How do we analyze the industry risks?
Discussions of Industry Risk Analysis
The only certainty in the uncertain process of new business venturing and developing new products is that the unexpected lies ahead. The simple fact of bringing into existence products and services that currently do not exist implies that much of the information required by potential stakeholders—such as technology, price, quantity, tastes, supplier networks, distributor networks, and business models—are not reliably available.
So uncertainty means that decision-makers do not have sufficient information about environmental factors, which increases the risk of failure. Recall that we define risk as the degree of certainty or uncertainty as to the realization of expected future financial returns in a business venture. But because it is important to have an understanding about the risk/reward scenario for each industry, we have identified certain industry risks in the below that capture the uncertainty of the industry and can help you measure the potential profitability of business activity.
As Michael Porter states, “The essence of strategy formulation is coping with competition.” Entrepreneurs often neglect any strategic discussions about the competition, because all too often they tend to feel that their product is so new, so superior, that any competitors out there will not be significant. Many assume that competitors will be will be slow to react, or “fleet on their feet.” But large established companies could come in after the market has been proven and buy up competitors, or even strategic partners/suppliers, and become a major direct competitor. And as one venture capitalists told us, start-ups even compete with other ventures outside their space for employees, resources, and financing. So underestimating the competition can be fatal to new business ventures and likewise, saying that there is no competition will most likely put an end to your financing potential.
Technology Transition Risk
We have learned that all business activity conducted in an industry faces the potential threats from disruptive technologies. As we discussed in previous Articles, clusters of innovations can also spring up and create a technological change that as a whole, disrupt an industry. Such changes create strategic inflection points and opportunities for new entrepreneurs to entry or industry leaders to reposition and recreate themselves.
All industries are subject to the marketing attempts of companies in other industries to win customers over to their own products. Substitute products are often at the end of their lifecycle in their respective market segments and reintroduced into another market, priced well below established products.
It is important to examine the bargaining power, buying practices, and payment terms exercisable by buyers of the product. There is also substantial risk from buyers who are significant contributors to the revenues of a start-up, and it is important to consider the economic health of all buyers.
Examines the bargaining power, selling practices and selling terms exercisable by suppliers of inputs to the industry. It is important to look at whether the inputs are human resources, commodities, completed product platforms, or sourced overseas.
For your industry analysis, start with the apex companies—the ones that are at the top of the food chain in your environment, preferably publicly traded. Your research should include their key success factors, how you can use them for business modeling, and financial analysis.