8.7 How do you analyse industry structure?

Hanumant Dhokle

INDUSTRY ANALYSIS

As discussed earlier, when we analyze the industry we have to analyze the industry life cycle, then analyze the industry based on Porter’s Model and also do a SWOT analysis. However, for ease of doing an analysis, the following template can be used. The factors influencing those parameters are also discussed here.

Industry Analysis Template

Growth

A growing industry gives room for profitability. But, a mature industry does not give much chance of profit appreciation. While considering the growth in value terms, remove the effect of inflation, i.e. an industry with 15 per cent growth in 1989 when the inflation was 8 per cent, actually had a real growth of only 7 per cent.

Profitability & Market Share

Average profitability of the industry should be attractive. Even if the past profitability figures   may not be high, a sudden turnaround in profitability is favourable. Understanding a company’s present market share can tell volumes about the company’s business. The fact that a company possesses an 85% market share tells you that it is the largest player in its market by far. When the firm is bigger than the rest of its rivals, it is in a better position on to absorb the high fixed costs of a capital-intensive industry.

Demand-Supply

The wider the demand supply gap, the better is the industry’s fortune in the future. For instance, sponge iron in India is currently booming because the demand exceeds supply. Similarly, if supply outstrips demand, the industry faces recession as had happened to the auto industry in India since 1991 till 2000. Avoid such industries for investment.

Capacity Utilisation

Low capacity utilization is a corollary to slackening demand. The dry cell industry in India is a vivid example.

Entry Barrier

High entry barrier is good for the existing companies. For instance, licensing requirement for the pollution prone industries like asbestos and cement stands as an entry barrier. Similarly, high investment cost stands as entry barrier for the integrated steel, cement and petrochemical industries. On the other hand, low entry barriers for the industries like financial services makes them vulnerable to competition.

Competition and Market Share

Less the number of competitors, more would be their market share and higher would be their margin. In an industry like television there are too many competitors, each with very low market share and there is a rampant price-cutting for survival. Thus the average profitability of such industry is low. Sometimes price war forces the industry to become sick as happened in the case of the moulded luggage industry during the Eighties.

Bargaining Power of Buyers

If the customers have a greater power over the industry, its profits go down and vice versa. If the buyers are a homogeneous group or industry, their performance affects operations of the industry. For instance, a recession in the auto industry had resulted in a recession in the auto-ancillary industry. Similarly, bankruptcy of state electricity boards results in delayed payment and hence high debtor turnover ratios for the electrical equipment manufacturing industry.

Bargaining Power Of Suppliers

Bargaining power of the suppliers and the availability of inputs can affect industries which do not have multiple sourcing. For instance, in 2003, sponge iron manufacturers raised the price and this affected their customers, i.e. mini-steel plants badly, due to which the prices of long products increased substantially.

Threat Of Substitute Products

Industries that are innovation-oriented like the electronics industry always face a threat of product obsolescence. Another threat is the competition from substitute products. For example, in 1991 when the government reduced the duty on imported scrap, which is a substitute for sponge iron in mini-steel plants, the manufacturers of sponge iron had to reduce their price immediately.

Technology Trends

Unless the industry has the upgraded technology, profitability cannot be improved. The conversion of wet to dry process in the cement making technology helped to improve the efficiency of those plants which opted for such up gradation.

The following steps should be used as a template to report major findings and organize your research (Use this template in case you are trying to develop an analysis for professional use).

Key factors to be considered while analyzing the industry:

  1. Geographic Area- Local? Regional?, State wide?, National?, International?
  2. Industry- product, size, trend, outlook
  3. Buyers-Target customers
  4. Regulatory environment
  5. Company information- Identify and research most successful businesses

A- Identify the Industry

B- Industry Overview

  1. Include :
  2. A brief history
  3. Facts that affect growth
  4. Government regulations
  5. Leading business in the Industry

C- Industry Trends Statistics

  1. Include:
  2. Estimated size of the industry- Rupees? Products/services sold?
  3. Establish Trends in sales over recent years.
  4. Determine current operational/management trends within the Industry?
  5. What types of marketing strategies are prevalent within the industry? Is the   industry seasonal? Sensitive to economic fluctuations?

D- Industry innovations/News/Govt. Regulations

E- Customer Market Data

  1. Include:
  2. Demographics-population/household size, median income, age,   sex, race,ethnicity, family and housing status etc
  3. Psychographics- lifestyle information, tastes, preferences, and buying habits

F- Competitor Information

  1. Include:
  2. Major businesses in the industry
  3. Where are they located?
  4. How long have they been in business?
  5. What is their market share?
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