Business Plan: Analyzing Your Industry
By Amy Fontinelle
A good business plan starts with research into the potential business's industry, competitors and market. This gives the business owner a complete understanding of the playing field.
As a business owner, you must understand what is going on not just in your own business but also in your entire industry. The factors that are hurting and helping the entire industry will also impact your individual business. While you probably can't control these external factors, you can control how your business will respond to them. (Find out why some companies thrive while others flounder. See Economic Moats: A Successful Company's Best Defense.)
Potential financiers will want to see that you have a thorough understanding of how your industry works and where your business fits in. They will also want to understand the industry that they will be investing in (if they don't already) and be convinced that your business will be a profitable addition to the industry.
Even if you haven't done all the work necessary to prepare a formal industry analysis and sector analysis, you have probably already gathered a lot of the information you need. It was probably an observation or a series of observations about the conditions in your industry that made you decide to open your business in the first place. You probably noticed a trend or an opportunity that you could exploit to earn a profit.
This is the first section of your plan where you can (and should) go into detail. Include the following information in your business plan's formal industry analysis.
Explain what's going on in your industry as a whole. What does the industry life cycle look like? Is the industry new, expanding, stable or declining? (Hint: if the answer is not "new" or "expanding," your business is in for a rough ride.) Is it growing faster, slower, or at the same pace as the economy as a whole? ("Slower" is not a good answer.) If your company is affected by seasonal and/or cyclical changes, explain how. List the market leaders and define their market share. Also note any other important competitors in the industry, such as startups to keep an eye on. Analyze the main products and services provided by the other companies in your industry, and their major competitive advantages and disadvantages. (Predicting sales growth can be something of a black art - unless you ask the right questions. See Great Expectations: Forecasting Sales Growth.)
Make sure to go into detail. For example, when looking at what products and services are provided by grocery stores, in addition to the obvious answer - grocery stores sell the food people eat on a daily basis - you should note note the specialty services offered by your competitors, such as freshly prepared hot meals, grocery delivery, butchers, delis, pharmacies, gift card sales, lottery tickets, movie rentals, banking services, florists and so on. When describing your major competitors, you would include not just other grocery stores, but also mass merchandisers, warehouse stores, and online stores that sell food. And while people need food year round and in all economic climates, they do tend to buy more near major holidays like Thanksgiving and Christmas.
How do businesses make money in your industry? This might sound like an overly obvious question, but think about it more carefully. Do you really know where and how grocery stores make money, for example? What wholesale prices can you expect when purchasing your merchandise? By what percentage can you mark your products up and still be competitive? What types of discounts can you profitably offer during sales? What will your employees expect to be paid? (Don't overlook the details when starting up a business. It's the small expenses that have the potential to make or break a great idea. Check out Business Startup Costs: It's In The Details.)
Legal, Economic and Political Factors
Consider the national, state and local issues that impact businesses similar to yours. How is your business affected by environmental issues, trade regulations, labor relations and health and safety regulations, for example? Consider the current situation of the business environment and the potential changes that could affect the industry.
In the case of the grocery store, the business owner would want to include information in his business plan about the minimum wage, working hours, overtime, workers' compensation and other laws that affect how grocery stores make employment and compensation decisions. The plan should also include information about grocery store employee unions and how this affects wages, working conditions and business disruptions; food storage and handling laws; liquor licensing laws; prohibitions on the sales of certain foods; tax laws, such as which foods are taxed, which are untaxed and the other collection regulations such as the different deposits on beverages sold in aluminum cans and glass bottles; and much more. What happens if food sold by your store makes people sick? How do food expiration dates affect your business? What about new regulations regarding the product you will sell, or the potential tax changes on those products or services? All of these issues are either things that your business will have to confront directly and/or things that affect your competitors (and therefore your ability to take away their market share). (Find out what you can do to limit risk and keep your business running smoothly, in Don't Get Sued: 5 Tips To Protect Your Small Business.)
In this section, you should describe the role technology plays in your industry, and how quickly the technology is changing your industry. What aspects of your business are most sensitive to changes in technology? How can you position your business to stay in touch with current, emerging and future technology? Do your competitors employ technologies that you will not, and if so, why?
To continue our grocery store example, you might elaborate on questions such as whether or not your competitors have websites, offer online shopping or use store loyalty cards that facilitate data mining. What systems are used to ensure that food is stored and displayed at the correct temperature? Remember to consider any technologies – existing or emerging – and how they will influence your business and the field in general.
In order to explore logistics, you must analyze the process of obtaining and storing your products and moving them to the customers. Identify the major suppliers and distributors in the industry, And evaluate how effective and accessible the existing suppliers and distribution systems in your industry are. Describe how your business will get its supplies, and how it will get those supplies to your business location. Consider any challenges you might face along the way, and what you plan to do in order to overcome them. (Learn how good companies manage inventory and turnaround time. Check out Measuring Company Efficiency.)
Where does your company fit into the industry? Having a compelling answer to this question is crucial to your sales pitch, and be sure to identify the components that are missing that you will provide, and what gives your business a competitive advantage.
The industry analysis requires a great deal of research. If you're not sure how to find the information you need about your industry, try starting with industry associations (e.g., the National Grocer's Association) and government agencies (especially the U.S. Census Bureau). If you can afford to pay for research, consider trade publications (like Supermarket News or Progressive Grocer) and Standard and Poor's Industry Surveys.
When writing your industry analysis, make sure you are being realistic. All is not rosy in any business or industry, so you need to identify and analyze potential risks to your business. If you don't yet know what those are, you're at a serious disadvantage; chances are, your toughest competitors have already thought about them. Financiers will expect that you have, too.
The industry analysis is also important as a foundation for your marketing and sales plan, which we'll discuss next.
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