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The use of statistics, market data, and economic trends to determine the financial strength of the technology sector is called technology industry analysis. Entrepreneurs and investors use technology industry analysis when determining whether or not to finance a new business or invest capital in an existing business operating in the tech field. The ability of any company to profit and grow is contingent on the customers, suppliers, and competitors in the field. Businessmen and potential investors use business analysis to determine how those three factors impact revenue and expansion prospects within an industry. Employing technology industry analysis provides such individuals with a more accurate industry outlook.
The technology industry is comprised of companies that provide innovative products or services designed to facilitate communication, entertainment, business transactions, or personal tasks. Customers are usually willing to pay a higher price for such products or services due to their efficiency and ability to increase productivity. The availability of cheaper substitute products makes consumers more sensitive to price and consequently places a limit on the amount a company can charge. This usually decreases profit. Technology industry analysis helps entrepreneurs and venture capitalists identify segments of the industry where consumers are willing to pay more due to a disparity in quality between higher-end products and cheaper imitations or where lower priced substitutes are not available.
Financiers who use technology industry analysis understand that many segments of the technology industry require several components to manufacture the products or software sold to consumers. This means that companies in the technology industry rely heavily on the suppliers of such parts. Such suppliers have the potential to negatively impact the profit margins of companies within the technology sector. Since such inputs are integral to the manufacturing process, providers of raw materials or technology components have substantial bargaining power over prices and terms of service.
Industry analytics related to the technology sector reveal high barriers to entry. Success in the technology industry is contingent on a company's ability to create innovative products that are mass-produced at the lowest cost possible. Consequently, businesses in this field must invest heavily in research and development as well as manufacturing and distribution centers. If the employees of a particular sector of the technology industry are unionized, for example, the inability of a business to negotiate favorable terms of employment and compensation also might prevent it from entering the market.
Technology industry analysis also reveals the impact of competition on the profitability of a business. Segments of the technology sector with a high concentration of sellers are less profitable because consumers have enough choices to be price sensitive. Competition also inhibits a business's ability to profit by forcing it to spend more money on features that differentiate the product from competitors in order to attract customers. These changes usually are not enough to allow a company to increase the price of the product, however. Consequently, profit margins are lower.