Industry Analysis 101: Essential for Every Investor’s Toolkit

Investing can feel like piecing together a complex puzzle. Each piece, representing a different industry, contributes to the overall picture of the market. Without a clear understanding of these pieces, investors risk making ill-informed decisions. This is where industry analysis comes in.

By diving deep into the intricacies of specific industries, investors can uncover hidden opportunities, assess potential risks, and make data-driven choices. In this guide, let’s explore the significance of industry analysis to invest in an industry you can thoroughly understand. 

Are you ready to uncover the secrets of industry analysis? 

What is an Industry Analysis?

Industry analysis is a tactic for exploring the competitive dynamics and industry environment. It provides a quantitative assessment of the ecosystem in which the companies operate in the sector. Learning the competitive environment is crucial to selecting the industry’s best stocks. 

This analysis is not just about following the latest industry news and updates. Detailed analysis involves researching major players, understanding market trends, and exploring growth potential to identify investment opportunities and threats. It helps predict future trends and market changes. Thus, it is a powerful tool for investors to make good returns. 

What is the Importance of Industry Analysis?

Analysing any industry gives more insight into what is happening in the said industry and how the competition is. Knowing the demand-supply dynamics, competitiveness among companies, prospective technological advancements, and macroeconomic factors gives you detailed information on how a company is positioned compared to its peers. It is important for investors for the following reasons:

• It gives an assessment of the overall health and growth potential of an industry
• Sheds light on industry trends and competitor performance 
• Offers insights into factors like regulations, government policies, and economic conditions that impact industry performance
• Predicts future performance of the industries and companies operating in the sector

Types of Industry Analysis

Different models were developed to analyse industries. These are explained below.

#1 Porter’s Five Forces Analysis

Introduced in 1980 by Michael Porter, this technique focuses on five factors for accurate industry analysis. 

1. Level of Competition

Intense competition in the industry tends to reduce a company’s profit potential due to price wars, product choices, government restrictions, and lack of product differentiation.

2. The Threat of Substitutes of Products or Services 

Product substitution also limits earning potential as it results in a price cap. However, product differentiation can successfully beat this threat. 

3. Bargaining Power of Buyers

Industries with a limited number of large buyers who account for the market sales will transfer negotiating power to buyers, which can result in lower product and service pricing. 

4. Bargaining Power of Suppliers

Industries with a limited number of players but a large number of suppliers cannot negotiate prices because suppliers will dominate the negotiation conversations.

5. Barriers to Entry  

Industries that are easy to enter will eventually face stiff competition. Companies that are unable to enter the industry will have a competitive advantage. 

#2 PEST Analysis

Political, Economic, Social, and Technological (PEST) factors determine the industry’s macroenvironment. Thus, this analysis focuses on gaining insights into government policies, regulations, labour laws, political stability, inflation, interest, exchange rates, demographics, population growth, consumer behaviour, technological advancements, etc.

#3 SWOT Analysis

Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis provides a broader overview of industry forces to determine their impacts on the industry and company. It evaluates factors that help the industry gain a competitive edge, factors that threaten growth, and factors that can help companies generate profits. 

What are the Checklist for Industry Analysis? 

Creating a checklist for industry analysis will help you understand what is happening within the industry and its competition dynamics. 

• Explore industry growth – is it growing, stagnant, or declining
• Research about emerging trends and disruptions
• Gain insights into competitors of the company and potential threats from new entrants.
• Know more about the susceptibility of the industry to economic downturns
• Conduct an analysis of trading volume within the industry
• Watch out for updates to industry-specific regulations and potential changes
• Analyse the impact of emerging social and environmental trends on how the industry operates 

Conclusion

In conclusion, industry analysis can offer insights into sources of revenue growth in the industry based on competitors’ market shares. A company’s future top-line growth and bottom-line profitability depend on its influence in its sector. It helps understand the business and competitive environment to provide an overview of the company’s context. It is crucial to understand the opportunities and threats that a company faces.

FAQs