Industry Analysis for Business Plans | Sample Business Plan

Industry Analysis


In this area of your plan you will be analyzing the industry you plan to enter.  This segment will require a bit of research and it is really important that you make sure your resources come from a credible reference.  You will want to have statistics; a lot of numbers that will illustrate you not only have a solid understanding of the industry you intend to enter, but that you are prepared to traverse the complex and competitive nature of business.

 

As with just about every aspect of a business plan, this segment can be confusing as there isn't a clear cut outline for what goes into an industry analysis. Pending the person or reference, you will find there are different answers, with varying terms that are used, to describe each section. Some will say you must evaluate your industry using Porter's 5 Forces, but Porter's 5 Forces is actually an approach to conducting an industry analysis as a whole, which doesn't explain where it falls within the industry analysis. The following are recommended components/sections of an industry analysis:

 

  • Industry Description
  • This section should be brief (only a few lines) and give a general overview of the industry you are entering.

     

  • Industry Trends
  • This area describes how well the industry is doing. One thing to consider when you are doing your research for establishing a business is that this is for you, as the business owner, as well as potential investors. While conducting your research, you may find that the industry you are about to enter is significantly declining; which should be a red flag to reconsider. There are a number of resources out there to get statistics on your industry, a search of OSHA will help you find your Standard Industry Code (which has been revised: North American Industry Classification System - NAICS). BLS.gov (Bureau of Labor Statistics) is another resource to gain key statistics regarding your industry.

     

  • Industry Size and Attractiveness
  • As a result of your research from the previous section, you will be able provide an overview of how large the industry is and the potential for growth. State any benefits that exist for your industry, such as; governmental subsidies or tax credits, are you a first mover or will you offer a product or service that will compliment an existing product, how will your product or service fill a need?

     

  • Profit Potential
  • Your profit potential is a result of a number of elements. Here you may use Porter's 5 Forces to evaluate your profit potential from an industry perspective. You will express any cost advantages, or pricing opportunities. This area analyzes your competition and those internal attributes you may have that will generate revenue.

     

  • Target Market
  • This section describes who you are targeting; their demographics. Are you targeting people that are willing to pay a premium, or are they thrifty. Are your customers young, old, male, female, technologically savvy, located in a particular area (a specific city, state, or country?). Do your customers own their own home, or do they rent? Are they health conscious or do they prefer fast food? Conducting some marketing research for this area will be useful as you will be able to analyze and provide statistics that may help you get to know who your consumers are.

     

  • Competitive Position
  • This area reviews where you stand within your market or industry. Discuss who you will be competing with, how well are they doing and how are you going to attract customers to come to you rather than them. Is there room for growth (scalability).


    Example


    Industry Analysis


    Industry Description

    This industry analysis will aid in researching the industry in which SI Co will be located.  This is the solar energy industry.  We can also determine how the company will compete in the industry.


    Industry Trends

    The solar energy industry is affected by many trends in the general environment.  Some of these trends include: cultural trends, economic climate, legal and political conditions, environmental trends, and technological changes.


    Legal and political conditions are especially a concern at the present time.  Solar energy will also reduce our dependence on foreign sources of oil and natural gas.  Many of the remaining resource reserves are located in unstable regions around the world; therefore the United States needs to ensure that alternative energy sources are developed.  Politicians are becoming increasingly concerned with alternative forms of energy.  President elect, Barack Obama, believes that alternative forms of energy are very important and will be pursued in the future.  Solar energy could generate $230 billion of new investment by 2016 with the recent passage of the Federal Solar Tax Credit for an additional 8 years (News, Research, & Multimedia, http://seia.org/cs/news_detail?pressrelease.id=217, October 2008). 


    The current economic climate is desperate for alternative forms of energy.  Solar energy installed in homes and businesses will provide savings on electrical expenses long-term.   Solar energy will also create many jobs for Americans.  It will create jobs in manufacturing and distribution, but will also include many solid building trade jobs for electricians, plumbers, roofers, designers, and engineers.  A recent study concluded that the solar energy industry is going to create 440,000 permanent jobs (U.S. Solar Industry Year in Review 2007, http://www.seia.org/galleries/pdf/year_in_review_2007.pdf, 9 October 2008). 


    Environmental trends play a large role as Americans are becoming more concerned with the global warming and “going green”.  Solar energy is a no emissions source of energy.  With increasing awareness of the global climate many believe we desperately need to switch to carbon-neutral forms of energy.  Solar energy provides an emission-free source of electricity and hot water that can reduce the nation’s carbon footprint (U.S. Solar Industry Year in Review 2007, http://www.seia.org/galleries/pdf/year_in_review_2007.pdf, 9 October 2008). 


    There are many emerging technological changes that will affect the solar energy market.  Companies are undergoing research and development to discover new techniques and materials to improve efficiency and cut cost.  New storage systems are also being pursued to improve the solar energy industry and to make it more efficient for future growth (Emerging Technology, http://seia.org/cs/emerging_technology, 9 October 2008).


    Cultural trends play a large role because, as previously stated, companies and individuals are becoming increasingly concerned with the global climate, global warming, and becoming more responsible with resources.  Because of this, solar energy is seeing a surge in interest. Americans burn more energy than any other in the world; therefore they have more influence over climate change than they might think.  Appendix 1 displays a chart form the Wall Street Journal article “A Big Sum of Small Differences” which explains how consumers directly and indirectly influence emissions (A Big Sum of Small Differences, http://online.wsj.com/article/SB122289755970595757.html?mod=todays_us_page_one, 2 October 2008). 


    Industry Size and Attractiveness

    The current size of the solar energy industry is just over 3,400 megawatts of installed solar power in 2007.  The United States ranks fourth in the world in solar energy.  However, solar energy is a growing industry.  The solar energy industry grew 48% in 2007 as compared to 2006, and is expected to grow vastly in the future.  As previously stated congress recently passed the Federal Solar Tax Credit for an additional 8 years.  This will create numerous permanent jobs, attract billions of dollars in investment, and aid in creating Americas independence from foreign countries relating to energy.  Because of the passage of this tax credit the United States is poised to become the largest solar market in the world (U.S. Solar Industry Year in Review 2007, http://www.seia.org/galleries/pdf/year_in_review_2007.pdf, 9 October 2008).


    Profit Potential

    Profit potential can be determined by performing a five forces analysis.  There are five forces that threaten the performance of the solar energy industry:  rivalry, buyers, substitutes, new entry, and suppliers.  The following chart examines whether these threats are low, medium, or high.  A more in depth analysis follows. 

    Competitive Force

    Threat to Industry Profitability

    Low

    Medium

    High

    Threat of substitutes

     

     

    Treat of new entrants

     

    Rivalry among existing firms

     

     

    Bargaining power of suppliers

     

     

    Bargaining power of buyers

     

     

     

    Substitutes are a very strong threat to the industry.  A major substitute to solar energy is continuing to use natural resources.  Consumers might choose to do this because of the initial investment that solar energy requires.   As industry trends continue to affect consumers, such as “going green,” it is likely that alternative forms of energy will become increasingly popular; therefore this trend may likely become lower in the future. 


    New entrants pose a low to medium threat to the industry.  This is a growing industry, so there will likely be many new entrants into the industry in the future because it is ripe for innovation.  However companies entering will still face challenges.  To compete with this industry, companies would need large amounts of funding.  They would also need marketing and networking in order to gain consumer knowledge and demand.  New entrants would also have to endure these expenses to differentiate their own products and gain the support of consumers.  The economy also determines the level of threat that new entrants possess.  In the last decade the economy has been performing poorly, which has made it difficult for new businesses to thrive.


    The industry’s rivals consist of all companies that produce the means for solar energy.  The threat of rivalry is somewhat low.  The number and balance of competitors is low.  Since this is a relatively new industry that is just beginning to realize growth, there are not many strong competitors.  The fact that the industry is growing is another reason that rivalry is low.  Therefore, there is room in the market for the new competitors. 


    Suppliers pose a medium threat to the solar energy industry.  There is a threat of possible forward integration.  This means that suppliers could decide to start installing and distributing solar energy as well as manufacturing it.  Supplier concentration means that there are only a few suppliers to provide a product to a large number of buyers.  This would give suppliers a large advantage over installers of solar energy.  However, there seems to be a large quantity of suppliers, so this is not a large threat. 


    Buyers exert a somewhat strong force in the solar energy industry.  In this case the buyers are those who use and purchase some form of energy.  Consumers have the option of choosing what type of energy they use at this time, whether that is natural gas, or green forms of energy such as solar power.  The economy plays a role in buyer’s options.  Solar energy saves money in the long run; however it requires an initial investment of capital.  Current economic conditions are making it difficult for individual consumers, companies, and even banks to get large amounts of capital for the use of loans.


    After evaluating the five forces model on the solar energy industry it can be concluded that most of the forces are moderate to high, therefore threats in the industry could greatly affect industry profitability.  The only low force was rivalry among competitors, and this is because the industry is growing.  It is likely to grow more in the future therefore the industry is ready for innovation.  The solar energy industry is a realistic place to start and be successful in a new venture.


    Target Market

    The target market for SI Co can be broken into three categories.  

    1. Individuals looking to purchase or build new homes, with a value of $300,000 or greater, in Madison County.  New house construction building permits and average cost of homes are as follows:

    • 2000: 910 buildings, average cost: $130,900
    • 2001: 971 buildings, average cost: $138,000
    • 2002: 1324 buildings, average cost: $140,300
    • 2003: 1340 buildings, average cost: $162,900
    • 2004: 1406 buildings, average cost: $174,300
    • 2005: 1320 buildings, average cost: $176,700
    • 2006: 933 buildings, average cost: $198,700

    (Madison County, Illinois (IL), http://www.city-data.com/county/madison_county-il.html, 20 November 2008).

    2.  Individuals who currently own a home with a value $300,000 or greater, in Madison County, who wish to invest money into their homes for the long-term savings.  In Madison County a chart listed in Appendix 3 shows 2007 house values in a distribution curve.  The chart shows that approximately 50,000 homes within Madison County are valued at $300,000 or higher (Madison County, Illinois (IL), http://www.city-data.com/county/madison_county-il.html, 20 November 2008).

    3.  Small business within Madison County.  A small business can best be defined as having 100 or fewer employees and gross receipts of $12 million or less over the previous three tax years.  For the purposes of SI Co, the small business targeted should be upper scale small business meaning, there should generally be 50 to 100 employees and gross receipts of $8 to $12 million of the previous three tax years (Small Business Certification Benefits and Eligibility Requirements, http://www.pd.dgs.ca.gov/smbus/sbcert.htm, 20 November 2008).


    Industry trends prove that Americans are becoming progressively more concerned with alternative forms of energy for an immense number of reasons.  Being wasteful of natural resources is becoming an ethical issue and our planets resources are depleting.  Individuals are becoming increasingly concerned with carbon emissions.  They are taking small steps to be more responsible therefore alternative energy sources are going to be a booming industry in the future (U.S. Solar Industry Year in Review 2007, http://www.seia.org/galleries/pdf/year_in_review_2007.pdf, 9 October 2008).


    Competitive position within target market

    The solar energy industry deals with direct, indirect, and future competitors.  Direct competitors are those who offer identical or similar products, such as other solar energy companies that are already established.  Indirect competitors offer close substitute products, such as companies providing a similar means of natural or green energy.  Future competitors are those who are not yet direct or indirect competitors, but could be at any time.  Another competitor is the status quo.  People are generally resistant to change, and often would rather keep their money than spend it.  To combat this, a product’s utility must rise above the cost, and consumers must be educated. 


    Staying competitive with other companies in this industry will require competitive price and quality, effective marketing, continuous improvement, as well as a variety of other factors.  The Solar Energy Industries Association (SEIA) provides a list of established competitors within Illinois (Appendix 3).  Since this is a growing industry there are sure to be new entrants into the market in the future. 


                 Growth for this industry is expected to continue growing throughout the tax credit period, and even in 2016 when the tax credit ends, analysts are still predicting growth for the industry.  With the continued Federal Support of the solar energy industry it is expected to spur economic growth in future decades (News, Research, & Multimedia, http://seia.org/cs/news_detail?pressrelease.id=217, 3 October 2008).