What is industry analysis?

INDUSTRY ANALYSIS:

The objective of the industry analysis is to assess the prospects of various industrial groupings. A careful analysis can suggest which industries have a brighter future than other and which industries are plagued with problems what are likely to persist for a while or intensify in future.

1. Industry life cycle analysis.
2. Study of the structure and characteristics of an industry.
3. Profit potential of industries.

1. Industry life cycle analysis:

Many industrial economists believes that the development of almost every industry may be analyzed in terms of a life cycle with four well – defined stages.

1. Pioneering Stage: during this stage, the technology and or the product is relatively new. Lured by promising prospects, many entrepreneurs enter the field. As a result, there is keen, and often chaotic, competition. Only a few entrants may survive this stage. [e.g. Aviation, Telecom etc.]
2. Rapid growth stage: once the period of chaotic developments is over, the rapid growth stage arrives. [e.g. I.T]
3. Maturity and stabilization stage: after enjoying an above average rate of growth during the rapid growth, the industry enters the maturity and stabilization stage. [e.g. FMCG Sector]
4. Decline stage: with the satiation of demand, encroachment of new products and changes in consumer preference, the industry eventually enters the decline stage, relative to the economy as a whole. [e.g. Textile, Jute]

2. Study of the structure and characteristics of an industry:

Since each industry is unique, a systematic study of it specific features and characteristics must be an integral part of the investment decision process, industry analysis should focus on the following:

(a)    Structure of the industry and nature of competition.

(b)   Nature and prospects of demand.

(c)    Costs, efficiency and profitability.

3. Profit potential of industries:

Profit potential industry depends on the combined strength of the following basic competitive forces:

(a)    Threat of new entrants: e.g. easy entry may push down the prices and reduces profitability.

(b)  Rivalry among the existing firms.

(c)    Pressure from substitute products.

(d)   Bargaining power of buyers.

(For e.g. Profit Potential of Telecom sector has declined on account of above four points.)