Vetting a business model concept requires critical thinking about how the it fits into the industry as a whole. One way to do think about this is by using SWOT analysis to provide a systematic view of the five industry components that affect your business model concept.
Industry SWOT analysis helps you anticipate and adjust your expectations and pressure points that may affect your business model concept, i.e. new government policies might: encourage more regulation which may cause barriers to innovation; raise taxes that may restrict available company resources to fund research and development; increase worker wages; build artificial demand thru product regulation.
When doing industry SWOT analysis, view your industry from ALL five perspectives to evaluate: rival responses to changing tactics; barriers to entry; supplier-contractor power; threat of substitutes; buyer-customer power. Here are some questions to ask about these five areas.
Intensity of Rivalry Among Existing Competitors…is the industry many only think about:
- Made up of numerous or equally balanced competitors?
- Made up of diverse competitors?
- Show indications of slow growth?
- Displaying high fixed or storage costs?
- Known for a lack of differentiation or switching costs?
- Capacity augmented in large increments?
- Participating in high strategic stakes?
- Built with high exit barriers?
Barriers to Entry…how to control these barriers plays a key role to all parties…properties of entry barriers change as conditions change & are outside the control of company…this means a major strategic decision impact. Think about the industry in terms of:
- Economies of scale
- Product differentiation
- Capital requirements
- Switching costs
- Access to distribution channels
- Cost disadvantages
- Independent of scale
- Government policy control
- Expected retaliation if you are entering
- Entry deterring price
- Experience & scale
- Experience/skill & resources to overcome…for instance, Gillette distribution makes it harder to get access to the shaving industry.
Bargaining Power of Suppliers-Labor Contractors…think about whether the industry is:
- Dominated by a few companies & is more concentrated than the industry it sells to
- Not obliged to contend with other substitute products for sale to the industry Industry is not an important customer of the supplier
- The suppliers’ product is an important input to the customers’ business
- The supplier group’s products are differentiated or do they have built up switching costs
- Supplier group poses a credible threat to forward integrate…for instance, Safeway is now selling their own brand of groceries.
Pressure from Substitute Products…is the industry vulnerable to:
- Subject to trends
- Other companies that cab improve their price/performance tradeoff with the industry’s product
- Substitute products produced by other industries earning high profits…that is a real threat to your pricing strategy
Bargaining Power of Customers-Buyers…yes, this is what many startups focus on. Think if your target customer in these terms:
- Are they concentrated or purchase large volumes relative to your expected sales
- Do the products they purchase from the industry represent a significant fraction of customer’s income/purchases?
- Are the products they purchase standard or undifferentiated?
- Are there few switching costs for the customer?
- Do the industry products offered earn low value for the customer?
- Does the customer/buyer pose a credible threat of backward integration…For instance, Apple is now making their own microprocessor instead of buying it from Intel.
- Is the industry product unimportant to the quality of the customer’s products/services?
- Does the customer have full information?
As you view your business model concept industry, be sure to focus on how you will fit into that industry. I know, an entrepreneur always wants to think the offered product/service will “build a market that does not have any competition”. I hate to burst your bubble, if the market is big enough, competition will appear because the rewards are too great! So, be sure to vet your business model concept using industry fit to improve your chance of success!
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