WHAT IS AN INDUSTRY?
An industry is how we understand the broader market are we engaged in, the competition within the same market and how we intend to be successful in within our areas of engagement.
These topics all lend themselves to one main action of companies, their ability to compete with others in shared market engagement; rivalry in business encourages refinement of strategy.
A strategy is important if you are going to compete with other companies. There are ways that companies organize their actions around their top competitors. What follows are concepts that can help you create success for your beginning venture within its industry around its competitors.
A systematic approach to understand an industry can revolve around the following five questions:
- What products or services are offered?
- Who are they sold to, or who is there target market?
- What does the environment look like around this company and its competitors?
- What is their production like?
- How do they distribute?
Before starting your business; it is important to have answered the above questions at least in your mind, and at most in a detailed business plan. This information will eventually help in creating a organization and strategy.
When we speak of products we mean draw more from the problems they solve. What technologies do they use? The products should have an obvious market. They do not have to, but they could be a harder sell to more established or experienced professionals.
Regarding the environment and competitors;
Porter’s 5 forces tries to determine the intensity of competition within an industry
These forces include:
1. New Competitors
2. Buyer Power
3. Supplier Power
One way to measure your threats of New Competitors is to examine the barriers to entry. Barriers to entry will be one way of examining your business idea. How hard would it be to replicate what you want to do? Besides imitation their are many barriers to entry to consider.
Most apparent barriers to entry include:
- economies of scale
- brand equity
- capital requirements
- cost disadvantages not associated with size
- distribution access
Economies of Scale is tantamount to achieve as it will yield the lowest price of a product, but highest output of that product.
Brand Equity is important as it creates or measures product differentiation. Showing customers your product is different from others among many competitors, is increasingly important in competitive industries.
Capital Requirements those industries that require large amounts of capital to be spent readily will scare away some would be entrepreneurs.
Cost Disadvantages not associated with size, is important as these are cost disadvantages you can not alter easily. For example trying to create an eCommerce business to compete with Amazon will quickly teach the cost disadvantage you would have when it comes to shipping with the United States Postal Service. Amazon has placed themselves in a strategic position for eCommerce. Often the prices of items there can be found at a discount due to their price advantage on each product.
Distribution access, equally important and the bane of all entrepreneurs with new products; is distribution. Being able to get your product out where customers can see it is crucial, especially when you are in retail. This is why packaging and brand identity is so important as it can educate customers and inform them of your product. The amount of education you can give depends on your distribution. Are your products on a site where Search Engine Optimization and someone searching for your product needs to happen before a sale? Or are your products sitting on good real estate in a retail store where customers see them constantly?
Regulations play an important part as they can make it easier or harder to enter an industry. Think of trying to sell cellphones vs selling securities.
These barriers to entry are important to know for any entrepreneur as a change in any of these areas can become an opportunity or a threat for your ideas.
Bargaining power of Customers
- if you will be a buyer the odds are better if you seek these positional advantages. Meaning placing yourself at a position to benefit more vs others in standard conditions.
- If you are a buyer with more power, it could due to their being few other buyers, and you buy in large volume
- If what you sell has lowproduct differentiation; creating ease of switching suppliers.
- As a buyer you have more power when the buyers represent a large portion of supplier revenues.
- As a buyer who can succesfully integrate backward, you allow yourself a positional advantage.
Bargaining power of suppliers = retailers vs manufacturers
This is one reason why China citizens have gained more wealth from production is because
Suppliers should focus on taking control of manufacturing process: or what is known as forward integration
raw materials, intermediate goods, manufacturing, marketing and sales, and after sale service
Suppliers tend to have more control or power when certain factors are in there favor.
- product differentiation, switching between suppliers is difficult.
- competitors have severe positional disadvantages
- less highly active companies in competition
- few substitutes
- the industry is not a large portion of the suppliers revenue base
- company integrates forward gaining significant control of supply or distribution control
Threat of substitute consumer products
A safer bet will be with products or services having these two advantages.
- show improvements in price performance relative to industry average (increasing prices compared to industry average)
- are produced by industries with large capital resources
Imitation of current rivals – think retailers vs automotive engineers
- Number and size of competitors, growth rate, and and related characteristics
- Try to stay out of industries with the following traits
- Numerous equal sized and powered competitors
- Slow growth within industry, main goal is market share not new customers
- Fixed costs are high and product or service has low turnover or can spoil
- Capacity gains can only happen in large amounts
- Costly exit strategies/ barriers
This is great for figuring out strategies regarding companies competing with each other. The same concepts may also help answer the equally important questions regarding the markets the company serves.
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