8.2 Why Industry Analysis ?
ANALYSIS OF INDUSTRY IS CRUCIAL STEP FOR STOCK ANALYSIS
Industry analysis helps an investor to know an industry or sector, better. For example, IT, banking, automobile etc. It helps you remain fully abreast of the trends in individual industry. It provides an up-to-date database and an incisive analysis of what the numbers speak. It is helpful in understanding the future functioning and performance of specific industries and respective companies. Thereby, it is helpful in zeroing in on the right industry segment for final investment.
How Do You Analyse An Industry?
In specific, following are the important areas where an investor or analyst can get an idea of the industry environment.
- Stages of industry life cycle
- Prices of the products and services
- Demand and supply condition
- New investments
- Level of competition
- Regulatory environment
Apart from having a general understanding of what a company does, you should analyse the characteristics of its industry, such as its growth potential. A mediocre company in a great industry can provide a solid return, while a mediocre company in a poor industry will likely take a bite out of your portfolio. Of course, discerning a company’s stage of growth will involve approximation, but common sense can go a long way: it’s not hard to see that the growth prospects of a high-tech industry are greater than those of the railway industry. It’s just a matter of asking your self if the demand for the industry is growing.
Market share is another important factor. Look at how Microsoft thoroughly dominates the market for operating systems. Anyone trying to enter this market faces huge obstacles because Microsoft can take advantage of economies of scale. This does not mean that a company in a near monopoly situation is guaranteed to remain on top, but investing in a company that tries to take on the ‘500-pound gorilla’ is a risky venture.
Success factors are those elements that determine whether a company succeeds or fails in a given industry. They vary greatly by industry. Some examples of possible success factors include quick response to market changes, a complete product line, fair prices, excellent product quality or performance, knowledgeable sales support, a good record for deliveries, solid financial standing, or a strong management team. The first step is to determine whether or not the company possesses each success factor identified.
Let us therefore look at a few tools to understand more about an industry and its profitability. Some of the tools are
A - Industry Life Cycle
B - Porter Five Factor Model
C - SWOT Analysis.