The series “How to Conduct a Market Research for Your SME” is intended to help you understand the importance of market research as a process and what steps you need to undertake to conduct a successful market research process for your SME. In Part 1, we discussed the first major step of successful market research – Country analysis. Today, in Part 2, we’re going to discuss the importance of Industry analysis.
It doesn’t matter if you want to enter the industry for the first time or you want to grow your business within an industry. In fact, you have to conduct a market research analysis if you want to succeed in the marketplace. Industry analysis can help you evaluate every financial factor in your industry. These financial factors can influence your business and can help you evaluate your competitors as well.
By doing industry analysis, you can decide the tactics that you’re going to use to achieve success in your industry. Knowing a country is one, but knowing your industry is a completely different thing. As a result, Porter’s five forces is a model that gives a comprehensive overview of each aspect of your industry.
1. Threat of new entrants
The threat of new entrants as a part of Porter’s five forces points out to the threat that new competitors pose to an existing industry. If the entry barrier is low in an industry, it means that the existing companies that work within the industry are endangered. More competition means less profit for the segment as a result. The threat of new entrants is one of the forces that form the industry’s competitive structure.
A threat of new entrants in an industry can influence the competitive ecosystem of an industry for the companies that coexist within the ecosystem. It has a big effect on their profitability too. This means that new competitors in the marketplace can decrease your market share and profitability too. As a result of decreased market share, you’ll be forced to make pricing and quality changes to your product.
2. Substitute products/services threat
A substitute product may offer the same or modified benefits of your product. A threat of a substitute product or service is a risk that companies face from replacement by its substitutes. Here, the threat is higher than the one from completely unique products in the marketplace.
The threat of a substitute product/service gives your customers more choices and options within your industry. This means more choices to fulfill their needs and solve their problems. That’s why it is massively important to examine similar products in your industry to see how your product can be better than the substitute product/service threats. There are few situations when the threat of a substitute product/service is greater than usual:
- Switching costs – With little or no switching costs for a consumer, there is more of a chance that they may explore and move over to a more attractive substitute.
- Product price – If substitutes have better pricing packages, then there may be more risk of consumers switching products.
- The quality of products – If the substitute products are better in quality, then it is more likely that consumers will want to use them or choose over your product.
- Product performance – If the substitute product performs better than yours in terms of functionality than there is a good chance that they will switch your product for the substitute.
- Substitute availability – The above factors matter only if the substitute product is available in the marketplace.
Once you identify the threat of substitute products/services you can address the threat with constant communication with your customers. Make sure that you build long-term relationships with your customers. Moreover, make sure that you provide them valuable information about your product/services as well as special packages and promotions.
3. Bargaining power of clients
Buyer’s power of bargaining is a strong factor that shows you the pressure that consumers can put on your business so you can provide them a better price, better quality and ultimately, better product. The bargaining power of your buyers in your industry affects your competitive environment and influences your possibility to achieve profit. Although, a strong buyer can create a competitive industry and on the flipside, a weak buyer will make your industry uncompetitive and weak.
If there are few buyers and many sellers – buyer power is high. Now if witching costs – the cost of switching from one company product to another company’s product – are low, the bargaining power of buyers is high. Consequently, if buyers can easily backward integrate – or begin to produce the seller’s product themselves – the bargain power of customers is high.
Buyer power is strong if:
- Buyers are more concentrated than sellers;
- Switching costs are low;
- Price sensitivity at buyers;
- High product education;
- Available substitute products.
Buyer power is weak if:
- Buyers are less concentrated than sellers;
- Switching costs are high;
- Buyer is not price sensitive;
- Products in the market are different;
- Substitutes are not available.
From one hand, low buyer bargaining power makes the industry that you choose more attractive and can increase your profits. On the other hand, high buyer bargaining power makes the industry that you choose less attractive and can decrease your profit.
4. Supplier’s power of bargaining
Powerful product suppliers can decrease profits within any industry. This is of huge importance for the industry that you want to compete in. Powerful suppliers increase the competitiveness of the industry by raising prices and reducing or increasing product quality.
A supplier group can have a big bargaining power if:
- It is dominated by a small number of companies and is more concentrated than the industry to which it sells;
- Is not required to contend with substitute products for sale in the industry;
- The products are of huge importance to the buyers;
- The threat of forwarding integration.
5. Intensity of competitive rivalry
The rivalry among companies within an industry is one of Porter’s five forces that determines the competitive intensity of an industry. The rivalry within your industry tends to increase when your company and your competitors feel the competitive pressure of the industry. Likewise, it sees it as an opportunity to improve your position in the market.
The structural factors that can affect competitive rivalry of an industry are:
- Numerous or equally balanced competitors
- Slow industry growth
- High fixed or storage costs
- Lack of differentiation or switching costs
- Capacity increased in large increments
- Diverse competitors
- High strategic stakes
- Higher exit barriers
If you want to conduct market research, you have to know these 5 components. They will give you a better understanding of the industry you are trying to enter. Furthermore, it might prevent you from making crucial mistakes. Once you understand your industry, then you can start to understand your competitors in the marketplace, which will be discussed in Part 3 of this series.
Thank you for your attention. If you are an Entrepreneur that wants to start a business or own a company that wants to expand, wants to successfully identify trends and competitors and better understand his clients but still not sure where to begin, BizzBee is here to guide you through the steps that will help you differentiate from your competition. Our expertise is in working with Entrepreneurs and Start-ups and we can guide you throughout the entire process.