Customer & Industry Analysis

Customer / Industry analysis should be conducted as part of a SWOT analysis, but the topic has been treated separately because of its importance to company profitability.

Customers

The long-term survival of your business relies on understanding what customers value now and how that might be different in the future. In understanding customer preferences, it is useful to look at the relative importance of the following attributes:

  • Product Characteristics: Including features, quality, range / selection, warranties, and packaging.
  • Brand Awareness and Image.
  • Convenience and Availability.
  • Customer Support: Including sales person competence and helpfulness, and the ability of supplier to adapt to customer needs.
  • Price: Price sensitivity is the degree to which customers will compromise on the other attributes to get a lower price.

The importance of each of the attributes will vary from industry to industry, from customer to customer, and over the industry life-cycle.

Product Characteristics will tend to be most important where customers shop around and compare products and have the knowledge to evaluate performance. Convenience will be critical for less-expensive frequently-used products and services. Customer Support is most important when customers feel vulnerable or at risk, for example in the financial and medical services industries.

Industry

Michael Porter (author of Competitive Strategy, Ref 10) developed the concept of “Five Industry Forces” that determine the profitability of an industry. This Five Forces model provides a useful framework for analysing the future profitability of an industry sector.

1. Threat of new entrants: New entrants bring greater competition and new capacity which will inevitably lower prices and profits. Any profitable industry will attract the attention of potential new entrants...it is the barriers to entry that will control the entry of new players, and therefore affect long-term profitability of an industry. Barriers to entry include:

  • Economies of scale: Where larger volumes allow lower costs, new entrants will be at a cost disadvantage to established players.
  • Product differentiation: Where it will be difficult for new entrants to win customers away from established products and brands.
  • Capital requirements: Where significant up-front investment is required, risk of entry will be higher.
  • Access to distribution channels: Especially where existing participants operate their own distribution networks.
  • Other cost disadvantages: Where established participants have cost advantages due to experience, favourable access to raw materials, favourable locations etc.
  • Government policy: Government regulations and licences may restrict the number of participants in an industry, or impose entry costs.
  • Expected retaliation: The threat of aggressive retaliation, eg price wars, can be sufficient to deter new entrants.

2. Rivalry among existing competitors: Ruthless fighting for market share severely reduces the profitability of the industry. Rivalry is likely to be most intense when:

  • There are many competitors that are similar in size and power.
  • Growth in total demand is slow.
  • Products are difficult to differentiate.
  • It is a high fixed cost industry, giving rise to the temptation to sell spare capacity at a low-margin.
  • Strategic stakes are high and players are willing to sacrifice short-term profitability for long-term market share.
  • Exit barriers are high – keeping unprofitable players in the industry.

3. Pressure from substitute products and services: Substitute products reduce demand growth and can impose a ceiling on prices.

4. Bargaining power of buyers: Powerful buyers can reduce profitability by forcing down prices or demanding better quality or service. Buyers will tend to have more bargaining power when:

  • They are few in number and /or their purchases are significant.
  • They are experienced, and price-sensitive.
  • The products are hard to differentiate.

5. Bargaining power of suppliers: Suppliers can use their bargaining power to squeeze margins. Suppliers will tend to have more bargaining power when:

  • They are few in number, and/or supply a significant proportion of the total.
  • Products are differentiated, so it is hard to switch supplier.
  • The supplier can threaten to withhold supply, or can afford to lose the contract.