Steps to A Basic Industry Analysis

Steps to a Basic Industry Analysis

By Professor Harvey B. Lermack

Philadelphia University

Philadelphia, PA

Revised August 29, 2004

© 2004Harvey B. Lermack

Note: These are basic steps you should follow when evaluating a case study in my graduate and undergraduate business strategy and business policy courses.

In order to assess the current strategy of a company, and its appropriateness and potential for success, you must understand the dynamics of the industry in which the company competes. While we often take for granted that this is easy to do, it takes a great deal of thought and analysis.

In Michael Porter’s words, “the essence of formulating competitive strategy is relating a company to its environment.” (Porter 3) Obviously, this means that you must thoroughly understand the company and its industry, as well as the outside environmental forces that affect the industry, in order to be successful in this pursuit.

Step 1 - Identify the Industry. Before you can analyze a company and industry, you must determine in what industry the company competes. Michael Porter defines an industry as “the group of firms producing products that are close substitutes for each other”. (Porter 5). Many companies produce more than one product or service; therefore, it is often difficult to clearly define the appropriate industry.

Look for clues in the case study. Also, when doing financial research for your company, you may find an industry grouping identified on the overview page. Often, two or more of those sites may cite a different industry; use your judgment to make your final determination.

Sometimes, a research source will identify a SIC (Standard Industrial Classification) code or NAICS (North American Industry Classification System) Code. These are two standardized industry classifications that may be used to focus on the appropriate industry classification. (Note: the NAICS is gradually replacing the older SIC system.)

You can also use Gutman Library’s Hoover’s Online, ValueLine Research Center, or Business & Company Resource Center. All of these allow you to look up a company and identify its SIC and/or NAICS code. In Business & Company Resource Center you can also read a description of the industry from the Encyclopedia of American Industry which is available full-text online.

Step 2 - Identify Research Resources. Research information about industries is available in several places. To do a thorough industry analysis, you will need to locate:

- Statistical data about the industry as a whole, such as its size, revenues, and market capitalization – these may be found in governmental and private databases

- Data about the company you are studying, and a few of its key competitors, including both strategic information and financial performance data – these may be acquired from annual reports, 10-k reports, and articles about the companies in business periodicals and Internet sources

- Overall information about the industry and the environment in which it competes, including competitive dynamics of the industry, outside forces that are impacting competition in the industry, and key success factors – this may be obtained only by reading articles and analyst reports about the industry, and will require a broad range of resources

The online resources of the Gutman Library provide an enormous amount of information. Log onto http://www.philau.edu/library and access Electronic Resources / Databases / Business. For help on using this resource, contact the Gutman Library staff.

You can also find a specific guide for doing company and industry research that identifies the most appropriate Gutman Library business research resources. It is found at http://www.philau.edu/infolit/sba/candiresearch.htm.

Other Internet sites provide rich research sources. A good starting point is my web links page. Go to http://faculty.philau.edu/lermackh/ and select Web Links.

One of my favorite web sites is Poisson Enterprises’ “How to Learn About an Industry or a Specific Company” at:

http://www.virtualpet.com/industry/howto/search.htm#identify. This site provides a step-by-step approach similar to the one outlined in this document, as well as specific research links for each step.

For industries that compete in the global marketplace – most of the ones we will study – you will also need to understand the cultural and social, commercial, regulatory and political, and other aspects of the countries and regions within which the company must compete.

Step 3 – Answer the Textbook Questions. You must use all the available information in the case study and from your research sources to thoroughly analyze the issues in the textbook chapter about analyzing industries.

For my graduate course MB42 Strategic Planning in the Global Environment, Chapter 3 of “Crafting and Executing Strategy,” titled “Analyzing a Company’s External Environment,” poses key 7 questions that you must analyze (Thompson 44).

1. What are the industry’s dominant economic characteristics? In order to answer this question, you must acquire data about the industry from governmental census data, private sites such as Yahoo.com, or other data-intensive web locations.

2. .What kinds of competitive forces are industry members facing? To identify the competitive dynamics of the industry, you will need to have a thorough understanding of the interrelationships among companies in the industry and their suppliers and buyers, as well as the ease of entry and exit from the industry. Periodical articles will supply much of this information.

3. What factors are driving industry change and what impacts will they have? Most significant driving forces for change originate from outside the industry – such characteristics as changing social trends, demographics, regulatory issues, etc. You will need to draw on all of your experience and information available to you to answer this question.

4. What market positions do rivals occupy – who is strongly positioned and who is not? Industry oriented financial web locations usually list a company’s key competitors, and information about each, that can serve as a starting point for this question.

5. What strategic moves are rivals likely to make next? Again, you will need a broad understanding of the competitive dynamics of the industry in order to answer this question.

6. What are the key factors for future competitive success? This question generally causes more confusion than any other. Here, I am looking for answers to the following question – “What must ANY COMPETITOR (not only the company you are studying) do well in order to successfully compete in this industry in the future?” Often, students answer with the things they think the company they are studying are doing well or can do well. That is not responsive to the question.

7. Does the outlook for the industry present an attractive opportunity? You should actually answer two interrelated questions here.

Will competitive dynamics of the industry, and likely future changes outside of the industry, make it likely that any company can be successful?

What is the likelihood that a company that successfully competes in this industry in the future will earn better than its cost of capital, i.e. that it will be financially successful?

Works Cited

Porter, Michael E. “Competitive Strategy.” New York: The Free Press, 1980.

Thompson, Arthur A., A. J. Strickland III and John E. Gamble. “Crafting and Executing Strategy,” 14th edition. New York: McGraw-Hill/Irwin, 2005.

© 2004 Harvey B. Lermack