ENT 3003 Exam 2 Chapters 5 8 Chapter 5 Analyzing the Industry Market Introduction o a grouping of businesses that interact in a common environment as part of a value The analysis of the industry in which the business will operate is critical to determining whether a new venture will be feasible Industry chain or distribution channel Ideas for ventures frequently come from understanding and having experience with an industry In addition comprehending how an industry works can help entrepreneurs find strategic partners customers venture capital and strategies for success and also learn where the pitfalls and roadblocks might be A strategic position in a growing dynamic healthy industry can go a long way toward ensuring a successful venture Young growing industries with lots of new entrants provide opportunities for businesses to become major players o Ex New Media Industry Understanding how an industry operates is fundamental to shaping effective entry and growth Market strategies and to determining the potential for profitability a grouping of customers that an entrepreneur targets Identification of the primary market and the first customer is one of the most important tasks that needs to be undertaken during a feasibility analysis o First Customers represents the segment of the marketplace that needs the product or service most an individual or organization who pays for a product or service it generally o The reason is that entrepreneurs have limited resources so they want to assure that their first sales come quickly which will happen if they ve targeted customers with real problems Entrepreneurs identify their primary customers by recognizing a need or pain in the market Identifying a pain or need in the market is only the first step o o Unfortunately many entrepreneurs don t place enough emphasis on in depth market analysis to support the need they have recognized As a result they tend to overestimate their market forecasts for demand by as much as 60 This kind of error can be devastating to a startup venture An Overview of the Industry Analysis There are two important reasons to study the industry o o 1 It represents the business s external environment and no business operates independent of its external environment 2 Entrepreneurs need to understand whether they can make a profit in the industry and if that profit will be significant enough to make the effort to start the business worthwhile Return on Investment ROI a critical factor in any entrepreneur s planning o Two forces influence ROI in an industry 1 Forces that tend not to change such as brand equity and intellectual property and forces that are dynamic such as the number of potential buyers or changing demographics and 2 The aggregate strength of the market forces Ex the airlines and publishing industries have intense forces acting on them so returns typically are not attractive Exploring an industry will involve gathering and synthesizing an enormous amount of information as well as talking to people who spend their days working in that industry o Starting with a clear understanding of what information needs to be gathered will increase the chances that the assessment is as accurate as possible o The data collected should answer the following key questions Is the industry growing What does the industry look like Where are the opportunities What is the status of any new technology How much do industry companies spend on research and development Who are the opinion leaders What does the future look like What are the typical margins in the industry Are there young successful firms in the industry Are there any threats to the industry derived by dividing gross profit by sales For all businesses there are global trends that offer rich opportunities to innovate Gross Margin o For the first time in 200 years emerging market countries will generate more growth than developing countries which will provide a new market of middle class consumers o These developing economies need to become productive quickly so there are opportunities to offer innovations that increase productivity o Global interconnectedness in economies markets and social groups means more volatility and an acceleration of the rate of innovation Going into the analysis with a firm grip on which questions need to be answered is the first step o Figuring out where to find this information is the next step Gathering Secondary Sources of Industry Information It s generally wise to begin any research by looking at secondary sources of information to gather background data o Today Goggle search engine and Wikipedia are great places to get an introduction to an o industry and pick up on some trends by noting what is being talked about Journals trade magazines industry analysts government publications and annual reports of public corporations are also an excellent starting point they provide more targeted information and generally from experts o Trade magazines provide a good sense of key firms and the direction the industry may be taking o The important thing to remember is to use multiple sources to draw conclusions because no one source is complete and it s important to get a variety of perspectives to look for patterns the classification system that The North American Industry Classification System NAICS the US Canada and Mexico developed to identify industries and allow for common standards and statistics across North America It is replacing the traditional U S Standard Industrial Classification system SIC o o NAICS covers 350 new industries that have never been coded before Some of these industries reflect high tech developments o However far more important of these categories are not technology based NAICS industries are identified by a six digit code instead of the four digit SIC code o The longer code accommodates a larger number of sectors and enables more flexibility in designating subsectors o NAICS is organized in a hierarchical structure much like the SIC o First two digits designate a major economic sector o Third digit an economic subsector o Fourth digit designates an industry group o Fifth digit designates the NAICS industry The NAICS agreement fixes only the first five digits of the code o The sixth digit is used for industrial classifications in other countries where necessary With the NAICS code one can find statistics about o The size of the industry o Sales o Number of employees o Etc It is easy to research common broad industries like