Business owners must understand the industries in which they operate to ensure continued success. A company that increases revenue by 5 percent every year may be considered to be doing very well by some measures, but if other companies in the same industry are routinely notching 8, 9, or 10 percent gains every year, that 5 percent suddenly looks puny. The savvy business owner won't wait several years, but will routinely conduct industry analyses to determine why he's lagging behind. Likewise, if the business is outperforming the industry, the owner should conduct the analysis to ascertain why he's ahead of the pack.
In general, a company performs as well as its industry is performing. Therefore, understanding how an industry changes is key to predicting the performance of a firm in that industry. For example, if the price of steel drops significantly, a steel-products manufacturer may be able to get cheaper materials and enjoy higher profit margins. Being able to predict changes such as these allows companies to react strategically.
Understanding the industry and its competitors helps planners position their companies in the market for their products or services, allowing them to determine how they can differentiate from other companies in the same industry. Without an industry analysis, a business might enter a market that's too competitive or one that's already saturated with similar products and services.
Opportunities and Threats
Another reason industry analysis is such an important tool for businesses is that it helps firms identify potential opportunities for the business to develop, as well as threats that could prevent company growth. Being able to meet a consumer need that's otherwise underserved might be an opportunity; high capital costs or strict government regulations on imports or exports are examples of possible threats in various industries.
Although an industry analysis looks primarily at the external factors affecting a business, it can help determine whether there's a fit between internal management preferences and the business environment. If there's a disconnect, the business may not survive as managers resist the forces that shape an industry. A thorough industry analysis may be combined with a SWOT — or Strengths, Weaknesses, Opportunities and Threats — analysis, which looks at both internal and external factors to help analyze a company's potential for success in a given market.