What is industry analysis?
A tool that facilitates a company’s understanding of its position relative to other companies that produce similar products or services
art of comparing companies with each other.
Why is industry analysis critical in stock selection?
It is a critical early step as industry returns are an important driver for portfolio returns
How are industries commonly classified?
By grouping companies with similar products or services based on principal business activity
What are the two classifications of companies based on business cycle sensitivities?
- Cyclical
- Non-cyclical
What characterizes cyclical companies?
a business that goes up and down with the economy, making more money when the economy is strong and less when it slows down
Airlines,
Hotels, Restaurants, and Leisure,
Luxury Goods and
Automotive
What defines non-cyclical companies?
Performance is independent of the economy, typically divided into defensive and growth industries
What are defensive industries?
The least affected by the economy and can sometimes perform better in worsening economies
The three main defensive sectors are utilities, food & groceries and health care. All have one thing in common: they provide products we can’t live without. And when inflation is on the rise, causing everything to become more expensive, these companies can raise the prices of their products.
What are growth industries?
Industries with strong fundamentals where growth is independent of macroeconomic factors
Growth industries are sectors that are expanding faster than the overall economy, driven by factors like new technologies, changing consumer demands, and demographic shifts. Examples of current high-growth industries include renewable energy (like solar power), technology (especially AI and cybersecurity), biotechnology, eCommerce, and healthcare
What are the five stages of the industry life cycle?
- Embryonic
- Growth
- Shakeout
- Mature
- Decline
Describe the embryonic stage of the industry life cycle.
Industry is just beginning to develop with slow growth in demand, high prices, and high chance of failure
What occurs during the growth stage of the industry life cycle?
Rapidly increasing demand, improving profitability, and relatively low competition among companies
What happens in the shakeout stage of the industry life cycle?
Slowing growth, intense competition, market saturation, and decline in number of firms
What characterizes the mature stage of the industry life cycle?
Market saturation, stable competitive environment, and focus on cost restructuring
What is the decline stage of the industry life cycle?
Diminishing demand, negative industry growth, and companies leaving the industry
What are limitations of industry life-cycle theories?
Changes may disrupt the cycle and not all companies in an industry perform the same
they offer oversimplified models that ignore market dynamism, such as external shocks and rapid technological shifts, and struggle to predict the variable duration of stages, often assuming a predictable sequence that doesn’t account for product reinvention or unexpected demand changes
What is a firm’s peer group?
Similarly related firms with similar business activities
a collection of companies with similar core business functions, size (like market capitalization or revenue), business models, and geographic presence, used for comparison in benchmarking, performance analysis, and determining executive compensation.
How can peer groups be identified?
- Reviewing annual reports
- Reviewing industry trade publications
by shared characteristics and common interests, such as age, background, hobbies, or professional fields, which lead to similar behaviors and social norms.
What does strategic analysis involve?
Understanding the competitive environment in which industry members operate
What is Porter’s Five Forces Framework?
A standard methodology for strategic analysis of industries
a framework that analyzes an industry’s competitive environment to understand its profitability and attractiveness
What does the threat of entry refer to in Porter’s Five Forces?
Industries that are easy to enter will be more competitive
What is the power of suppliers in Porter’s Five Forces?
Suppliers may restrict who they sell to and can set different prices
What does the power of buyers indicate?
Strong buyers can pressure sellers to lower prices and improve product quality
What is the threat of substitutes?
Availability of substitutes can make an industry more competitive and decrease profit potential
What does rivalry among existing competitors lead to?
High intensity in rivalry results in aggressive pricing and targeting each other’s customers
