MODULE 6: INDUSTRY AND COMPETITIVE ANALYSIS

Industry Analysis

1. Do not analyse a company in a vacuum. First ask: what kind of battlefield is this business fighting in? A strong company in a rotten industry can still disappoint you. A merely decent company in a beautiful industry can make you look smart.
2. Industry analysis helps you do three things.

1. Think of it like airlines versus software. Even a brilliantly run airline still faces brutal fuel costs, fixed costs, and price wars. Meanwhile a decent software company with sticky customers can often earn much better returns. The ceiling is different before the management team even shows up.
2. During the dot-com bubble, many investors behaved as if “internet” itself was a business model and an industry analysis. It was neither. Companies with no moat were valued like kings simply because they were in a fashionable narrative. Right now it is happening for AI.
3. The step-by-step flow is simple.

1. GICS: Sector ⟶ Group ⟶ Industry ⟶ Sub-industry [SGISub]
   ICB: Industry ⟶ Supersector ⟶ Sector ⟶ Subsector [ISSS]
   TRBC: Economic sector ⟶ Business sector ⟶ Group ⟶ Industry ⟶ Activity [EBGIA] G for Group, S always for Sector, B for business, I for Industry

2. How to classify? c

1. These schemes are useful, but do not worship them. They are filing cabinets, not reality. Amazon.com is the classic headache. Is it retail? Is it cloud computing? Is it logistics? If you blindly accept one label, you can miss the economics of the segment that actually makes the money.
2. Strict hierarchies create a real problem: multi-business firms get shoved into one box. That box may be legally tidy and analytically useless.
3. Geography matters too. A hospital in France and a hospital in the United Arab Emirates may both be “healthcare services,” but reimbursement rules, regulation, and patient behaviour can be so different that throwing them together tells you very little.
4. Other ways to group companies could be on the basis of business cycle, geography, financial measures, or environmental, social, and governance scores. Consumer staples and utilities are usually defensive. Industrials, materials, and many consumer discretionary businesses are usually cyclical.
5. Industry size = sales of the product or service you are actually studying, not total corporate sales. If a company sells USD 100 billion of total revenue, but only USD 40 billion comes from smartphones, then for smartphone industry sizing you use USD 40 billion, not the full company sales.
6. Growth industries still have room to penetrate their addressable market. Mature industries are already saturated and tend to grow roughly with the broader economy or even shrink if substitutes steal demand. Semiconductors can still behave like a growth industry. Tobacco is the classic mature or declining example.
7. Characterise growth in two dimensions.

1. Mature does not mean dead. It just means the easy land grab is over. A mature grocery chain grows differently from a young software platform. One mostly rides population, inflation, and share shifts. The other may still be grabbing new users at a fast clip.
2. Profitability: use return on invested capital (the return earned on operating capital regardless of debt mix) where possible, because it is cleaner than return on equity when firms use very different leverage. If that is hard to get for an entire industry, use operating margins for major listed players as a practical shortcut.
3. Market share =

1. Do not obsess over the exact last decimal place of market share. The trend matters more than the point estimate. If Netflix keeps taking share from linear television, that trend tells you far more than whether its exact share this quarter is 12.1% or 12.4%.
2. Herfindahl-Hirschman Index (industry concentration) = sum of squared market shares. Use whole percentages, not decimals.

1. Why concentration matters: if ten firms all have tiny shares and sell similar products, they usually fight harder on price. If two or three giants dominate, price discipline is easier. Not guaranteed, but common.
2. Good cautionary example: the airline industry has become more concentrated in many markets, yet competition can still be vicious because the product is easy to compare and fixed costs are brutal. So concentration helps, but it is not a magic wand.

Industry Structure and Competitive Positioning

1. Of the five forces described next, if some or all of them are strong, then firms will likely earn zero or close to zero economic profits (return on invested capital minus cost).

2. Porter's Five Forces (internal analysis of industry) > Rivalry, new entrants, and substitutes usually make life worse for profits. Strong customer power squeezes price. Strong supplier power squeezes cost.

   1. Rivalry: Rivalry is highest when many similar firms face slow growth and high fixed costs, forcing price cuts to stay at full capacity. Delta Air Lines, United Airlines, and American Airlines cut fares aggressively because planes, fuel contracts, and crews are fixed costs and demand grows slowly.
   2. Barriers to Entry: Saudi Aramco and ExxonMobil face little new competition because oil production needs billions in drilling, refining, and scale.
   3. Threat of substitutes: Substitutes cap pricing by making demand more price-sensitive. A patented drug maker such as Pfizer may enjoy pricing power until a substitute, generic, or alternative treatment appears.
   4. Bargaining power of buyers: Buyers of addictive goods such as cigarettes have low bargaining power because they are less likely to switch on small price changes.
   5. Bargaining power of suppliers: A critical supplier with unique technology can squeeze the industry. Taiwan Semiconductor Manufacturing Company, the company that manufactures advanced chips for Apple and others, is a better example than Microsoft here because it literally sits inside the hardware supply chain. 3.1 Porter’s Five Forces is just a pressure map. You are asking who can hurt industry profits and how badly. If everyone around the firm has a knife, returns stay low. If the firm is surrounded by weak players and loyal customers, returns stay high.

1. Threat of new entrants is high when it is cheap and easy to enter. Restaurants are the classic example. Tens of thousands open every year. Banking is the opposite: licenses, regulation, trust, and compliance make entry slow and expensive.
2. New entrants are weaker when incumbents enjoy the following advantages.

1. Threat of substitutes asks a different question: if the customer does not buy this product, what else solves the same problem?
2. Streaming video was the substitute that hurt cable television. Video calls became a substitute for a lot of business travel. Plant-based meat is trying to become a substitute for animal protein.
3. Substitutes matter even when they look “different.” A restaurant is a substitute for cooking at home. A gaming subscription is a substitute for some other entertainment spending. The customer budget is one pool.
4. Bargaining power of customers rises when buyers are concentrated, products are standardised, the product is a big chunk of their budget, or they can build the thing themselves.
5. Bargaining power of suppliers rises when suppliers are few, specialised, hard to replace, or costly to switch away from. This is why semiconductor manufacturing, aircraft engines, and some specialised software inputs give suppliers real power.
6. Rivalry among existing competitors is often the nastiest force in the room. High fixed costs, slow growth, little differentiation, and many equal-sized competitors make price wars more likely. Airlines, autos, and generic drugs are famous for this.
7. The generic-drug business is a great example. Once patents expire, several manufacturers can sell chemically identical pills. Customers do not care who made them. Price competition gets ugly very fast.
8. A useful real-world scandal memory hook: when Boeing pushed hard on production and competition with Airbus, the pressure of rivalry, cost control, and execution created terrible downstream consequences in the 737 MAX saga. That was not “Porter’s Five Forces” alone, but it is a reminder that competitive pressure can push firms into bad decisions.
9. After Five Forces, look outside the industry using political, economic, social, technological, legal, and environmental analysis. This is less about current profitability and more about where the world may be pushing the industry next.
10. Political: tariffs, subsidies, healthcare reimbursement, defence spending, fuel policy, sanctions. Oil and defence are obvious political industries.
11. Economic: growth, inflation, interest rates, exchange rates. Car sales and housing are very exposed because they depend on financing costs and consumer confidence.
12. Social: demographics, habits, fashion, wellness trends, public opinion. Lululemon benefited from the wellness trend. Tobacco suffered from the opposite kind of social trend.
13. Technological: sustaining versus disruptive innovation. Sustaining innovation improves the existing product. Disruptive innovation changes the game. Cable television improved for years in a sustaining way; streaming disrupted it.
14. Legal: lawsuits, restrictions, packaging rules, approvals, licensing, data privacy, antitrust. Tobacco and cannabis are full of legal risk. So are big technology platforms.
15. Environmental: emissions rules, waste rules, water usage, land restrictions, climate transition risk. Utilities, autos, airlines, and energy cannot ignore this anymore.
16. Real-world example: Netflix disrupted cable television. That was not just a technology story. It was also a social shift in how people wanted to watch content, an economic shift in how households budgeted entertainment, and a competitive shock to the old bundled cable model. Good industry analysis notices that these forces often move together.
17. Now come competitive strategies.

1. Walmart is the classic cost leadership story. Apple is the classic differentiation story. A niche luxury safari lodge serving a very specific type of wealthy traveller is a focus story.
2. Cost leadership works when customers are price-conscious and product differences are small. The weapons are scale, discipline, supply-chain efficiency, cheap distribution, and ruthless cost control.
3. Differentiation works when customers care about quality, brand, service, design, convenience, or ecosystem. The danger is that the premium becomes absurd and customers stop paying for the sparkle.
4. Focus works when a narrow group has distinct needs that larger firms serve badly or uneconomically. A premium pilgrimage-tour operator or a software product made only for small dental clinics can win this way.
5. The dangerous place is being stuck in the middle. You are not cheapest, not special, and not targeted. That is where mediocre companies go to die slowly.

1. PESTLE (external analysis):
   1. political, Trump may impose tariffs on your raw materials and you are bankrupt. Eg: Post tariff children toy industry in US.
   2. economic, Economic cycles affect your business, an upcoming interest rate hike might wreck your leveraged business.
   3. social, This is how society reacts to a business, for example, don't try starting a beef factory in India (although its legal, but don't).
   4. technological, streaming video disrupted cable television; this is not a prettier cable box, this is a different business model.
   5. legal, plain packaging rules, lawsuits, and advertising restrictions changed tobacco economics for decades.
   6. environmental, stricter emissions rules can make life harder for airlines, autos, and fossil-fuel producers while helping cleaner alternatives.