Industry Analysis: Meaning, Types, Benefits, Limitations, and Necessity

Industry analysis is defined as an assessment tool designed to offer business entity a comprehensive idea about the complex nature of a specific industry. It includes reviewing the market, political, and economic factors that have a direct impact on the development of an industry.

Meaning of industry analysis

Industry analysis is conducted by the business entity or specifically an entrepreneur to identify the factors which are influencing the sector that they have already or thinking about investing in.

The potential new entrants, condition of the competitors, and both the buyer and suppliers have a direct influence on the working of an industry. It is the industry analysis concept that gives the business entity the necessary information so that they can make plans to tackle them effectively.

Remember, it is vital to gain a definite perspective about the forces at work in the overall scheme of things if you want to conduct comprehensive strategic planning.

The industry analysis helps the owner to know about the various opportunities as well as threats that face the business so that they can take steps to combat them and gain competitive advantage.

Understanding the environment surrounding the industry and the factors that are influencing them helps to anticipate future trends and gives you the weapon to take the required direction with confidence.

This has an impact on your ability to succeed as you are in a better position to take important calls and succeed in your endeavors.

Types of industry analysis

The types of industry analysis used are as follows-

#1. Competitive Forces Model or Porter’s 5 Forces

Michael Porter developed this model, and it gives a true impression of the industry. It includes

#1.1 Industry rivalry –

The number of already established rival companies, no product differentiation, high fixed costs, and slow growth are the factors that impact the competition in an industry.

You can see the industry rivalry in the form of ad campaigns, price competition, launch and introduction of new products as well as the additional services offered. Customer loyalty more often also gives rise to competition in the industry.

#1.2. The threat caused by potential entrants –

This determines the ease with which a new entry can enter the market and gives an idea about the difficulties that a new competitor or investor is going to face in the current conditions.

Some important barriers are a huge amount of capital investment, economies of scale, access to the distribution channel, cost of consumer alliance, brand loyalty of the customers, government policies regarding the sector and the degree of product differentiation.

#1.3 Bargaining power of suppliers –

The power of suppliers is predominant in places where their number is far and few between, there are not enough substitutes of their products, the suppliers are resourceful and the cost of switching from one supplier to another s too high.

They then have the bargaining power and has a direct impact on the industry.

#1.4 Bargaining power of the buyer –

In most cases, the buyer holds the whip as he is the predominant factor in the scheme of things. The future of the industry as a whole is mostly dependent on the buyer as he can influence decisions by demanding more discount, additional features as well as better quality.

The buyer has several buying options, whereas the supplier is dependent on the buyer for sale.

#1.5 The threat of substitute services/products –

Substitutes have a great hold on the market because if a substitute product is available to the buyer at a reasonable cost, he will tend to opt for it. The substitute easily minimizes the costs and ultimately, profits.

#2. Ratio analysis

Several ratios, for example, “profit per employee” is determined using the information and data from the industry and to compare it with the average of the industry as a whole. You can get an estimate about the progress of a particular unit by the help of this ratio.

The industry analysis is important in cases like diversifying and investing, and the ration analysis proves to be a great tool for this purpose.

#3. Broad Factors Analysis 

It is also known by the name of PEST Analysis and has proved its usefulness in analyzing external; environment. For using Broad Factor Analysis or PEST Analysis, it is important to know about the following four components

#3.1 Political –

The political factors that have an impact on the industry are regulations and policies related to overall political stability, labor laws, trade policies, tariffs, environmental regulation, and taxes.

#3.2 Social –

The social factors include behavioral trend, for example, fashion, health, demographics like gender, age, and population growth.

#3.3 Economic –

The economic factors that have an impact on the industry include the ability to access capital, GDP growth rates, interest rates, exchange rates, and inflation.

#3.4 Technological –

The technological aspects that have an impact on the industry include development and advancement that can change the way of operating a business and even the way people now live their lives.

#4. SWOT Analysis

It summarizes the numerous industry analysis system and establishes its implication for the entity in question. SWOT Analysis stands for strength, weakness, opportunities, and threats, respectively. You need to know the following g factors to conduct SWOT Analysis

#4.1 Internal –

The existing internal factors that have been the cause of the present condition can continue to exist

#4.2 External –

Measure the importance of external factors in terms of their happening and its impact on the business entity.

The necessity of industry analysis

Industry analysis is a way of collecting data and information, analyzing and assessing it, and lastly formulating a strategic plan for the growth in business. The necessity of industry analysis is explained below-

#1. Retaining valuable, existing customers –

It is the customers that are the lifeblood of a business. It is vital to retain the loyalty of the customers so that it can generate revenues.

It is the industry analysis that helps the business to understand rival companies and what are they offering to the customers to retain their loyalty.

This report will help you to make necessary changes so that you can enhance your skills and add value to existing customers

#2. Attracting new customers –

Once an organization has gained a better perspective on its competitors through an industry analysis report, it becomes easier to create new strategies for attracting new customers.

#3. Sustainability of business –

Strong value proposition helps the business in its plans of growth. It needs to know about its competitors their products and strategy to keep up with them. Industry analysis offers a framework that will keep the business sustainable for at least the next decade.

#4. Integrating strategy in culture-

Industry analysis provides the necessary framework and helps the business to align its strategy successfully with the culture of the organization.

#5. Star performers-

Industry analysis helps to know about the skills and knowledge your company needs to move forward. This way you can retain the employees that you think are suitable for your company.

It also helps the company to hire people from the outside with the necessary skills if you do not have them on board.

#6. Creating the bigger picture –

Industry analysis helps an organization to understand the industry requirements so that it can make a better framework for its company.

10 Benefits of industry analysis

The benefits of using an industry analysis are described below-

1. The industry analysis report is beneficial as it helps to assess the profitability of a particular industry
2. It is generally able to forecast the potential behavior of the competitors
3. Helps to recognize and identify strategies that will prove its worth
4. Industry analysis is a tool to develop a competitive strategy that will act as the best defense against competitive forces
5. Helps to highlight the strength and weakness of an organization with its analysis
6. Industry analysis pinpoints the area where strategic changes will yield best payoffs
7. It emphasizes on the area where the industry trend shows threats or even opportunities.
8. Industry analysis helps the entrepreneur to know about the position of his company relative to the competitors in the industry.
9. Can easily forecast demand and supply and consequently about the financial gains
10. Industry analysis helps to discover untapped opportunities in the industry.

4 Limitations of industry analysis

The limitations of an industry analysis are as follows-

1. Seasonal factors play a key role in an industry and can have a direct impact on the purchase and sale patterns. If analysts do not consider this factor it can prove a serious limitation in the industry analysis report
2. If an industry is hit by inflation severely, it has a direct impact on the balance sheets and can thus prove a severe limitation for the industry analysis report
3. Industry analysis is a subjective method and is not a guarantee of success.
4. Sometimes the incorrect interpretation of data can result in choosing the wrong path and making wrong decisions.

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