An industry is a group of companies that sell products or services that are similar to each other, such as the furniture industry, the car industry, or the financial services industry. Knowing the type of industry you’re competing in helps you predict changes, movements, or shifts that may impact your business. Also knowing how competitive your industry is can be helpful because some are more cutthroat than others.
What industry does your company operate in? You can most easily identify it by answering the question, “If customers were to purchase elsewhere, what are all the potential options that exist?”
Classify the different types of companies you identify with in small groups until you have a big enough circle to define the entire set. For the most part, identifying your industry is intuitive, but sometimes the nets aren’t cast wide enough. For example, a charter sailing company isn’t in the cruise industry. Instead, the company is swimming in a bigger pond called the travel and tourism industry.
In an effort to understand the dynamic nature of an industry, you can break any industry into five components or forces: new competitors, substitute products, power of suppliers, power of buyers, and competitive rivalry (see the figure). These five forces impact every industry in some form or fashion and determine your industry’s attractiveness and long-run profitability.
