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 Always display financial information, such as industry sales and growth
rate, in a multiyear format, making it easy to spot trends
o Display your information graphically if possible
o Provide information about your industry on a regional or local basis if
appropriate
o 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 three-
to 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

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 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 If you know which segment is growing the fastest and/or is the
most profitable, that’s good information to convey
o Some industries have clearly bifurcated, with the most successful
companies serving either the top end of the market or the bottom
end
o 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

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 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

VI. 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