Industry analysis
1
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2Material in this presentation is adapted and based on the CFA Institute Investment Series books
Notes for Industry Analysis
▸Chapter 9 of prescribed textbook will be useful as background reading for question 4 of
your assignment
▸Investments : Principles of Portfolio and Equity Analysis
• by Michael G. McMillan, , Wendy L. Pirie, , Gerhard Van de Venter, , Lawrence E. Kochard, , and
Jerald E. Pinto
▸This is not an exhaustive summary it is simply some background for things that you
should consider when undertaking an industry and company analysis
▸I do not expect you to copy this template – rather this is a guide for how you might
structure your discussion and research to answer question 4 a
Material in this presentation is adapted and based on the
CFA Institute Investment Series books. 3
Industry Analysis
▸Industry analysis is the analysis of a specific branch of manufacturing, service or trade
▸A good analysis of the industry in which a company operates provides a framework to
analyse an individual company
▸Industry analysis is useful in a number of investment applications that make use of
fundamental analysis. Its uses include the following:
• Understanding a company’s business and business environment. Industry analysis is often a
critical early step in stock selection and valuation because it provides insights into the issuer’s
growth opportunities, competitive dynamics, and business risks
▸For a credit analyst, industry analysis provides insights into the appropriateness of a
company’s use of debt financing and into its ability to meet its promised payments
during economic contractions
Material in this presentation is adapted and based on the
CFA Institute Investment Series books. 4
Industry Analysis: Things to consider
I. What are the barriers to entry? Is it difficult or easy for a new competitor to challenge
incumbents? Relatively high (low) barriers to entry imply that the threat of new entrants
is relatively low (high)
II. How concentrated is the industry? Do a small number of companies control a relatively
large share of the market, or does the industry have many players, each with a small
market share?
III. What are capacity levels? That is, based on existing investment, how much of the
goods or services can be delivered in a given time frame? Does the industry suffer
chronic over- or under capacity, or do supply and demand tend to come into balance
reasonably quickly in the industry?
IV. How stable are market shares? Do companies tend to rapidly gain or lose share, or is
the industry stable?
V. Where is the industry in its life cycle? Does it have meaningful growth prospects, or is it
demand stagnant/declining?
VI. How important is price to the customer’s purchase decision?
Material in this presentation is adapted and based on the
CFA Institute Investment Series books. 5
Strategic Analysis starting point: Porter’s “Five
Forces” Framework
6
Intensity
of Rivalry
Bargaining
Power of
Customers
Threat of New Entrants
Threat of Substitute
Products
Bargaining
Power of
Suppliers
First focus
for analysis
Material in this presentation is adapted and based on the
CFA Institute Investment Series books.
Representative Industry Sectors
7
Basic Materials and Processing
Consumer Discretionary
Energy
Financial Services
Industrial/Producer Durables
Technology
Telecommunications
Utilities
Material in this presentation is adapted and based on the
CFA Institute Investment Series books.
Using GICS
8Material in this presentation is adapted and based on the CFA Institute Investment Series books.
Industry Life Cycle
Source: Based on Figure 2.4 in Hill and
Source: Based on Figure 2.4 in Hill and Jones (2008).
Source: Based on Figure 2.4 in Hill and Jones (2008).
9Material in this presentation is adapted and based on the CFA Institute Investment Series books.
Example: Industry Analysis for Confectionary
Material in this presentation is adapted and based on the
CFA Institute Investment Series books. 10
Major Companies Cadbury, Hershey, Mars/Wrigley, Nestle
Barriers to
Entry/Success
Very High: Low financial or technological hurdles, but new players would lack
the established brands that drive consumer purchase decisions.
Level of
Concentration
Very Concentrated: Top four companies have a large proportion of global
market share. Recent mergers have increased the level of concentration.
Impact of Industry
Capacity
Not applicable: Pricing is driven primarily by brand strength. Manufacturing
capacity has little effect.
Industry Stability Very Stable: Market shares change glacially.
Life Cycle Very Mature: Growth is driven by population trends and pricing.
Price Competition Low: A lack of private-label competition keeps pricing stable among
established players, and brand/familiarity plays a much larger role in consumer
purchase decisions than price.
Demographic
Influences
Not applicable.
Government &
Regulatory
Influences
Low: Industry is not regulated, but childhood obesity concerns in developed
markets are a low-level potential threat. Also, high-growth emerging markets
may block entry of established players into their markets, possibly limiting
growth.
Social Influences Not applicable.
Technological
Influences
Very Low: Innovation does not play a major role in the industry.
Growth vs.
Defensive vs.
Cyclical
Defensive: Demand for candy and gum is extremely stable.