1.02 – Understanding Your Industry
New industries emerge regularly. With e-commerce capturing the attention of many aspiring entrepreneurs, you might wonder, “Is e-commerce an industry?” Indeed, if we define an industry as a group of related businesses, then all e-commerce businesses share one common element: the Internet. This applies to retail businesses, manufacturers, wholesalers, and service companies, all of which utilize the Internet, forming a single value chain.
Retail businesses share retailing, and manufacturers share manufacturing. Are retail and manufacturing distinct industries? Within retail, you find clothing retailers, book retailers, and many more. Thus, clothing and publishing can be considered industries. The answer is yes to all these questions.
Industries are layered, starting with broad categories and narrowing down to specifics. Consider Amazon, a well-known e-commerce business. If you view e-commerce as an industry, Amazon is part of it. Within e-commerce, Amazon functions as a retail business using the Internet for marketing and distribution. Moreover, Amazon operates in various sectors such as publishing, music, toys, and video. Thus, studying Amazon means understanding multiple industries.
To conduct a feasibility study, you need to examine your chosen industry thoroughly. Begin at the broadest industry level and drill down to the segment involving your product or service.
Using a Framework of Industry Structure
To analyze your industry, you can use a common framework developed by W.H. Starbuck and Michael E. Porter, experts in organizational strategy. This framework helps you evaluate external forces impacting your industry and the countermeasures you must adopt. New businesses must continually monitor these external forces.
The entrepreneurial environment often resembles a battlefield, with threats and countermeasures. The first step is identifying these external forces.
Carrying Capacity, Uncertainty, and Complexity
- Carrying Capacity: Carrying capacity refers to how many businesses an industry can sustain. When oversaturated, the industry’s capacity to produce exceeds demand, making it tough for new businesses to survive.
- Uncertainty: Measures the predictability of an industry. Fast-changing technology industries typically have higher uncertainty, presenting more opportunities for new ventures.
- Complexity: Involves the number and diversity of inputs and outputs in an industry. Complex industries, like biotechnology and telecommunications, deal with more suppliers, customers, and competitors, along with strict regulations.
Recognising Threats to New Entrants
Industries often have high entry barriers. Here are some key barriers:
- Economies of Scale: Established businesses can produce goods more cheaply due to large volumes, which new businesses cannot match. New firms often form alliances to overcome this.
- Brand Loyalty: Competitors with strong brand loyalty make it hard for new businesses to attract customers. Finding a market niche helps establish your brand loyalty. More on niches and branding can be found in “Fundamentals Of Marketing & Promotion” or “An Introduction To Building Brand Consistency”.
- High Capital Requirements: High costs for advertising, R&D, and equipment can be prohibitive. Outsourcing expensive functions can help new businesses manage these costs.
- Buyer Switching Costs: Buyers hesitate to switch suppliers without a compelling reason. Thus, new businesses must meet unfulfilled needs to attract customers.
- Access to Distribution Channels: Established methods for product distribution can be challenging for new companies. Innovating new methods can provide an edge.
- Proprietary Factors: Established companies may own technology or locations offering a competitive edge. New ventures often leverage proprietary factors to enjoy brief, competition-free periods.
- Government Regulations: Lengthy and expensive regulatory processes can deter new businesses. Strategic alliances with larger companies can mitigate these costs.
- Industry Hostility: Rival companies in some industries make it difficult for new entrants. Finding a market niche where you offer what competitors do not can help your business thrive even in a hostile environment.
Identifying Threats from Substitute Products/Services
Your competition includes businesses offering substitute products using different methods. For instance, restaurants compete for consumer dollars not only with other restaurants but also with entertainment venues serving food.
Spotting Threat from Buyers' Bargaining Power
Buyers can force prices down when they buy in volume. Established companies often have this advantage, making it hard for new entrants to compete.
Distinguishing Threat from Suppliers' Bargaining Power
Suppliers can raise prices or alter product quality, particularly where few suppliers exist. Labour is also a key supply factor, with skilled labour shortages driving up costs in some industries.
Being Aware of Rivalry Among Existing Firms
Highly competitive industries see price wars, which can drive down profits. New businesses should find unserved niches to avoid competing on price.
Deciding on an Entry Strategy
Your industry’s structure dictates your entry strategy. Misjudging this structure can lead to choosing the wrong strategy, wasting time and money. Generally, new ventures have three entry strategies:
- Differentiation: Stand out through product innovation, unique marketing, or branding. Differentiation builds customer loyalty, making your product less price-sensitive.
- Niche Strategy: Identify and fill a market niche unmet by others. This strategy provides space to grow without direct competition, allowing you to establish standards and a brand.
- Cost Superiority: Being the low-cost leader is challenging due to reliance on volume and low production costs. New ventures can leverage this in emerging industries where everyone faces similar disadvantages.
