When you’re considering starting a new business or entering a new industry, it’s wise to do your research. An industry analysis is an integral part of your business plan. It helps your investors to understand the potential for your new venture, and enables you to figure out how to overcome the barriers of entry into the market.

Understand the Importance of an Industry Analysis

An industry analysis helps business owners to develop a strategy to ensure the success of their company. Usually completed as part of a business plan, an industry analysis can also be done if you’re thinking about pivoting your company into a new area or marketing your products to a new industry.

An industry analysis helps you to understand the trends that are taking place in the industry today, as well as the historical trends that have led to that moment. Looking back at what the industry has been like can help businesses to figure out future trends. Industry analysis also enables business owners to understand external factors that affect the industry, such as politics, government regulations, economic forecasts, technological advances and socio-demographic movements.

In addition, an industry analysis is used to review the direct and indirect competition your business may face. This entails reviewing who the big, medium and small players are in the industry and what advantages they have over your new business. Reviewing the competitive dynamics of the industry enables businesses to craft a unique value proposition that helps them differentiate themselves from the other companies competing in the same space.

Use Industry Research to Learn the History

When writing your industry analysis, begin by reviewing market research reports of your industry that cover the last few years. What changes have taken place in your industry, and why have they taken place? For example, technological advances could have changed the way products are produced, resulting in lower manufacturing costs and higher profit margins for businesses. The same technological advances could have also resulted in a loss of jobs for manufacturing employees. This trend can help you understand what the future of the industry may look like.

Include a brief overview in your industry evaluation, offering background and context. You can use the PEST Analysis that covers four key external factors that affect your industry and help shape it into what it is today. These factors include:

  • Political, such as regulations, tariffs and government stability
  • Economic, such as inflation or exchange rates
  • Social-Demographic, such as population growth or health trends
  • Technological, such as advancements and developments

In your industry evaluation, include the total sales numbers in your industry. This will help you to understand what the market looks like so you can determine the sales potential of your business. If it appears that the total sales numbers for the business are low, it may mean that the market is too small for your business to enter. It could also mean that you have the potential to change the industry with a revolutionary product or service.

The numbers you need to include in your industry evaluation include:

  • Industry-wide sales in dollars and units
  • Trends in sales volume, such as geographic, demographic or seasonal
  • Sales for each major channel, such as in-store and online

Look at the Key Financial Measures of Your Industry

How is success measured in your industry? This is a critical element to research and include in your industry analysis. It showcases the metrics you need to aspire to in order to find success in your new business. It also provides investors with a tangible marker of achievement.

Include what average profit margins are like in the industry. What are the average prices for common products? What are the manufacturing or material costs like? Understanding these details will help you build a sound financial model for your business, proving to investors that you have the plan in place to meet your targets.

Research the Major Players in the Industry

Reviewing the competition is a major part of the industry analysis. By understanding which other businesses are playing in the same arena, you can begin to develop the unique angle for your business in order to stand out from the crowd.

First, research the giants in the industry. These are the major players who will own a large part of the market share. Which products or services do they offer? What are their marketing tactics like? What kind of prices do they offer customers? Does brand loyalty play a part in their success? It’s also important to ascertain whether their target market is the same as your target market. While they may offer similar products and services, it’s possible that they cater to a different audience segment, which could work in your favor.

Understand Who Your Direct Competitors Are

Determine who your direct competitors are and include those details in your industry analysis. Your direct competition could be other small businesses that sell the same kind of products and services, or they could large- or medium-sized businesses who also operate in the same industry. Review the business’ target market to determine whether they are your direct competition.

Consider using a SWOT analysis to understand where you stand compared to your direct competition. This includes reviewing:

  • The strengths of the other businesses

  • The weaknesses of the other businesses, over which you have an advantage

  • The opportunities that exist in the external market that you can partake in

  • The threats that exist in the market that could endanger your competitors or yourself

Assess Your Barriers to Entry in Your Industry Analysis

In your industry analysis, it’s important to include the obstacles you face that may hold you back from entering the market and finding success. Barriers to entry may include:

  • Costs
  • Technology
  • Distribution
  • Competition
  • Logistics

If the barriers to entering the market are too high, you will need to consider a new strategy or a creative way to overcome those obstacles. Look at what your competitors are doing or have done to overcome the same barriers. Visit those businesses in person if possible to research their operations and marketing strategies.

For example, if you’re considering opening a fast food small business, the barriers to entry will include the competition you’re up against which own a considerable portion of the market share. In order to creatively overcome a barrier like that, you may need to find a new angle which the competition doesn’t have, such as offering farm-to-table local food that’s fast and convenient.

Look at How Consumers Are Changing the Industry

Be sure to research how your customers are affecting the industry. What kind of product quality are they demanding? Are they only interested in paying a certain price? Is speed a critical factor for them, or do they value high-quality service above all else? Understanding the customer trends in your industry will help you to deliver a highly tailored market strategy that resonates with your target audience. Consider reviewing published market research or conducting your own online surveys with people who fit the characteristics of your target market.

An industry overview example for a clothing company may determine that customers are interested in clothes that have been manufactured sustainably and locally. As a result, this information may factor in where you get your products manufactured and the kinds of materials you use. Identifying these trends before your competition can provide you with a distinct advantage when entering the market.