What is Industry Analysis and How to Do it?

For investors in the equity market, fundamental analysis is about more than evaluating companies alone. It is also essential to study the industry in which a company operates to understand how that entity may be affected by broad market forces. So, if you are planning to invest in a company over the long term, you need to also focus on industry analysis. 

In this article, we delve into the meaning of industry analysis, discuss who benefits from it, go over an example of industry analysis and more.

What is Industry Analysis?

Industry analysis is the process of assessing the status of an industry at large. An industry is a segment of the economy that consists of companies and enterprises engaged in similar lines of business — which may involve the production of goods or the provision of services. Some examples of industries include healthcare, financial services, infrastructure and more. 

Industry analysis involves evaluating such industries to understand their strengths, weaknesses, growth prospects, competitive structure and other similar aspects. It also includes studying the play of demand and supply forces within an industry, the role of technology therein and how other macroeconomic factors influence the industry. 

Who Benefits From an Industry Analysis?

Industry analysis is useful for various categories of stakeholders. Many kinds of people and organizations can benefit from this kind of research and study. The main beneficiaries of industry analysis include the following: 

• Investors

Industry analysis is crucial for investors because it helps them make informed investment decisions. By understanding the dynamics of an industry, they can evaluate the potential risks and returns associated with specific companies in that market segment. 

This kind of analysis also makes it easier for investors to identify emerging trends, assess competitive markets and study future growth prospects. Equipped with these insights, investors can strategically allocate their capital and potentially earn higher returns while also managing risks more effectively. 

• Business Leaders

For business leaders, industry analysis is an indispensable tool in strategic planning and decision-making. It provides valuable insights into market trends and competitive forces. Leaders can also better assess the potential opportunities or threats within the environment in which companies operate. 

Such insights form the foundation of business strategies as they help identify areas for innovation or expansion. By staying updated about industry trends and dynamics, business leaders can ensure that their companies capitalize on emerging opportunities easily.

• Entrepreneurs

Entrepreneurs and founders of startups can also greatly benefit from industry analysis when they want to launch a new venture or enter existing markets. A thorough understanding of the industry can help them identify gaps in the market, assess their competition and pinpoint potential entry barriers. 

Analyzing the industry is also crucial for understanding customer preferences, so entrepreneurs can tailor their products or services to meet the demands of the market. Furthermore, it also allows founders to be prepared for regulatory challenges, if any. 

• Policymakers

Industry analysis can also be a valuable resource for policymakers and government officials who are responsible for economic regulation and development. By studying various industries in-depth, they can understand the nuances of each economic segment and identify sectors that require policy intervention or support. 

With industry analysis, it also becomes easier to develop beneficial policies and promote growth and competitiveness. Policymakers can easily assess the impact of various proposed regulations and make informed decisions about allocating resources for different industries. 

How to Perform Industry Analysis?

To carry out industry analysis successfully, you can rely on any of the three different methods commonly used in this area — namely, SWOT analysis, Porter’s 5 forces analysis and PEST analysis. Let us discuss each method of industry analysis further, 

• SWOT Analysis

SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. In this type of industry analysis, these four aspects are evaluated in detail, so you can get a clear picture of the pros and cons of an industry. Strengths include any aspects that give the industry a competitive edge, while weaknesses include adverse factors that could become gross disadvantages. Opportunities include the potential for further growth and development, while threats are factors that could adversely impact those opportunities. 

• Porter’s 5 Forces Analysis 

Porter’s 5 forces are central to the competitive forces model of industry analysis. Here, the following forces are assessed to understand the overall state of the industry. 

1. Industry Competition: This force assesses the intensity of rivalry among existing companies within the industry. It considers factors like the number and size of competitors, industry growth rate and the level of product differentiation. 
2. Bargaining Power of the Buyers: This force evaluates the leverage customers have over the prices and terms of sale. It is affected by factors like the number of buyers, their size and importance to the industry, and the cost of switching to another supplier. 
3. Bargaining Power of the Suppliers: This force examines the leverage that suppliers have in dictating terms to the industry. It is influenced by the number of suppliers, the uniqueness of their product or service and the cost of switching suppliers. 
4. Threat of Substitute Products/Services: This force assesses the probability of buyers switching to alternative products/services that fulfil similar needs. It considers factors like the price-performance trade-off of substitutes and the cost of switching. 
5. Threat of New Entrants: This force measures how hard or easy it is for new competitors to enter the industry. It is determined by factors like economies of scale, capital requirements, access to distribution channels and government regulations. 

• PEST Analysis

Like Porter’s 5 forces, PEST analysis or broad factors analysis also involves evaluating a few crucial factors, as outlined below. 

1. Political Factors: These factors include government policies, regulations and political stability that affect an industry. Political factors can impact business operations and trade policies, so they influence the overall industry greatly.
2. Economic Factors: These factors include economic influencers like GDP growth, inflation rates and unemployment levels. Economic factors can affect how consumers spend, how businesses invest and how the industry grows overall.
3. Social Factors: These involve demographic trends, cultural norms and consumer behaviors that shape market demands. Social factors can influence product preferences, workforce availability and even CSR initiatives within the industry.
4. Technological Factors: These factors, like technological advancements, innovation rates and R&D activities, are very relevant to any industry. They can drive product development, improve operational efficiency and even disrupt existing business models.

Industry Analysis: An Example

To understand industry analysis better, let us discuss a brief example where we analyze Porter's 5 forces in the automobile industry in India. 

• Industry Competition: High, with numerous domestic and international players like Maruti Suzuki, Hyundai and Tata Motors competing fiercely
• Bargaining Power of Buyers: Moderate, as customers have many options but switching costs can be high
• Bargaining Power of Suppliers: Low to moderate, due to a large number of component suppliers
• Threat of Substitutes: Moderate, with growing public transportation and ride-sharing services
• Threat of New Entrants: Low, due to high capital requirements and established brand loyalties

This tells us that the Indian automobile industry is highly competitive and has moderate growth potential. It is also significantly influenced by changing consumer preferences and government regulations.

Conclusion 

All in all, industry analysis can be extremely useful for various stakeholders and categories of people. Investors, in particular, often overlook industry assessment in fundamental analysis. If you intend to invest in a company over the long term, ensure you avoid this common mistake. 

You can carry out industry analysis more effectively with the Research 360 platform from Motilal Oswal. Here, you can identify which industries have advanced or declined at a glance. You can also gain insights into the change in market cap percentage, volume, delivery percentage and more. These details can help you decide which industries to focus on.