Industry Analysis

Question 1

What is Industry Analysis?

Answer 1

Industry analysis involves identifying the industry type, its life cycle stage, profitability along with its competitive position. The objective of industry analysis is to identify industries that will prosper and those that will underperform. This is important because a good company in a poorly performing industry will still find it difficult to do well as it would have to buck the overall economic trend.

Question 2

What does Industry Analysis look into?

Answer 2

Industry analysis demands insight into:
1. Key sectors of the economy that influence a particular industry.
2.Relative strengths/weaknesses of a particular industry under various forecasted economic scenarios.

Question 3

Industry Analysis requires the examination of:

Answer 3

1. the competitive structure of the industry
2. The factors that determine the relative competitive positions of firms within the industry.

Question 4

What the key characteristics in Industry Analysis?

Answer 4

1. Past Sales and Earnings Performance
2. Permanence
3. Attitude of Government towards the Industry
4. Labour Conditions

Question 5

Why is Past Sales and Earnings Performance important to Industry Analysis?

Answer 5

The historical performance provides a helpful perspective for forecasting into the future. An industry with only a short history might make the investor more cautious because it lacks the proven ability that it is able to weather bad times. Historical record is also crucial to calculate average levels and assess stability of performance in both sales and earnings. Even though past average levels or past variability may not be repeated in the future, the analyst needs to know how the industry has reacted to different economic scenarios in the past. This enables the analyst to assess the likely performance of that industry under his predicted economic scenario.

Question 6

What is Permanence and its impact towards Industry Analysis?

Answer 6

Permanence is a phenomenon related to the products and technology of the industry. If the analyst feels that the need for a particular industry will vanish in an extremely short period of time, it would be foolish to invest in that industry. Sometimes an industry fades from the scene because of a replacement industry that eliminates the past need

Question 7

How does the Attitude of Government towards the Industry impact Industry Analysis?

Answer 7

Governmental support such as tax, financial, import restrictions or governmental restrain such as restrictive legislation and legal enforcement play an important role in the growth of an industry. As government becomes more influential in attempting to regulate business and to advocate consumer protection, the permanence and profitability of the industry will be affected but more because of regulatory changes rather than technological ones.

Question 8

How does Labour Conditions affect the Industry Analysis?

Answer 8

The state of labour conditions is dependent on a few factors such as the power of the labour union in the industry e.g. whether the industry is labour or capital intensive or if the labour movement is prone to go on strike. In Singapore’s context, this factor is usually not that critical due to the close working relationship of the unions and the government.

Question 9

What are Michael Porter’s Competitive Forces?

Answer 9

1. Rivalry among Existing Firms
2. Threat of New Entrants
3. Threat of Substitute Products
4. Bargaining Power of Buyers
5. Bargaining Power of Suppliers

Question 10

What is Rivalry among Existing Firms?

Answer 10

It is the extent to which firms compete for market share by using various tactics (eg. price competition, advertising, promotional campaigns, product introductions and better customer service). All these tactics may lead to lower profitability for competitors in the same industry either by lowering the prices that can be charged or increasing the cost of doing business. The analysis looks into the size of the players in the industry as well as the levels of price-based and non-price-based competition. Normally, price-based competitive strategies are quite easy to copy and result in lower margins for all players in the industry.

Question 11

What is Threats of New Entrants?

Answer 11

New entrants compete with established companies in the industry and this may lead to price wars and/or increases in costs for existing businesses. When there are many barriers to entry, the threat to established companies is less serious. Barriers may be in the form of low current prices relative to costs, high start-up costs or licensing requirement. A strong brand also makes it more difficult for new entrants to penetrate the market.

Question 12

What is Threat of Substitutes?

Answer 12

It is the extent to which businesses in other industries offer substitute products or services that can meet the same need. The availability of substitutes constrains the prices firms in the industry can charge, since high prices might encourage customers to switch to a substitute.

Example: If oil prices become too high, it may become economical for consumers to switch to cars that run on gas or electricity rather than petroleum.

In addition to existing substitutes, companies need to be on the lookout for potential substitute that may be viable in the near future. The role of technology cannot be ignored as technology drives the development of substitutes over time.

Question 13

What is Bargaining Power of Customers?

Answer 13

It is the extent to which customers are able to dictate prices, quality, and customer service level by bargaining among the competitors in the industry. Customers tend to possess greater bargaining power when they purchase a significant quantity of an industry’s output. The greater the customer’s bargaining power, the lower the profit potential for the industry.

Question 14

What is the Bargaining Power of Suppliers?

Answer 14

Suppliers provide the resources needed for production in the form of people, raw materials, information and financial capital.

They can exert great influence over the industry when:
* there only a few of them selling to many businesses in the industry and/or
* there are no substitutes for their products or services and/or
* their product or services are critical to the industry.

Companies are at a disadvantage if they become overly dependent on any powerful supplier.

Question 15

What are Business Cycles?

Answer 15

The economy recurrently experiences periods of expansion and contraction. However, the length and depth of each cycle is usually different from previous cycles.
These periods of economic recession → economic trough → economic recovery → economic peak are called business cycles.

Question 16

What is the Rotation Strategy?

Answer 16

A key investment strategy that links the business cycle and the industry analysis. It works by predicting the next phase of the business cycle that the general economy is entering, and which industry will do well in that cycle. The key to success in using the rotation strategy is to be able to predict the next phase of the business cycle and to invest in anticipation of this change to the next phase of the business cycle. Usually, it will be too late to wait for concrete evidence that we are well into this predicted change in phase of the business cycle.

Question 17

What is the Industry Life Cycle?

Answer 17

The industry life cycle describes the various stages of development of an industry from its beginning to end. During each stage, an industry can expect different level of sales and competition. Mistakes made in identifying stages in industry life cycle will be more costly than mistakes made in identifying stages in business cycles. The industry life cycle is useful to the investor as it helps to identify when an industry can expect large revenue and profits and is thus, a good candidate for investment. It also helps to determine a good time to exit from the industry.

Question 18

What are the five stages of the Industry Life Cycle?

Answer 18

Pioneering Development
Rapid Accelerating Growth
Mature Growth
Stabilisation and Market Maturity
Deceleration of Growth and Decline