How to do Industry Analysis?

Industry analysis is one of the fundamental pillars of Equity Research Analysis. Often investors look for tips and tricks to spot a company worth putting their money into. However, with the right balance of fundamental and technical analysis, one can learn how to ride the waves of the market like a pro!

Welcome to yet another read by Leapup that covers the intricacies of Industry Analysis and comprehends different Industry Analysis Methods –

What is Industry Analysis?

Industry analysis is a process of evaluating an industry to understand the factors that drive it. The factors include but are not limited to market size, the potential for growth, government regulations, key players in the industry, the effect of technology, and identifying what prevails amongst consumers, i.e. consumer trends.

This process helps investors compare companies in that industry, spot risks and opportunities, and make smarter choices.

What’s the significance of Industry Analysis?

Imagine planning a tour to Shillong with family and you’ve never been to this place.

What would be the first step? Google the route, weather, and hotel arrangements, or go to a travel booking app to do all the search and analysis for yourself.

Similarly, it is very crucial to understand the external factors that impact your investing journey before putting your hard money in. If you need more reasons why industry analysis matters,

Keep Scrolling 🔽

Industry analysis helps you spot the finest investment opportunities within a given industry.
It gives you an insight into the industry dynamics which eventually complement your investment decisions.
It gives a space to evaluate the future potential for both the stock and the entire industry.

Valuation is one of the essential stages while performing Equity Research. Do you know the different methods of Valuation? Check here!

Do you know the Different Industry Analysis Methods?

Here comes the most awaited section- types of industry analysis.

Okay, so I must tell you- there are plenty of methods to conduct industry analysis- SWOT Analysis, PEST Analysis, Porter’s five forces, Blue Ocean strategy, and many more.

However, in this piece we will discuss the two most popular methods of conducting industry analysis-

Intrigued, Which two are we going to discuss?

Keep Reading!!Before we move further, do you know that Investment banking is one of the most popular careers amongst finance grads? If you’re one of the fellas who wish to grab this Sought-after position? Then check out our latest post!

1. SWOT Analysis

SWOT Analysis, where the word “SWOT” stands for Strengths, Weaknesses, Opportunities, and Threats, respectively, is one of the fundamental methods used for performing industry analysis.

Strengths: Strengths are those internal factors that give an industry an edge over others, for instance, a strong reputation, an efficient production process, or innovative technology.

Weaknesses: Aspects that make an industry vulnerable come into play here. This could include outdated technology, higher costs of production, poor supply chain management, etc.

Opportunities: Opportunities are those factors that can push the growth charts, and raise profits. Take, for example, any tech advancement, or varying consumer trends if adopted on time in emerging markets could present opportunities in the industry.

Threats: The external factors that can affect a business negatively on profitability, performance, or an overall basis.

Industry Analysis Methods

SWOT analysis isn’t just limited to industry analysis. It is a versatile tool that can be applied to

various contexts, provide a structured framework for identifying strengths, weaknesses, opportunities, and threats.

By understanding all elements of SWOT, stakeholders/ investors can develop strategies, which can-

Capitalize on Strengths,

Mitigate Weaknesses,

Seize Opportunities,

And lastly, address and guard from possible Threats.

2. Porter's Five Forces

Michael Porter, an American academic, introduced the five forces in his book “Competitive Strategy: Techniques for Analyzing Industries and Competitors” which outlines Porter’s framework for analyzing industry structure and competitive dynamics.

Here are the 5 powers that Porter talked about-

Force 1- “Rivalry with Peers”

The analysis talks about the importance of understanding a company’s position in comparison to its industry peers. This is especially applicable in the case where there is monopolistic competition, i.e. the product differs but not enough to gain a bigger pie in the market share.

Force 2- “Threat of New Competition”:

Industries that offer ease of new players’ entry often face the threat of increased competition. On the other hand, high industry barriers (say energy industry has some regulatory compliances plus requires extensive capital expenditure) often enjoy limited rivalry and thus extended profitability.

Force 3- “Threat of Substitutes”:

Alternate, substitute, replacement – whatever the word used, it means one thing, i.e. the products that can replace each other. If a brand product can be replaced easily, then it doesn’t exist for longer in the industry, which in turn, puts extra pressure on the company to create a differentiator.

Force 4- “Bargaining Power of Buyers”:

Ever heard of the concept Demand is inversely proportional to Supply? If there are a lesser number of buyers than suppliers in the market, i.e. low demand and high supply- it automatically puts pricing power in the buyer’s hand. If a product is expensive the buyers can easily switch to a cheaper option given the high supply.

Force 5- “Bargaining Power of Suppliers”:

In the above pointer, we discussed the situation when buyers have the upper hand. But what about suppliers, when do they get to dominate?

Suppliers hold power in those industries they control essential resources. In such spaces. small and mid-cap entities are quite vulnerable if the big sharks hold significant bargaining power.

How to do Industry Analysis?

To conduct a comprehensive industry analysis, follow these step-by-step guidelines:

1. Review Information about the Industry

Gather white papers, and reports, and analyze the industry both online and offline.
Familiarize yourself with the industry’s current landscape and dynamics.

2. Define the Relevant Industry

Identify the products within the industry. Study these products and figure out what sets them apart from those in other industries.
Determine the geographic scope of competition to understand market boundaries.

3. Identify and Segment Participants

Recognize key players including buyers, suppliers, competitors, substitutes, and potential entrants.
Segment participants into groups if necessary to analyze their roles and influence

4. Dissect the Industry

Recognize sub-industries within the larger industry, such as residential and commercial properties in real estate.
Focus your analysis on the specific sub-industry relevant to your business.

How to do Industry Analysis?

5. Assess the Underlying Drivers of Competitive Forces

Evaluate the intensity of rivalry among competitors, considering factors like product similarity and market saturation.
Analyze the bargaining power of buyers and suppliers, considering factors like market concentration and switching costs.
Evaluate the threat of substitutes and new entrants, considering factors like product differentiation and entry barriers.

6. Forecast Potential Company Growth

Predict future demand and supply trends within the industry.
Assess the growth potential of your company compared to competitors based on past performance and product portfolio.
Monitor stock prices and industry reports to gauge market sentiment.

7. Note Recent Developments

Stay informed about recent industry developments and their potential impact on companies.
Monitor market trends, regulatory changes, and technological advancements affecting the industry.

8. Compose Your Evaluation

Summarize your findings in a structured report format.
Include an introduction, objectives, information presentation, results, conclusions, and a synopsis.
Revise and refine your report to ensure clarity and accuracy.

9. Assess Your Company

Utilize your analysis to make informed decisions about your company’s strategy and objectives.
Compare your company’s performance and positioning against industry benchmarks and competitors.
Consider adjustments to your strategy based on the insights gained from the analysis.

10. Test Analysis for Consistency

Evaluate the consistency of your analysis with actual long-term profitability.
Determine the controlling forces for profitability within the industry.
Assess whether more profitable players are better positioned to the identified competitive forces.

11. Analyze Changes in Competitive Forces

Monitor shifts in competitive forces over time, considering both positive and negative impacts.
Anticipate future changes in the industry landscape and their implications for your company.

By following these steps, you can conduct a thorough and insightful industry analysis to inform strategic decision-making for your business.

Learn By Doing!

Nothing happens just by staring at the screen. You need to get some first-hand experience with it!

Wondering where to get some practical learning?

Don’t worry, Leapup provides comprehensive Equity research training that covers industry analysis in detail along with relevant tools required to perform fundamental analysis of a company. We’ve got mentors who have been teaching core finance skills to the “ready-to-learn” minds for years.

Like what you read? We have more coming…

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