After the macro environment, the next biggest sources of opportunities are the industry and the market. One of the most difficult aspects about industry analysis is defining what constitutes an industry in the first place. The proper classification of what industry the enterprise is competing in is important if the entrepreneur’s intention is to define who are the relevant customers, who are the direct and indirect competitors, and what are the critical characteristics of the market as to the quality of products or services to be delivered.
Participants in an industry include:
- Rivals or competitors in a particular type of business (e.g., Jollibee vs. McDonald’s, Coca-Cola vs. Pepsi, Samsung Galaxy vs. Apple’s iPhone, etc.). True rivals or competitors are those competing for the same or similar markets.
- Suppliers of input (e.g., fuel, electricity, raw materials) to rivals as well as suppliers of machinery and equipment, suppliers of manpower and expertise, and supplies of merchandise.
- Consumer market segments being served by rivals or competitors.
- Substitute products or services, which customers shift or turn to.
- All other support and enabling industries.
After identifying the participants, it would help the entrepreneur to determine the logic of the industry. How do these participants in the industry make or lose money? What critical factors drive the industry’s success? What critical factors lead to failures?
A thorough analysis of industry structure and dynamics yields opportunities for the clever entrepreneur. Situating his or her enterprise within the realm of an industry provides many profitable opportunities for the entrepreneur.
There are several ways of defining an industry. The most common way of defining an industry is according to product types or according to the functions of the product or service. Classic examples of these industries include the computer industry (Microsoft vs. Apple), beer industry (San Miguel Beer vs. Beer na Beer), fast food industry (McDonald’s vs. Jollibee), and cola industry (Coca-Cola vs. Pepsi Cola).
Another way of defining an industry is by tracing the industry from its most basic raw material down to its various consumer applications, otherwise known as product or value-added chain. The difference between the product and value-added chain is the focus of the analysis. Product chain focuses on the volume produced or converted at each link of the chain. On the other hand, the value-added chain focuses on the economic rather than the volume aspect of the chain.
To illustrate the tracing of a product chain, a good example would be the coconut industry. The coconut tree, regarded as the ‘tree of life,’ is useful for different purposes. Its trunk, shell, meat, husk, and leaves find their way to all types of products such as oils, soap, handicraft, oleochemicals, furniture, wallboards, coir, etc. Looking at this value chain alone presents many potential opportunities for the entrepreneur.
However, defining an industry with a narrower scope presents a threat because of its limiting effect. For example, to simply classify all those using coconuts in their production process as being in the coconut industry per se might not be too useful. The reason is that most of the coconuts harvested are processed into coconut oil, which is just one of the many substitutes in the fats and vegetable oils industry traded worldwide.
The value-added chain follows the product chain but concentrates on the ‘value’ added from one stage of the product to the other—a value that is given by the market price differential between stages of production. The differential would include the additional costs of processing the product from one stage to the next and the profit margins added on each stage by the processor (or distributor). A good example of the value-added chain would be a cup of designer coffee. At farm gate prices, one would get a few pesos out of a bag of freshly picked coffee beans. The coffee beans will then get processed and packaged by the coffee manufacturer. Cost and profit margins are added before selling the product to distributors. Once it gets in the hands of the distributors, the latter will have to market and sell the finished product to coffee shops for a few more pesos added to cover for the logistical and transportation costs incurred. The coffee shops will then proceed to concoct their own versions of designer coffees. The fancier the coffee gets, the more expensive a cup of designer coffee becomes. The figure shows the relationship between product and value-added chain.
The entrepreneur may discover weak links in the chain that need strengthening or gaps in the whole chain that need filling. Sometimes, the opportunity lies not in finding gaps and weaknesses but in assailing the strongest links where there may be a concentration of bargaining power. In this case, the entrepreneur should determine which players produce the most volume of goods, which ones control the flow of those goods, which ones make the most profits, and which ones push the most volume through the market channels all the way to the final customers. These processes may uncover strategic opportunities for industry intervention.
The entrepreneur should always be alert in detecting windows of opportunities emanating from shifts in the industry power equation or changes in the industry rules of the game.