Industry and Competitive Analysis

Analyzing an industry helps understand common opportunities and risks that companies within the same industry face due to similar business models and market conditions. Industry analysis also helps in understanding the long-term sustainability of economic profits influenced by industry structure and competitive forces.

Industry analysis enhances the accuracy of forecasts by providing insights into competitive forces and historical data on competitive actions and strategies. This broader perspective helps analysts predict future market behaviors more accurately.

Through industry analysis, analysts can identify attractive investment opportunities by comparing the strengths and weaknesses of companies within the same industry. This can lead to diversified investment strategies that mitigate company-specific risks.

The steps involved in industry and competitive analysis include defining the industry, conducting an industry survey, analyzing industry structure through models like Porter's Five Forces, assessing external influences using PESTLE analysis, and evaluating a company's competitive strategy and positioning.

Schemes like GICS, ICB, and TRBC are used to categorize companies globally into hierarchical structures based on the similarity of the products or services they sell. These are updated regularly to accommodate new companies and changing business models.

These schemes may not accurately reflect the diversity within industries, especially for companies that operate across multiple industries or have diverse product lines. They also may not account well for geographical differences and changes over time can affect comparability.

Besides the standard industry classification, companies can also be grouped by geography, sensitivity to the business cycle, statistical similarities in financial metrics, or ESG characteristics. These methods can provide different insights compared to traditional industry classifications.

Industry size is measured by total annual sales, which may not include all sales of each industry constituent. Historical growth rates can be calculated year-over-year or as a compounded annual growth rate (CAGR), considering contributions from volume and price/mix drivers.

The historical growth pattern of an industry can be characterized by its growth rate magnitude and sensitivity to the business cycle. Growth industries have idiosyncratic drivers separate from broader economic growth, while mature industries have growth rates in line with or declining relative to broader economic activity.

The best measure of industry profitability is the distribution of returns on invested capital over time. Profitability can also be assessed through the profitability of publicly traded companies within the industry, assuming similar profitability for private competitors.

Market shares are measured by expressing annual revenues of industry participants as percentages of the industry size. Trends in market share over time can indicate competitive performance, and industry concentration can be measured using the Herfindahl-Hirschman Index (HHI).

A framework used to analyze the competitive forces within an industry that affect its profitability. These forces include the bargaining power of suppliers and customers, the threat of new entrants and substitutes, and the intensity of rivalry among existing competitors.

A strategic tool used to identify and analyze the external macro-environmental factors that might impact an industry. These factors include Political, Economic, Social, Technological, Legal, and Environmental influences.

Refers to the potential for new competitors to enter the industry, which can affect the market share of existing companies. Barriers to entry like economies of scale, brand loyalty, and regulatory policies can influence this threat.

Describes the influence customers have on an industry. High bargaining power allows customers to demand lower prices or higher quality.

Indicates how much power suppliers have to drive up the prices of inputs. This power is higher when there are fewer substitutes for the input or when switching suppliers is costly.

The threat that alternative products or services may offer similar or better benefits to consumers, potentially capturing the market share of existing companies in the industry.

The intensity of competition among existing firms in the industry. High rivalry pressures prices and impacts the profitability of all firms involved.

Include government policies, regulatory changes, and political stability that can affect an industry’s operations and profitability.

Factors such as GDP growth, inflation, and economic cycles that can influence consumer spending and industry performance.

Cultural trends, demographic changes, and shifts in consumer behavior that can impact industry demand and market dynamics.

Advancements in technology that can create new products, improve processes, or render existing products obsolete.

Laws and regulations that govern industry practices and can affect operational freedom, compliance costs, and competitive dynamics.

Environmental factors and sustainability issues that can impact industry operations, such as regulations on emissions and waste management.

An intentional strategy is a deliberate plan involving company-wide planning and feedback, while an unintentional strategy arises from disparate actions within a company, often leading to suboptimal outcomes.

Three primary strategies identified by Michael Porter include cost leadership (focusing on efficiency and scale), differentiation (offering unique products or services), and focus (targeting specific market segments).

A competitive strategy should be evaluated based on its defense against industry forces, alignment with external PESTLE factors, and the company's capability to execute the strategy.

Each strategy carries specific risks such as cost inflation for cost leaders, imitation for differentiation, and larger competitors for focus strategies.