I bet you agree: You need to know the industry you want to start a business in, and the kind of business you want to start, before you can start it.
Industry analysis is part of good management. That’s not just for the business planning, but rather for business survival, beginning to end. Most of the people who successfully start their own business have already had relevant business experience before they start, most often as employees.
But in this article, I focus on how to consolidate and formalize that industry knowledge into a formal business plan.
Although all business owners need to know their industry, the documented details and explanations are mainly for when you’re writing a business plan you need to show to outsiders, like bank lenders or investors. You’ll need to do some industry analysis so you’re able to explain the general state of your industry, its growth potential, and how your business model fits into the landscape.
And if your business plan is more of an internal strategic roadmap, you should still be very sure—whether you have to prove it to others or not—that you know your market, even if you don’t do a formal industry analysis. Whether you’re a service business, manufacturer, retailer, or something else, you want to know your industry inside and out.
What to cover in your industry analysis
Whether you write it all out in a formal business plan or not, when you’re doing your industry analysis, you’re looking at the following:
- Industry participants
- Distribution patterns
- Competition and buying patterns
Everything in your industry that happens outside of your business will affect your company. The more you know about your industry, the more advantage and protection you will have.
A complete business plan discusses:
- General industry economics
- Distribution patterns
- Factors in the competition
- And whatever else describes the nature of your business to outsiders
A note on finding industry information
The internet has had an enormous impact on the state of business information. Finding information isn’t really the problem anymore, after the information explosion and the huge growth in the internet beginning in the 1990s and continuing in the 21st century.
Even 10 or 15 years ago, dealing with information was more a problem of sorting through it all than of finding raw data. That generality is truer every day. There are websites for business analysis, financial statistics, demographics, trade associations, and just about everything you’ll need for a complete business plan.
You should know who else sells in your market. You can’t easily describe a type of business without describing the nature of the participants. There is a huge difference, for example, between an industry like broadband television services, in which there are only a few huge companies in any one country, and one like dry cleaning, in which there are tens of thousands of smaller participants.
This can make a big difference to a business and a business plan. The restaurant industry, for example, is what we call “pulverized,” meaning that it, like the dry cleaning industry, is made up of many small participants. The fast-food business, on the other hand, is composed of a few national brands participating in thousands of branded outlets, many of them franchised.
Economists talk of consolidation in an industry as a time when many small participants tend to disappear and a few large players emerge. In accounting, for example, there are a few large international firms whose names are well-known, and tens of thousands of smaller firms. The automobile business is composed of a few national brands participating in thousands of branded dealerships, and in computer manufacturing, for example, there are a few large international firms whose names are well-known, and thousands of smaller firms.
Products and services can follow many paths between suppliers and users.
Explain how distribution works in your industry:
- Is this an industry in which retailers are supported by regional distributors, as is the case for computer products, magazines, or auto parts?
- Does your industry depend on direct sales to large industrial customers?
- Do manufacturers support their own direct sales forces, or do they work with product representatives?
Some products are almost always sold through retail stores to consumers, and sometimes these are distributed by distribution companies that buy from manufacturers. In other cases, the products are sold directly from manufacturers to stores. Some products are sold directly from the manufacturer to the final consumer through mail campaigns, national advertising, or other promotional means.
In many product categories, there are several alternatives, and distribution choices are strategic.
Amazon made direct delivery a huge competitive advantage, especially in its earlier years. Doordash and competitors chose to be intermediaries between restaurants and customers, and several businesses offer prepackaged meal ingredients delivered with instructions for finishing the preparations in the consumers’ kitchens. Now major grocery chains offer grocery delivery. Red Box made a strategy of DVDs in kiosks. An entire industry of food delivery options gives consumers choices like restaurant meals or fresh meals ingredients being delivered. Many products are distributed through direct business-to-business (B2B) sales and in long-term contracts such as the ones between car manufacturers and their suppliers of parts, materials, and components. In some industries, companies use representatives, agents, or commissioned salespeople.
Technology can change the patterns of distribution in an industry or product category. The internet, for example, changed options for software distribution, books, music, and other products. Cable communication first, and more recently streaming, changed the options for distributing video products and video games. Some kinds of specialty items sell best with late-night infomercials on television, but others end up working on the web instead of television.
Distribution patterns may not be as critical to most service companies, because distribution is normally about physical distribution of specific physical products such as a restaurant, graphic artist, professional services practice, or architect.
For a few services, the distribution may still be relevant. A phone service, cable provider, or an internet provider might describe distribution related to physical infrastructure. Some publishers may prefer to treat their business as a service, rather than a manufacturing company, and in that case distribution may also be relevant.
Competition and buying patterns
It is essential to understand the nature of competition in your market. This is still in the general area of describing the industry or type of business.
Explain the general nature of competition in this business, and how the customers seem to choose one provider over another:
- What are the keys to success?
- What buying factors make the most difference—is it price? Product features? Service? Support? Training? Software? Delivery dates?
- Are brand names important?
In the computer business, for example, competition might depend on reputation and trends in one part of the market, and on channels of distribution and advertising in another. In many business-to-business industries, the nature of competition depends on direct selling, because channels are impractical.
Price is vital in products competing with each other on retail shelves, but delivery and reliability might be much more important for materials used by manufacturers in volume, for which a shortage can affect an entire production line.
In the restaurant business, for example, competition might depend on reputation and trends in one part of the market, and on location and parking in another.
In many professional service practices, the nature of competition depends on word of mouth, because advertising is not completely accepted. Is there price competition between accountants, doctors, and lawyers? How powerful are the insurance decisions in medicine, like in or out of network? How do people choose travel agencies or florists for weddings? Why does someone hire one landscape architect over another? Why choose Starbucks, a national brand, over the local coffee house? All of this is the nature of competition.
The key to your specific industry analysis is a collection of decisions and educated guesses you’ll probably have to make for yourself. There are few pat answers. Maybe it’s easy parking, a great location, great reviews on Amazon or Yelp, or recommendations on social media. You can’t necessarily look this up. It’s the kind of educated guessing that makes some businesses more successful than others.
Do a very complete analysis of your main competitors. Make a list, determining who your main competitors are. What are the strengths and weaknesses of each?
Consider your competitors’:
- Financial position
- Channels of distribution
- Brand awareness
- Business development
- Technology, or other factors that you feel are important
- In what segments of the market do they operate? What seems to be their strategy? How much do they impact your products, and what threats and opportunities do they represent?
Finding competitive information
Competitive research starts with a good web search. Look up competitors’ websites and social media, then search for mentions, reviews, announcements, and even vacancies and job search information. An amazing array of competitive information is posted in plain sight, where anybody can find it.
From, there, for a good review of additional sources of information, I suggest Practical Market Research Resources for Entrepreneurs, also here on Bplans.
A lot of businesses organize competitive analysis into a competitive matrix. The standard competitive matrix shows how different competitors stack up according to significant factors.
Some people also use a SWOT analysis to think about competition in terms of opportunities and threats, the “OT” of SWOT. Opportunities and threats are generally taken as externals, which would include competition, so it’s valuable to run a SWOT analysis on your business to help figure this out.