The basics of industry analysis (IA) consist of knowing five pieces of information.

1. SIC/NAICS number and description (online): Getting this information is detailed in Skill Module 7.1. It is important to know to search for other information about the firm.
2. Industry size over time (online): Getting this information is detailed in Skill Module 7.1 for 2001 data, but you can also get earlier years. These numbers tell you the overall trend (growing, stable, declining) and the degree of fragmentation of the industry (how many firms are in the industry, and how much of the market the largest firms have). Fragmented industries—in which the largest four firms control 40 percent or less of the sales —are more likely to have active small business populations.
3. Profitability: This is key data. You can get the basic information for a wide variety of industries from the Bizstats Web site (www.bizstats.com). For this site you need to know the description of your business (you will find restaurant under "Retailing—Restaurant and Drinking Places") and an estimated total sales per year (put in what you would hope your sales would be if you do not have better information). You can pay for online reports at the Risk Management Association (RMA) or BizMiner Web sites, or you can check if your school or local library has a copy of the RMA's Annual Statement Studies: Financial Ratio Benchmarks. The key numbers are in the "Income Data" section in percentage form. Find the size of your firm above the "Number of Statements" number (for start-up businesses, the smallest size is often the best place to start). Then look down the column for the "Gross Profit," "Net Profit," and "Profit Before Taxes" numbers. Gross profit is what is left after deducting the cost of goods sold. Net profit is what is left after deducting the operating expenses of the business. Profit before taxes represents the amount of money the owner or owners take out of the firm annually and on which they pay taxes. When the business can sustain it, owners tend to put their salaries in the operating expense category. However, if the firm cannot afford the owner's salary, the only income is the profit before taxes.
4. How profits are made (interview or articles): Armed with the information from above, you can look for the last piece of the puzzle—how profits are made. There are usually four activities to evaluate. One is what can be done to generate more sales. Second is a judgment of whether it is possible to charge a premium for a product or service. Third is how to keep the cost of goods or services below the industry's average. Fourth is looking at ways to keep operating expenses below industry averages. Small businesses may use one or more of these approaches. Finding out which get used and the specifics of how they are used generally requires either talking to people in the industry or checking out the industry press. Skill Module 7.2 talks about where to find the trade and professional press for particular industries. If you go the interview route, you can talk to people at companies in the industry. Among the owners most willing to talk are those who have been officers in trade and professional associations or owners of businesses who would not see you as competition, such as owners in other cities. Many people have also found chat rooms, like those at http://groups.google.com or discussion boards (via http://www.boardreader.com), to be useful in finding people and comments. Whenever possible, try to get at least five different sources to make sure you know what is really going on.
5. Target market competitor concentration (directory checking): By looking at the listings for local and commercial directories (and companies' Web sites), you can get an idea of the market scope and scale of the businesses with whom you'll be competing. By getting the number that matches your firm in scale and scope, you can get a clear idea of the concentration of competitors in your segment of the industry—and whom you will need to keep an eye on.
6. Analysis: In general, the data you have gathered is put into a report, which helps readers understand what the numbers mean for the industry under consideration. When analyzing the industry, give an overview of the industry (e.g., growing, stable, declining, does it have any major segments like finedining vs. quick service restaurants) in words and numbers, its size and profitability (as well as the trends for each over the past 3 to 5 years), and the major strategies by which businesses in the industry make money (e.g., cost or differentiation strategies, see "Strategy Selection" later in this chapter).
7. Sources: Let readers know where you obtained your information (e.g., books, Web sites, or personal interviews). It is important to assure them of the quality of your work. Without sources, you could be accused of plagiarism.