INDUSTRY ANALYSIS

                   
                    When studying an industry, an entrepreneur must answer three questions before pursuing the idea of starting a firm. First, is the industry accessible—in other words, is it a realistic place for a new venture to enter? Second, does the industry contain markets that are ripe for innovation or are underserved? Third, are there positions in the industry that will avoid some of the negative attributes of the industry as a whole? It is useful for a new venture to think about its position at both the company level and the product or service level. At the company level, a firm’s position determines how the company is situated relative to its competitors, as discussed in Chapter 4. For example Windspire Energy, the subject of the “You Be the VC 1.1” feature, has positioned itself as a maker of wind power turbines that home owners and businesses can buy to produce electricity. Individual units are priced at $9,000 to $12,000 fully installed, and each unit has a fairly modest physical footprint. This is a much different position than GE Wind Energy, which manufactures and sells the tall wind turbines that you see in some parts of the United States. GE Wind Energy units are up to 350 feet tall, have a fairly large physical footprint, and are sold primarily to utility companies.
                    The importance of knowing the competitive landscape, which is what an industry is, may have been first recognized in the fourth century B.C. by Sun-tzu, a Chinese philosopher. Reputedly he wrote The Art of War to help generals prepare for battle. However, the ideas in the book are still used today to help
managers prepare their firms for the competitive wars of the marketplace. The following quote from Sun-tzu’s work points out the importance of industry analysis:
                    We are not fit to lead an army on the march unless we are familiar with the face of he country—its pitfalls and precipices, its marshes and swamps.1
                    These words serve as a reminder to entrepreneurs that regardless of how eager they are to start their businesses, they are not adequately prepared until they are “familiar with the face of the country”—that is, until they understand the industry or industries they plan to enter and in which they intend to compete.
                    It’s also important to know that some industries are simply tougher than others in terms of survival rates and profit potential. For example, the fouryear survival rate in the information sector is only 38 percent, while it is 55 percent in education and health care. What this means is that the average start-up in education and health care is roughly 50 percent more likely than the average start-up in the information sector to survive four years, which is a big difference.2 These types of differences exist for comparisons across other types of industries. The differences can be mitigated some by firm-level factors, including a company’s products, culture, reputation, and other resources.3 Still, in various studies researchers have found that from 8 to 30 percent of the variation in firm profitability is directly attributable to the
industry in which a firm competes.4 As a result, the overall attractiveness of an industry should be part of the equation when an entrepreneur decides whether to pursue a particular opportunity. Studying industry trends and using the five forces model are two techniques entrepreneurs have available for assessing industry attractiveness.