What is Industry Analysis?
Industry Analysis implies completely understanding the particular industry in which the firm operates or proposes to operate. The analysis of the industry is important because the factors associated with the industry influence its functioning to a great extent and thus have an impact on its survival and growth. It helps in ascertaining the competitive dynamics of an industry.
What is Industry?
The industry refers to the group of firms that offers goods and services of similar nature or close substitutes. For example, Firms providing telecom services to customers are called Telecom Industry.
Further, the factors given below are analyzed in Industry Analysis:
The setting of an Industry is all about the pattern of the industry with regard to the stage of evolution, stage of maturation, and geographical dimension. Based on these aspects, Michael Porter has grouped industries in the given categories:
- Fragmented Industry: Industry which is dispersed at diverse places and each place serves local markets. Due to non-mechanized production technology, there are a number of challenges in the expansion of such an industry beyond a specific geographical area. For example Pottery and Farm equipment of non-mechanized nature.
- Emerging Industry: The market for the product exists in the abstract form and takes physical form later. In the initial stage, these industries are emerging ones and so the preferences of the customers are dispersed evenly. In such an industry, the company has three alternatives for differentiating the product in order to obtain a competitive advantage, these are:
- Designing of the product to satisfy one part of the market.
- Launching of two or more products at the same time for two or more parts of the market.
- Designing a new product for the middle of the market.
- Maturing Industry: With the passage of time, the industry grows and matures, numerous competitors, join the industry and attempt to mark their presence in all the segments available in the market. It is a fact the number of competitors grew faster than the industry and so they try to capture the market share of each other by way of product differentiation.
- Declining Industry: The next phase in the life cycle of an industry is declining, which takes place due to a reduction in demand for the product or the emergence of substitutes. Hence the firms operating in a declining industry either bring new products or leave the market.
- Global Industry: The strategic position of competing firms in a global industry is based on their global positions. And because of differentiation based on cost, quality, specifications, brand value, etc., a global firm has an upper hand over a domestic one.
Industry Struct consists of all the economic and technical factors that operate in an industry. As per structure, there are five types of industry:
- Monopoly: In a pure monopoly, only one seller in the market exists, which sells products to numerous customers. Hence, product differentiation is not required. For example State Electricity Board, Indian Railways, etc.
- Oligopoly: In this structure, few sellers exist in the industry with no product differentiation. And so a change in the price by one seller affects other sellers too. For Example Petroleum and Gas Companies.
- Pure Competition: Also called as perfect competition. In this industry, there are numerous sellers with no differentiation in products. the compete on the basis of price and the sellers have no control over price, as they are regulated by market demand and supply forces. For Example Cement, Sugar, and Steel industries.
- Differentiated Oligopoly: In this industry, few sellers offering differentiated products exist in the industry. Further, the differentiation depends on the price, quality, product design, features, specifications, delivery, and after-sales service.
- Monopolistic Competition: In such an industry, numerous sellers offer differentiated products to customers. Further, the firms that have high product differentiation enjoy high customer loyalty and monopoly power. Although competition is present due to the existence of multiple sellers.
An industry is regarded as attractive when the scope of earning profit is enough. Industry Attractiveness reflects the profitability position of the industry. It depends on a number of factors like:
- Nature of Demand: Industry’s present and future business scope are based on the overall market size and rate of growth. When the demand for the product offered in an industry is high and increases continuously due to an increase in population, and income of people, changes in tastes and preferences, etc. the industry automatically becomes attractive. As against, when the demand is decreasing the industry becomes unattractive.
- Industry Potential: Overal sales potential also has an impact on the industry attractiveness. The potential of an industry depends greatly on the volume, i.e. the high volume industry has more potential as compared to a low volume one.
- Profit Potential: Profit potential implies the possibility of making the desired volume of profit. The volume of profit is influenced by sales volume and profit margin.
- Growth Prospects: The higher the growth prospects in an industry the more attractive it is, and vice versa.
- Entry and Exit Barriers: Depending on the entry and exit barriers, the industry becomes more or less attractive. High entry and low exit barriers often make the industry more attractive, as they tend to reduce competition from entering the and at the same time they reduce the cost of exit from the industry.
How the industry is performing is also a factor that needs to be analyzed. Industry performance is based on the following factors:
- Profitability: Profit in terms of sales or investment made measures the performance of the industry.
- Operational Efficiency: Operational efficiency is calculated as a ratio between input and output. Factors the influence operational efficiency are men to machine ratio, labor productivity, availability of power and infrastructure, technology level, quality of raw materials, and so forth.
- Technological Advancements: Industry performance is also influenced by the development and use of state of the art technology and so the firms that use modern technology to produce goods, have a competitive advantage over other firms, because of reduced cost and high quality.
- Innovation: You might have observed that there are certain industries wherein the rate of innovation is more than others especially in the electronic industry.
Industry Analysis is about analyzing the environment of the industry and helps in surviving the competition and gaining a competitive advantage. It is basically a tool that the companies use to determine the extent of competition in an industry and also to understand the firm’s position in the market.