What Is an Industry Analysis?
Industry analysis is a vital responsibility of any business analyst so they can understand the future outlook and the demand-supply mechanics.4 min read
Industry analysis is a vital responsibility of any business analyst. It is a study of a specific industry to understand its future outlook based on past trends and its demand-supply mechanics.
Businesses use industry analysis to help them understand how companies, including their own, compete within an industry.
Aspects of Industry Analysis
Aspects of an analysis include:
- Demand-supply statistics
- Degree of competition within the industry
- State of competition between the industry and emerging industries
- Future prospects based on things like technological advances
- Credit systems
- Influence of other external factors in the past and possibly the future
Industry analysis gives a company an idea of where they stand within their industry. It also provides insight into new opportunities or threats that could affect the company.
Industry analysis isn't perfect, but it still provides valuable information that businesses can work with.
Types of Industry Analysis
Michael Porter introduced Porters' Five Forces, one of the most famous models for industry analysis, in his 1980 book “Competitive Strategy: Technique for Analyzing Industries and Competitors.”
Porter states that analyzing the Five Forces produces an accurate overview of an industry's inner workings and makes analyzing easier. It gives companies a good base for building strategies and understanding the industry's environment. The Five Forces mainly help to determine the attractiveness of an industry. They are:
1. Intensity of Industry Rival
The amount of other companies in an industry and their market shares is a direct indication of that industry's competitiveness. There are a lot of factors that affect these. A lack of diverse products and high exit costs (fixed assets, government restrictions, labor unions, etc.) also add to the competitiveness.
2. Threat of Potential Entrants
If it's easy for new businesses to enter the industry, the risk of having more competition is extremely high. It it's difficult, companies who have small competitive advantages can benefit from them for longer. Also, business's competition remains more constant.
3. Bargaining Power of Suppliers
If an industry relies on only a few suppliers, those suppliers have a lot of room for bargaining. This especially affects small businesses because it influences the price and quality of their product.
4. Bargaining Power of Buyers
If an industry has a lot less buyers than it does suppliers, the buyers have more power. Buyers can bargain for lower prices, better quality, discounts, and additional services.
5. Threat of Substitute Goods/Services
When an industry has similar products to another industry, it adds that much more to the competition. This can lower profits because companies can't charge higher prices than their competitors. Substitutes can be products that work the same but vary in pricing, or products that cost the same and vary in quality and utility.
Broad Factors Analysis is the analysis of Political, Economic, Social, and Technological factors or PEST. An analyst using PEST would study the four components of the model.
SWOT Analysis is a way to shrink other analysis methods into a form that shows businesses how factors might affect them. It stands for Strengths, Weaknesses, Opportunities, and Threats.
The Importance of Industry Analysis
Many companies have a dedicated industry analyst.
Businesses can use analysis to identify which stage of growth they are in. They could still be growing and gaining advantages, or they could be at a point where there's no more room to grow.
A detailed analysis can provide entrepreneurs with opportunities that no one else sees.
It's important to understand that industry analysis is subjective and won't always guarantee desired results.
How to Write an Industry Analysis
The most important step to take when writing an analysis is studying the competitive scenario of an industry using the Five Forces.
To write an analysis:
- Start by writing a brief outline of the industry.
- Include historical data, the current state of the industry, and it's potential for growth.
- State which economic factors influence the industry the most and the reason for your analysis.
- Add some information about the industry's competitors and how they operate.
- Then, write about any similar services or products.
- After the outline is finished, start writing the detailed analytical presentation.
- Note factors like income projections, past performance, price fluctuations, consumer base, and geographical growth.
- Forecast industry growth for the next decade using existing financial data and industry understanding, perhaps using a graph.
- Next, apply Porter's Five Factors to the industry in detail. Write about how they're used and their effects on the industry.
- Finally, give long-term and short-term assessments. Explain any foreseeable issues or opportunities and how to avoid or take advantage of them. Finish off with a three or four-line summary.
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