How Competitive is the Industry?
If you are confident there is a real demand for your product or service, and you believe you are likely to be able to break even, you are well on the way to having a feasible idea. However, you still need to take into account what is happening in the industry.
Why is the industry important? It is because businesses do not operate in isolation. They are affected by external factors, and as a business owner you will need to be able to overcome threats and evaluate opportunities.
Factors Affecting Competition
Some industries are more competitive than others – the higher the level of competition in an industry, the harder it’ll be to earn a profit.
There are five ‘forces’ that affect how competitive an industry is, shown by the Porter’s Five Forces model.
You will need to work out if the force of any of these factors is so high that it will be difficult for you to operate your business. For example:
- Competitive rivalry: If there are lots of competitors already in the industry, it is harder to make a profit.
- Supplier power: If there is only one supplier for a certain product, they could change their prices and force you to pay more. It could get very hard to make a profit.
- Buyer power: If all products in the industry are very similar, buyers can easily choose to buy from a competitor instead of from you. Similarly, if you rely on one major customer, you may feel you need to keep your prices low or offer extra benefits in order to keep that customer.
- New entrants: If it is very cheap and easy for a new business to set up and do exactly what you do, competition will be higher.
- Threat of substitutes: If customers have lots of other options available to them and do not necessarily need your type of product, it can be more difficult to attract customers and make a profit.
SWOT analysis (see below) is commonly used in business to analyse the forces operating with and against you. It looks at the strengths and weaknesses of your particular business (internal factors), as well as external factors (opportunities and threats) your business will face in the industry in which it will operate.
To complete a SWOT analysis, you simply identify and describe the strengths and weaknesses of your proposed business, as well as the opportunities and threats it faces from the external environment.
- Strengths are features internal to your business that are valuable and could potentially create an advantage. They include your own expertise and knowledge, as well as other factors such as your business assets and anything unique that your business has that others do not.
- Weaknesses are features internal to your business that create a disadvantage. They include factors such as areas of expertise that you do not have, as well as resources you lack.
- Opportunities are positive things (which are not already part of the business) which you can use or pursue to improve your business or create an advantage. They include things like possible business partnerships, new markets, grants being available to buy equipment, and so on.
- Threats are things outside of your business that have the potential to negatively impact your business. They include factors such as your major customer relocating, changes in laws which are not favourable to you, and new competitors entering the market. You will need to avoid or overcome them so you are not at a disadvantage.
Strengths and weaknesses are internal factors: that is, they are things in your business. As such, you may have some control over them.
On the other hand, opportunities and threats are external factors: that is, they are things in the environment that you have much less control over. The basic idea behind SWOT analysis is to use your strengths and the opportunities available to you to counter weaknesses and overcome threats.
By completing a SWOT analysis you will be more aware of the challenges your business will face, and the opportunities you could pursue to make your business succeed. Based on this, you may decide that operating in the industry will be very difficult, and your business may not be viable. Although this is not the outcome you are probably hoping for, remember that it is best to find this out before you spend money to start your business.
Factors to Consider
Keep in mind that your competitors’ strengths and weaknesses create threats and opportunities for you.
- A competitor’s weakness creates an opportunity that you can take advantage of. For example, if a competitor has problems completing work on time, you can make your business more attractive by being efficient and punctual.
- Similarly, a competitor’s strength will present a threat to your business. If it is the competitor who is efficient and it is you who has the problem completing work on time, you will need to overcome this weakness or use one of your strengths to make up for it. At the very least you will need to improve your planning so you can give customers realistic estimates of when work will be completed.
It is a good idea to carry out a SWOT analysis for each of your closest competitors so you are aware of their strengths and weaknesses.