Industry Analysis: Meaning, Types and How it Works￼
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Different analytical tools help investors analyse a business in the context of its industry or sector. In order for the investors to make informed decisions about an investment in a particular stock, the current market trends, target company’s adaptability to market changes , competition, etc must be studied.
Industry analysis is one such factor used by investors to dissect the level of competitiveness by analysing the overall environment of a particular industry. Let’s discuss this concept in greater detail.
What Is Industry Analysis in the Stock Market?
Industry analysis is a comprehensive analysis that offers a complete picture to investors about a particular industry in general. investors can carry out this kind of analysis to understand what exactly is happening in the industry as a whole.
This includes understanding the demand-supply situation, the level of existing competition in the industry, emerging competitors, and the overall industry outlook. Various external factors like technological advancement and regulatory situations are also part of industry analysis.
This analysis provides an in-depth understanding of a company’s position with regard to its competitors. Companies can get an idea about challenges and opportunities that will come their way and how they should deal with them. Now that you are briefly aware about industry analysis, let’s shift our focus to how to go about the same.
How to Carry Out Industry Analysis?
There are different frameworks that help companies and stakeholders in industry analysis. But before that, one has to follow a string of steps that eventually leads to a point where one can use the corresponding frameworks.
Here are the steps that one should follow to effectively perform industry analysis:
- Review all Available Information
The foremost thing is to carry out intense research using various reports, research papers, white papers, and presentations. Investors can use all this available information to gain a piece of first-hand knowledge about that particular industry.
These pieces of information may not offer the required expertise to prepare an industry analysis report, but it helps to lay the foundation for the same.
- Gain Knowledge about the Industry
Every industry has several sub-components and each of these sub-components has its own distinct characteristics. Suppose you are looking for information on the real estate industry, it will have several sub-classifications like household, commercial, rental, hotels, corporate offices, etc.
It would be beneficial if you get an idea regarding the particular industry as a whole along with different sub-components of the same to gain finer understanding of the details.
- Forecast Demand and Supply
The third step entails forecasting the demand and supply situation of the respective industry correctly. This is crucial because the performance of the entire industry is tied to market forces of demand and supply.
Under this step, companies need to prepare a list of their competitors. After that, they need to closely analyse the financial health of each competitor including their revenue, growth rate, and operating profit from sales operations. Next, carry out a comparative analysis of your target company. Along with this, you should look for companies which are planning to launch new/innovative products that can disrupt the industry. All these are crucial as it unearths factors responsible for demand and supply.
This is again one of the most important things while preparing an industry analysis report. By analysing the competition, you can find out the strengths and weaknesses of your company compared to its peers. This can help you in taking an informed investment decision. .
What Are the Different Types of Industry Analysis?
The different categories of industry analysis are as follows:
- Competitive Force Model
Developed by Michael Porter, this model focuses on five major forces that impact an industry. It includes the industry competition, threats posed by potential entrants, bargaining power of buyers, bargaining power of suppliers, and challenges associated with substitute products.
Analysing these five parameters provides an overview of the industry. It also helps companies to focus on solutions by identifying their strengths and weaknesses.
- SWOT Analysis
The full form of SWOT is strengths, weaknesses, opportunities, and threats. There are two parts to this SWOT analysis. One is related to internal factors and the other is to external factors. It is essential to conduct the SWOT analysis for the industry to understand its future prospects and how can the industry as a whole gain from the opportunities while minimising the threats
- PESTLE Analysis
PESTLE analysis consists of six macroeconomic parameters including political, economic, social, technological, legal, and environmental. A PESTLE analysis allows a strategic and systematic evaluation of a business’s prospects, risks and opportunities. While a SWOT analysis concentrates on a company’s internal processes, PESTLE provides information on external factors.
Industry analysis is an important tool that helps in analysing the environment of an industry or sector and assessing the degree of competitiveness in it. It is fruitful for investors as it allows them to identify stocks with a competitive advantage in the market. This analysis can give a true picture of where the company stands compared to its peers and how it can leverage its position.
Frequently Asked Questions
Q1. What are the advantages of industry analysis for investors?
Ans. The major benefit of carrying out an industry analysis is that it helps in identifying unexplored investing opportunities. Additionally, investors can evaluate the profitability of a particular industry by using it.
Q2. What are the drawbacks of carrying out an industry analysis?
Ans. One of the biggest cons of this analytical tool is that its results depend on data collated from various sources. If these sources are not reliable, it may lead to inaccurate representations and eventually incorrect investment decisions.
Q3. Who benefits from industry analysis?
Ans. All kinds of investors like large-scale investors, small investors, and even institutional investors can benefit from industry analysis. It represents a complete picture of obstacles and opportunities associated with every industry which is what investors look out for.
Q4. Are business cycles a part of industry analysis?
Ans. Yes, business cycles form an integral part of industry analysis. The impact of this can be high, moderate, or low depending on the industry and its current state.