In this article, I will explain in a brief way how industry analysis is done. If you are going to start a business or you decided to invest in a company. Then it is very important for you to analyse that particular industry(sector) before taking any further decision. Read this article to the end to get an idea of analysing industry.
Industry analysis helps you to asses a sector or a company from various perspectives. During the analysis, you will come to know the demand-supply characteristics, competitiveness, etc
There are three ways of analysing an industry
- Porter’s 5 Force Analysis
- PEST Analysis
- SWOT Analysis
1. Porter’s 5 Forces
This model explains below mentioned five forces that affect an industry.
- The Threat of Substitutes
- The Threat of New Entrants
- Competition of Established Rivals
- Bargaining Power of Consumers
- Bargaining Power of Suppliers
The Threat of Substitutes
Due to advancement in technology and changes in consumer living habits and requirements, new products are launching in the market with more features than the existing ones. Few examples are typewriters were replaced by computers, Telegram by SMS and Email. The best example is the Symbian O.S replaced with Android which led to the bankruptcy of Nokia. These substitutes offer more features at a better price. This is called Threat of Substitutes.
The Threat of New Entrants
If a business is booming in the market, everyone wants to start it. This cause loss to the old players. This is called the threat of new entrants. The business with high barriers to entry faces less competition from the new entrants. Some of the sectors which don’t get affected by new entrants are Finance and Oil and Gas. These require more capital and licenses which is hard to get. Because of less competition, the bargaining of the consumers, as well as suppliers, would be less.
Competition of Established Rivals
A business with high rivalry has less chance to improve its profits. Online food delivery business is showing such kind of rivalry in the current market. Because of high competition, food delivery companies offering high discounts to attract more customers. But this is killing their profits. Two other business which faces the same kind of competition is Airlines and Telecommunications.
Bargaining Power of Consumers
Let us say you went to a market to buy vegetables. There you can see many sellers offering the same product at different prices or almost similar prices. Because of more sellers, the buyer has more options, so they can easily switch to the one offering for less price. In this case, the bargaining power of consumers is high due to the presence of more sellers.
With the help of the above example, you can understand that the business with more substitutes increases the bargaining power of the consumers.
Bargaining Power of Suppliers
Bargaining power of suppliers is inversely proportional to the bargaining power of consumers. If the suppliers are less and buyers are more then the bargaining power of the supplier will be high. The best example of this category is Oil Suppliers. OPEC countries which supply oil has high pricing power.
For better understanding, I will give one example. There are only a few countries that can produce Jet Engines. The companies in those countries have more Price Power over the engines.
The remaining two ways of Industry Analysis (PEST analysis & SWOT analysis) will be continued in the next article
CLICK ME to read Part 2 of Industry Analysis
Read these articles also for better understanding of Fundamental Analysis – ARE YOU INVESTING OR SPECULATING? FUNDAMENTAL ANALYSIS – INTRO, ECONOMIC ANALYSIS – FIRST IN THE TOP – DOWN APPROACH