for ways to improve the existing product, innovation now focuses on optimizing market share by creating a better manufacturing process, better delivery method, and more.
In the growth phase, the demand for the products/services continue to increase. This helps firms to enjoy profits and maximize their market share.
● Shakeout Stage
The third stage of this cycle is called the shakeout stage. As its name suggests, things start to get a bit tense for the firms at this stage as the industry starts to get saturated.
The shakeout stage of the industry life cycle is a time of intense competition. As a result, firms have few choices other than to lower costs, increase prices and make investments in marketing to survive in this competitive environment.
In general, firms that are weak in their marketing, innovation, support, customer, and product quality lose market share and eventually are forced out of the industry.
Moreover, strong firms gain more market share as weaker competitors leave the marketplace.
● Maturity Stage
After that, the industry enters the fourth stage of its life cycle, which is the maturity stage. At this stage, the industry is at its peak.
At this stage, the market has reached its maximum size, where growth is unlikely to be positive or negative.
Companies at the stage of maturity experience maximum profits, revenue, and cash flows because the demand for products/services is at its maximum. Products continue to become more popular among the general public, and the prices are pretty down compared to new products competing in the industry.
Companies with strong policies and sales numbers survive and dominate the marketplace. As a result, the market situation becomes an oligopoly with only a few large firms existing.
● Decline Stage
Right after the Industry experiences a peak, that’s when it is hit by a decline. The intensity of competition in an industry that is declining depends on several factors: the emergence of a new product, changes in the rules and regulations, supply chain issues, etc.
To deal with the decline, companies try to maximize their profit by focusing on their most profitable product line to stay in the industry.
To gain dominance in the industry, larger companies try to acquire smaller countries during the decline phase to somehow increase their market share. However, companies that face huge losses decide to quit the industry at this stage.
To write an industry analysis, it is essential to assess the competition in the industry. There are many ways to do that, but one of the most efficient ways to determine competition is by using Porter’s five forces model.
Porter’s five forces model helps analyze competition and analyze whether new products/services will succeed in the market. It highlights five factors that affect business competition.
● Competitive Rivalry
The competitive rivalry factor tells how many rivals there are and who they are. It also looks at the quality of competitors’ products and services.
In intense competition, companies frequently cut prices and launch high-impact marketing campaigns. This makes it easy for buyers to go elsewhere if they don’t feel like getting a good deal from a particular company.
Moreover, when a business does not face much competitive rivalry, it can make vast profits.
● Supplier Power
Supplier power refers to how easily suppliers can increase their prices.
If your industry has few possible suppliers, you are at a severe disadvantage and have little to negotiate. However, if there is plenty of competition, supplier power will be low, and you can use that to your advantage.
If you have multiple choices of suppliers, you can switch to a supplier who might provide a better deal. However, this creates pressure for your primary supplier to compete with those competing for your business.
A single or limited number of suppliers could leave you vulnerable if they decide to increase prices due to limited supply.
● Buyer Power
Buyer power is when a buyer has the ability to influence prices. For example, if there are fewer buyers than there are suppliers, the buyers have good bargaining power and can drive down prices.
Imagine, if a couple of savvy customers control your business, you will have to listen to them. However, suppose you have many customers and little competition. In that case, you can choose whom you want as customers and how much they pay for your products or services.
● Threat of Substitution
The threat of substitution refers to the likelihood of your customers finding alternatives for your products or services.
An example of substitution could be the conveyor belt in the factories. It is a substitute for the workers needed to transport the products from one part of the factory to the other.
Buyers would substitute for cheaper and better quality products.
● Threats of New Entry
A company’s position in a market can be seriously weakened if new companies enter the market. Suppose it takes little money and effort to enter a market. In that case, rivals can quickly enter the market and weaken the position of already existing companies.
However, if there are durable barriers to entry, it is almost impossible for a new company to enter the market.
For example, there are high barriers to entry in the pharmaceutical industry since drugs produced are protected by a legal patent. No one can replicate it; as a result, it is difficult for new companies to enter the pharmaceutical industry.
The third and last factor that needs to be included in the industry analysis is environmental analysis. You guys must be thinking, what’s that, but don’t worry. In this section, we will discuss what environmental analysis is.
The environmental analysis highlights the factors responsible for affecting a business’s environment. In addition, it highlights the factors that affect the performance of a business.
Both internal and external environments affect business operations and monitor that different tools are used.
One of the tools used to highlight external factors that affect the operations of a business is PEST analysis or otherwise known as the Broad factors Analysis. Pest is an acronym for political, economic, social, and technological factors that affect an organization.
Pest analysis starts off by highlighting the political factors affecting an organization. Under the section on political factors, factors such as government policies and political stability are discussed since it affects an organization’s operations.
Then economic factors are discussed. Factors such as inflation, interest rate, and exchange rate are discussed since they play a significant role in affecting an organization’s performance.
Moreover, other external factors, such as social and technological factors, are highlighted in the Pest analysis. Under the section on social factors, demography, culture, and social norms that affect a business are discussed.
Similarly, technological factors such as innovation and change in technology are discussed since they play a significant role in influencing a company’s operations.
Other than PEST analysis, SWOT analysis is also used to highlight both internal and external factors affecting the performance of an organization.
Swot analysis highlights strengths, weaknesses, opportunities, and threats an organization faces. The strengths and weaknesses are the internal factors that affect the operations of an organization, while opportunities and threats account for external factors.
While conducting a SWOT, initially, an organization’s strengths are highlighted. These are the internal factors of an organization that provide a competitive edge and make up for the strengths of an organization.
After analyzing the strengths, weaknesses of an organization are discussed in a SWOT analysis. Weaknesses are the internal factors that hold back an organization from achieving growth.
After highlighting the internal factors that affect the business, SWOT analysis highlights opportunities and threats an organization faces. These are the external factors that influence the operations of a business.
To have a better understanding of SWOT analysis and how it is applied to an industry as a whole, then have a look at the Swot analysis of the fashion industry.
To see what factors affect the environment of a business, it is necessary to conduct an environmental analysis.
PEST analysis and SWOT analysis are essential components of environmental analysis. Both are vital to determining what role internal and external factors affect an organization’s operations.
As we have reached the end of this article, let’s summarise what we have learned. We started off by explaining what industry analysis is and why it is essential to conduct an industry analysis.
After that, we discussed that it is crucial to collect the correct reports and data of the relevant industry to conduct an accurate industry analysis.
Then we proceeded further and learned how to write the industry analysis. While writing an industry analysis industry life cycle, we learned that assessing the competition and carrying out environmental analysis is necessary. In the end, we assume that now you guys know the significance of industry analysis, and reading this article has enabled you to conduct one for your own company.