Definition of Industry Analysis
Industry analysis involves reviewing the economic, political and market factors that influence the way the industry develops. Major factors can include the power wielded by suppliers and buyers, the condition of competitors, and the likelihood of new market entrants. An industry analysis is a business function completed by business owners and other individuals to assess the current business environment. This analysis helps businesses understand various economic pieces of the marketplace and how these various pieces may be used to gain a competitive advantage. Although business owners may conduct an industry analysis according to their specific needs, a few basic standards exist for conducting this important business function.
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Facts of Industry Analysis
Small business owners often conduct industry analysis before starting their business. This analysis is included in the entrepreneur’s business plan that outlines specific elements of the economic marketplace. Elements may include the number of competitors, availability of substitute goods, target markets and demographic groups or various other pieces of essential business information. This information is commonly used to secure external financing from banks or lenders for starting a new business venture.
Features of Industrial Analysis
Industry analysis features include a review of the economic and political underpinnings of the business environment. Economic reviews often include an examination of the industry’s business cycle. The business cycle helps individuals understand if the industry is growing, reaching a plateau or in decline. A political review helps individuals understand the amount of government regulation and taxation present in the business industry. Industries with heavy government involvement may have fewer profits for companies operating in these environments.
The Importance of Industry Analysis
A comprehensive industry analysis requires a small business owner to take an objective view of the underlying forces, attractiveness, and success factors that determine the structure of the industry. Understanding the company's operating environment in this way can help the small business owner to formulate an effective strategy, position the company for success, and make the most efficient use of the limited resources of the small business.
"Once the forces affecting competition in an industry and their underlying causes have been diagnosed, the firm is in a position to identify its strengths and weaknesses relative to the industry,"
Porter wrote. "An effective competitive strategy takes offensive or defensive action in order to create a defendable position against the five competitive forces."
Some of the possible strategies include positioning the firm to use its unique capabilities as defense, influencing the balance of outside forces in the firm's favor, or anticipating shifts in the underlying industry factors and adapting before competitors do in order to gain a competitive advantage.
Considerations of Industrial Analysis
Industry analysis may be conducted using Michael Porter’s five forces model. Porter is a Harvard professor renowned for his work in creating a specialized industry analysis model. The five forces model reviews an industries supplier power, threat of substitutes, buyer power, barriers to entry and the rivalry that is created when companies compete for the previous four forces. This standard industry analysis tool helps individuals use a time-tested management procedure for generating intelligent business analysis.
Time Frame of Industrial Analysis
Business owners may need to conduct several industry analyses throughout their company’s lifetime. Economic markets are in a constant state of flux and may incur significant changes from shifts in political policy. Although smaller businesses may struggle to conduct an industry analysis in a timely manner, larger or publicly held companies often conduct an analysis each quarter. The results of their analysis are often included in forward-looking statements in quarterly or annual reports.
Expert Insight of Industrial Analysis
Small business owners may need to seek outside help for conducting an industry analysis. Management consultants, public accounting firms or the Small Business Administration (SBA) may provide small businesses with copious amounts of resources regarding various industry analyses. This information can save the business owner valuable time from attempting to reinvent the wheel and create a new analysis when one may already exist from a professional organization.
