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 other players in the industry will also impact your business. While you probably can't control all of these external factors, you can control how your business will respond to them. In fact, the way your business responds to them might constitute part of its competitive advantage. (Find out why some companies thrive while others flounder in 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 for themselves 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. That’s why a good business plan contains research into the business's industry, competitors and market to give the reader a complete understanding of the competitive landscape. How do your firm's products or services fit into their industry, and how do they interact with market conditions to create a profitable opportunity? Explain the concrete reasons you expect your business to flourish, and lay out the steps you will take to achieve your company's goals.
Even if you haven't yet done all the work necessary to prepare a formal industry analysis and sector analysis, you have likely already gathered much 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 noticed a trend or an opportunity that you could exploit to earn a profit. Now you just need to put that into writing and back it up with data.
The industry analysis is the first section of your plan where you can and should go into detail instead of merely summarizing. Include the following information in your business plan's formal industry analysis.
Defining Your Industry
The industry overview for your business plan, also called a market analysis, should define the industry that your business belongs to, the major characteristics of that industry and its major existing players. Where do their strengths and weaknesses lie? How will your business be able to compete with their strengths and improve on their weaknesses?
A local foods business, for example, would be part of the grocery store and supermarket industry. Based on your research from a reputable business data provider such as Hoovers, you would explain how this industry is dominated by large companies such as Kroger and Safeway but how smaller companies can compete by serving a local market effectively, offering unique products or providing superior customer service. (source: http://www.hoovers.com/industry-facts.grocery-stores-supermarkets.1535.html)
Explain what's going on in your industry as a whole. What does the industry life cycle look like? Is the industry new, expanding or stable? Is it growing faster, slower or at the same pace as the economy as a whole? If your company is affected by seasonal and/or cyclical changes, explain how. For example, because all of your food will come from within a 100-mile radius, your business will be strongly affected by seasonal changes in the availability of fruits and vegetables. How will you attract customers in the winter when you don’t have tomatoes for sale but Kroger does? 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.
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 the specialty services offered by your competitors, such as freshly prepared hot meals, grocery delivery, butchers, freshly brewed coffee, pharmacies, gift card sales, lottery tickets, movie rentals, banking services 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.
Where does your company fit into the industry? Having a compelling answer to this question is crucial to your sales pitch. Be sure to identify what other businesses lack that you will provide – what gives your business a competitive advantage? Why would someone visit your store instead of their local farmers market or Whole Foods or instead of using a meal preparation delivery service like Blue Apron?
How do businesses make money in your industry? This might sound like an 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 food from local farmers? 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? (Check out Business Startup Costs: It's In The Details.)
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). Also consider trade publications (like Supermarket News or Progressive Grocer) and Standard and Poor's Industry Surveys.
When writing your industry analysis, be realistic. All is not rosy in any 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. Potential lenders and investors will expect that you have, too.
To explore logistics, you must analyze the process of obtaining and storing your products and delivering them to 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 where your business will get its supplies from and how it will get those supplies to your business location. Will local farmers be able to make deliveries to you when they visit a nearby farmers’ market? Will you need to hire drivers to go to their farms? How frequently will you need to meet up with each farmer to get fresh produce, meat and dairy? Consider any challenges you might face along the way and create a plan to overcome each one. Could weather conditions prevent you from getting a shipment and mean you’re completely out of stock of a popular item? How will you placate customers in that situation? Will you stock items from further away? Offer discounts on future shopping trips? (Learn how good companies manage inventory and turnaround time in Measuring Company Efficiency.)
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 business environment and the potential changes that could affect the industry. What effect could a new mayor, governor or president have on your business? What about changes to the federal farm bill or changes in laws about selling raw milk products? Have there been recent salmonella or listeria outbreaks that have affected the way consumers buy food?
Other legal, economic and political factors that could affect your business include 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; food stamp acceptance; consumer sentiment toward genetically modified foods; and much more. What happens if food sold by your store makes people sick? What will you do in the event of a product recall? (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.) How do food expiration dates affect your business? What about new regulations regarding the products you sell or potential tax changes affecting those products or services, such as junk food taxes? All of these issues are either things that your business will have to confront directly or things that affect your competitors (and therefore your ability to take away their market share).
In this section, you should describe the role technology plays in your industry and how quickly 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 do 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 and offer discounts to customers. What systems are used to ensure that food is stored and displayed at the correct temperature? What backup systems exist in case of a power failure? Does your company have an app? What does it offer – in-store coupons, weekly circulars, recipes, the ability to create a shopping list? Will you employ self-checkout or RFID technology? Will you use drones to deliver baskets of produce? Consider any technologies – existing or emerging – and how they will influence your business specifically and the industry in general.
The industry analysis is also important as a foundation for your marketing and sales plan. We'll discuss that next.
Business Plan: Marketing And Sales
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