So, I realize that I touched on some of this back in part one when discussing information and intelligence.  I think that it is worth revisiting in more detail, and will be especially good for anyone still in the process of planning a business.  External analysis is an evaluation of factors outside of your organization with an emphasis on strategic importance.  The simple version is the second half of the SWOT analysis covered a couple of weeks ago, and all of Porter’s Five Forces.  Look for and evaluate opportunities and threats.  While it is still important to know what the industry and market look like for an established organization; it shouldn’t dictate the strategy of an existing business.  If you are still planning it can be very beneficial to attempt to find space in the industry and market with little or no competition.

Industry Analysis

What is the status of the industry?  Is it growing?  Is it shrinking?  Are there government regulations on the industry?  Are there barriers to entry?  Who are the players in the industry?

Last week I talked a little bit about the business life cycle.  Today I will give a brief description of the industry life cycle; I’ll use the cell phone industry as an example.  Ten years ago cell phones were just starting to become a mainstream product.  Prior to that they were a novelty for the cutting edge, gadget obsessed crowd.  They were big, clumsy expensive, and not considered necessary by most.  Ten years ago; however, they were starting to get smaller, cheaper, more reliable, and most importantly desirable.  They had moved from the infancy stage and were entering the growth stage.  Ten years ago the consumers buying phones fell into the early adopter category.  As they gained popularity they became mainstream, and the general population became consumers.  By four years ago they had reached maturity, the small portion of the population without a cell phone fell into the laggard category.  Now the cycle is repeating with smart phones. 

Why is the industry life cycle important?  The current position of an industry in the cycle is of great importance in the development of strategy.  In the early phases growth is slow, prices are high, and production is expensive.  As demand picks up early in the growth stage, production increases causing prices to fall, but the increase in demand keeps them from dropping to the cellar.  The industry tends to only be somewhat competitive since there are a lot of potential customers left to target.  It is also largely fragmented with numerous firms offering similar products.  Once those customers become more difficult to find the industry is approaching maturity.  Maturity typically sees increased competition and falling prices.  With a limited number of customers to pursue competitors must lower prices to lure them away from others.  You also see increased mergers and acquisitions to increase market share; and therefore, consolidation.  Don’t plan on low prices and high volume in an infant industry; or high prices and low volume in a growing one.  The use of disruptive strategies can minimize the importance of the industry lifecycle by forcing a restructuring of the industry.  Those will be an entire post by themselves.

Regulation in the industry is important to know about.  Almost every industry has some level of regulation.  Not all are as heavily regulated as airlines, but even hot dog vendors have some regulations to deal with.  In an existing organization be sure to keep track of any legislation or governmental rule changes which might impact your business.  When planning one be as thorough as possible in learning about all of the rules and be ready to track any future changes.

Barriers to entry can be as simple (if not expensive) as capital cost, and others can be grueling approval processes for federal or state licensing.  Know what you are getting yourself into and how hard it is to do.  These can also be good for the existing players as they protect the industry from rapid changes and new entrants.

Who are the players in the industry?  Let’s use the landscaping industry as an example.  There are, in the Spokane area, quite a few landscaping companies.  There are the ones which do nothing but mow lawns.  There are some which mow lawns and spray for weeds.  Some which only do irrigation work.  Some which only do landscape construction.  There are a few that do everything.  There are big ones, small ones, and a lot of mid-sized ones.  What we can see from this is that there are several markets within the industry.  The two big markets are landscape maintenance and landscape construction.

Market Analysis

Market analysis is fairly similar to industry analysis, but more company-centric.  You will spend more time looking at your direct competition and evaluating their specific strategies.  By studying the competition you can evaluate what they do well, where they are deficient, and where they are going.  I don’t condone building an entire strategy on what your competition does, but if you can match your strength with their weakness it is probably better than matching your strength with their strength.  Identify their core competencies; where do they derive their greatest strength?  Do they have exceptional supply chain management like Wal-Mart?  Do they have to most advanced products like Apple?  Do they have better service than everyone else?  What is their general strategy?  Are they differentiated; have they tried to distinguish their offerings from their competition?  Are they focused; do they offer one specialized product or service and not worry about trying to offer something to everyone?  Are they diversified; do they offer a version of everything?  Be aware that cost leadership is not sustainable unless it is a result of another strategy.  You can’t maintain cost leadership by simply deciding to charge less; you need to generate cost savings through another means.  Wal-Mart derives their cost leadership through logistical dominance. 

Now, with a vision statement, and an understanding of the industry and market; you are on your way to developing your own strategy.  I will touch on the market again with additional details in a post on marketing strategy in the future.  We are slogging our way through the gritty parts of strategy, but I promise it gets better.  Once this groundwork is laid we will get into most exciting part; developing a winning strategy.

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