Chapter 5
Industry Analysis
Key Words
Industry—a group of firms producing a similar product or service, such as airplanes,
music, electronic games, or fitness club memberships
Chapter Overview
This chapter introduces and describes the industry analysis portion of the business plan.
It’s important that this section focus strictly on a firm’s industry rather than its industry
and its target market simultaneously.
Chapter Summary
1.
An industry is a group of firms producing a similar product or service, such as
airplanes, music, electronic games, or fitness club memberships.
2.
specific target market until an understanding of the broader industry is obtained.
The reason it’s important to separate the analysis of a firm’s industry and its
3.
It’s important that the industry analysis appear early in a business plan, because
4.
size, growth, and sales projections; industry characteristics; industry trends; and
long-term prospects.
The major sections of an industry analysis include: industry definition, industry
5.
If your firm operates in two or more industries, you should identify all the
industries that it participates in and recognize that it will be necessary to conduct
a firm operates in more than one industry, it may be appropriate to conduct a full
analysis on the primary industry that firm operates in and an abbreviated analysis
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on the other.
6.
The key to the industry size, growth, and sales projections portion of the analysis
7.
The four key issues to deal with in the industry characteristics section of the
analysis are industry structure, the nature of the participants in an industry, key
ratios, and the industry’s key success factors.
8.
its growth rate, regardless of how positive they are, are basically moot points if
The topic of industry structure is particularly important. An industry’s size and
9.
the industry analysis.
The industry trends portion of an industry analysis is arguably the most
10.
The industry analysis should conclude with a brief statement of your beliefs
regarding the long-term prospects for the industry.
Chapter Outline
I. Introduction
II. Industry Definition
III. Industry Size, Growth Rate, and Sales Projections
a. Industry Size
IV. Industry Characteristics
a. Industry Structure
V. Industry Trends
a. Environmental Trends
b. Business Trends
Chapter Notes
I. Introduction
• An industry is a group of firms producing a similar product or service
• Industries vary along many dimensions, including size, growth rate,
structure, financial characteristics, and overall attractiveness
is to not just report the numbers. The key is to make sense of the numbers and
present them in a way that builds the credibility of your business plan.
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II. Industry Definition
• Briefly (no more than several sentences) describe the firm’s industry:
o The industry’s SIC code and NAICS code should be provided
industries that it participates in
• It may be difficult to identify an industry that matches an innovative new
product or service
o In the case of an innovative product or service, improvise by
selecting industries that represent the closest fit, and then include
additional pertinent information
III. Industry Size, Growth Rate, and Sales Projections
• This section discusses the size (in dollars), the growth rate (in percent),
and the future sales projections for the industry or industries our firm will
be entering
a. Industry Size
o Industry size is normally displayed in dollars over a
three- to five-year period
b. Industry Growth Rate
o An industry’s growth rate should be reported on a
percentage basis along with an interpretation of
what the numbers mean
c. Industry Sales Projections
o This section should report sales projections for your
industry
IV. Industry Characteristics
• This section talks about the structure of your industry and lays out its
competitive landscape
• The four key issues to deal with are: industry structure, the nature of the
participants in an industry, key ratios, and the industry’s key success
factors
a. Industry Structure
o Industry structure refers to how concentrated or fragmented
o Report on how concentrated or fragmented your industry is
• Concentrated industries are dominated by a few
large firms
• An industry is typically fragmented if it’s in the
emergence stage of its life cycle and/or the cost of
entry is relatively low
you will need to explain how you plan to compete
• Some firms compete in concentrated industries by
identifying a niche that is less expensive to compete
in, or by using innovation to lower the cost to enter
the industry
o You will also need to report on the general
attractiveness of an industry’s competitive
landscape
o Attractiveness can be evaluated using
Michael Porter’s “five forces” model:
• Relatively high barriers of entry to
keep out competition
• Not enough rivalry to create
cutthroat competition
b. Nature of Participants
o In this brief section, you will provide your reader with a
“feel” for the nature and mixture of firms in your industry
o You want your reader to visualize how your firm will fit in
or see the gap that your firm will fill
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c. Ratios
o Report an industry’s key financial ratios and other ratios of
interest
o This information provides a point of reference to compare a
company’s financial and non-financial projections against
d. Key Success Factors
o Key success factors define what an organization in the
industry has to be good at to be successful
V. Industry Trends
• This is arguably the most important section of an industry analysis
because it often lays the foundation for a new business idea in an industry
• The two types of trends that are the most important to focus on are
environmental trends and business trends
a. Environmental Trends
o The most important environmental trends are economic
trends, social trends, technological advances, and political
b. Business Trends
o Other trends impact industries that aren’t environmental
trends per se, but are important to mention
VI. Long-term Prospects
• The industry analysis should conclude with a brief statement of your
beliefs regarding the long-term prospects for the industry
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VII. How the Industry Analysis Affects and Is Affected by Other Sections of the
Plan
• Industry analysis is a foundational aspect of evaluating the merits of a
prospective business venture
Review Questions
1.
What is an industry? Why is it important to include an “industry analysis” in a
business plan?
Answer: An industry is a group of firms producing a similar product or service,
2.
Why is it important that the industry analysis focus strictly on a firm’s industry
rather than its industry and its target market simultaneously?
Answer: The reason it’s important to separate the analysis of a firm’s industry
3.
Why is it important for an industry analysis to appear early in a business plan?
Answer: The industry analysis should appear early in the plan because it
4.
Why is identifying a company’s industry a tough call in many instances?
Answer: Identifying a company’s industry can be difficult because a firm’s
5.
What should you do if your firm operates in more than one industry?
Answer: If your firm operates in two or more industries, you should identify all
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6.
industry on a regional or local basis if appropriate. (4) Avoid the temptation to
report only positive or flattering information about your industry.
What are the four general rules-of-thumb for completing the industry size,
growth, and sales projections portion of the industry analysis?
Answer: (1) Always display financial information, such as industry sales and
7.
What topic should be discussed in the industry structure portion of an industry
analysis? Why are these topics important?
Answer: The topic of industry structure is particularly important. Structure
8.
the top end of the industry or the bottom end. The worst place to be in a
bifurcated industry is right in the middle.
Why is it important to know how an industry is segmented?
Answer: Understanding which segments of your industry are growing fastest or
9.
IBISWorld and Mintel industry profiles and looking at industry trade journals
and magazines.
Why is knowledge of the key success factors in an industry important? How can
an industry’s key success factors be identified?
Answer: Key success factors in every industry define what an organization in
10.
an industry and it typically provides the justification for claims made earlier in
the industry analysis.
Why is the industry trends portion of the industry analysis arguably the most
important section of the analysis?
Answer: The industry trends portion of an industry analysis is arguably the most
Application Questions
1.
You just reviewed a business plan for a company that will make athletic shoes
with rollers on the bottom, which will allow its users to literally skate from place
abbreviated analysis on the other.
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to place like they were wearing roller skates. One thing you noticed is that the
plan didn’t include an industry analysis. When you asked Kevin, the author of
the plan, why the industry analysis was left out he said, “Are you kidding? My
industry is one of the hottest ones in America. Heelys, a company just like ours,
has over two million users already. An industry analysis isn’t necessary.” Do you
agree with Kevin? If he said to you, “Okay, persuade me that an industry
analysis is necessary,” what would you tell him?
Answer: A firm’s industry analysis lays out what is realistically possible and
2.
Cybex International (http://www.cybex.com) is a company that makes premium
exercise equipment for home and commercial use. What industry is Cybex in?
(Provide both an SIC and NAICS code.) Report the industry’s past three years of
sales, sales growth, and make a prediction for its sales and sales growth for the
next year. Is Cybex in the same industry as Prime Adult Fitness? Explain your
answer.
Answer: Cybex operates in the Sporting & Athletic Goods Manufacturing
Industry data will change on an annual basis.
3.
Kelly Ryan, a high school classmate of yours, is thinking about starting a
company to compete with Cartridge World, the company that sell franchises to
people who open small storefronts to refill printer ink cartridges for their
customers. Kelly is writing a business plan and is working on the industry
analysis. Kelly’s having trouble nailing down the exact industry he will be
competing in, and is having trouble finding sources of information to help him
discern the environmental trends that are impacting his industry. If Kelly asked
you for your help, how would you help him determine the industry his cartridge
refill company will participate in, and what suggestions would you give him for
finding information on the environmental trends that are impacting his industry?
Answer: The best Internet resources to assist in helping identify industries, and
4.
Cereality (http://www.cereality.com) is a company that’s launched an exciting
work from. It also helps to temper the enthusiasm of business plan writers and
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new concept in the restaurant industry. Spend a few minutes looking at
Cereality’s website and studying its business concept. If the founders of
Cereality had carefully studied the restaurant industry before coming up with
their business idea, what factors about the industry might have led them to the
idea for Cereality?
Answer: Student responses will vary but should address issues supportive of the
5.
One industry mentioned in the chapter that is fairly “hot” is the mattress
industry. Spend enough time studying the mattress industry to determine whether
it is structurally attractive for new entrants. Report your conclusions.
Additional Activities
1. Who Has the Answer?
Purpose: to stimulate students to learn the key terms and concepts in this chapter.
This activity should be used as an introduction (or icebreaker) for this chapter. Select
2. A Life or Death Decision
Purpose: to demonstrate the importance of researching industry trends and to raise the
possibility of being successful even in a declining industry.
After lecturing on industry trends, ask students to identify an industry that is dying.
3. Practicing with Porter
Purpose: to encourage students to analyze an industry using Porter’s Five Forces model
and to identify if an industry is attractive and profitable or not.
After lecturing on Porter’s Five Forces model, ask them to form discussion groups. Their
goal is to use the model to analyze an industry that all are likely to be familiar with. For