Analyzing an industry is a crucial skill for any economist, business owner, or investor. It helps you understand the competitive forces, trends, opportunities, and threats that shape the performance and potential of a sector. But how can you analyze an industry like a pro? Here are some steps and tools that can help you.
The first step is to define the scope and boundaries of the industry you want to analyze. You can use various classifications, such as the North American Industry Classification System (NAICS) or the Standard Industrial Classification (SIC) codes, to identify the industry and its subsectors. Alternatively, you can use your own criteria, such as product, market, customer, or technology, to narrow down the industry.
Learning a new industry can be daunting until you internalize that all businesses in all industries can be simplified to the basic economics of a lemonade stand: all businesses, whether telecom, real estate, oil drilling, or daycare, earn revenues in, pay operating costs out, reinvest or distribute proceeds, and finance their capital stack through some combination of debt and or equity. My father once told me: “you know, vanilla is still the most popular flavor” - to inculcate the idea that we do not need to invent complicated ideas and use financial engineering - it’s often the simplest concepts that solve for basic supply demand imbalances/inefficiencies that end up the most disruptive. The rest is noise!
The next step is to evaluate the industry structure, which refers to the number and size of competitors, the degree of differentiation, the barriers to entry and exit, and the bargaining power of suppliers and buyers. You can use frameworks, such as Porter's Five Forces or PESTEL analysis, to examine how these factors affect the industry profitability and attractiveness.
Real Options Analysis (ROA) provides a framework to assess and value the strategic decisions companies can make in response to uncertainties in the industry. When combined with traditional industry analysis tools, it offers a more nuanced and dynamic view of the industry's potential risks and rewards. It borrows principles from financial options theory but applies them to real-world, non-financial assets and decisions. When analyzing an industry, real options can help in understanding, valuing, and managing the uncertainties and potential opportunities inherent in strategic investments. Can be applied to entry and exit decisions, growth, deferral, flexibility, staging, switching and abandonment options. ROA can help to quantify flexibility.
The third step is to analyze the industry dynamics, which refers to the changes and trends that affect the industry over time. You can use tools, such as SWOT analysis, industry life cycle, or scenario planning, to identify the strengths, weaknesses, opportunities, and threats of the industry, as well as the stages of growth, decline, or maturity, and the possible future scenarios.
The fourth step is to compare the industry performance, which refers to the financial and operational results of the industry and its competitors. You can use metrics, such as revenue, profit, market share, growth rate, or return on investment, to measure and benchmark the industry performance. You can also use ratios, such as profit margin, asset turnover, or debt-to-equity, to evaluate the industry efficiency, productivity, or leverage.
The fifth step is to identify the industry drivers, which refers to the key factors that influence the industry performance and potential. You can use models, such as value chain analysis, resource-based view, or core competencies, to determine the sources of value creation, competitive advantage, or differentiation in the industry. You can also use concepts, such as innovation, disruption, or sustainability, to explore the potential for change or improvement in the industry.
The final step is to synthesize the industry analysis, which refers to the integration and interpretation of the findings from the previous steps. You can use techniques, such as SWOT matrix, Porter's generic strategies, or Ansoff matrix, to formulate strategic recommendations, actions, or goals for the industry or your business. You can also use tools, such as charts, graphs, or dashboards, to visualize and communicate your industry analysis.
Whenever possible, talk to your key consumer, or target to understand what are their main decision making driving points. Sometimes offerinc a tailored experience to minimize the "pains" will provide more results than simply lower prices