You've got a job working long hours and you want to try something else. Why not use your skills to start your own business? That might be a good idea, but you'd better look around and do an industry analysis first. The most common methods of conducting an industry analysis are: PEST analysis, SWOT analysis and examining Porter's Five Forces.
TL;DR (Too Long; Didn't Read)
An industry analysis helps business managers understand the position of their companies relative to competitors in the same marketplace, identify opportunities and focus their resources on ways to develop competitive advantages.
Conduct a PEST Analysis
A PEST analysis examines the political, economic, social and technological factors in a market.
- Political: At first, examining the politics of a market might seem irrelevant to starting a small business. But it's not. Political winds and trends can affect regulations that might make it difficult to start a new business and could hinder its growth.
- Economic: Is this a good time to start a new business? Is the economy going up or down? It's much better to swim with a rising tide than to fight a downdraft.
- Social: Consumers' wants and desires are constantly changing. Are socio-cultural trends working in favor of your business? What about the demographics of potential customers for your business? Use industry reports from trade associations to find this information.
- Technology: A business cannot survive without staying up-to-date with the latest technology. Your competition will certainly be using the most innovative technologies for their companies, and you will have to meet them to compete and stay in the race.
Perform a SWOT Analysis
A SWOT analysis explores strengths, weaknesses, opportunities and threats.
- Strengths: As you examine the industry structure of your competition, what are the strengths you have and they don't. How can you set yourself apart?
- Weaknesses: Don't overlook this. Be honest and identify your weaknesses. Then, make plans to offset them.
- Opportunities: Look for openings in the marketplace. Identify situations that you can exploit to gain a foothold in the market and make it profitable.
- Threats: What are the obstacles you will face when starting your business? What is your competition doing that you can't? Do you have enough capital to support the business until it is profitable?
Analyze Porter's Five Forces
Porter's Five Forces is one of the most prominent methods of industry analysis:
- Intensity of competition: How many competitors are already in the market, and how strong are they? Obviously, the opportunity for success is better when the competition is thin and weak.
- Suppliers' bargaining power: Suppliers are always on the lookout for the chance to increase prices. Can your business find multiple suppliers? The more choices you have, the easier it is to switch when a supplier tries to squeeze you with higher prices.
- Buyers' bargaining power: Customers will always be negotiating for lower prices. Large buyers will use their strength to get lower prices. Having a larger customer base will help to lessen this risk.
- Threat of substitution: How easy is it for your customers to find substitutes for your products? Ease of substitution can put a damper on prices when customers have more choices.
- Threat of potential new entrants: The difficulty of new competitors entering the market can be both good and bad. If it's hard for you to get started, that will be a deterrent for others to get in.
Having your own business has many rewards. But it requires hard work and careful planning. Conducting an industry analysis is an essential process to starting a business and improving the odds of having a successful and profitable venture. An industry analysis can also be a useful tool for established companies looking to stay competitive.
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.