What Is Industry Analysis? (Plus How To Use It)

By Indeed Editorial Team

Published May 3, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Industry analysis is a means for businesses to understand the working environment of their industry. Its methods help businesses assess internal and external factors that may relate to decisions about growth and opportunity. If you're an equity research analyst, financial analyst or a team member interested in conducting an industry analysis, you may want to learn more about which method would work best for you. In this article, we cover what industry analysis is, why it's important, various industry analysis models and how to utilize it for your business.

What is industry analysis?

Industry analysis is a research tool used to develop a comprehensive understanding of the competitive dynamic of an industry. Different methods of industry analysis focus on varying components, but the primary aim of industry analysis is to gather information that enables businesses to make better decisions. Industry analysis uses ratio analysis and other comparisons to provide a complete perception of the company's growth potential within its industry.

Importance of industry analysis

Industry analysis is important for allowing companies to identify threats and opportunities and better understand their position within the market. Industry analysis allows businesses to make important decisions like whether to enter a market, how to improve services and products for a competitive edge and how to influence the market in their favor. By using industry analysis, companies might avoid price wars and expensive rivaling advertising campaigns.

Types of industry analysis

These are various models you can use for industry analysis:

Competitive forces analysis

This model of industry analysis determines the competitive intensity and long-term profit potential in an industry. The primary purpose of this model is to understand the principal reasons for profitability in an industry. It focuses on the connection between competitive forces and profit potential. These are the important components of the competitive forces model:

  • Potential for new competitors: If there are low barriers to entry in an industry, that means it's fairly easy for a new business to emerge that competes with yours. Understanding what the potential is for new competitors allows you to project your profit margins with better accuracy.

  • Bargaining power of buyers: This component analyzes what extent buyers, who may be customers or retailers, have power in influencing the company. Product differentiation and loyalty programs lower bargaining power of buyers.

  • Bargaining power of suppliers: This component addresses how much control suppliers have over businesses. If there are fewer suppliers, the bargaining power of suppliers increases.

  • Threat of substitution: By assessing this threat, you understand how likely it is for your clients to switch to alternatives. How many substitutes there are, how willing customers are to switch and how the cost of the alternative compares to your product are all important components.

  • Competitors and nature of competition: Determine the intensity of competition by assessing the volume of existing competitors, their size, how the industry is growing and product differentiation. Competition is high when there are many same-sized competitors in a slow-growing market. When the products and services offered by these competitors don't differentiate, competition is even greater.

Related: What Is a Five Forces Analysis?

Broad factors analysis

This model of industry analysis allows you to analyze key features of the external environment. The broad factors analysis allows companies to assess their external opportunities and threats so they can create plans to take advantage of them or avoid them. Most external issues fit into one of four categories:

  • Political analysis: These external factors focus on government decisions that impact a business. This can include regulations, merger laws and corporate taxes.

  • Economic analysis: These factors focus on how the economy affects a business, including interest rates, exchange rates and consumer spending.

  • Social analysis: Demographic change, social groups and trends are the focus of social analysis. These external factors are how a customer base can change.

  • Technological analysis: There are certain disruptive technologies to industries that can render products and services obsolete. This component focuses on how technology can both aid and disrupt a company.

Related: What Is External Analysis? Definition and Examples

SWOT analysis

This analysis creates a comprehensive view of your business situation so you can create strategic plans for an optimal future. This method focuses on both internal and external factors, relating internal factors as both strengths and weaknesses and external factors as opportunities and threats. The SWOT analysis model can help companies decide on business ventures by examining advantages and disadvantages. These are the various components of this industry analysis model:

  • Understanding strengths: These are the aspects of your business that operate well, giving you a competitive edge over your opponents. They are your critical success factors and possibly your unique advantages in the industry. You may want to find ways to build upon these strengths.

  • Weakness analysis: Your weaknesses are the aspects of your business that put you at a disadvantage compared to your competitors. These are the aspects of your operation that you may want to improve upon.

  • Evaluating opportunities: External factors like trends and market changes affect your opportunities. Assessing your strengths and weaknesses allows you to better understand which opportunities are right for you.

  • Threat assessment: Understanding which external factors like market fluctuations and government regulation affect your business negatively allows you to identify your threats. As with opportunities, understanding your strengths and weaknesses allows you to prepare for these threats and avoid the negative impact.

Read more: Purpose of a SWOT Analysis

How to conduct and use industry analysis

Follow these steps to conduct and use industry analysis:

1. Understand why you're conducting industry analysis

The first step to conducting industry analysis is defining your goals. Understanding why you're conducting industry analysis makes it easier to select a method or methods to use, as you can use these models concurrently to create a more complete comprehension. With a goal in mind, the right method of industry analysis can help you understand your business within the industry and strategize a plan for growth and development.

Read more: How To Conduct an Industry Analysis

2. Form a comprehensive understanding of the industry

By using one or all of the methods above, you want to assess external and internal factors that may affect your success and ability to grow. Using these models allows you to consider all factors affecting your business. It may also be helpful to create a visual representation of this information, as it allows you to conceptualize and communicate the information to your team and business partners. These are some aspects of forming a comprehensive understanding of the industry:

  • Conduct market research to identify an ideal customer: Using market research, you can understand external factors like trends and lifestyle changes, along with other factors like your buyer's bargaining power.

  • Perform evaluations of your industry competition: Assessing your competitor's threats and opportunities, along with strengths and weaknesses, allows you to capitalize on your own distinct abilities and excel in the industry.

  • Gather data about internal and external factors: You may want to understand how government regulations, social-demographic behaviors and technological advancements can help or hinder your success. Having a comprehensive understanding of these external factors, along with internal factors like your own weaknesses and strengths, creates a comprehensive knowledge of how your business operates within the industry.

3. Analyze the internal and external data you've gathered

Once you have your data, you may want to hire or consult with data analysts to extrapolate meaning from the data. Which conclusions are most valuable to you depend on your specific strengths, weaknesses and industry. You may choose a focus such as determining how demographic shifts are going to affect your buyer's bargaining power or how supplier prices are going to change the threat of new competition in the market.

4. Strategize using the internal and external industry data

Using your data and projections, you can make actionable plans for how to take advantage of market shifts or avoid negative impact from external factors. This may mean using new technology to appeal to a younger generation or creating a loyalty program to decrease your buyer's bargaining power. Considering all supply chain issues, internal and external threats and opportunities allow you to plan for fulfilling your company's potential.

Explore more articles