Importance of Industry Analysis

By
Monisha Singh
Sanjeevkumar
• Difference between Sector and industry
A sector refers to a large segment of the economy, while the term industry
describes a much more specific group of companies or businesses.

Example: Automobile sector includes Auto – 4 wheelers, Auto – 2 wheelers,

Auto – 3 wheelers.

• Industry Analysis:
Industry analysis involves reviewing the economic, political and market
factors that influence the way the industry develops. Major factors can
include the power wielded by suppliers and buyers, the condition of
competitors, and the likelihood of new market entrants.
 Objectives for Industry Analysis
• which industries will benefit most from the upcoming
economic environment?

• Is there a difference between the returns for alternative

industries during specific time periods?

• Will an industry that performs well in one period continue to

perform well in the future?

• Is the performance of firms within an industry consistent over

time?
 Framework for analysis

• General features / basic conditions of the industry

• Industry Environment
• Industry structure
• Industry attractiveness
• Industry performance
• Industry Practices
• Industry trends / the future of the industry
 Comparison of industry performance
200.00%

150.00%

100.00%

Power
50.00%
Auto

0.00%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-50.00%

-100.00%
 Performance of companies within Auto
Industry
300.00%

250.00%

200.00%

R 150.00%
e
t 100.00%
u Tatamotors
M&M
r Maruti
n 50.00%

0.00%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-50.00%

-100.00%

Year
 Performance of companies within Power
Industry
100.00%

80.00%

60.00%

R
e 40.00%
t
u TATAPOWER
RELINFRA
r 20.00%
NTPC
n
0.00%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-20.00%

-40.00%

year
 Continued…
• During any time period, the returns for different industries vary within a
wide range.

• The rates of return for individual industries vary over time, so we cannot
simply extrapolate past industry performance into the future.

• The rates of return of firms within industries vary. so analysis of individual

companies in an industry is a necessary follow-up to industry analysis.
 Industry Analysis Process
• Industry analysis process includes both a macro- and a microanalysis.

• Macro analysis topics are

1. The business cycle and industry sectors

2. Structural economic changes and alternative industries
3. Evaluating an industry’s life cycle
4. Analysis of the competitive environment in an industry
 Business cycle and industry
• Industry performance is related to the stage of the business life cycle.
• One needs to switch from one industry to another over the course of
business life cycle.
• Following figure depicts which industry group performs well in different
stages of life cycle.
 Economic variables affecting different
industries

• Inflation

• Interest rates

• International economics

• Consumer Sentiment
Structural economic changes and alternative
industries
• Demographics

• Lifestyles

• Technology

• Politics and regulations

Evaluating the Industry Life Cycle
Porter’s five Forces Model
Thank you