Learning Module 6
Industry and Competitive Analysis
Key Outcomes Summary & Practice Problems
What you must be able to do
Curriculum Year: 2026
Describe the purposes of, and steps involved in, industry and competitive analysis.
Describe industry classification methods and compare methods by which companies can be grouped.
Determine an industry's size, growth characteristics, profitability, and market share trends.
Analyze an industry's structure and external influences using Porter's Five Forces and PESTLE frameworks.
Evaluate the competitive strategy and position of a company.
1 · Uses of Industry Analysis & Steps
Industry analysis helps analysts understand the structural factors that drive profitability and competitive dynamics. It is an essential step in the company and industry analysis framework.
Issuers sell securities to investors
Funds flow to the issuer
IPO — first public offering
Seasoned offering — additional shares of previously issued security
Underwritten — investment bank guarantees sale
Best efforts — bank acts as broker, no guarantee
Private placement — to qualified investors; less disclosure
Rights offering — existing shareholders get rights to buy at discount
Shelf registration — sell shares over time
Investors trade securities among themselves
Funds flow between traders
Provide liquidity — investors can exit
Liquid secondary markets lower cost of capital in primary markets
Investors pay more for liquid securities
Higher prices = lower cost of capital for issuers
Investment applications of alternative data: Satellite imagery of retail parking lots → foot traffic data ahead of earnings; shipping activity → supply chain indicators; agricultural satellite data → crop yield forecasts; social media sentiment → predictive signals for stock returns and IPO performance. Alternative data can identify factors affecting security prices, improve asset selection, optimize trade execution, and uncover trends before they appear in traditional financial reports.
2 · Industry Classification & Grouping Methods
An industry is commonly defined as companies that sell similar products or services from a customer's perspective. Third‑party classification schemes help analysts, but they have limitations.
Major Classification Schemes
Scheme | Provider | Structure | Key Features |
|---|---|---|---|
GICS | MSCI & S&P | 11 Sectors → 25 Industry Groups → 74 Industries → 163 Sub‑Industries | Most widely used; demand‑based; global; updated annually |
ICB | FTSE Russell | 11 Industries → 20 Supersectors → 45 Sectors → 173 Subsectors | Demand‑based; global |
TRBC | Refinitiv | 14 Economic Sectors → 33 Business Sectors → 62 Industry Groups → 154 Industries → 898 Activities | Covers private companies, non‑profits, government |
Limitations of Classification Schemes
Strict hierarchical taxonomies: Companies with multiple business lines are assigned to a single grouping, even if they operate in different sectors (e.g., Amazon Web Services vs. e‑commerce).
Groupings may be too narrow or too broad: Application software includes vastly different companies (Shopify vs. Check Point).
Geographical considerations: Global schemes may not capture locally competitive industries (healthcare, retail).
Changes over time: Reclassifications (e.g., Real Estate sector carved from Financials) affect historical comparability.
Alternative Grouping Methods
Geography: Country classification (developed, emerging, frontier) based on incorporation, primary listing, or headquarters — not revenue composition.
Business cycle sensitivity: Defensive (staples, healthcare, utilities) vs. Cyclical (financials, materials, consumer discretionary).
Statistical similarities: Clustering based on financial ratios, valuation multiples, growth rates, volatility, momentum.
ESG characteristics: Carbon intensity, board diversity, exposure to controversial businesses.
3 · Industry Survey — Size, Growth, Profitability, Market Share
After defining the industry, the analyst surveys it by estimating key metrics.
Measured by total annual sales from the product/customer perspective.
May include private company sales (estimated from government data or consultancies).
Growth rate: year‑over‑year or CAGR.
Characterise growth: Mature vs. Growth; Defensive vs. Cyclical.
Profitability: Best measured by ROIC distribution (if available) or operating margins of public players.
Market share: Company revenue / industry size. Trend is more important than point estimate.
Herfindahl‑Hirschman Index (HHI): Sum of squares of competitor market shares. Measures concentration.
HHI 1,500–2,500 = moderately concentrated; >2,500 = highly concentrated.
HHI = Σ si² (si = market share of firm i, stated as a whole number)
Example: 30%, 30%, 20%, 20% → 30² + 30² + 20² + 20² = 2,600
Warehouse Club case study: US retail (excluding autos) is a large, mature, moderately cyclical industry. Top 10 firms hold ~28.6% market share (fragmented). E‑commerce is the most significant market share trend, with Amazon capturing ~40% of online retail. HHI is low, indicating high competitive intensity.
4 · Porter's Five Forces & PESTLE Analysis
Porter's Five Forces determines an industry's long‑run profitability. PESTLE analysis examines external influences on industry growth and market share dynamics.
Porter's Five Forces
• Barriers: economies of scale, network effects, brand loyalty, switching costs, regulatory hurdles
• Example: Restaurants (low barriers) vs. commercial banks (high barriers)
• Products/services fulfilling the same customer need
• Example: Video conferencing vs. business travel; digital advertising vs. TV
• Few concentrated customers, low switching costs, undifferentiated products
• Example: Electronic component suppliers vs. Apple/Samsung
• Few concentrated suppliers, specialized inputs, high switching costs
• Example: TSMC (exclusive chip supplier for Apple)
Intense if: many equal‑sized firms, slow industry growth, undifferentiated products, high exit barriers
• Example: Automakers (fierce price competition despite few players)
Alternative Grouping Methods
Factor | Description | Example |
|---|---|---|
Political | Fiscal/monetary policy, geopolitics, regulation, government spending | Energy: OPEC actions; Healthcare: government reimbursement |
Economic | GDP, inflation, interest rates, exchange rates | Auto industry (durable goods, cyclical); multinational currency exposure |
Social | Cultural trends, demographics, lifestyle changes | Beauty industry: social media and premiumization trends |
Technological | Innovation, disruption, R&D intensity | Streaming video disrupting cable; Sustaining vs. Disruptiveinnovation |
Legal | Laws, regulations, court rulings | Tobacco regulations; cannabis legalisation |
Environmental | Climate transition risks, waste, land use | Carbon taxes; energy transition (fossil fuels → renewables) |
Disruptive vs. Sustaining Innovation: Sustaining innovations improve existing products (e.g., cable TV improvements). Disruptive innovations create new markets with different value propositions (e.g., streaming video). Incumbents face the "innovator's dilemma" — investing in disruption speeds the decline of their existing business, but ignoring it cedes market share.
5 · Competitive Strategy & Positioning
An effective competitive strategy creates a defence against the five industry forces, aligns with external influences, and leverages the company's resources and capabilities.
Three Generic Competitive Strategies
Strategy | Means of Execution | Defends Against | Risks |
|---|---|---|---|
Cost Leadership | Economies of scale, favourable access to inputs, strict cost control, aggressive pricing | New entrants (scale), customers (price only to marginal cost), rivalry (price competition) | Cost inflation, technological change, loss of discipline, premiumization trend |
Differentiation | Brand, advertising, patents, superior quality/features, premium pricing | New entrants/substitutes (customer loyalty), customers (unwilling to switch), suppliers (pass‑through) | Imitation, buyers become sophisticated, pricing premium too high |
Focus | Proximity to customers, deep understanding of a narrow segment, may combine cost or differentiation elements | Similar to differentiation, but for a specific group; larger competitors may not serve the niche | Larger competitors outcompete on price, segment demand converges with industry, exclusivity limits market share |
Warehouse Club example: Cost leadership strategy — low prices, limited selection, high volume, efficient operations. The company's low costs and membership fee revenue enable it to operate profitably while charging lower prices than competitors. This creates a virtuous cycle: low prices → more members → more sales → more negotiating power with suppliers → even lower costs.
Evaluating a competitive strategy: 1) Does it defend against the five industry forces? 2) Does it align with expected PESTLE influences? 3) Does the company have the resources and capabilities to execute it? A poor position is to be "stuck in the middle" — neither a cost leader nor differentiated nor focused.