Industry Analysis

Industry Analysis is a type of investment that focuses on the status of an industry or industrial sector.  Industrial analysis is to assess an organization’s market place.  It helps in determining the competitive rules and strategy an organization is likely to use.  To learn about that structure is essential insight for organizational strategy.

Michael Porter’s 5 Forces are widely used to assess the structure of any industry.  Porter’s 5 Forces are –

• bargaining power of suppliers,
• bargaining power of buyers,
• threat of new entrants,
• threat of substitutes,
• rivalry among competitors.

Stronger forces are associated with a more challenging business environment.  To identify the important structural factors of an industry via 5 Forces, an Industrial Analysis is conducted that will answer the question “what are the key factors for competitive success”?

Bargaining power of suppliers:

• How much power the suppliers have over your organization?
• Factors affecting the bargaining power of suppliers.
• Minimizing the bargaining power of suppliers.
• Perspective on the bargaining power of suppliers.

Bargaining power of buyers:

• How much negotiating power the buyers have?
• How much power do your buyers have over you?
• Minimizing the bargaining power of buyers.
• Perspective on the bargaining power of buyers.

Threats of new entrants:

• How easy for others to enter your business?
• Unique barriers.
• Factors affecting the threat of new entrants.
• Minimizing the threats of new entrants.
• Perspective on new entrants.

Threat of substitutes:

• What products your customers can by instead of yours?
• Substitutes can come in many forms.
• How substitutes affect the market place?
• Factors affecting the threat of substitutes
• Minimizing the threat of substitutes.
• Perspective on threat of substitutes.       

Rivalry among competitors:

• How intense is your competition?
• Intensity of rivalry among competitors.
• Factors influencing rivalry among competitors.
• Minimizing the threat of rivals.
• Perspective of rivalry among competitors.

All the above factors are not necessarily important when assessing the overall attractiveness of an industry.  In some industry, it is easy to gain entry, but very difficult to get out of it.  Normally these industries tend to be mediocre investment as such.

However, the 5 Forces concept provides entrepreneurs an excellent tool to examine the profit potential in a particular industry.  Gaining an understanding of the way in which each of the 5 Forces influences any industry profitability provides the company with tactics for countering the strength of the forces.

Questions:

• Why Industrial Analysis is important?
• Explain the Five Forces concept.