Lesson 1 of 8 · All lessons in this module
- Why analyse an industry, and the five steps
- Defining an industry and grouping companies
- Industry size and the character of its growth
- Profitability, market share trends and concentration (HHI)Video lesson
- Industry structure: Porter's Five ForcesVideo lesson
- External influences: PESTLE analysis
- Integrated case: from an industry survey to a forecast
- Competitive strategy and positioning
Free lesson: the first lesson of every module is open to everyone.
Lesson 1 of 8 · 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.
Why the industry matters
Firms in the same industry usually have similar business models. They compete for the same customers as sellers and for the same inputs (labour, materials, real estate) as buyers, so a demand boom, an input shortage or a new regulation tends to hit all of them at once.
Over the long run, these structural factors produce clear differences in profitability between industries. Company-specific factors, such as the business model, competitive strategy, size and quality of execution, then decide where each company sits relative to the industry median.
Research on economic profit (ROIC above WACC) found that the industry was the most important factor in whether high profits last. Company-specific effects were much larger for weak performers than for strong ones: a poorly run firm can sink far below its peers, but even a well-run firm struggles to stay far above them.
A useful mental model: competition pulls each company's profitability toward an industry base rate over time. Industry analysis estimates that base rate, asks whether the structure is changing, and then judges whether a company has strengths that let it beat the base rate. The pull is not absolute; some companies out- or underperform their industry for many years.
Better forecasts and new ideas
Incumbents, substitutes, suppliers and customers all discipline a company's prices, costs and market share. An analyst who looks only at the company tends to underrate these forces and to overrate how much the company controls its own destiny.
Taking an industry view, and keeping a record of past competitive moves and how they worked out, sharpens forecasts. Evidence suggests analysts who also cover a company's suppliers forecast its earnings more accurately.
Industry analysis also identifies investment opportunities: comparing peers can reveal a strong company the analyst had overlooked. Some investors decide they want exposure to the industry itself and to diversify away company-specific risk; they may buy a basket of companies, sized by market value, liquidity or relative attractiveness.
A first question for any company's growth: is it coming from the industry (for example an economic expansion lifting all sellers) or from the company (gaining market share)? The answer changes how you forecast it and how much you would pay for it.
The five steps
Industry and competitive analysis is the second stage of the wider company analysis framework: after analysing the company's past and present (business model, revenue drivers, profitability, capital) and before building the forecast.
Within that stage, the analyst works through five steps. Each step feeds the next: you cannot measure market shares before you know which sales belong to the industry, and you cannot judge a strategy before you know which forces it must defend against.
| Step | Key work | Main output |
|---|---|---|
| 1. Define the industry | Start from a third-party scheme; use judgement on substitutes, multi-segment firms and geography | The set of competitors and products |
| 2. Survey the industry | Size, growth rate and character, profitability, market share trends | Facts on the industry's economics |
| 3. Industry structure | Porter's Five Forces; decide which forces matter most and what to monitor | Why profitability is high or low |
| 4. External influences | Political, economic, social, technological, legal, environmental (PESTLE) | Drivers of future growth and share shifts |
| 5. Competitive analysis | Evaluate the company's strategy and position in this industry | Whether it has a competitive advantage |
Formula
- Market share
Company growth beats industry growth only if market share rises.
Worked examples
Example 1 Industry growth or company growth?
Aurelia Kitchens SA grew revenue from EUR 500 million to EUR 546 million. Its industry grew from EUR 10.0 billion to EUR 10.4 billion. How much of Aurelia's growth came from the industry, and how much from gaining share?
Example 2 Base rate thinking
Two analysts cover Brightwater Cement plc, which earned ROIC of 19% last year. The median cement producer earns about 10%, and the industry's structure has not changed. Analyst X forecasts 19% for the next ten years; Analyst Y forecasts a gradual decline toward the low teens. Which forecast is more consistent with industry analysis?
On the exam
Expect concept items: why industry matters for profitability (structural factors vs company-specific factors), which attributes are industry-level, and the order of the analysis steps.
- Thinking the business cycle explains long-run profitability differences between industries; that is structural factors. The cycle drives short-run swings.
- Calling competitive strategy or business model an industry attribute; they are company-specific. Sensitivity to the business cycle is an industry attribute.
- Assuming industry forces put a floor under weak companies; they act mainly as a ceiling.
Check yourself
Q1Over the long run, differences in profitability between industries are best explained by:
Q2Which of the following is most likely an industry attribute rather than a company-specific attribute?
Q3Research on industry and company effects on economic profit suggests that industry and competitive forces act mostly as:
Q4An industry grows 8% and a company in it grows 3%. If the company's market share was 8.0%, its new share is closest to:
Q5Which step of industry and competitive analysis most likely comes immediately before analysing external influences with PESTLE?
Answer the 5 questions: +10 XP for each one you get right first time.
Liked this lesson? Get the rest free for 7 days
Create a free account to open the other 7 lessons in this module, with videos, flashcards that come back before you forget them, the question bank and full mocks. No card needed.