Industry Analysis

What Is Industry Analysis?

Industry analysis refers to the analysis of the industry’s environment that guides the industry to grow and survive in a competitive environment and gain a competitive edge in the industry as it predicts the future and changes in the market and analyzes the threats and opportunities in the way ahead and making decisions and planning accordingly.

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It is one of the primary tasks of equity research analysts. In some companies, there’re dedicated teams who primarily do industry analyses and write reports on the same. In simple terms, industry analysis reveals the industry dynamics to the stakeholders. So it’s an essential part of creating a competitive advantage for a companyCompetitive Advantage For A CompanyCompetitive advantage refers to an advantage availed by a company that has remained successful in outdoing its competitors belonging to the same industry by designing and implementing effective strategies that allow the same in offering quality goods or services, quoting reasonable prices to its customers, maximizing the wealth of its stakeholders and so on and as a result of which the company can make more profits, build a positive brand reputation, make more sales, maximize return on assets, etc.read more in the competitive market.

Industry Analysis Explained

The term industry analysis in strategic management explains the procedure followed to evaluate or analyse the general market environment in which the business is operating. It is necessary for every business to understand the industry dynamics by studying the trends, level of competition, potential growth opportunities and resistances that it may face during operation so that it can plan its business operation strategically for the future.

Analysis of the industrial condition is typically done by keeping in mind market size, technological advancement, changes in rules and regulations, the objective of the company, etc. The industry landscape is continuously changing, and it is important to keep track of them so as to remain updated about the latest condition that may affect the entity directly or indirectly. Only then it is possible for the management to identify possible avenues of growth and expansion by utilizing the existing resources.

A detailed study of the industry analysis for business plan is important for strategic decision-making that is equally important for the management and all stakeholders. It will also help in proper resource allocation and use them to their optimum capacity along with the implementation of cost control procedures.

This is a comprehensive guide on how one can conduct an industry analysis. If we learn these skills and prepare for equity research analystsEquity Research AnalystsAn equity research analyst is a qualified professional who interprets financial information and trends of an organization or industry to provide recommendations, opinions, reports, and projections on the corporate stocks to facilitate equity trading.read more profile (conducting industry analysis plus writing the report), we will certainly have better prospects than our peers.

The best way to learn is to do it in action. Just select an industry and follow the above steps to do the analysis in reality and write a report. If we happen to sit for an interview for an organization of the same industry, present the report along with our resume. We see how much value addition would be for us during the interview and how it will help us uplift our candidature in front of the interviewers.

Types

Let us study the various types of industry analysis for business plan conducted in companies.

• Analysis of competition – This is of utmost importance since this provides an idea about the operational level and quality of products and services that the entity should give to its customers so as to continue operating smoothly. For this, they need to understand the competitor’s profile, their strength, weakness, market share, quality of products manufactured, etc and use them as benchmark to compare them with the business. This will help in product and brand positioning, pricing an differentiation.
• Customer and supplier analysis – This is required to understand the demand and supply and plan business strategy as per the requirement. If supplier’s position is strong, it may raise cost and affect sourcing of goods. A strong buyer market will lead to fall in price, raising the requirement of cost control and innovation to maintain good customer base to survive in the market.
• Analysis of market – This includes study of various parts of the industry including market trends, size, growth, segmetation in the form or demographics, customer behavior or psychology, geographical environment, etc. It is necessary to use historical data which will help in predicting the future as well.  
• Study of the regulatory environment – Proper analysis of the rules and regulations that should be followed, the general, laws that govern the industry, and the legal implications of not following them should be done.
• Study of the value chain – It is important to study the entire chain starting from the manufacturer to the end customer and identify potensial opportunity for cost saving and expansion.
• Financial and economic analysis – A major part of the industry analysis in strategic management is study of the financial and economic indicators like inflation, currency and interest rate fluctuation affecting the industry, effect of economic cycles, effect of changes in international markets and global competitors in the industry, etc.
• Technology – Technological advancement is a very important factor contributing to rapid changes in industrial environment. Thus, any business should track the latest technological developments in the industry in which they are operating so that it is possible to adopt those ideas in the business itself as fast as possible and remain on the same page as the competitors. This will help the business to remain sustainable.

How To Do?

There’re many frameworks we can use to do industry analysis. But what’s more important is to follow a few steps and get to the point where one can use the frameworks to assess the correct picture of the industry.

First, we will look at the steps you can follow, and then we will talk about the frameworks economists/equity research analysts can use to analyze the market/ industry.

• Review the available information: If you dive in, you will be able to find many available reports, white papers, analyses, research reports, and presentations. If you don’t have any idea about the industry you’re trying to analyze, first use these materials to get to know the industry. Read everything you need to know and identify the key factors to help you write the report after analysis. These reports and information can’t fully help you, but they will give you some idea about what to look for while analyzing the industry.
• Get an idea about the right industry: It may happen that you’re searching for the real estate industry. But real estate is a huge industry, and there are many sub-industries like household complexes, commercial properties, hotels, the amusement industry, etc. It would help if you got an idea about the right industry. If there’s no relevance in the industry you’re searching for, you’ll lose focus, and the analysis will not be able to pinpoint accurate data.
• Are you able to forecast future demand and supply? This is the key thing in any industry. Why? Because everything depends on the demand and supply of the industry. Here’s what you should do. Make a list of the competitors in the industry. Find out the financial health of each competitor. Please take account of the growth rate and the products they’re selling in the last five years. Then do a comparative analysis with your business. You’ll get an idea of what to work upon and what to leave alone. In simple terms, you’ll be able to recognize the key factors that are responsible for future demand and supply in the market.
• Competition: This is the most important thing to consider. A business can use three common frameworks to understand the micro and macro factors.

Industry Analysis Simple Explanation in Video

Examples

Let us apply some of the learning from the above step to industry analysis report of the Automobile Sector, IT Services Sector, and Steel Sector, respectively.

Industry Parameters	Automobile Sector	IT Services	Steel Sector
Demand: Why would there be a continued demand for the product/service	The income of Individuals affect the sale of Cars Industrial activities affect sales of Commercial vehicle Easy Loans and interest rate should help	IT Services thrive by providing Low-cost proposition for the same services Labor/skill shortage in the long run	Demand supply mismatch due to excess supply can put pressure on margin Infrastructure growth / Housing Construction demand, especially in higher urbanization areas Performance of downstream companies such as Cars, White goods, etc
Key supply drivers	Steel prices Metal prices such as Aluminium, rubber, etc	Educated manpower at a reasonable cost Continuous skill enhancement of employees	Price of iron ore
Degree/nature of change	Moderate. The smaller life cycle of a product. Changes in technology	A high degree of change – due to technology changes / high competition	Low. Strongly dependent on the business cycleBusiness CycleThe business cycle refers to the alternating phases of economic growth and decline.read more and demand-supply gaps
Predictability of business	High. Due to car buying by consumer and Commercial vehicle for Goods movement	Predictability is low due to fast technology changes. The clock speed for the Business is high. Changes in the environment every 2-3 years	Medium
Cyclicality?	Moderate for cars. High for commercial vehicle	Not yet as the model is moving to offshore	High
Ability to increase price ahead of inflation (Pricing power)	Poor	Very moderate. More demand-supply gap driven. Commoditization at the lower end and moving up the value chain	Only if there is supply shortfall, else poor
Some sort of monopoly or OligopolyOligopolyAn oligopoly in economics refers to a market structure comprising multiple big companies that dominate a particular sector through restrictive trade practices, such as collusion and market sharing. Oligopolists seek to maximize market profits while minimizing market competition through non-price competition and product differentiation. read more	Low in India. High competitive intensity, especially in mid-segment	None at all – close to perfect competitionPerfect CompetitionPerfect competition is a market in which there are a large number of buyers and sellers, all of whom initiate the buying and selling mechanism. Furthermore, no restrictions apply in such markets, and there is no direct competition. It is assumed that all of the sellers sell identical or homogenous products.read more;	None
Does the company have a recurring revenueRecurring RevenueRecurring Revenue is a part of the Company’s total revenue or income constantly generated in the future at regular intervals (monthly or yearly). This type of revenue is relatively stable as you can predict its occurrence with reasonable confidence. read more stream	Yes. High-value purchase with long cycle	Yes	Yes.
Does the business have franchise/brands, or is it a commodity	Franchise/branding is strong in India.	Weak to the moderate brand. No franchise. Lock in due to Switching costsSwitching CostsSwitching cost is the cost suffered by a customer when switching a service, product, or supplier. It includes not only financial costs, but also psychological costs, time costs, and so on.read more	Commodity with poor brand/franchise value
Does the industry enjoy high growth rates? For how long	Commercial vehicles are cyclical. Cars / personal vehicle have a much steadier trend	High growth currently due to model shifts. Looks likely for the next few years	Cyclical industryCyclical IndustryCyclical industries refer to those businesses whose performance efficiency is highly correlated with or sensitive to the economic cycles. These companies grow when the economy is in the growth or expansion stage and declines with an economic recession or depression—for instance, automobiles, aviation, construction industries.read more

How To Write A Report?

The simple way to write a report is to follow the steps you used in the previous section. Here’s how you can write a report on Industry Analysis effectively –

• Write an overview of the whole industry analysis – The purpose of writing the overview is to give a big picture to the readers (CEO/ top management professionals) quickly about your analysis. It’s important that you summarize important points and also your findings in a brief manner.
• Analytical Presentation: This is the most important part of the report. It would help if you used all your findings and analytical judgments to make this part effective. Use graphs, charts, images, and pointers to emphasize your points. Talk about the micro and macro factors of the business. Also include the competitors, their products and services, customer satisfaction, how much value the competitors are providing, what they’re missing out on, etc. Analyze the controllable and uncontrollable factors and also mention if there’re any recent developments in the industry.
• Forecast: In the next section, give your suggestions and forecast the industry’s possible future. Also, mention the long-term and short-term valuation of the industry and what could be the challenging issues in the future.
• Finally: Write a summary of the entire report in one-two paragraphs. Include the key factors of the report and your suggestions in brief.

While writing the industry analysis report, it’s better if you use lucid language. If you would like to use any jargon, mention the meaning so that the readers don’t get stuck in between.

Importance

The concept has a lot of value in the business environment. Let us try to understand why it is so.

• The process helps in identifying possible growth and new business opportunities that the company can adopt for its future, like identify potential niche not yet explored, latest emerging trends.
• Risk assessment is necessary because it will help in anticipating the challenges that may become a threat to the business. Industry analysis will guide the management to develop contingency plans and strategies to mitigate of control the risk effectively.
• The concept guides the entity regarding how to align the objective of the company with the requirement of the market. It helps in assessing the industry condition and channelize the resources to meet the business objectives by designing strategies to meet customer preferences and market expectations.
• The analysis of industrial condition will also help in identifying the entry and exist points or operational levels that need innovation, restructuring, repositioning etc. It provides valuable information regarding feasibility of new projects or long-term ventures and understand at which level it is possible to enter or change strategies to stay ahead in the competition.
• This industry analysis framework also leads to proper communication to stakeholders regarding how to business is performing relative to the entire industry and its future plans so as to gain faith and trust of the suppliers, shareholders or investors and ensure a long-term relationship.

Thus the above highlights some of the points of importance of study of industry.

Industry Analysis Vs Competitor Analysis

Both the above are two different but related topics that lead to market research and planning. But there are some differences between the two, as given below.

• The former focusses on industry as a whole but the later focusses only on the competitors.
• The industry analysis framework deals with industry trends, dynamics, risks, opportunities, etc, but the latter deals with same but related to competitor companies.
• The main purpose of the same is to provide information at the macro level like the industry landscape, growth opportunities, unexplored niche, etc. But the latter has the purpose of providing information about the competitor’s strategies, work process, decision making, customer base, etc.
• The former provides an overall understanding of the market health and challenges that is useful for decision making whereas the latter provides an understanding of the per companies or competitors operate and use it as a benchmark for improvement.

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