Lesson 1 of 7 · 11 min
Why analyse an industry, and the five steps
Competition pulls a company's profitability toward its industry's base rate, so an analyst must understand the industry before judging, forecasting or valuing any company in it.
In short
- Companies in one industry sell into similar product markets and buy in similar factor markets, so they face the same demand, supply and risk factors.
- In the long run, industry structure explains most of the profitability differences between industries; company-specific factors (business model, strategy, size, execution) create the spread around the industry median.
- Industry forces act more like a ceiling than a floor on returns: competition pulls high performers back toward the industry base rate.
- Industry analysis improves forecasts (prices, costs, market share) and helps identify investment opportunities, including a basket approach to gain industry exposure.
- The process: define the industry → survey it → analyse its structure (Five Forces) → analyse external influences (PESTLE) → evaluate the company's competitive position.
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