© 2000 John Petroff
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© 2000 John Petroff |
The approach to industry analysis differs considerably depending on whether the approach is top-down or bottom-up, as already introduced in Chapter 9 Section G. In a top-down sequence, industries are compared on the basis of a chosen criterion (for instance, expected rate of growth, expected rate of return, volatility, i.e. BETA, or a combination of these), in order to select the industries that outperform others. After an industry is chosen, companies within the industry are compared on the basis of a second set of criteria (such as rate of return, market share, technological leadership, stability). In a bottom-up sequence, the industry is already known, it is the industry in which the company has the bulk of its sales, which was naturally the case in Chapter 9 Section G. The inquiry focuses then on composition, competition, impact of business cycle, sensitivity to income and other factors, that characterize this particular industry. The analytical approach also depends on the decision at hand and the strategy of the decision maker, which were extensively covered throughout Chapter 4.
An industry is defined as a group of companies offering identical or very similar products. It was already pointed out repeatedly that companies in the same industry are quite similar in terms of strategy, resources and operations, as well as risk and profitability. Since companies in the same industry compete with each other, and they constitute major threats to each other. This is one of the themes to which this chapter is devoted. Industries compete with each other as well. No industry outperforms all others all the time: not in the long run, not over the business cycle. Thus, this chapter must also pay attention how industries affect and compete with other industries. Finally, performance of companies within an industry also vary. Market forces, as well as strategies of competitors, make company fail. Understanding and foreseeing these forces and strategies is therefore essential. An analysis of internal aspects of a company would be grossly incomplete without confronting management strategies with competitive opportunities and threats of its industry. The following topics will be covered.
A- Classification of industries
B- Industry composition
C- Growth rate trend in sales and earnings
D- Performance over business cycle
E- Sensitivity analysis
F- Industry technological forecast
See research assignment R-14B.1 and R-14B.2.
See research assignments R-14.1
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