Defining the industry-
Defining the industry is the very first step in conducting an industry analysis. However, it is not always an easy task as there can be several challenges in defining an industry. While there are standard industry classification systems such as NIC in India and NAICS in the US, they may not necessarily capture the substance of the industry. For instance, a single classification for the manufacture of passenger cars may not differentiate between entry-level compact car manufacturers and high-end luxury car manufacturers.
This challenge increases when a company competes in multiple industries to earn its income, such as PVR Limited, which competes with satellite channels, OTT platforms, live theaters, live performances, and sporting leagues. Narrow industry definitions create a risk of overlooking other competitors, while broader definitions make it difficult to compare the performance of different segments within the broader group.
An analyst should carefully consider the various factors that drive the business and classify it as part of the industry group that shares common driving factors. For example, if an analyst believes that PVR Limited’s business is driven by people’s propensity to spend time outside their home, it may be appropriate to classify it as part of the out-of-home entertainment industry. On the other hand, if the business is largely driven by people’s propensity to consume movie content, it may be appropriate to classify it as part of the entertainment media industry.
Understanding industry cyclicality-
Economic cycles affect all businesses. However, they affect some businesses more than others. Based on their cyclical nature, industries can be classified into three categories:
|Defensive industries||These are industries that create products and services that have low-income elasticity, meaning that changes in income levels do not significantly impact demand for their products.||
|Semi-cyclical industries||These industries experience some fluctuation in demand based on economic cycles, but have a certain level of base demand that helps maintain sales even during recessionary periods.||
|Deep cyclical industries||These industries experience extreme fluctuations in demand based on economic cycles, and may be heavily impacted by commodity prices.||
Market sizing and trend analysis-
|Market sizing||The process of determining the total size of a market, typically in terms of the number of potential customers or the total revenue generated by the market.||- Estimating the number of potential customers for a new product
- Determining the total revenue generated by a particular industry
|Trend analysis||The process of examining data over time to identify trends or patterns.||- Analyzing sales data over several years to identify seasonal trends
- Examining social media data to identify changing consumer preferences
Secular trends, value migration, and business life cycle-
|Secular Trends||Long-term trends that persist over many years or even decades and can shape consumer behavior, technological developments, and other factors that affect the market.||The rise of e-commerce, the increasing importance of environmental sustainability, and the growing trend toward health and wellness.|
|Value Migration||The process by which the economic value of a product or service shifts from one part of the market to another due to changes in consumer preferences, shifts in the competitive landscape, or the introduction of new technologies.||The shift from traditional brick-and-mortar retail to e-commerce, the move from print to digital media, and the emergence of electric vehicles as a viable alternative to gasoline-powered cars.|
|Business Life Cycle||The stages of development that a business typically goes through, from its inception to its eventual decline or demise.||Start-up, growth, maturity, and decline.|
Understanding the industry landscape-
Industry landscaping needs to be very comprehensive. While analysts can use their own frameworks, there are certainly established frameworks that can help understand the industry landscape. These include the following:
(i) Michael Porter’s Five Force Model
(ii) PESTLE analysis
(iii) BCG Matrix
(iv) SCP analysis
Michael Porter’s Five Force Model for Industry Analysis-
this model analyses any industry on the basis of five broad parameters or forces. These 5 forces are divided into 2 vertical and 3 horizontal ones, as listed below:
1. Threat of Substitutes
2. Threat of New Entrants
3. Threat of Established Rivals
1. Bargaining Power of Suppliers
2. Bargaining Power of Customers
1. Threat of Substitutes: This force is concerned with the availability of substitute products or services that can meet the same customer needs as the industry’s offerings. When there are many substitutes available, the power of the industry decreases as customers have more options to choose from. For example, the availability of electric cars as a substitute to gasoline cars can have a significant impact on the automotive industry.
2. Threat of New Entrants: This force is related to the barriers to entry for new companies in the industry. If the barriers are low, then new entrants can easily enter the market, leading to increased competition and reduced profitability for existing firms. Barriers to entry can include high start-up costs, government regulations, brand loyalty of customers, and economies of scale.
3. Threat of Established Rivals: This force is related to the intensity of competition within the industry. When there are many established firms competing for market share, the rivalry is high, which can lead to price wars, reduced profitability, and increased marketing expenses. The threat of established rivals can be influenced by factors such as product differentiation, industry concentration, and exit barriers.
4. Bargaining Power of Suppliers: This force refers to the ability of suppliers to exert influence on the industry. When suppliers have significant bargaining power, they can increase their prices or reduce the quality of their products, which can have a negative impact on the profitability of the industry. Factors that can influence the bargaining power of suppliers include the number of suppliers, the availability of substitute inputs, and the importance of the input to the industry.
5. Bargaining Power of Customers: This force refers to the ability of customers to influence the industry by bargaining for lower prices, higher quality, or better service. When customers have significant bargaining power, they can demand these benefits and reduce the profitability of the industry. Factors that can influence the bargaining power of customers include the number of customers, the availability of substitutes, and the importance of the industry’s product or service to the customer.
By analyzing these five forces, businesses can gain a better understanding of the industry landscape and its potential opportunities and threats.
Political, Economic, Socio-cultural, Technological, Legal, and Environmental (PESTLE) Analysis-
|Political||The political environment of the country can have an effect on the company's operations. For example, changes in government policies, regulations, and taxes could affect the company's operations. The company could also be affected by political instability in the country.|
|Economic||The economic environment of the country can also have an effect on the company's operations. Economic factors such as inflation, unemployment, and the level of economic growth can influence the company's ability to operate successfully.|
|Socio-cultural||The socio-cultural environment of the country can also have an effect on the company's operations. Social trends and changes in consumer tastes can influence the company's ability to compete successfully.|
|Technological||The technological environment of the country can also have an effect on the company's operations. Advances in technology can make certain processes more efficient and can open up new opportunities for the company.|
|Legal||The legal environment of the country can also have an effect on the company's operations. Changes in laws and regulations can affect the company's ability to operate successfully.|
|Environmental||The environmental environment of the country can also have an effect on the company's operations. Pollution and climate change regulations can affect the company's operations.|
Boston Consulting Group (BCG) Analysis-
Boston Consulting Group (BCG) is a management consulting firm that provides advice to help organizations improve their performance. BCG uses a variety of analytical techniques, including the BCG matrix, to help companies identify growth opportunities and allocate resources effectively
BCG’s signature tool, the BCG matrix, is a framework that helps companies analyze their businesses and identify growth opportunities. The matrix divides a company’s products or businesses into four quadrants based on their relative market share and market growth rate. The four quadrants are:
Stars: These are products or businesses with a high market share in a rapidly growing market. These are considered the most valuable businesses within a company, and they often require significant investment to maintain their position.
Cash cows: These are products or businesses with a high market share in a slow-growing market. These businesses generate significant cash flow, which can be used to invest in other areas of the company.
Dogs: These are products or businesses with a low market share in a slow-growing market. These businesses typically do not generate much value for the company and may be candidates for divestment.
Question marks: These are products or businesses with a low market share in a rapidly growing market. These businesses have the potential to become stars, but they also require significant investment to grow their market share.
By using the BCG matrix, companies can assess the potential of their different businesses and allocate resources accordingly. This can help them focus on the areas of their business that are most likely to generate value and growth.
|BCG Matrix Quadrant||Description||Examples|
|Stars||High market share in a rapidly growing market.||Apple's iPhone in the smartphone market.|
|Cash cows||High market share in a slow-growing market.||Coca-Cola in the soft drink market.|
|Dogs||Low market share in a slow-growing market.||Nokia's Symbian operating system in the mobile operating system market.|
|Question marks||Low market share in a rapidly growing market.||Tesla's electric cars in the electric vehicle market.|
Structure Conduct Performance (SCP) Analysis:
Structure: Structure refers to the structure of the market, including the number of sellers and buyers, the concentration of market power, and the extent of competition.
Conduct: Conduct refers to the behavior of firms in the market. This includes pricing strategies, marketing strategies, and product innovation.
Performance: Performance refers to the economic performance of the market, including the prices of goods and services, the quality of products, and the level of consumer welfare.
SCP analysis is a framework used to analyze the structure, conduct, and performance of a market. It is used to assess the efficiency of a market, identify areas of market failure, and suggest potential policy interventions. The analysis involves both quantitative and qualitative methods to assess the effectiveness of a market. This includes economic theory, market surveys, and empirical studies. The goals of SCP analysis are to improve market efficiency and consumer welfare.
Key Industry Drivers and Industry KPIs:
Key Industry Drivers:
Industry drivers are the factors that drive the growth and development of a particular industry. These factors can be internal or external to the industry and can include things like changes in technology, consumer preferences, regulations, and competition. Understanding industry drivers is important for businesses to stay competitive and adapt to changes in the industry. Here are some examples of key industry drivers:
|Technological||Advances in technology can drive growth and innovation in an industry. For example, the development of smartphones has driven growth in the mobile app industry.|
|Regulatory||Changes in regulations can impact an industry, for better or for worse. For example, increased government regulations can limit the growth of the tobacco industry.|
|Economic||Economic conditions such as recessions, inflation, and interest rates can impact an industry. For example, a recession can lead to decreased consumer spending, negatively impacting the retail industry.|
|Societal||Changes in societal values and trends can impact an industry. For example, the growing trend of eco-friendliness has driven growth in the renewable energy industry.|
|Competitive||Changes in competition, such as the entry of new competitors or mergers and acquisitions, can impact an industry.|
Industry KPIs, or Key Performance Indicators, are metrics that are used to measure the performance and success of a company or industry. These metrics can include things like revenue, profit, market share, customer satisfaction, and employee retention. Understanding these metrics is important for businesses to evaluate their performance and make strategic decisions. Here are some examples of key industry KPIs:
|Revenue||The total income generated by an industry during a specific period.|
|Profit||The amount of money an industry makes after deducting expenses from revenue.|
|Market share||The percentage of total market sales that an industry has.|
|Customer satisfaction||A measure of how satisfied customers are with the products or services provided by an industry.|
|Employee retention||A measure of the percentage of employees who stay with an industry over a certain period of time.|
The regulatory environment, or regulatory framework, refers to the set of laws, regulations, and policies that govern an industry. It is important for businesses to understand the regulatory environment in which they operate, as changes in regulations can have a significant impact on their operations and profitability.
For example, changes in environmental policies can result in the closure of mines or factories, which can have a significant impact on the mining or manufacturing industries. Similarly, changes in tax laws or import/export regulations can affect businesses operating in the international market.
Businesses must comply with regulatory requirements and obtain necessary licenses and permits to operate legally. Failure to comply with regulations can result in fines, legal action, and reputational damage.
Taxes are tools that a government uses to earn income which can be used to meet its expenses. However, governments also use taxes as a tool to encourage or discourage certain businesses. For example, the state government of Kerala introduced a fat tax in 2017. They levied 14.5% additional tax on junk foods. This was done with the intention to discourage the junk food industry.
Similarly, at a national level, India has several slabs of Goods and Service Tax (GST). Many essential products have no GST or have lower GST rates while luxury products have much higher GST rates.
|Type of Tax||Description||Examples|
|Direct Taxes||Taxes imposed directly on individuals or businesses by the government and are paid directly to the government.||Income Tax, Property Tax, Capital Gains Tax|
|Indirect Taxes||Taxes charged on goods and services and are collected from the consumer at the point of sale. They are paid by the consumer, but collected by the business.||GST, Excise Duty, Value Added Tax|
|Other Taxes||Taxes that do not fall under direct or indirect taxes, such as taxes on road use and stamp duty.||Road Tax, Stamp Duty, Securities Transaction Tax|