How to Determine Industry Attractiveness
The most important step toward creating a great business model is creating a product that customers want and will buy. This is called a powerful offering. The first step in creating a powerful offering is selecting the right market. Picking the combination of industry attractiveness, niche attractiveness, and customer attractiveness creates the best market for your product.
An industry is the broadest category or definition of the business you’ll be in. Examples of industry include the following:
Automotive aftermarket manufacturing
Lawn and garden distribution
Within a broad industry are often-defined industry segments that further refine the offering. Here are some examples:
The vehicle manufacturing industry has segments for heavy-duty trucks, electric automobiles, recreational vehicles, and more.
The restaurant industry has segments for fast food, fine dining, casual dining, and so on.
Clothing manufacturers have segments for athletic wear, men’s suits, lingerie, women’s business attire, and bridal gowns, among others.
The medical doctor industry has segmentation for general practitioners, surgeons, podiatrists, holistic practitioners, ophthalmologists, and hundreds more.
The HVAC (heating, ventilation, and air conditioning) industry has segments for light-duty, boilers, and heavy-duty systems.
Many businesspeople use the term market as a catch-all for the combination of industry, segment, niche, and customer (in other words, who will pay you for your product). Although simply referring to the market is easier, breaking things down into more discreet pieces enables you to gain additional insight into your model.
These concepts, however, bleed into one another. If your industry niche is electric cars, your customer segment is probably dictated by the fact that you make electric cars. The two complement and bleed into each other.
You’re much more likely to be successful in a good industry than a bad one. In a good industry, most companies are successful; examples include software development, mineral extraction, and insurance. In a bad industry, margins are historically low and/or competition is overly intense; examples include airlines and construction.
However, you can find numerous examples of companies that entered unattractive industries and were successful because their business model was strong in other areas. Examples include Waste Management (garbage), Apple (computer hardware), Nike (shoes), and Vistaprint (commercial printing).
You have a much greater chance of success if you pick an attractive industry. Consider these factors:
Is this industry, as a whole, growing or shrinking?
Will this industry be strong in ten years?
How many incumbents are in this industry, and how strong are they?
Do you see an opportunity for this industry to overlap into a different existing market (convergence)?
Could the industry provide powerful synergies with an existing part of your business?
After you identify an attractive industry, identify the best subset of that market, or niche, and then identify the best customers to serve within that niche. Working in an attractive industry is helpful, but it isn’t a prerequisite. Many great business models have been created in bad industries by carving out attractive customer segments, niches, or both.
Vistaprint created an excellent business model serving customers no one wanted (microbusinesses) in an industry no one wanted to be in (printing). Vistaprint succeeded by leveraging a highly differentiated sales, distribution, and cost model.
There’s an old saying, Everyone thinks they know how to run a restaurant because they know how to eat. Every industry and business can be learned. However, if you’re unfamiliar with an industry, count on some hard work to get up to speed.
As you choose your industry, keep in mind that the business landscape is always changing. Gas stations used to fix cars; now they sell donuts and sandwiches. If you look into the future, it can help you determine whether your chosen industry has peripheral growth opportunities or potential threats.