1. Introduction

Organisations do not operate in isolation. Their performance and long-term success depend strongly on the industries and sectors in which they compete. Industry and sector analysis is therefore a central component of strategic management, enabling firms to understand market structures, competitive conditions, and long-term trends that shape profitability and growth. By systematically analysing industries and sectors, organisations can identify opportunities, assess risks, and develop strategies that align with external conditions (Johnson et al., 2017).

Industry analysis focuses on the competitive environment within a specific market, while sector analysis often refers to broader groupings of related industries that share technological, regulatory, or customer characteristics. Together, these perspectives help organisations evaluate market attractiveness and strategic positioning.

In recent years, globalisation, technological innovation, and regulatory change have transformed many industries. Digital platforms have disrupted traditional sectors such as retail, transport, and education, while sustainability concerns have reshaped energy and manufacturing industries. These developments make industry and sector analysis more important than ever for strategic decision-making (Teece et al., 1997).

This article explores the theoretical foundations, key concepts, and tools of industry and sector analysis. It examines how organisations assess market structure, industry life cycles, competitive dynamics, and strategic groups. It also discusses the application of industry analysis to startups and small and medium-sized enterprises (SMEs) and evaluates limitations and criticisms. The article positions industry and sector analysis as a bridge between macro-environmental analysis (PESTEL) and firm-level strategy tools such as SWOT and VRIO.

2. Conceptual Foundations of Industry and Sector Analysis

Industry and sector analysis is rooted in industrial organisation economics and strategic management theory. Early work in this area sought to explain differences in firm performance through structural characteristics of industries rather than through individual firm actions (Porter, 1980).

The structure–conduct–performance (SCP) paradigm argued that market structure influences firm behaviour and, ultimately, industry performance. Strategic management later expanded this perspective by recognising the role of firm-level strategy and innovation in shaping competitive outcomes (Porter, 1985).

Industry analysis complements macro-environmental tools such as PESTEL by focusing on industry-specific conditions. It also precedes internal analysis by identifying the external constraints and opportunities that firms face. Together, these analytical layers provide a comprehensive view of the strategic environment (Johnson et al., 2017).

Sector analysis broadens the scope to include related industries that share technologies, customers, or regulations. For example, the healthcare sector includes pharmaceuticals, medical devices, and healthcare services. Sector-level analysis is particularly useful for understanding long-term trends such as digitalisation, demographic change, and sustainability.

3. Industry Structure and Market Characteristics

Industry structure refers to the basic features of a market that influence competition and profitability. Key characteristics include the number of competitors, degree of concentration, product differentiation, and barriers to entry (Porter, 1980).

Highly concentrated industries, such as utilities or telecommunications, are dominated by a small number of large firms. These industries often have high entry barriers and stable profitability. In contrast, fragmented industries such as restaurants or retail have many small competitors and intense price competition.

Product differentiation also shapes industry dynamics. Industries with highly differentiated products, such as luxury fashion or software, experience lower price competition and greater customer loyalty. Commodity industries, such as agriculture or raw materials, face strong price pressure due to low differentiation.

Entry and exit barriers further influence industry structure. High capital requirements, regulation, and proprietary technology protect incumbents and stabilise competition. Low barriers encourage frequent entry and exit, increasing volatility and uncertainty (Grant, 2016).

4. Industry Life Cycle

Industries evolve over time through stages known as the industry life cycle: introduction, growth, maturity, and decline (Vernon, 1966).

4.1 Introduction Stage

In the introduction stage, products are new and demand is uncertain. Firms focus on innovation and market education. Competition is limited, but costs are high and profits are low due to investment in research and development.

4.2 Growth Stage

During growth, demand increases rapidly and new competitors enter the market. Firms seek to build market share and establish brand loyalty. Profitability improves as economies of scale are achieved.

4.3 Maturity Stage

In maturity, market growth slows and competition intensifies. Firms compete on cost, efficiency, and differentiation. Consolidation often occurs through mergers and acquisitions.

4.4 Decline Stage

In decline, demand falls due to technological substitution or changing consumer preferences. Firms may exit the industry, diversify into new sectors, or focus on niche markets.

Understanding the life cycle stage helps organisations anticipate strategic challenges and choose appropriate competitive strategies (Grant, 2016).

5. Strategic Groups and Competitive Positioning

Strategic group analysis examines clusters of firms within an industry that follow similar strategies, such as price levels, distribution channels, or product quality (Porter, 1980). For example, in the airline industry, full-service carriers and low-cost airlines form distinct strategic groups.

Strategic groups differ in performance due to variations in resource allocation and competitive positioning. Barriers between groups limit mobility and protect group-specific advantages.

This analysis helps organisations identify direct competitors and potential repositioning opportunities. It also reveals gaps in the market where new strategies may succeed.

Sector analysis focuses on long-term trends that reshape entire groups of industries. These trends include technological innovation, demographic shifts, and regulatory change.

Digitalisation has transformed sectors such as finance (fintech), education (edtech), and healthcare (healthtech). Sustainability pressures have driven growth in renewable energy and circular economy industries.

Sector-level analysis enables organisations to identify emerging opportunities and anticipate disruptive change. Teece et al. (1997) argue that dynamic capabilities are required to adapt to such structural shifts.

7. Industry Analysis and Strategic Decision-Making

Industry and sector analysis informs key strategic decisions such as:

  • market entry and exit

  • investment priorities

  • diversification

  • mergers and acquisitions

  • innovation strategies

For example, entering a high-growth sector may offer long-term potential but also high risk. Mature industries may provide stable returns but limited growth.

Industry analysis also supports risk management by identifying vulnerabilities such as regulatory threats or substitute technologies (Johnson et al., 2017).

8. Industry and Sector Analysis in Startups and SMEs

For startups and SMEs, industry and sector analysis is particularly important due to limited resources and high uncertainty. These firms must carefully select attractive markets and avoid industries with intense competition and low margins (Blank and Dorf, 2012).

Startups often target niche segments within broader sectors, using innovation to differentiate themselves. Lean Startup theory emphasises experimentation, but industry analysis provides the context for understanding structural constraints (Ries, 2011).

SMEs also benefit from understanding sector trends, enabling them to anticipate changes and adapt their business models accordingly.

9. Integration with Other Strategy Tools

Industry and sector analysis is most effective when combined with other strategy tools:

  • PESTEL identifies macro-environmental forces.

  • Porter’s Five Forces evaluates competitive pressure.

  • SWOT integrates internal and external insights.

  • VRIO assesses internal resources.

Together, these tools form a coherent strategic analysis framework.

10. Limitations and Criticisms

Despite its value, industry and sector analysis faces several limitations. First, it assumes relatively stable industry boundaries, which may not apply in digital or platform-based markets (Mintzberg et al., 2009).

Second, analysis may become descriptive rather than strategic, listing trends without clear implications. Third, forecasting industry evolution is uncertain, especially in rapidly changing environments.

Industry analysis should therefore be used as a guide rather than a prediction tool and should be updated continuously.

11. Strategic Implications

Industry and sector analysis shapes long-term strategy by identifying attractive markets and guiding resource allocation. It encourages proactive rather than reactive decision-making and supports sustainable competitive advantage.

By understanding industry structure and sector trends, organisations can align innovation, investment, and competitive positioning with external realities.

12. Conclusion

Industry and sector analysis is a fundamental component of strategic management. It enables organisations to understand market structures, competitive dynamics, and long-term trends that influence performance and growth.

This article has demonstrated the theoretical foundations, practical applications, and limitations of industry and sector analysis. When combined with other strategy tools, it provides a comprehensive framework for informed strategic decision-making.

As part of the Strategy Tools series, industry and sector analysis bridges macro-environmental scanning and firm-level strategic planning, supporting coherent and sustainable strategy development.

Executive Summary

Industry and sector analysis is a strategic management approach used to evaluate the structure, dynamics, and long-term attractiveness of markets. It focuses on understanding industry characteristics such as competition, growth potential, entry barriers, and life cycle stages, as well as broader sector trends driven by technology, regulation, and social change.

This article explains how industry and sector analysis supports strategic decision-making by helping organisations assess opportunities and risks before entering or expanding within a market. It examines key concepts including industry structure, strategic groups, and the industry life cycle, and highlights the importance of sector-level trends such as digitalisation and sustainability.

The article also discusses the relevance of industry and sector analysis for startups and SMEs, which must carefully choose markets that offer growth potential without excessive competitive pressure. By combining industry analysis with tools such as PESTEL, Porter’s Five Forces, and SWOT, organisations gain a holistic understanding of their strategic environment.

Despite limitations such as uncertainty and changing industry boundaries, industry and sector analysis remains a valuable framework for guiding long-term strategy. When applied critically and updated regularly, it supports informed decision-making, innovation, and sustainable competitive advantage.

References (OBU Harvard Style)

Blank, S. and Dorf, B. (2012) The Startup Owner’s Manual. Pescadero, CA: K&S Ranch.

Grant, R.M. (2016) Contemporary Strategy Analysis. 9th edn. Chichester: Wiley.

Johnson, G., Scholes, K. and Whittington, R. (2017) Exploring Strategy. 11th edn. Harlow: Pearson Education.

Mintzberg, H., Ahlstrand, B. and Lampel, J. (2009) Strategy Safari. 2nd edn. Harlow: Pearson.

Porter, M.E. (1980) Competitive Strategy. New York: Free Press.

Porter, M.E. (1985) Competitive Advantage. New York: Free Press.

Ries, E. (2011) The Lean Startup. New York: Crown Publishing.

Teece, D.J., Pisano, G. and Shuen, A. (1997) ‘Dynamic capabilities and strategic management’, Strategic Management Journal, 18(7), pp. 509–533.

Vernon, R. (1966) ‘International investment and international trade in the product cycle’, Quarterly Journal of Economics, 80(2), pp. 190–207.