Elements of Industry Analysis

The scope of industry analysis is the study of co-relations and the strength of co-relations between industry trends and a range of economic and business variables. Analysts well versed in the trends, competitive environments, strengths and other characteristics of the industry, seek to make gains from or protect themselves from losses. Industry analysis also comes into use when analysts need to make forecasts about scenarios. Ideally analysts would have compared their forecasts as well as the variables to use them to see if all posts have been covered adequately. Realistically though this is not always possible as information is not shared.

Analysts use trade reports, annual reports, press releases, and economic research reports to arrive at their analysis of an industry. Analysts also compare different industries with respect to their returns. The consistency, stability and risk of the returns for an industry is evaluated and compared with other industries. Analysts suggest suitable industries for investment as a result.

Analysts also look within an industry for specific strategic groups with good risk adjusted returns. High-end luxury hotels, within the hotel industry or low cost-no frill airlines in the airlines industry are examples. The mode of delivery and barriers to entry are some of the variables evaluated when looking at a strategic group.

Analysts look out for investment opportunity by reviewing an industries life cycle. A company could be in the embryonic stage, the growth stage, the maturity stage and the decline stage. The point the industry is on the product life cycle is juxtaposed with the experience curve. The experience curve shows the direct cost of goods sold or produced. It is a declining function of cumulative output. It is a declining function since capital utilization increases: fixed costs are spread over a large number of units produced and there is an improvement in management, techniques and marketing.

Industry analysis therefore involves evaluating a great number of criteria, the competitive environment, the economy, life cycle, business cycle and experience curve in order to get a better picture of the industry and the investment opportunities and obstacles therein.

The following is a summary of the factors taken into account during industry analysis:

1. Demographics

2. Macroeconomic factors: economic trends

3. Government (legal, regulatory and political)

4. Bargaining capacity of suppliers

5. Technological factors

6. Social factors