Effective business strategies aren't created in a vacuum.
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You need to be informed about the marketplace and keenly aware of where the opportunities lie. But to do that, you'll need to know how to conduct an industry analysis. Here's how to get started . . .
It's a simple fact of business that some industries are ripe for profit and some aren't. Successful entrepreneurs are masters at analyzing industries and markets to identify gaps waiting to be filled by their company's products or services. Although the task of industry analysis can seem daunting, you can learn a lot by focusing your attention on the issues and areas favored by professional analysts.
Barriers to Entry
Barriers to entry are factors that make it difficult for new businesses to enter a particular industry. These barriers often consist of things like significant loyalty to existing brands, high fixed costs, or restrictions imposed on new entrants. If your business is already established in the industry, then barriers can work to your benefit by limiting the number of competitors. But if you aren't already established, an industry teeming with barriers to entry can make your job a long, uphill slog – at best.
In some industries, suppliers possess enough power to impact the entire industry. For example, if there are few suppliers in the industry and the cost to switch from one supplier to another is substantial, you could run into problems trying to convince buyers to switch to your product. Also, if existing suppliers have a high profit margin on their products, they can create difficulties for new businesses by slashing prices to drive competitors out.
Generally, the more buyers that exist in a given industry the better. If the industry survives on the business of a select few buyers, your company could be forced into the uncomfortable position of rolling the dice on a diminutive client pool, and the loss of just one client could send your company into crisis mode. However, an industry with a large customer base that is accustomed to switching suppliers with relative ease may be a perfect candidate for your products.
Ease of Substitution
Industries in which buyers can easily change suppliers are attractive to new entrants. But maintaining your industry position can be a challenge, especially if all products are similar and it is easy to transition between suppliers. To maintain your position, you will need to find a way to differentiate your product from the competition. If the industry doesn't lend itself to differentiation, you should consider the substitution factor into your overall growth strategy.
Finally, your industry analysis needs to consider the level of competition that currently exists in the industry. Many industries possess no clear leader, but are instead characterized by a highly competitive mix of similarly sized businesses. In these industries, the fierce level of competition limits profitability as companies jostle to gain an edge. Sometimes these industries have even matured to the point of saturation, restricting growth to customers that can be stolen from the competition. Although it's not impossible to achieve growth in a highly-competitive industry, the level of competitive rivalry is something that needs to be taken into account.