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How to do industry analysis

Intro Porter’s Five Forces

The tool was created by Harvard Business School professor Michael Porter, to analyze an industry’s attractiveness and likely profitability. Since its publication in 1979, it has become one of the most popular and highly regarded business strategy tools.

  1. 同业竞争者 Competitive Rivalry. This looks at the number and strength of your competitors. How many rivals do you have? Who are they, and how does the quality of their products and services compare with yours?
    • Where rivalry is intense, companies can attract customers with aggressive price cuts and high-impact marketing campaigns.
    • Also, in markets with lots of rivals, your suppliers and buyers can go elsewhere if they feel that they’re not getting a good deal from you.
    • On the other hand, where competitive rivalry is minimal, and no one else is doing what you do, then you’ll likely have tremendous strength and healthy profits.
  2. 供应商的议价能力 Supplier Power. This is determined by how easy it is for your suppliers to increase their prices.
    • How many potential suppliers do you have? How unique is the product or service that they provide, and how expensive would it be to switch from one supplier to another?
    • The more you have to choose from, the easier it will be to switch to a cheaper alternative. But the fewer suppliers there are, and the more you need their help, the stronger their position and their ability to charge you more. That can impact your profit.
  3. 购买者的议价能力 Buyer Power. Here, you ask yourself how easy it is for buyers to drive your prices down. How many buyers are there, and how big are their orders? How much would it cost them to switch from your products and services to those of a rival? Are your buyers strong enough to dictate terms to you?When you deal with only a few savvy customers, they have more power, but your power increases if you have many customers.
  4. 替代者/替代品威胁 Threat of Substitution. This refers to the likelihood of your customers finding a different way of doing what you do. For example, if you supply a unique software product that automates an important process, people may substitute it by doing the process manually or by outsourcing it. A substitution that is easy and cheap to make can weaken your position and threaten your profitability.
  5. 新进入者威胁 Threat of New Entry. Your position can be affected by people’s ability to enter your market. So, think about how easily this could be done.
    • How easy is it to get a foothold in your industry or market? How much would it cost, and how tightly is your sector regulated?
    • If it takes little money and effort to enter your market and compete effectively, or if you have little protection for your key technologies, then rivals can quickly enter your market and weaken your position.
    • If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it.

The disadvantage of Porter’s model

  • In this model, you need to know the whole industry totally and detailedly, that’s theoretical , it’s not real.
  • It assume there is no cooperation between company, yet it’s not true.
  • It assume the marketing share is fixed. In the real world , the industry would be expanded by development and innovation from company and their competitors.

Do the industry analysis

Industry analysis should be conducted in those steps:

Step one: Review available reports

Those reports should be found in some industry website. And it might be unwise to depend on existing industry analysis reports due to many factors change constantly.

Therefore, read the most recent report and envisage its relevancy.

Step two: Approach the correct industry

Be careful for the industry that has many sub-industries. Pick the most relevant one which suits your purpose.

Step three: Demand & supply analysis

Draw the scenario of demand and supply

  • who demand for something (products, services)
  • who supply those products or services
  • compare supply companies, know their profits and losses, cost, etc.

Step four : Competitive

In this part, we need use Porters’ Five Forces Model.

The model will be the framewrok of industry analysis, those five parameters will show you the competitive landscape.

They are:

  1. Barriers to Entry
  2. Supplier Power
  3. Threat of Substitutes
  4. Buyer Power
  5. Degree of Rivalry

Step five: Recent development of the industry

On the macro-level, what we know about the industry? Including the recent industrial developments, innovation, global comparative, etc.

Step six : Industry dynamics

See the industry as living person or something, its life cycle, look closely.

For example, if you are tracking the aluminum industry, you should know the per capita consumption in the country.

May take a look industrial life cycle with those stages, to identify which stage would be:

  • Start-up stage, new tech applied on living and producing.
  • Consolidation stage. Once the product has proved itself in the market, several leaders in the industry start surfacing. The start-up stage survivors become more stable and market share can be easily envisaged.
  • Maturity stage. The product has attained the full aptitude to be consumed at this stage by the users. Most often, firms at this stage are referred to as cash cows as their cash flows are quite consistent but offer very little opportunity for growth of profit.
  • Relative decline. In this stage, costs are not optimal (effective), sales drop or stabilize, prices and profitability diminish (less and less), can’t profit and increased sales.

Write a industry report

  • Begin : overview of the industry, should include its competitors and their operations..
  • Mention historical data and the nature of the industry, including its growth potential.
  • The influencing economical factors and the purpose of your industry analysis.
  • The similar products and services.
  • The detailed analytical presentation of the specific industry.
  • Highlight factors like geographical growth, consumer base, price fluctuations, past performances and income projections.
  • Use existing financial data and industry understanding to forecast industry growth for the next five or ten years. Use statistical graph in this section.
  • The next sections: using Porter’s Five Forces model and a detailed write-up about its five factors, its use and repercussions in the industry. Talk about governmental regulations relevant to the industry in this part.
  • Last, give long-term and short-term valuations(forecast) impacting the industry such as any foreseeable(can be seen in the future) problems impacting the business in a negative fashion (negative direction) and potential corrective measures. In three to four line, write up the summarization.
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