6. Industry Analysis

Defining the industry-

An industry is a sector of the economy that produces goods or services. Industries are typically defined by the type of products or services they produce, the methods they use to produce those products or services, and the customers they serve. Examples of industries include the manufacturing industry, the construction industry, the healthcare industry, and the information technology 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 i.e., a fall or rise in income does not affect the demand significantly. Therefore, these industries experience minimal impact on account of economic cycles. Rather, their business prospects are affected only by secular trends. Food, agricultural inputs, and healthcare are some of the industries that have exhibited these traits in the past.
    • Semi-cyclical industries: These industries experience growth in sales during the expansionary phase and decline during the recessionary phase. However, these industries do have some base level demand which helps the industry to have reasonably healthy sales in recessionary conditions also. The consumer durables industry has exhibited these traits.
    • Deep cyclical industries: These industries witness extreme cyclicality in their revenues as they are largely driven by the economic cycle and/or commodity cycles. The capital goods industry exhibits such behavior. During recessionary conditions, their sales drop significantly as most companies put their capacity expansion plans on hold. However, these industries experience massive growth at the first signs of economic recovery as pent-up demand results in higher orders.

Market sizing and trend analysis-

Market sizing refers to 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. This information can be useful for businesses looking to enter a new market, as it can help them to understand the potential size of the market and the potential revenue they could generate.

Trend analysis is the process of examining data over time to identify trends or patterns. This can be useful for businesses as it can help them to understand how a market is evolving, identify potential opportunities or threats, and make more informed decisions about their operations. Trend analysis typically involves collecting data on key metrics related to the market, such as sales, revenue, and market share, and then using tools such as graphs and charts to visualize and analyze the data over time.

Secular trends, value migration, and business life cycle

Secular trends are long-term trends that tend to persist over many years or even decades. These trends can have a major impact on industries and businesses, as they can shape consumer behavior, technological developments, and other factors that can affect the market. Examples of secular trends include the rise of e-commerce, the increasing importance of environmental sustainability, and the growing trend toward health and wellness.

Value migration is the process by which the economic value of a product or service shifts from one part of the market to another. This can happen for a variety of reasons, such as changes in consumer preferences, shifts in the competitive landscape, or the introduction of new technologies. Value migration can have a major impact on businesses, as it can create new opportunities for growth, but it can also pose a threat to businesses that are unable to adapt to the changing market.

The business life cycle refers to the stages of development that a business typically goes through, from its inception to its eventual decline or demise. The stages of the business life cycle can include start-up, growth, maturity, and decline. Understanding the business life cycle can be useful for businesses, as it can help them to identify where they are in the cycle and plan accordingly. For example, a start-up business may need to focus on building a customer base and generating revenue, while a mature business may need to focus on innovation and maintaining market share.

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:
Horizontal Forces:
1. Threat of Substitutes
2. Threat of New Entrants
3. Threat of Established Rivals
Vertical Forces:
1. Bargaining Power of Suppliers
2. Bargaining Power of Customers

Industry Rivalry-

Industry rivalry refers to the competitive dynamics within an industry, including the level of competition among firms and the intensity of their competitive behavior. Industry rivalry can be influenced by a variety of factors, such as the number and size of firms operating in the industry, the level of differentiation among products or services, and the ease with which customers can switch from one firm to another. High levels of industry rivalry can drive firms to engage in aggressive tactics, such as price cutting and marketing campaigns, in order to gain market share and win customers. Understanding the level of industry rivalry in an industry can be important for businesses operating in that industry, as it can help them to anticipate and respond to competitive threats.

Threat of Substitutes-

The threat of substitutes refers to the potential for consumers to switch to alternative products or services that serve the same purpose as the product or service being offered by a particular company. The threat of substitutes can be driven by a variety of factors, such as changes in consumer preferences, the introduction of new technologies, or the availability of lower-priced alternatives. The greater the threat of substitutes, the more difficult it can be for a company to maintain its market share and pricing power. Understanding the threat of substitutes in an industry can be important for businesses operating in that industry, as it can help them to anticipate and respond to changes in the market.

Bargaining Power of Buyers-

The bargaining power of buyers refers to the ability of customers to negotiate favorable terms with a company, such as lower prices or higher-quality products. The bargaining power of buyers can be influenced by a variety of factors, such as the number of buyers in the market, the importance of the product or service to the buyer, and the availability of substitute products or services. The greater the bargaining power of buyers, the more difficult it can be for a company to maintain its pricing power and profitability. Understanding the bargaining power of buyers in an industry can be important for businesses operating in that industry, as it can help them to anticipate and respond to changes in the market.

Bargaining Power of Suppliers-

The bargaining power of suppliers refers to the ability of suppliers to negotiate favorable terms with a company, such as higher prices for their goods or services. The bargaining power of suppliers can be influenced by a variety of factors, such as the number of suppliers in the market, the importance of the goods or services they provide to the company, and the availability of substitute goods or services. The greater the bargaining power of suppliers, the more difficult it can be for a company to maintain its profitability. Understanding the bargaining power of suppliers in an industry can be important for businesses operating in that industry, as it can help them to anticipate and respond to changes in the market.

Barriers to entry (Threat of new entrants)-

Barriers to entry are factors that make it difficult for new companies to enter a market and compete with existing firms. These barriers can be created by a variety of factors, such as economies of scale, intellectual property, government regulations, and the presence of strong incumbent firms. The greater the barriers to entry in an industry, the more difficult it can be for new companies to enter the market and compete with existing firms. Understanding the barriers to entry in an industry can be important for businesses operating in that industry, as it can help them to anticipate and respond to potential threats from new competitors.

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 sociocultural 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

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.

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:

Industry drivers refer to the factors that drive the growth and development of a particular industry. These can be internal or external factors, and they can include things like changes in technology, consumer preferences, regulations, and competition. Industry KPIs, or key performance indicators, are metrics that are used to measure the performance and success of a company or industry. These can include things like revenue, profit, market share, customer satisfaction, and employee retention. Together, industry drivers and KPIs help companies and organizations understand the current state of their industry and make strategic decisions for the future.

A unit of pricing refers to the standard unit of measurement used to determine the price of a product or service. This can vary depending on the type of product or service being offered. For example, the unit of pricing for a product like a bottle of water might be the individual bottle, while the unit of pricing for a service like home cleaning might be per hour or per square foot. It’s important for businesses to clearly communicate their units of pricing to customers in order to avoid confusion and ensure fair pricing.

Key constraining factors are the factors that limit or hinder the growth or success of a company or industry. These can include things like competition, regulations, economic conditions, and access to resources. Identifying and understanding key constraining factors is important for businesses and organizations because it can help them make strategic decisions and overcome challenges. For example, if a company is facing intense competition, it may need to focus on differentiating its product or improving its marketing efforts in order to stand out. Understanding and addressing key constraining factors can help a company improve its performance and achieve its goals.

Regulatory environment/framework:

Industry analysis cannot be complete without adequate knowledge of the rules of the game. Even small changes in the regulatory framework can have a big impact on businesses. For example, the whole discussion in India on FDI in multi-brand retail has been revolving around how much should retailers invest in developing the back-end infrastructure, what could be construed as a back-end infrastructure, could they buy out some firm’s existing set up, how much minimum they should purchase from Indian vendors, etc. Changes in environmental policies have resulted in the closure of various mines and have affected businesses drastically.

Taxation:

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.

Broadly, taxes charged by the government can be classified into two categories (i) Direct taxes (ii) Indirect taxes

Direct Taxes- Direct taxes are taxes imposed directly on individuals or businesses by the government and are paid directly to the government. Examples of direct taxes include income taxes, property taxes, capital gains taxes, and inheritance taxes.\

    1. Income taxes are taxes imposed by governments on individuals or businesses based on their income. Income taxes are calculated based on the taxpayers income, deductions, and credits. Income taxes can be progressive, meaning the number of tax increases as the taxpayers income increases, or they can be flat, meaning the same rate of tax is applied to all income levels.
    2. A surcharge is an additional fee added to a regular price or charge. Surcharges are often used to cover additional costs, such as taxes or processing fees. Surcharges can apply to products, services, or transactions, such as credit card payments or shipping charges.
    3. Minimum alternate tax (MAT) is a tax imposed on companies that do not pay corporate income tax due to certain exemptions or deductions. MAT is based on the companys book profits, which are calculated according to the tax law. MAT is intended to ensure that companies that do not pay corporate income tax still contribute to the governments revenue.
    4. Cess is a tax imposed by the government on certain goods or services to raise additional revenue. Cess is typically used to fund specific programs or services and can be imposed at any rate. Examples of cess include education cess, agricultural cess, and infrastructure cess.

Indirect taxes

Indirect taxes are 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. Examples of indirect taxes include sales tax, valueadded tax (VAT), and excise taxes.

    1. GST (Goods and Services Tax) is a type of indirect tax implemented in many countries. It is a tax on the value of goods and services supplied by a business to a consumer. The GST is usually calculated as a percentage of the price of the goods or services. The rate of GST varies from country to country, but it is typically around 518%.
    2. Excise duty is a type of indirect tax imposed on certain goods and services. It is usually calculated as a percentage of the price of the good or service. Examples of goods and services subject to excise duty include alcohol, tobacco, fuel, and certain luxury items.
    3. Value Added Tax (VAT) is a type of indirect tax imposed on the sale of goods and services. It is calculated as a percentage of the price of the good or service and is usually between 1020%.
    4. Customs duty is an indirect tax imposed on goods imported into a country. It is calculated as a percentage of the value of the goods and is typically between 525%.

Other taxes- 

Road tax: Road tax is a type of indirect tax imposed on the use of roads in a country. It is typically calculated as a percentage of the cost of the vehicle and is usually between 110%.

Stamp duty: Stamp duty is a type of indirect tax imposed on certain transactions, such as property purchases, transfers of shares, and contracts. It is usually calculated as a percentage of the value of the transaction and is typically between 0.22%.

Security transaction tax (STT) is a type of indirect tax imposed on certain stock market transactions. It is typically calculated as a percentage of the value of the transaction and is usually between 0.10.3%.

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Chart Source– Tradingview.com

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