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Assessing Industry Potential

FastTrac, Kauffman Foundation

Prior to assessing individual growth strategies, you will first want to look at the big picture, that of the industry as a whole, and assess its growth potential. In determining industry potential, key considerations include its current size and rate of growth as well as profitability characteristics and trends.

Size and Growth

Knowing the current size of your industry can help you place your business in a larger context and assess its potential for growth. Industries go through phases similar to businesses—start-up, early stage, growth, rapid growth, maturity, and innovation or decline. The following questions will help you determine if your industry offers the growth potential you seek.

  • How many companies similar to yours exist nationally, regionally, and locally?
  • How does the current size of the industry compare to historical figures from five or ten years ago? Are sales growing? Leveling off? Declining?
  • What are the total dollars spent, or the total units consumed, by buyers nationally, regionally, and locally?

The answers to these questions can help you determine your future prospects. Examining the industry’s history and current size may reveal a great deal about the stability of opportunities in your industry. You might compare the size of the industry five years ago with today to determine whether it is growing or shrinking locally, regionally, or nationally. You might compare historical profit margins with today to see if the industry is showing growth in profitability. Such comparisons are particularly helpful in established industries such as finance and retail because history reflects how these industries have grown over time.

Profitability

Identifying profit margins typical of your industry can help you assess your business’s potential to succeed and make money. Some industries are notorious for their small profit margins, while others are much more lucrative. These questions can help you determine profit margins that you can use as benchmarks:

  • What are the industry’s standards for Gross Margins and Net Profit percentages?
  • What factors affect Gross Margins and Net Profits?

Trends and Changes

The marketplace has changed dramatically over the last ten years and will continue to change. These changes affect the way business is conducted and the choices customers have to access information or buy products and services. For example with the Internet and wireless computing, businesses may be virtual and on the other side of the world from their customers.

Understanding trends specific to your industry can help you plan and predict the future. These trends may be based on seasonality, economic fluctuations, or changing customer demographics and psychographics. Other industries may also have a direct or indirect impact upon yours. For instance, bank interest rate increases or decreases affect investment and real estate industries. What other industries affect sales in your industry?

For example, a new-home builder has noted that a current and emerging trend within the home construction industry is to build homes with either a ranch style or reverse story and a half floor plan in response to the preferences and needs of the aging baby boomers. This market is now in their fifties and prefer homes with the master bedroom on the first floor, a large kitchen for family get-togethers, and a relatively small yard for ease of maintenance.

As this trend will continue into the next decade, the builder has added several floor plans to accommodate this target market. Continual monitoring of demographic changes within the local community will allow the builder to provide floor plans to meet consumer preferences. That, along with monitoring key indicators such as interest rates, new home sales, and local growth rates will help the builder determine the product mix (various floor plans to offer) and forecast sales.

© 2006 Ewing Marion Kauffman Foundation. All rights reserved.

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