The information developed from economic analysis ad forecasts will help the analyst to visualize in specific the growth patterns and opportunities of various industry.
It’s the relative strength and weakness of a particular industry.
Important Factors in Industry Analysis
The most important of the characteristics that are to be evaluated in industry analysis can be enumerated as given below:
1. Past Sales and Earnings Performance
For an analyst, the past sales and earnings performance of the firm form crucial input in forecasting future trends.
This is not to say that the firm is going to repeat the same performance again.
Rather, the analyst is more interested in examining the contribution of the various factors in the past so that the relevance of these factors individually and relatively can be properly evaluated under present conditions.
In any firm, sales and earnings play an important role. These variables will exhibit a degree of consistency only when the firm has weathered a variety of economic conditions.
The analyst from the observation of these variables will be able to judge the stability of the performance in terms of sales and earnings as well as the growth rates.
Another crucial factor is that of the relationship between sales and fixed costs.
The more the fixed costs, the higher will be the break event point and higher will; be the sales volume to be achieved.
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2. Performance
By permanence, we understand the products and the technology of a particular industry not becoming obsolete in a short span of time.
If the industry is not permanent, then investing in that industry altogether becomes a losing proportion.
In some of the cases, a product with additional features manufactured by employing superior technology makes the existing product totally irrelevant or at least results in the manufacturing process becoming a commercially enviable proposition.
In this age of rapid technological developments, this factor plays a crucial role in industry analysis. The government’s role is also an important factor affecting the permanence of the industry.
3. The Attitude of Government towards Industry
It is imperative for an analyst that he should be well aware of the various government policies and regulations with reference to an industry in which he is going to invest.
Government policies like deregulating an industry by allowing foreign investment, imposing high tariffs on imports, and restrictive legislation have a bearing on their performance.
Some of the legal restrictions result in the profits being very low for a particular industry.
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Thus, an analyst, for that matter, an investor should be thorough with various government regulations and their implications and should be able to predict, at least broadly, the changes likely to take place in the regulations in the near future.
4. Labour Conditions
This is an important factor to be considered in industry analysts which are labor-intensive.
An analyst should examine the various provisions of the labor laws and also go into the possible reasons that may halt the production process and its fall out on the profits of the industry.
In case of a prolonged strike, a labor-intensive firm will not only lose its customers and goodwill but also may not be able to cover its fixed costs in certain cases.
While analyzing this situation, the three general types of barriers that an analyst should concentrate on are:
5. Existence of Product Differentiations
This existence of the first barrier assures that a new entrant will not be able to charge as much as the existing firms.
Also, he has to spend large amounts of money on advertising to capture an acceptable share of the market as this situation is usually found in cases where the customers exhibit a high degree of brand loyalty.
6. Absolute Cost Advantages
Absolute cost advantages mean that the existing firms are capable of producing and distributing the products at lower costs than the new entrants irrespective of the volume produced.
As a result, they enjoy wider profit margins. this may be due to the fact that the existing firs may have exclusive patents, own the resources or superior management skills that are less available to the new entrants.
7. Advantages Rising from Economies of Scale
Economies of scale are usually realized when the production levels are quite high.
A new entrant in this case also has to garner a significant market share so that he can avail of the benefits from economies of scale.
If he fails to do so, he will be able to compete with the prices offered by the existing players.
8. Industry Share Prices Relative to Its Earnings
In addition to the various factors, the analyst also has to look at the present share prices.
In this case, an under prices share would be the best bet.
Also, he should examine the fact that the share prices are not high due to the overzealous nature of the investors to acquire the shares of the firms in a new industry.
Usually the shares of these companies high fluctuations depending on the crowd’s behavior.
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9. Demographics
The study of demographics includes much more than population growth and age distribution.
Demographics also include the geographical distribution of people, the changing ethnic mix in society, and changes in income distribution.
10. LifeStyles
Lifestyles deal with how people live, work, form households, consume, enjoy leisure, and educate themselves.
Consumer behavior is affected by trends and fads.
The rise and fall of designer jeans, chinos, and other styles in cloths illustrate the sensitivity of some markets to changes in consumer testes.
11. Technology
Trends in technology can affect numerous industry factors including the product or services and how it is produced and delivered.
There are literally dozens of examples of changes that have taken or are taking place due to technological innovations.
For example, innovations in process technology allowed steel mini-mills to grow at the expense of large steel producers.
12. Polities and Regulations
Because political change reflects social values, today’s trend maybe tomorrow’s law, regulations, or tax.
The industry analyst needs to project and assess political changes relevant to the industry under study.
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