Understanding Your Industry and Your Business

In order to create a Vision for your business (where you see your company at some future point in time), it is first important to understand your industry, it’s trends and where your company fits in that industry.

Here are two related tools to help you.

   1.    Michael Porter’s Five Forces That Drive Industry Competition

Michael Porter is a Professor at the Harvard Business School who has concentrated on business strategy and industrial economics since 1975.

He has identified five forces that need to be understood in order to formulate strategy, which I define as the link between Mission (what you do and why you do it) and Vision (what you want to be at some point in the future). 

The following diagram names these five forces and how they relate to each other.

a.    Threat of New Entrants – New entrants to an industry bring additional capacity, the desire to gain market share and often new resources to use in gaining market share at the expense of existing competitors.  This can and often does lead to lowering of prices which, unless costs can be reduced, leads to lower profitability.  So a question to ask is “how easy it to enter your industry in terms of economies of scale, product differentiation, investment required, cost to customers to switch to the new entrant, access to distribution, proprietary technology and product know how, government regulation and subsidies?”

b.    Substitute Products and New Technology – Are there potentially other products and/or new technologies that could make the industry’s products obsolete or less valuable?

c.    Bargaining Power of Buyers – Are there only a few large buyers in this industry that have the power to demand lower prices, higher quality, and more services thus playing competitors against each other?

d.    Bargaining Power of Suppliers – Are there a few powerful suppliers that can squeeze profitability by raising prices or providing long, uncertain delivery times?  How important is your business to that of your key suppliers – can they make more money selling to other industries?

e.    Intensity of Rivalry Among Existing Competitors – How difficult is it to gain a competitive advantage?  Is there intense price competition?  Are there numerous or very similar competitors?  Are products viewed as a commodity?  Is it easy for customers to switch suppliers? Is the industry exhibiting slow growth?  Are there high fixed costs or are there a high costs associated with exiting the industry?  Is there over capacity?

Not all of these forces are important to any one industry or company. Rather what is important is to gain an understanding of this framework so that it can be used to rapidly identify crucial structural features that determine the nature of competition in your industry.  Once understood, you can focus your strategic attention to the things that matter most.

Reference: Michael E. Porter, “Competitive Strategy – Techniques for Analyzing Industries and Competitors” The Free Press, New York, 1980

            2.  SWOT Analysis – SWOT is an acronym for “Strengths, Weaknesses, Opportunities and Threats” that can be used in conjunction with Porter’s Five Forces to gain an understanding of your business.

• Strengths - characteristics of the business that give it an advantage over others.

·        What does the company do well?

·        Is the company strong/a leader in its market?

·        Does the company have a strong sense of purpose and a culture to support that purpose?

• Weaknesses - characteristics that place the company at a disadvantage relative to others

·         What does the company do poorly?

·         What problems could be avoided?

·         Does the company have serious financial or other issues that could impact performance?

• Opportunities - elements that the company could exploit to its advantage

·         Are industry trends moving upward?

·         Do new markets exist for the company’s products/services?

·         Are there new technologies that the company can exploit?

• Threats - elements in the environment that could cause trouble for the business

·         What are competitors doing well that you are not?

·         What obstacles does your company face?

·         Are there troubling changes in the company’s business environment – technologies, laws and regulations?

Your team should spend considerable time and discussion with this analysis.  Once completed, you will be ready to work on your vision - see my blog "What is Your Vision for Your Company?"