Understanding Your Clients Industry
The viability of any company hinges not only on how smoothly it is running internally, but also how well it is competing in its industry and marketplace. Today more than ever, a company's position within its industry is a key factor in its success. And industry position is a factor that can and does change quickly.
How many companies suddenly find that their product, which had been the market leader, superceded because of a major change in technology? Harvard Graphics, a leader in computer graphics software for years, is a good example. Or what about the local do-it-yourself store chain that finds that it has been overrun by new behemoths offering more of everything and cheaper than ever, à la Home Depot? And there are always the one-product companies that find instant success—they may even create a new market—but never quite discover the next product to continue the trend. Memorex Telex is just such a company. There are very successful retail and service companies that lose their competitive edge, realizing too late that failing to meet the customers' ever-growing expectations is fatal. Filene's Basement comes to mind.
The perils above range from external threats, shifts in go-to-market strategy, failures of product development and the inability to read the market and execute a brand-building strategy. Of course, we have just scratched the surface. There are many more risks awaiting those who dare to be in business.
Because there are more landmines sprinkled across the virtual landscape of any company than can be constantly managed, analyzing an industry to determine the driving forces that affect a company is crucial. It is crucial both for maintaining fiscal health and regaining it in a turnaround.
The importance of rolling up your sleeves and diving into a study of the forces that propel an industry has never been more urgent or more necessary. The Internet and e-commerce combined with wireless communications and other technologies are turning buying habits upside-down in both the consumer and the industrial markets. If you aren't educating your customers, building affinity through traditional and online strategies, and managing the brave new world of chat rooms and cyber-P.R., you can bet your competitors are. The following outline provides a framework for performing such an in-depth analysis.
The company and industry must first be analyzed to identify the driving forces affecting both. The analysis should:
...reviewing how the company stacks up against its competitors, analyzing its strengths and weaknesses...and positioning the company to react effectively...to changes in the marketplace...ultimately will make the difference between failure, mediocrity or success.
- Understand the underlying industry trends, business cycles, regulatory and political considerations, technological advancements and economic conditions.
- Understand the competitive nature of the industry, the barriers to entry and the leading industry players.
- Identify the key factors that have led the industry leaders to reach and retain their position, then benchmark your own company against these success drivers.
- Analyze the rates of return in the industry.
- Identify where your industry is vulnerable, including the current and future risks and opportunities.
Market Position in the Industry
Position in the industry determines a company's long-term ability to compete, as well as how profitable it can be. The top players in the industry enjoy a variety of competitive advantages. Understanding where your company stands against (or among) the market leaders is critical to devising a successful business model.
Market position is assessed by analyzing the following aspects of the company's business and by making analytical and qualitative comparisons to the competitors:
- sustainable competitive advantages,
- reputation and name recognition,
- customer perception of product/service quality and uniqueness,
- customer perception of industry leadership,
- market share and potential vulnerability for the company and its competitors,
- marketing focus,
- purchasing practices and contracts,
- reputation with vendors/suppliers,
- vulnerability of key customer or supplier relationships,
- distribution channels and
- manufacturing capabilities.
How does the company's profit structure measure up against its competition? By benchmarking its company against others in the market, management can determine if its operations are meeting, beating or lagging behind the best practices within the industry. The analysis will reveal the issues that impact profitability and will indicate where improvements are possible and needed.
The first objective of analyzing the profit structure is to determine whether a sufficient level of profitability can be generated to support the company's capital structure, operations and strategic plan. This analysis includes an assessment of some or all of the following attributes of the company's operations and a comparison to other successful industry players:
- pricing policies,
- manufacturing and distribution costs,
- gross margin levels,
- overhead costs,
- EBITDA as a percent of sales,
- debt and capital relationships,
- return on investment/return on assets,
- accounts receivable days outstanding,
- inventory turns and
- accounts payable aging.
Driving the financial strength of the company is the underlying operational well-being of the enterprise, and being able to maintain operational well-being in the midst of constant change, shifting market desires and competition from unanticipated sources is now the price of staying in business.
Taking a hard look at key driving factors and best practices within the industry and among your competitors, compared to your own performance, will define where and how you should improve the company's operations. Each industry and company has its own "drivers," but, by way of example, it is the following type of productivity issues that need to be reviewed:
- productivity per employee, per physical assets, per store or square foot, and per financial assets;
- service levels, such as success rates, delivery times and product returns;
- quality assurance rates; and
- customer satisfaction/repeat business.
The capital structure of the company must also be evaluated to determine the level and type of debt and equity required to allow the company to pursue opportunities, counter aggressive competition and withstand adverse industry or economic downturns. This assessment includes an evaluation of the following facets of the company's financial structure:
- cash flow available for debt service as compared to industry standards and leaders,
- investment funds available to capitalize on opportunities and
- cash reserves available to sustain the company during downturns in the industry or the economy.
There are no cut-and-dried rules about when, or how often, an in-depth industry review should be undertaken. Certainly the answer is driven by the nature of the industry itself as well as the types of external events that tend to affect it. However, such a review should be done as part of any strategy plan or long-term business plan. Additionally, it should be updated annually to insure that the company is still on the train and not under it.
Likewise, there is no pat answer to the question of who should do the analysis and whether an outside consultant can bring more value to the process than the cost of internal management's time. If an organization is able to recognize that an exclusively internal team may not be objective, using a third party will certainly leverage the benefits of the process and the likelihood that meaningful follow-up actions will occur.
Senior management, or turnaround management, will make decisions from a position of strength if they fully understand what drives efficiency and profitability in their industry. Honestly reviewing how the company stacks up against its competitors, analyzing its strengths and weaknesses against those of the market leader, and positioning the company to react effectively (or better yet, to lead) to changes in the marketplace ultimately will make the difference between failure, mediocrity or success.