e: Describe the elements that need to be covered in a thorough industry analysis.

Question 1

A thorough industry analysis should:

Evaluate the relationships between macroeconomic variables and industry trends.
Estimate industry variables using different approaches and scenarios.
Check estimates against those from other analysts.
Compare the valuation for different industries.
Compare the valuation for industries across time to determine risk and rotation strategies.
Analyze industry prospects based on strategic groups.
Classify industries by their life-cycle stage.
Position the industry on the experience curve.
Consider demographic, macroeconomic, governmental, social, and technological influences.
Examine the forces that determine industry competition.

Answer 1

Elements of an industry analysis
• Evaluate the relationships between macroeconomic variables and
industry trends using information from industry groups, firms in the
industry, competitors, suppliers, and customers.
• Estimate industry variables using different approaches and scenarios
• Compare with other analysts’ forecasts of industry variables to
confirm the validity of the analysis and potentially find industries that
are misvalued as a result of consensus forecasts
• Determine the relative valuation of different industries
• Compare the valuations of industries across time to determine the
volatility of their performance over the long run and during different
phases of the business cycle . This is useful for long term investing as
well as short term industry rotation based on the current economic
environment.

Question 2

Analyze industry prospects based on strategic groups

Answer 2

firms that

are distinct from the rest of the industry

Question 3

Classify industries by life‐cycle stage

Answer 3

embryonic, growth,
shakeout, mature, or declining

Stages of an industry life cycle in chronological order are:Embryonic, growth, shakeout, mature, and decline are the life-cycle stages of an industry.

Question 4

Position of the industry on the experience curve

Answer 4

shows the cost
per unit relative to output.

The experience curve, which illustrates the cost per unit relative to output: slopes downward.

The experience curve, which shows the cost per unit relative to output, slopes downward because of increases in productivity and economies of scale, especially in industries with high fixed costs.

The industry experience curve shows cost per unit relative to cumulative output. Cost per unit typically decreases over time due to higher utilization rates for fixed capital, improvements in the efficiency of labor, and better product design and manufacturing methods.

Question 5

Consider the forces that affect industries ‐

Answer 5

demographic,

macroeconomic, governmental, social, and technological

Question 6

Examine the forces that determine competition

Answer 6

‘The forces that determine competition’

Question 7

A manager tells a research analyst, “A thorough industry analysis should use more than one approach to estimate industry variables,” and “An analyst should not compare his valuations to those of other analysts.” Which of these two statements is (are) CORRECT?

Answer 7

Only one of these statements is accurate.

The first statement is accurate. When analyzing an industry, an analyst should use different approaches and scenarios when estimating industry variables. The second statement is inaccurate. Comparing one’s own forecasts with those of other analysts can be useful for confirming the soundness of the analysis and for identifying industries that are potentially overvalued or undervalued by the consensus view.