So we’ve decided that our new product idea could be a goer, and its now time for us to determine whether an industry is attractive for our product. Alternatively you may have existing products, and need to asses your current industry in order to prepare your new marketing plan.

There are a number of things we need to consider when we are assessing the attractiveness of an industry, but before we go any further its good to define an industry, as often people confuse an industry and a market.

An industry can be defined as a group of firms that offer a product or class of products that are similar, and are close substitutes for one another.

A market on the other hand is comprised of individuals and organisations who are interested and willing to buy a good or service to obtain benefits that will satisfy a particular need or want, and have the resources to engage in such a transaction.

Markets are comprised of buyers, industries are comprised of sellers.
 


 

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So how can we best judge an industry’s attractiveness?

An industry’s attractiveness can best be judged by:

Analysing its driving forces
It’s critical success factors
The degree to which a management team can perform on these factors

Along with the five major competitive forces:

Rivalry among present competitors
Potential competitors
Bargaining power of suppliers
Bargaining power of buyers
Threat of substitutes

I’ll cover each one individually.

Analysing industry driving forces

 

Macro-environmental trends are important in shaping the attractiveness of industries, they can be know as driving forces and include:

Changes in the industry’s long-term growth rate – directly affects investment and strategic marketing programmes
Changes in key buyer segments – Affects the demand and strategic marketing programmes
Diffusion of proprietary knowledge – Controls both the rate at which products become more alike and the entry of new firms
Changes in the cost and efficiency, derived from scale and learning effects – Potential to make entry more difficult
Changes in government regulations – Affects entry, costs, competition, profitability

Examining this data will allow you to determine whether an industry is sufficiently attractive to enter or remain in, and will help you shape your marketing decisions to enable your firm to compete effectively.

Lets now cover the market forces that collectively determine an industry’s long term attractiveness.

Rivalry among competitors

 

Rivalry occurs among firms when there are close substitutes for each other, thus firms are mutually dependent. What one firm does affect the others, and vice versa.

Rivalry tends to be greater when there is high investment intensity, and when the amount of fixed and working capital required to produce a dollar of sales is large.

Rivalry is also great when there are many small firms in an industry or no dominant firm exists. Firms will compete with each other on price, quality, etc., in order to win market share and achieve ‘number 1’ status within the industry.

When there is little product differentiation, rivalry tends to be high. This usually results in firms entering a price war, and focusing on scale effects to drive costs down (which allows them to be more completive on price!). Another issue with little differentiation is that it is very easy for consumers to switch from one sellers product to another.

Threat of new entrants

 

Generally speaking, the greater the threat of new entrants into an industry, the less attractive is that industry.

Entry is more difficult when strong economies of scale exist, if the industry has strong capital requirements, when strong product differentiation exists, and if gaining distribution is particularly difficult.

Bargaining power of suppliers

 

The determinant of industry attractiveness is exercised largely through increased prices or better terms of sale.

The greater the power of key suppliers to an industry, the less will be the overall attractiveness of the industry. Firms experience higher than normal costs, which will either eat into the firms bottom line or need passing on to the customers.

Bargaining power of buyers

 

Consumers are always looking for lower prices, better product quality and extra services, all of which affect the competition within an industry.

Buyers will play supplier off against one another, in order to achieve the best deal for themselves or their company.

The greater the buying power of customers served by an industry, the less attractive is that industry.

Threat of substitutes

 

Substitutes are alternative product types (not brands) that perform essentially the same functions, for example plastic bottles verses aluminum cans.

Substitute products put a ceiling on the profitability of an industry by limiting the price that can be charged, and therefore is a major consideration when considering the industry’s attractiveness.

Conclusion

 

As always, detailed and up to date research is key.

You must decide whether to enter (or continue to invest in) an industry, as to whether the growth of a market is sufficient to offset the deteriorating attractiveness of the industry.

Completing this research will help you develop your marketing (and product) strategy, to best position your product to compete with others products within your industry and build all important competitive advantage.

Things are not always as first seem when you delve into the detail.

If you have any questions, comments or opinions, please share.

 

 

Other posts you might like…

 

Is an Industry attractive?
Environmental Analysis: Tools To Identify Attractive Markets
How Quick Do Customers Adopt New Products? – The Adoption Process

 

 

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