INDUSTRY ANALYSIS 1) Overview: History of the industry in brief Domestic scenario Global scenario Industry life cycle analysis

(explained in detail later)

2) Product/Service Details: Main & sub-groups (STEEL: iron ore, sponge iron, billets, hot-rolled, coldrolled, galvanised) Users (construction, railways, automobile, consumer durables, etc.) Substitutes (aluminium, plastics) Production process and forward/backward integration

3) Demand and Supply: Past trends in production and prices Regional analysis of demand and supply – domestically and globally Future trends in production, prices and regional demand & supply Major players and their market shares

4) Inputs: Raw materials – domestic supplies as well as imports Location of plant – near raw materials or near the consumers (steel plants near iron ore mines) Energy inputs – fuel and power supply (gas replacing naphtha as gas is cheaper and cleaner) Labour (huge labour force at SAIL and small one at Essar Steeel) Transportation ( of raw materials and end products – road, rail and sea)

5) Technology & R&D: Technology for making cars and 2 wheelers – mostly foreign tie-ups by Indian companies (Bajaj & Kawasaki, Hero & Honda, Maruti & Suzuki, etc.)


Research & development (R&D) – crucial for pharmaceuticals sector and high end chemicals and pesticides as well as auto sector

6) Exports & Imports: Destinations of exports and for imports Competitiveness of the specific Indian industry in global markets Cost and quality of Indian products/services

Indian outsourcing sectors: IT, BPO, pharma, high-end chemicals & pesticides, auto ancillaries 7) Government Policies: Govt support for specific industry Excise, customs and other central duties State level duties – sales tax, octroi and now VAT Environmental regulations Various other government clearances required for setting up an unit – central and state level

8) Industry Aggregate Analysis: take a specific sector like cement and get an aggregate total of cement companies in India and get sales, profits, margins growth and decline over the last 5 years similarly, one can create sub-groups in an industry – like steel can be subdivided into HR, CR and GR producers and separate industry aggregates for each sub-group can be calculated industry aggregates enables in comparing different industries in terms of growth rates, profit margins and cost analysis. it also helps in comparing individual companies in a sector against the sectoral statistics



9) S.W.O.T. Analysis 10) Executive Summary ---------------------------------------------------------------------------------------------------------------------Industry Life Cycle Analysis: Many economists/analysts believe that the development of almost every industry may be analysed in terms of a life cycle with four well-defined stages:

1) Pioneering Stage – during this stage the technology or the product is relatively new. Depending on the entry barrier of investments (high or low) several players enter this new field. Often there is keen and at times chaotic competition. Only a few entrants may survive this stage. 2) Rapid Growth Stage – companies which survive the previous stage of intense competition witness significant expansion in their sales and profits. 3) Maturity and Stabilisation Stage – once the industry is more or less fully developed, its growth rate generally moves with that of the economy as a whole. 4) Decline Stage – with the satiation of demand, encroachment of new products and change in consumer preferences, the industry eventually enters the decline stage, relative to the economy as a whole. Implications from above for an investor: - give industry analysis prior attention in your investment selection process - display caution during the pioneering stage – high risk and high return/loss - respond quickly and increase your investments during the rapid growth stage - moderate your investment during the maturity stage - sensibly divest when signals of decline are evident ----------------------------------------------------------------------------------------------------------------------MICHAEL PORTER MODEL: FORCES DRIVING INDUSTRY COMPETITION Michael E. Porter’s “Competitive Strategy: Techniques for Analysing Industries & Competiton” Porter’s view is that the profit potential of an industry depends on the combined strength of five basic competitive forces: 1) Threat of New Entrants: New entrants add capacity, inflate costs, push prices down and reduce profitability. The threat from new entrants is low if the entry barriers confer an advantage on existing firms and deter new entrants. Entry barriers are high when: - high investments required to enter the industry - economies of scale required are large


existing firms control distribution channels and have a strong brand image/value switching costs are high for the buyer if he wants to move from one supplier to another government policy either limits or prevents new entrants

2) Rivalry Between Existing Firms: Firms in an industry compete on the basis of price, quality, promotion, service, warranties and so on. If rivalry between the firms in an industry is strong, competitive moves and counter-moves dampen the average profitability of the industry. High rivalry in an industry when: - number of competitors in the industry is large - at least a few firms are relatively balanced and capable of engaging in a sustained competitive battle - as industry growth is sluggish, companies strive for higher market share through various means - chronic over-capacity in the industry - exit barriers are high - if industry’s product is regarded as a commodity or near-commodity, strong price and service competition takes place - high fixed costs force firms to increase capacity utilisation and thus push sales more 3) Pressure from Substitute Products: All firms in an industry face competition from industries producing substitute products. Substitutes limit the profit potential of the industry by imposing a ceiling on the prices that can be charged by the firms in the industry. Threat from substitutes is high when: - price-performance tradeoff offered by the substitute products is attractive - switching costs for prospective buyers are minimal - substitutes products are being produced by industries earning superior profits 4) Bargaining Power of Buyers: Buyers are a competitive force and if they are powerful they can depress the profitability of the supplier industry. Bargain power of buyer group is high when: - its purchase are large relative to the sales of the seller (auto ancillary unit supplying to Maruti) - its switching cost are low - it poses a strong threat of backward integration 5) Bargaining Power of Suppliers:

Suppliers, like buyers, can exert a competitive force in an industry as they can raise prices, lower quality and curtail the range of free services they provide. Powerful suppliers can hurt the profitability of the buyer industry. Suppliers have strong bargaining power when: - few suppliers dominate and the supplier group is more concentrated than the buyer group - there are hardly any viable substitutes for the product supplied - the switching costs for the buyers are high - suppliers do present a real threat of forward integration POTENTIAL ENTRANTS | | Threat of New Entrants | | Bargaining Power The Industry Bargaining Power SUPPLIES Of Suppliers Rivalry Among of Buyers BUYERS Existing Firms | | Threat of Subsitute | Products | SUBSTITUTES

Sign up to vote on this title
UsefulNot useful