In industry analysis, management intends to understand the attractiveness of the market or submarkets. Many investment decisions are based on industry analysis. Such analysis provides information on industry profitability, growth potential, key competitors and their success factors, distribution systems and other industry dynamics. Key issues in industry analysis include:
(i) Degree of competition in the industry,
(ii) Dominant economic features,
(iii) Drivers of change and,
(iv) Key success factors.
Degree of Competition or Market Profitability
In the analysis of market or industry attractiveness, we need also to determine the profitability of the market, which in turn, affects the profitability of the individual company. Most investment decisions including allocation of resources are based on expected “return on investment” (ROI).
Michael Porter’s Five-Factor Model of industry is a useful model to analyze the profitability of the market, which is influenced by the following factors:
Rivalry within the industry. Aggressive competition reduces prices and increases costs hence affect profitability. It depends on factors such as industry growth rate, product differences, brand identity, switching costs and exit barriers.
ii. Threat of Potential Competitors. High barriers to entry limit the number of competitors, discouraging potential competitors. Hence, affects profitability. It depends on entry barriers such as economies of scale, government policy, access to distribution and brand identity.
iii. Threat of Substitute Products. The emergence of substitute products, rather than competing brands of the same product affect the profitability or size of the market.
Substitute here refers to products of other industries that can be used to substitute the industry’s products e.g gas is a substitute of electricity.
iv. Bargaining Power of Customers. Customers’ ability to demand more or force prices down affects profitability.
v. Bargaining Power of Suppliers. Suppliers’ ability to influence cost of supplies or inputs directly affects profitability.
Dominant economic features
A dominant economic feature in an industry is an outstanding factor that characterizes the industry. Extreme factors rather than moderate factors tend to be outstanding. For instance, market size will be a dominant feature if it is too small or too big. They include market size, market growth rate, distribution channels used, resource requirement, and capacity utilization.
Drivers of Change
A driver of change in an industry refers to what is causing change in the industry i.e what is making the industry to change. They usually include change in the long term industry growth rate. Change in buyers or users of the product, change in uses of the product, technological change, product innovation and globalization.
Key Success Factors (KSF)
A success factor in an industry is a factor that enables firms in the industry to succeed. In an industry, success factors may be many, but key ones or those with strongest effect are few. Key success factors vary across industries and include management, human resource, equipment, finance, technology, research and development, cost of operations, quality among others.