Chapter 5
Industry Analysis
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

The trends affecting an industry also matter

It is important that the industry analysis section of your business plan focus
strictly on the firm’s industry rather than the industry and the target market
simultaneously
o
A target market is the limited portion of an industry that a firm goes after
or tries to appeal to at a certain point in time

It’s premature for a new firm to discuss a specific target market until an
understanding of the broader industry is obtained

The industry analysis should appear early in the business plan because it logically
precedes the analysis of a firm’s target market and marketing strategy
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

A firm’s industry can be defined narrowly or broadly (e.g., JetBlue can be defined
as in the airline industry or in the transportation industry)

The definition determines the scope of the firm’s overall sphere of concern

If your firm operates in two or more industries, you should identify all the
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
o
The advantage of this approach is that your analysis is anchored in
established NAICS categories, which provide you with plentiful
information
o
If you create a new definition that is more precise, it may be more difficult
to accumulate good-quality information for your industry analysis
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

The key is to make sense of the numbers and present them in a way that builds the
credibility of your business plan

There are four general rules of thumb for completing this section:
o
o
o
o
IV.
Always display financial information, such as industry sales and growth
rate, in a multiyear format, making it easy to spot trends
Display your information graphically if possible
Provide information about your industry on a regional or local basis if
appropriate
Avoid the temptation to report only positive or flattering information
about your industry
a.
Industry Size
o
Industry size is normally displayed in dollars over a threeto five-year period
o
The ideal size for a start-up is large enough to allow
different competitors to serve different segments profitably
but small enough that it isn’t attracting the immediate
attention of larger potential competitors
o
If your industry is broken down into easily identifiable
segments, it may be appropriate to report the share (in
percentage) of each segment
o
Some plans also report the contribution that a specific
industry makes to its larger industry sector
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
o
Some plans comment on how the industry growth rate
compares to similar industries
o
If you are defining an industry that isn’t being actively
tracked by a reliable source, finding good sales data will
require creativity and persistence
c.
Industry Sales Projections
o
This section should report sales projections for your
industry
o
You can quote from established sources, but do so
sparingly; readers will want to know how you have
interpreted the data
o
Include concrete numbers for what you think your
industry’s sales and sales growth rate will be for the next
one to three years
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 the
industry is and whether the industry’s competitive landscape is
generally attractive or unattractive
o
Report on how concentrated or fragmented your industry is

Concentrated industries are dominated by a few large firms

Fragmented industries include a large number of smaller
companies

Normally, an industry is concentrated if large capital
investments are required to participate, or if it has matured
and consolidation has taken place

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

Most firms launch into a fragmented industry; no
explanation need be made about this approach

If you plan to launch into a concentrated industry, 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

No good substitutes for the basic product or
service

Limited power of suppliers to negotiate
input prices up

Limited power of buyers to force selling
prices down
o
Comment on the most salient of the
“five forces” in your business plan
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
o
You should also discuss how the industry is segmented
o
o
o
V.
VI.
If you know which segment is growing the fastest and/or is the
most profitable, that’s good information to convey
Some industries have clearly bifurcated, with the most successful
companies serving either the top end of the market or the bottom
end
The worst place to be, in bifurcated industries, is right in the
middle
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
o
Most industries have 6 to 10 key factors
o
Most successful firms are competent in all their industry’s key
factors and differentiate themselves by excelling in two or three
areas
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 and regulatory
changes
o
Some industries experience slow or no growth for years, and then
experience sudden upswings in growth as environmental change
turns in favor of the industry
b.
Business Trends
o
Other trends impact industries that aren’t environmental trends per
se, but are important to mention
o
You can’t cover every possible fact affecting an industry, but you
should mention the major trends
Long-term Prospects

The industry analysis should conclude with a brief statement of your beliefs
regarding the long-term prospects for the industry

No new information should be provided at this point; rather draw from the
preceding sections of the industry analysis to support your conclusions
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

A careful analysis of a firm’s industry lays out what is realistically possible and
what isn’t realistically possible for a start-up to achieve

Most start-ups are constrained enough by their industries that their performance
falls in line with what you would expect after reading their industry analysis

The industry analysis affects other sections of the business plan because it is a
point of reference to work from

It helps temper the enthusiasm of business plan writers and provides a useful
reference for a plan’s readers