What is industry analysis? How to conduct industry analysis?

Careful consideration is necessary before investing in any stock. To maximize returns and mitigate associated risks, it is important to undertake thorough research and due diligence. Investors should review the company’s past and present performance and the industry in which it operates before investing in its stocks.

The industry refers to a group of similar companies. Food and Beverage (F&B), entertainment, education, fashion, construction, and agriculture are common examples of industries. It is essential to perform industry analysis while researching a company before making an investment decision. Let us understand what is industry analysis and the importance of industry analysis.

What is industry analysis?

Industry analysis is a tool used to analyse the environment and competitive dynamics of an industry. It is a method to assess the ecosystem in which companies of the same industry operate. In simple words, it is the process of researching and understanding the competitive environment of a particular industry.

It includes studying the industry’s major players, market trends, and growth potential which helps identify opportunities and threats, and develop strategies for success. With industry analysis, it is possible to predict future trends and changes in the market.

For instance, you plan to invest in a company indulged in the metal sector. You should know the demand and supply of metal products in the country and associated pricing. You must also be aware of the various government laws and provisions for the industry. Industry analysis also helps draw comparisons among various companies classified in the same industry. This way you are able to invest in the right stock company and make good profits.

What are the various ways of conducting industry analysis?

There are different types of industry analysis to explore. Following is a mention of the most popular analysis types:

Porter’s five forces to analyse stocks

Michael Porter is an American academician who introduced the five forces in his book Competitive Strategy: Techniques for analysing industries and competitors to conduct an industry analysis. Read on for its detailed description of these five forces employed for analysis:

Intensity of rivalry with peers

You need to be aware of the company’s positioning with its peers from the same industry. As per Potter, the level of competitiveness is very high when there are several companies in the same industry and each of their offerings is similar. Each company tries to find an edge over the other and gain market share. Certain factors such as increasing fixed costs or high exit costs make the competition intense.

Threat of new competition

In a situation where the market competitiveness is already so high, imagine a new player entering. Generally, in industries where entry barriers are high, companies enjoy profitability for a long span of time due to lower peers.

Threat of substitution

Substitutes are products that can be used as an alternative to the other product. If the prices of a product increase, consumers tend to shift towards its substitute that offers similar benefits at a lower cost. In India, the threat of substitution is very high, as consumers mainly consider the pricing of the product to make their purchasing decisions. The more serious the threat of substitution, the more vulnerable the industry. All companies will constantly compete to provide quality offerings at the best possible pricing.

Bargaining power of buyers

The bargaining power of buyers refers to the power consumers or buyers have to compel the sellers to provide quality offerings with lower pricing. Such a dynamic arises if there are more suppliers in the market or there are a number of similar products to switch to. The bargaining power of buyers deeply impacts the company’s profits.

Bargaining power of suppliers

Suppliers have an integral part in any industry. They provide raw materials for the production of goods. Large companies typically have their own network of suppliers and rely on them. However, small and medium-sized companies rely on normal suppliers for sourcing. The situation of bargaining power of suppliers occurs when the number of suppliers is less.

For instance, certain medicine ingredients are provided only by a handful of suppliers. Hence, they have a free hand in determining their prices and supply volumes. Small and medium-sized company profits are largely affected by this.

SWOT Analysis

SWOT Analysis is by far the simplest and most popular method of industry analysis. SWOT stands for Strengthens, Weaknesses, Opportunities, and Threats. Following is a brief description of each pointer:

• Strengths – Factors that give the industry an edge over others.
• Weaknesses – As the name suggests, these are factors that make the industry vulnerable.
• Opportunities – These are factors that are likely to help the industry grow and generate higher profits.
• Threats – These are factors that act as roadblocks in the company’s efficient functioning and potential growth.

When conducting industry analysis, it is critical to be well-informed and to keep up with the latest news and developments. To do this, it is beneficial to create a list of relevant points and to thoroughly research the industry. Additionally, it is recommended to seek professional advice if more specific findings are required.  It is also advisable to invest in an industry that you have a decent understanding of. This will help you in making suitable investments and managing them efficiently.

Conducting an industry analysis is essential in order to gain insight into the ABCs of a particular industry, as it can have a direct effect on the stock prices of companies in that industry. Potter’s five-force stock analysis and SWOT analysis are two of the most commonly used methods for conducting this type of analysis. It is important to conduct thorough research prior to investing in stocks in any industry, in order to make informed decisions.