What’s an industry? Ask 10 people what an industry is, and you will likely get 10 answers. Without a clear understanding of what an industry is, the scope or what an industry analysis should be is unclear as well.
Best practices pre-1979, see Wikipedia: “The SIC code system … the 1939 List of Industries … became the first Standard Industrial Classification for the United States. The SIC system was last revised in 1987 … The Office of Management and Budget, or OMB, was tasked with revising the SIC system to reflect changing economic conditions…. The result was the North American Industry Classification System, or NAICS…”
Best practices post-1979, see Michael Porter’s books Competitive Strategy and Competitive Advantage, chapter one. Porter’s industry framework is known as the “Five Forces” which describe the competitive elements of industry structure that determine industry profitability. The elements include:
- Industry Competitors
- Industry Buyers
- Industry Suppliers
- Industry Substitutes
- Industry Potential Entrants
Most people find the above obvious. What’s not so obvious is that the five forces are an “industry” framework where the word “industry” means something way more granular than most people think (and that includes people at leading management consulting firms). In short, you use the five forces to determine industry scope (aka: the industry) which, I admit, is a little complicated if you are new to the subject.
My experience at developing (and communicating about) thousands of industry analyses since 1986 (as well as teaching the subject) has found that the following examples provide more training than learning a week’s amount of theory or reading 98% of LinkedIn posts that talk about strategy. So, if possible, just accept the following:
The “Financial Services Industry” and the “Healthcare Industry” each include over 1,000 industries. To appreciate the granular level of an “industry” where it makes sense to do a Porter five-forces analysis, each of the following are distinct, multi-billion-dollar, global industries:
- Paper Napkins Manufacturing
- Paper Towel Manufacturing
- Facial Tissues Manufacturing
(Note: in the DCA Sandbox we plan to provide data for a dozen or more industries including Potato Chips Manufacturing, Corn Chips Manufacturing, and other food and beverage industries at a similar granularity)