The Industry Analysis

The industry analysis report sheds light on the economic health of the company,
underlining the understanding whether it will be beneficial for the stakeholders to

invest in such a company and offering recommendations and/or corrective actions
to take in case of any untoward developments in the company.
As an equity research analyst, you might work on industries like Oil and Gas, Metal,
Information Technology, Automobile, Financial Services, Infrastructure,
Pharmaceuticals and Consumer durables.
Types of industries
Industries can be o various types each major product group constitutes and
industry. Industries can also be classified in terms of size of the constituent units or
companies, state or pace of development of the industry, spread of the market, etc.
these are important ways of looking at the structure of an industry. Based on such
factors, various industries can be broadly classified into five categories according to
Porter:
1.
Fragmented industry
2.
Emerging industry
3.
Mature industry
4.
Declining industry
5.
Global industry.
Stratefic steps in writing an Industy Analysis

Step 1: Determine or specify the objective or objectives so that there is no lack
offocus.
Step 2: Collect and scan through available published or secondary data.
Step 3: Identify data or information gaps for generation of primary data
Step 4: Generate primary data (through survey, interviews, meetings, etc) to fill the
data information gap.
Step 5: Process/tabulate varioius data
Step 6: Prepare a general overview of the industry using the proessed/tabulated
data/information.
Step 7: Prepare specific sectoral analysis-technology, product, marketing pattern,
competition analysis.
Step8: Draw inferencesor conclusions to complete the analysis.
The Need for Industry Analysis
Industry analysisalso known as Porters Five Forces Analysisis a very useful tool
for business strategists. It is based on the observation that profit margins vary
between industries, which can be explained by the structure of an industry.
The Five Forces primary purpose is to determine the attractiveness of an industry.

However, the analysis also provides a starting point for formulating strategy and
understanding the competitive landscape in which a company operates.
Industry analysis and competition
Competition within an industry is grounded in its underlying economic structure. It
goes beyond the behaviour of current competitors.
The state of competition in an industry depends upon five basic competitive forces.
The collective strength of these forces determines profit potential in the industry.
Profit potential is measured in terms of long-term return on invested capital.
Different industries have different profit potentialjust as the collective strength of
the five forces differs between industries.
Industry analysis as a tool to develop competitive strategy

Industry analysis enables a company to develop a competitive strategy that best
defends against the competitive forces or influences them in its favour. The key to
developing a competitive strategy is to understand the sources of the competitive
forces. By developing an understanding of these competitive forces, the company
can:
Highlight the companys critical strengths and weaknesses (SWOT analysis)
Animate its position in the industry
Clarify areas where strategic changes will result in the greatest payoffs
Emphasize areas where industry trends indicate the greatest significance as either
opportunities or threats
Industry analysis and structure
The five competitive forces reveal that competition extends beyond current
competitors. Customers, suppliers, substitutes and potential entrantscollectively
referred to as an extended rivalryare competitors to companies within an industry.
The five competitive forces jointly determine the strength of industry competition
and profitability. The strongest force (or forces) rules and should be the focal point
of any industry analysis and resulting competitive strategy.
Short-term factors that affect competition and profitability should be distinguished
from the competitive forces that form the underlying structure of an industry.
Although these short-term factors may have some tactical significance, analysis
should focus on the industrys underlying characteristics.
An industry analysis consists of three major elements: the underlying forces at work
in the industry; the overall attractiveness of the industry; and the critical factors
that determine a company's success within the industry.
One way in which to compare a particular business with the average of all
participants in the industry is through the use of ratio analysis and comparisons.
Ratios are calculated by dividing one measurable business factor by another, total
sales divided by number of employees, for example. Many of these ratios may be
calculated for an entire industry with data available from many reports and papers
published by the U.S. Departments of Commerce and Labor.
By comparing a particular ratio for one company with that of the industry as a
whole, a business owner can learn much about where her business stands in
comparison with the industry average. For example, a small nursing home business
can compare its "payroll per employee" ratio with the average for all residential
care operators in the U.S. in order to determine if it is within a competitive range. If
her business's "payroll per employee" figure is higher than the industry average,
she may wish to investigate further. Checking the "employees per establishment"
ratio would be a logical place to look next. If this ratio is lower than the industry
average it may justifying the higher per-employee payroll figure. This sort of
comparative analysis is one important way in which to assess how one's business
compares with all others involved in the same line of work. There are various
sources for the industry average ratios, among them is the industry analysis series
published by Thomson Gale as the USA series.
Another premier model for analyzing the structure of industries was developed by
Michael E. Porter in his classic 1980 book Competitive Strategy: Techniques for
Analyzing Industries and Competitors. Porter's model shows that rivalry among
firms in industry depends upon five forces: 1) the potential for new competitors to
enter the market; 2) the bargaining power of buyers; 3) the bargaining power of
suppliers; 4) the availability of substitute goods; and 5) the competitors and nature
of competition. These factors are outlined below.
Power of supplier group

The following conditions indicate that a supplier group is powerful:
It is dominated by a small number of companies and is more concentrated than the
industry to which it sells
It is not required to contend with substitute products for sale in the industry
The industry is not one of the suppliers important customers
Its products are an important part of the buyers business
Its products are differentiated or there are built-up switching costs
It poses a definite threat of forward integration
Competitive battles can take the form of price wars, advertising campaigns, new
product introductions, or expanded service offeringsall of which can reduce the
profitability of firms within an industry. The intensity of competition tends to
increase when an industry is characterized by a number of well-balanced
competitors, a slow rate of industry growth, high fixed costs, or a lack of

differentiation between products. Another factor increasing the intensity of
competition is high exit barriersincluding specialized assets, emotional ties,
government or social restrictions, strategic interrelationships with other business
units, labor agreements, or other fixed costswhich make competitors stay and
fight even when they find the industry unprofitable.
INDUSTRY (MAJOR COMPONENTS)

*Industry overview
=Read all the available but relevant industry reports and statistics to see whether it
makes sense to dig deeper. Some of the reports you will find already contain indepth information that the need for new industry analysis is eliminated.
However, it is unwise to depend on existing industry analysis reports as the market
is always volatile and industry factors change constantly.
Therefore, pick up a current report and envisage its relevancy in the current market.
*Industry new and innovations
*Consumer market data(trends consumer deal with/ tours, hotels, iphone)
*Competitors(who)
The Porters model is extensively used while analyzing any industry.
*Economic conditions and influences
*Government regulations
COMPETITIVE RIVALRY WITHIN AN INDUSTRY

/Industry rivalry (degree of competition among existing firms)intense competition
leads to reduced profit potential for companies in the same industry
/Threat of substitutes (products or services)availability of substitute products will
limit your ability to raise prices
/Bargaining power of buyerspowerful buyers have a significant impact on prices
/Bargaining power of supplierspowerful suppliers can demand premium prices and
limit your profit
/Barriers to entry (threat of new entrants)act as a deterrent against new
competitors
POSTER FIVE FORCES
This is the most important step of any industry analysis. In this, you need to study
the competitive scenario using Porters Five Forces Model. The model acts as the
framework of industry analysis. Michael Porter, a famous strategist and author, first
came up with this model. In this model, five parameters are analyzed to see the
competitive landscape.
They are:
Barriers to Entry
Supplier Power
Threat of Substitutes
Buyer Power
Degree of Rivalry

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What are the five forces in Porter's model?

What are some factors that increase competitive rivalry?

The industry analysis report sheds light on the economic health of the company,

underlining the understanding whether it will be beneficial for the stakeholders to

Stratefic steps in writing an Industy Analysis

The Five Forces primary purpose is to determine the attractiveness of an industry.

Industry analysis as a tool to develop competitive strategy

Power of supplier group

competitors, a slow rate of industry growth, high fixed costs, or a lack of

INDUSTRY (MAJOR COMPONENTS)

COMPETITIVE RIVALRY WITHIN AN INDUSTRY

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