Strategy: Industry Analysis

Industry analysis is the discipline of understanding how value is created and captured in a market, who has power, where profits tend to pool, and what forces can reshape the playing field. Done well, it helps leaders answer practical questions: Is this an attractive industry to enter or invest in? How hard will it be to win? What will erode margins? Where is the next disruption likely to come from?

A solid industry analysis does not predict the future with certainty. It clarifies the competitive environment so strategic choices are based on structure and evidence rather than momentum, anecdotes, or internal optimism.

Why industry analysis matters for strategy

Strategy is about making choices under constraints. Industry analysis frames those constraints by highlighting:

• The sources of competitive pressure that limit pricing power and profitability
• The levers available to improve a firm’s position within the industry
• How industry structure might change due to technology, regulation, or business model innovation
• Which assumptions must be tested before committing capital

Two companies can operate with similar capabilities and yet experience very different outcomes because of industry forces. A well-run business in a structurally poor industry often struggles to earn above-average returns, while a mediocre operator in a structurally favorable industry can appear successful for long periods.

Defining the industry and the competitive set

Before applying any framework, define what “industry” means in your case. That sounds basic, but it is where many analyses fail.

Scope: product, customer, geography, and time horizon

An “industry” can be defined by:

• Product or service boundaries: What needs are being met?
• Customer segment: Are you serving consumers, enterprises, or public sector buyers?
• Geography: Are competitive dynamics local, national, or global?
• Time horizon: Are you assessing current structure or likely structure in three to five years?

A ride-hailing firm, for example, competes not only with other apps but also with taxis, car ownership alternatives, public transit in some contexts, and potentially micromobility. A narrow definition may hide real substitutes. An overly broad definition can dilute the analysis and make every force look “moderate” because the category becomes meaningless.

Market positioning starts with the reference point

Market positioning is always relative. Once the competitive set is defined, positioning becomes clearer: low cost versus differentiation, niche focus versus broad coverage, premium versus mass market. Industry analysis provides the external logic for why a position is defensible or fragile.

Porter's Five Forces: a practical structure for competitive pressure

Porter’s Five Forces remains a widely used framework because it is concrete and decision-oriented. It evaluates industry attractiveness by analyzing how competition and bargaining power shape long-run profitability.

1) Rivalry among existing competitors

Rivalry is the most visible force, but it is not only about how many competitors exist. It is about how they compete and how destructive that competition becomes.

Key drivers include:

• Rate of industry growth: slow growth often intensifies share battles
• Fixed costs and capacity: high fixed costs encourage price cutting to fill capacity
• Product differentiation: low differentiation increases price-based rivalry
• Switching costs: low switching costs make customer retention harder
• Exit barriers: if firms cannot leave easily, rivalry persists even when profits fall

Practical implication: If rivalry is high, strategy often shifts toward structural advantages such as scale economies, unique distribution, data or learning curves, brand trust, or regulatory positioning rather than incremental feature competition.

2) Threat of new entrants

The threat of entry determines how easily profits attract new competitors who can bid down returns. The central question is not “Are startups entering?” but “Can entrants enter at scale and compete profitably?”

Barriers to entry can include:

• Economies of scale in production, marketing, logistics, or R&D
• Network effects or platform dynamics
• Access to channels, distribution, or exclusive partnerships
• Customer switching costs and embedded workflows
• Brand credibility and reputation requirements
• Regulation, licensing, and compliance burdens
• Capital intensity and access to financing

Practical implication: When entry barriers are low, incumbents should assume constant pressure on margins and focus on speed, customer loyalty, and cost advantages that improve with scale.

3) Bargaining power of buyers

Buyers gain power when they can demand lower prices or higher service levels without switching costs. Buyer power is high when:

• Customers are concentrated and buy in volume
• Products are undifferentiated or easily comparable
• Switching is easy, or procurement is professionalized
• Buyers can credibly backward integrate
• The purchase is a large share of the buyer’s costs, making price sensitivity intense

Practical implication: If buyers are powerful, positioning must reduce comparability. That can mean differentiated outcomes, bundled solutions, integration into customer processes, or performance-based value arguments.

4) Bargaining power of suppliers

Suppliers have power when they can raise input costs or restrict quality and availability. Supplier power increases when:

• Suppliers are concentrated, and buyers are fragmented
• Inputs are specialized or protected by IP
• Switching suppliers is costly or risky
• Suppliers can forward integrate
• Inputs materially affect product quality or differentiation

Practical implication: Strategies to mitigate supplier power include multi-sourcing, standardization, vertical integration where justified, long-term contracts, or redesigning products and processes to reduce dependency on constrained inputs.

5) Threat of substitutes

Substitutes are not direct competitors; they are alternatives that satisfy the same underlying need. Their presence caps industry profitability because customers can switch when prices rise or performance disappoints.

Substitutes become more threatening when:

• They offer a compelling price-performance trade-off
• Switching is easy and low risk
• The customer’s job-to-be-done is met in a simpler way
• New technology reduces substitute friction

Practical implication: Tracking substitutes often requires looking outside the category. A gym competes with home fitness, outdoor activities, and wellness apps. A B2B software tool may be substituted by spreadsheets, internal development, or broader platforms.

Competitive dynamics: how the game is actually played

Five Forces describes structure, but competitive dynamics describe behavior. Two industries can have similar structures and still play differently due to norms, incentives, and strategic interactions.

Price versus non-price competition

Ask where competition shows up:

• Pricing and discounting
• Product features and innovation cycles
• Branding and trust
• Service levels and support
• Distribution reach and partnerships

In industries where price wars are common, improvements in unit economics and cost discipline are strategic, not operational.

Basis of advantage and the risk of imitation

Competitive advantage tends to persist when it is difficult to copy. In practice, that often means advantages rooted in:

• Scale and cumulative experience
• Proprietary data and feedback loops
• Integrated ecosystems and switching costs
• Regulatory approvals or standards participation
• Deep customer relationships and embedded workflows

If your advantage can be replicated within a year, it is not a long-term advantage. Industry analysis helps identify which forms of advantage are likely to survive competitive response.

Industry attractiveness: turning analysis into a decision

Industry attractiveness is not a moral judgment; it is an economic assessment of expected returns relative to risk and required investment. A “good” industry often shows some combination of:

• Manageable rivalry and rational pricing behavior
• Meaningful barriers to entry
• Balanced buyer and supplier power
• Limited substitute pressure or strong differentiation
• Tailwinds from demand growth or favorable regulation

Attractiveness also depends on your starting position. A tough industry can still be attractive for a company with unique assets, such as privileged distribution, a cost advantage, or technology that changes the economics.

Disruption: how industry structure changes

Disruption is not simply new technology. It is a shift that changes one or more of the Five Forces enough to redistribute profit pools.

Common disruption patterns include:

Business model disruption

A new pricing model or route to market can lower entry barriers or intensify rivalry. Examples include subscription replacing one-time purchases, marketplaces unbundling distribution, or freemium models shifting customer acquisition economics.

Technology-driven shifts

Technology can create substitutes, reduce switching costs, or enable new entrants. Cloud computing, for instance, reduced capital requirements for software businesses and accelerated entry in many categories.

Regulatory and standards shifts

Regulation can raise barriers to entry, change buyer power (through reimbursement or procurement rules), or create new substitutes. Standards can commoditize differentiation or, conversely, lock in incumbents.

Platform and ecosystem effects

Platforms can reallocate bargaining power. When value flows through a dominant platform, suppliers and downstream players may find margins compressed, even if end-market demand grows.

A practical approach to conducting industry analysis

To keep the work grounded and useful:

1. Define the industry carefully: specify customers, use cases, and geography.
2. Map the value chain: identify where profits concentrate and who controls bottlenecks.
3. Apply Five Forces with evidence: use pricing behavior, concentration, switching costs, and capacity data where possible.
4. Identify the key uncertainties: what could change buyer power, entry barriers, or substitutes?
5. Translate into strategic choices: where to compete, how to position, and which capabilities matter most.

Industry analysis is not a one-time exercise. Competitive environments evolve, especially under technological change and shifting customer expectations. Leaders who revisit industry attractiveness and competitive dynamics regularly are better prepared to defend margins, anticipate disruption, and choose positions that can win over time.