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CFA® Level I · Equities · free lesson
Industry and Competitive Analysis
A company's results are shaped as much by its industry as by its management: industry growth sets the tide, and industry structure decides how much of the value created stays with producers. This module sets out a process for analyzing an industry, explains how companies are classified and grouped, shows how to measure an industry's size, growth, profitability and concentration, and applies Porter's five forces and the PESTLE framework.
What you will learn
1. Describe the steps in an industry and competitive analysis and explain how its conclusions feed into company forecasts and valuation.
- Steps: define the industry, measure size and growth, assess profitability, analyze structure, scan external influences, position the company.
- Life cycle stages: embryonic, growth, shakeout, mature, decline.
- Industries earning returns above their cost of capital usually have structural advantages.
- Conclusions become forecast assumptions for growth, margins, investment and risk.
- A good industry definition captures the real competitors and substitutes.
2. Describe industry classification systems and compare the ways companies can be grouped for analysis.
- Commercial systems (GICS, ICB) classify companies by principal business activity, usually revenue.
- GICS has four levels starting from 11 sectors; ICB uses a similar hierarchy.
- Government systems (ISIC, NACE, NAICS) classify establishments for economic statistics.
- Cyclical industries move with the economy; defensive industries sell necessities with stable demand.
- Statistical clustering groups by return co-movement but may lack an economic rationale.
3. Calculate and interpret measures of an industry's size, growth, profitability, concentration and market share trends.
- Industry CAGR = (ending size / beginning size)^(1/years) - 1.
- Measure industry margins on an aggregate basis, not as a simple average of company margins.
- Market share = company revenue / industry revenue; trends signal competitive strength.
- CR_N sums the top N shares; HHI sums all squared shares and weights large firms more.
- Concentration supports, but does not guarantee, pricing power and high margins.
4. Analyze an industry's structure and external influences using Porter's five forces and the PESTLE framework.
- Five forces: new entrants, supplier power, buyer power, substitutes, rivalry.
- Weak forces (high barriers, fragmented buyers and suppliers, few substitutes, calm rivalry) support high returns.
- Rivalry is fiercest with slow growth, high fixed costs, undifferentiated products and high exit barriers.
- PESTLE scans political, economic, social, technological, legal and environmental influences.
- External changes can reshape the forces and shift profits within the value chain.
Module at a glance
- Industry analysis: define, size and grow, assess profitability, analyze structure, scan the environment, position the company.
- Life cycle: embryonic, growth, shakeout, mature, decline; each stage implies different growth and margin assumptions.
- GICS and ICB classify by principal business activity; government systems classify establishments.
- Cyclical industries swing with the economy; defensive industries sell necessities.
- CAGR = (ST / S0)^(1/T) - 1; measure margins on an aggregate basis.
- CR_N sums top shares; HHI sums squared shares and captures dominance by one firm.
- Five forces explain profitability; PESTLE identifies external changes that can reshape it.
This free module has 4 lessons, 12 practice questions with full explanations.