Industry Analysis- Your business is not too small to benefit.

Your business does not exist in a vacuum. No matter how big your business is, the ability to analyze and understand your competition is essential for success. One analytical tool is Porter's 5 Forces Analysis. These 5 forces, competitive rivalry, supplier power, buyer power, threat of substitutes, and threat of new entries, can provide information that will solidify your business integrity. Listen in to learn more. 

Transcript

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Welcome to The Water Trough, where we can't make you drink, but we will make you think. My name is Ed Drawster, the Small Business Doctor, and I'm really excited you chose to join me here as we discuss topics that are important for small business folks just like you. If you're looking for ideas, inspiration, and possibility, you've come to the right place. Join us as we take steps to help you create the healthy business that you've always wanted. Welcome back to the water trough. This is ed draws to the small business doctor. One of the concepts that we teach in business school. Is industry analysis. And most of us are probably familiar with that. Having created a business plan. We had to, Look at the market around us and see what our products and services could bear and view. The folks that are our competitors Industry analysis in short is a marketing process. It provides. Stats or statistics about the market potential of your business products and services. And you need to derive specific information about the current state of the industry. And it's target markets by doing this, you enable yourself to be competitive with those people around you. If you're not yet in business, it's also good to do an industry analysis, to be able to establish whether or not your ideas are viable. In the environment that exists around you. Because of industry analysis, you're able to understand market trends and outlooks. You can identify potential competitive threats and risks. You can recognize them tap the market opportunities. This is a big one for small business, because if others aren't doing it or aren't doing it in a unique fashion, maybe that's the place where you can fit in and make great things happen. And then the fourth benefit of industry analysis is to learn about substitute products and service trends. All of this information is valuable. Vital. To the business owner. Both at the inception. Or prior to the. Creation of the business. And to remain competitive throughout. The life of the business as well. So, no matter how small your company might be, and you might think to yourself, well, What I'm doing is unique and I don't need to know these things. Don't lose sight. Of the benefit of industry analysis. And in the world of industry analysis, there is a particular tool. That. We promote with our students, which is very, very useful. This tool is Porter's five forces of competitive position analysis or in short Porter's five forces or five force analysis. It was devised in 1979 by Michael Lee Porter of Harvard business school. And it's a simple framework for assessing and evaluating the competitive strength in business. There are five forces that Porter. The spouses as being important. In our ability to assess our relation. To our competitors. These are competitive rivalry. Supplier power. Buyer power. The threat of substitution. And the threat of new entries. So I'm going to talk about each of these. A little bit at length here. So as to give a better idea of what they're all about. The first competitive rivalry. Kind of speaks for itself. Competitive rivalry is a measure of the extent of competition among existing firms. We're not looking to what is coming down the road. We're looking at what exists today. Now the thing about competitive rivalry. Is when you're assessing it, you've gotta be clear who your competition actually is. Now that might sound straightforward, but you have to really carefully assess that you have to determine carefully who is your competition? Who is. Doing the same thing as you thereby taking away. Your efforts in that very same niche. Competitive rivalry. Is of course a positive thing as well. Competition keeps us on our toes. It inspires innovation. And in some cases let's not mistake. competition can become our cohorts as well. But being aware of our competitive rivals is very important so that we know how we fit in. With the environment. We are not, or at least in very, very few cases, are we ever completely alone in what we have to offer? So competitive rivalry is a very real. And a very important element. Of our industry analysis. The second deporters five forces is supplier power. Suppliers have the power to influence. Price. As well as the availability of resources and inputs, for example, Let's say that you are your manufacturing. An automobile. And one of the materials that you need in the production of automobiles obviously is certain metals, plastics, and parts. The supplier. Provides these parts for you, And it's necessary that you have them in order to complete the production of the vehicle that you're trying to make. If the supplier. Is one on whom you depend. Let's say, for example, there's an exclusive supplier of a particular. Material. Then you are pretty much at the whim. Of their availability. If you're dependent upon them and can't switch to other suppliers for various reasons, including her costs or lack of alternative sources. Then they can change their pricing at any time. They have that ability to do that. They can restrict the flow of resources as well. No, it's not necessarily to say it's done in an effort to diminish your performance. But for a host of reasons, the supplier might face an issue. Where they have to. Increase their prices or the availability of their resources and supplies. Might be reduced. In such cases. The supplier exerts a power, a control over you. Now, if you're in a business, Where you were not dependent upon suppliers at all. And many of us in smaller businesses are not, then this is not a concern, but if you are in a position, particularly in manufacturing, where you depend upon others to provide raw materials that you need in the production process. The supplier power can be pretty substantial. The third of Porter's five forces is buyer power. Now. It might be wondering how can buyers possibly influence my decisions about what I do in my business. Buyers. Are of course the end point we produce goods and services. With the expectation that buyers will purchase them. However. If we have larger, more influential customers. Demanding higher quality products for lower prices. For example, we have a favored. Buyer. And by favorite, I mean, perhaps the one that's buying most of our materials. They can exert pressure on us. By saying we want higher quality products, but we want lower prices as well. It's kind of along the lines of that old adage. Putting all your eggs in one basket. If your buyers are in one basket. You stand a greater risk of your buyers influencing. How you conduct your business? Because the buyer. Now has the ability to expect and demand. Improve quality and lower pricing. The buyer has the ability to play the industry participants off of one another. The threat of substitute products. Is the fourth of Porter's five forces. Substitute products or services may displace our own. The threat of substitutes is high. When rivals are even companies outside the industry offer more attractive or lower cost products. So let's say back to the buyer power, our largest group of buyers. Is asking us to reduce prices and asking us to make changes, improving the quality. Of what we're providing them. A competitor might seize this opportunity. Producing a substitute products by substitute, not necessarily functionally different than that, which we offer. But substitute as in coming from another source. And the substitute product. Is going to possibly displace our own. The competitor will use this information. Two. Reduce their pricing and, to increase the quality of the product. Thereby taking away from your. Own output. And finally the fifth, uh, Porter's five forces. Is that of the threat. A new entry. When new competitors enter into an industry offering the same products or services. The position of any company will be at risk to some degree. Imagine if you had one business in the industry providing services and goods. When you add the second one, the potential is there for the second one to take. Uh, way business from the first. Even in established industries where there may be, let's say the top two or three. Performers. The entry of a new one with greater innovation, greater facility, and speed has the potential to cause risk. So the threat of new entry. Refers to the ability of new companies to enter into an industry and have an impact on those that are currently there. So these five forces are something that you should look at. As you are, number one, building your company. Number two. Continuing to grow. These forces. Are exerted externally. From the outside of our organization. But it behooves us to be aware of them and to realize how they can impact us. What's more, it's important that we keep an ongoing vigilance over these things. Because these things are subject to change on a almost continual cycle. There are far more ways to look at industry analysis, but Porter's five forces is a pretty straightforward way. To assess. This information. I hope this was helpful. I am at draws to the small business doctor. And until we meet again, I wish you a healthy business. Um, we're learning how to necessarily.