A great captain cannot save a leaking boat. Study the industry before the company: its cycles, its competition and its rules.
Economic analysis (Chapter 5) asks whether the economy will grow. Industry analysis asks how each industry will be affected by that economy, and how the players in it will react.
Seven questions every industry analysis must answer:
This is the first step, and it is not always easy. Standard systems exist: NIC (National Industry Classification) in India, GICS (Global Industry Classification Standard), and NAICS (North American Industry Classification System) in the US. But they may miss the real substance.
NIC puts every passenger car maker in one class. But entry-level cars and luxury cars behave very differently. Analysts may treat them as separate industries.
Competes with OTT platforms and TV, and also with live theatre and sport. Call it only a "cinema exhibitor" and you miss rivals. Call it "media and entertainment" and the peers are not comparable.
Phone cameras took sales from entry-level, then mid-tier cameras. Treat cameras as a standalone industry and you ignore the biggest competitor.
GICS is widely used by global investors. It has four tiers: sectors, industry groups, industries and sub-industries. As of March 2023 (source MSCI): 11 sectors, 25 industry groups, 74 industries, 163 sub-industries.
Economic cycles affect every business, but some far more than others.
Low income elasticity: demand hardly changes when income rises or falls. Affected mainly by secular trends.
Examples: food, agricultural inputs, healthcare.
Grows in expansion, falls in recession, but keeps a base level of demand.
Example: consumer durables.
Driven by economic and commodity cycles. Sales collapse in recession as firms freeze expansion, then surge at the first sign of recovery from pent-up orders.
Examples: capital goods, steel.
An under-penetrated industry has room to grow. As it matures, growth slows. So analysts estimate both the current and the potential market size. Both are hard: unorganised and private players do not publish data, and potential size rests on assumptions that may be wrong. Past trends help fill the gaps and reveal secular trends.
Start from macro factors and work down to the industry.
Number of patients who had the therapy × average spend per patient = industry revenue.
Add up data from individual companies.
For each hospital offering the therapy, take the revenue from it. Add them all.
Secular trends are long-term changes in what is made or consumed (Chapter 5). The book names five drivers:
As incomes rise, people shift to premium products.
Japan's ageing population cut per capita beer consumption.
Western influence raised demand for western clothing in Asia. Change can be sudden, as after a pandemic.
GST made logistics more efficient, which reduced demand for new commercial vehicles.
When a secular trend gives one party a lasting advantage at another's cost, shareholder value migrates from loser to winner. Spotting it early helps analysts get in ahead of time and get out of losing businesses.
Shale gas moved value to US oil exploration. Globalisation helped low-cost China grow.
Digital cameras crushed the film roll industry; Kodak had to shut down.
Fierce competition cut Indian telecom prices and telecom shareholder value, but cheap data boosted digital content providers.
Blackberry led corporate mobile email. With 2G, rivals like Apple offered the same and took the value. (The least common of the four.)
Just taking shape. Concept being proven.
Concept works. Customers adopt. Steep growth.
Most possible users already use it. Few new customers.
New technology or tastes replace it.
Rare: finds a new use and starts again.
The book's Indian example: call taxis. They took shape around the turn of the century, grew fast for a decade on the back of more phones and rising income, then shrank sharply when app-based aggregators arrived.
Each shift displaces workers, who must reskill, and capacity, which must find a new use. Not every disruptor causes displacement, though: shale gas lowered crude prices for the long term without changing what people consumed.
Industry landscaping means studying all the players and how they interact: competitors, customers, suppliers, regulators and new technology. Low competition lets firms pass cost increases to customers and keep margins. High competition squeezes prices and profits. Four established frameworks help:
Threat of established rivals (horizontal)
The book: 3 horizontal forces (substitutes, new entrants, established rivals) and 2 vertical forces (suppliers, customers).
Aviation, telecom, retail, textile, sugar, power. The forces keep profits low.
Education, FMCG, healthcare, IT. Weak forces, high margins for long periods.
| Force | High when... | Book examples |
|---|---|---|
| Industry rivalry | Many companies; little differentiation; everyone competes on price or credit; low switching cost | Aviation, Indian telecom. Munger: "If only basis of competition in an industry is pricing, it is a self-defeating business." Micromax won 10% share in 3 years with special features at low prices. |
| Threat of substitutes | Substitute is as good or better (quality, price, ease); low switching cost | Telegram to SMS; cement pipes to steel and plastic; typewriters to computers; Kodak. No substitute threat: power, healthcare, education. Solar and LED are slow because of upfront cost. |
| Buyer power | Strong competition among sellers; standard products; close substitutes with low switching cost | Large buyers such as the government have more power |
| Supplier power | Few suppliers, many buyers; critical inputs; low competition with differentiation; no substitutes; high switching cost | Sugarcane price set by government with farmers; OPEC and crude oil; hospitals and schools (you rarely bargain) versus the vegetable seller (you always do) |
| Threat of new entrants | Low barriers. Barriers are high with licensing, patents, huge specialised investment, strong brands, distribution and loyalty | Skills (IT), capital (oil and gas), distribution (banking), brand loyalty (toothpaste, coffee). Buffett: "economic castles protected by unbreachable moats" |
Low competition, high barriers to entry, weak supplier power, weak buyer power, few substitutes. Such an industry has strong pricing power and high margins.
The book's example: education in India. Demand is large and growing; students have little bargaining power; it is largely recession-proof; opening an institute needs many permissions (high barriers); quality institutes are few (low competition); teachers' salaries are set by management (weak suppliers); alternative courses lack credibility (few substitutes).
Political, Economic, Socio-cultural, Technological, Legal and Environmental. Adding Ethics and Demographics gives STEEPLED. It looks at the external environment, mostly from the view of a business choosing which country to set up a unit in.
Stable laws and policy, little corruption and red tape, press freedom, ease of doing business, healthy public finances.
GDP growth, inflation, rates, trade mix, BoP, currency stability, forex reserves, monetary policy, dependence on imported resources like oil.
Age, education, health, values, lifestyle. Young India versus ageing Japan. Nuclear families raise demand for day care and packaged food.
R&D push, tech-savvy people and institutions, scientific temper.
Consistent, transparent, enforced laws. Book examples of discomfort: Vodafone retrospective tax, cancelled telecom and mining licences.
Clear policy on pollution, waste, mining, forests, rehabilitation. Unclear rules deter manufacturers.
Not every factor matters equally to every company. Judge each factor's weight for the business.
Developed by the Boston Consulting Group. Unlike Porter and PESTLE, which look at industries and countries, BCG looks at the segments within one business, as a portfolio, through market growth and cash generation.
Rising cash generation over time.
Cera Sanitaryware
Could grow with the right strategy, but may eat cash and fail.
Tata Nano (failed), Bajaj Pulsar (succeeded)
Little investment needed, steady cash.
Navneet Publications, Colgate
Slow growth, tough competition, little cash.
Can be seen as an extension of Porter's model that also looks at the financial results.
Number of players (monopoly, oligopoly), concentration, organised versus unorganised, substitutes, supplier and buyer equations, market size, growth, integration. Overlaps Porter and SWOT.
Behaviour that follows: commoditised or branded, seasonal (umbrellas) or year-round (FMCG, pharma), cyclical, skill needs, dependence on policy.
Financial result: RoE, RoIC, WACC. High return on capital creates wealth.
Conduct example from the book: high interest rates may deter buyers of real estate and four-wheelers, but hit two-wheelers less.
Key performance indicators (KPIs) differ by industry. Revenue per employee suits a BPO, which bills by headcount, but tells little about a capital-heavy manufacturer. Company annual reports and management discussion show which KPIs an industry uses. Two more guides:
What the company treats as one unit when it sets a price. Easy for manufacturers (goods sold). Hard for services: a cafe like Starbucks prices on what it expects to earn per patron, not per cup.
Demand, supply or regulatory. Limited market: track penetration rate. Limited capacity: track capacity utilisation. Regulated: track what the regulator tracks.
| Industry | Unit of pricing and constraint | Key metrics |
|---|---|---|
| Airlines, transport, logistics | Passengers or cargo × distance. Constraint: capacity | Passenger or cargo km; price per passenger or cargo km; capacity and occupancy rate |
| Autos, capital goods | Goods sold. Constraint: capacity | Volume and growth; average realisation and growth; capacity utilisation |
| Banks, NBFCs | Loan value, priced as interest. Constraints: deposits, regulatory capital, liquid assets, market liquidity | Net interest margin; capital adequacy; NPA ratio; deposit and loan growth; CRR and SLR; CASA ratio; central bank policy rates |
| Consumer goods | Goods sold. Durables: capacity in high growth | Volume and growth; average price and growth; capacity utilisation (durables) |
| IT services, BPO, KPO | Full-time equivalent (FTE) per month. Constraints: workforce, currency, few big clients | FTEs billed; revenue per FTE; bench strength and attrition; constant currency growth; customer concentration and "million dollar" clients |
| Media | Print: ad space. TV and radio: airtime. Online: views or clicks. Mostly ad revenue | Readership, viewership, TRPs, site visitors; ad realisation per unit; content acquisition cost |
| Retail | Unit of pricing less relevant (trading business). Constraint: store network | Number of stores; same-store sales growth |
| Telecom, internet | A subscriber. Constraint: market size limited by population | ARPU (average revenue per user); churn; subscriber acquisition cost; market share |
Small changes in regulation can have big effects. The book's examples: the long debate on FDI in multi-brand retail (back-end investment, local sourcing), mine closures after environmental policy changes, cancelled telecom licences, and amendments to the Companies Act. Analysts must pay close attention to regulation.
Taxes raise money for the government, and also encourage or discourage businesses. Kerala's fat tax (2017) added 14.5% tax on junk food. GST charges essentials little or nothing and luxuries more.
The person who bears the tax also pays it to the government. Main example: income tax.
The seller collects it and pays the government; the end consumer bears it. Main example: GST.
30% of taxable profit; 25% if turnover was below Rs 400 crore. Optional schemes: 15% to 25% if the company gives up certain deductions.
Minimum Alternate Tax. If normal tax is below 15% of book profits, pay 15% of book profits + 4% cess + surcharge. The excess becomes MAT credit for future years.
A tax on tax. All goes to the central government, not shared with states. 12% if income is above Rs 10 crore; 7% from Rs 1 to 10 crore; nil below Rs 1 crore.
Levied on tax plus surcharge, and used only for its stated purpose. 4% for health and education.
Worked example: taxable profit Rs 100 crore at 30% = 30. Surcharge 12% of 30 = 3.6. Cess 4% of 33.6 = 1.344. Total about Rs 34.94 crore.
Lifetime tax paid upfront on new vehicles. Hits auto sales, auto ancillaries, motor insurers.
Paid when documents are registered, mostly on buying or selling assets. Hits real estate, brokers and AMCs.
Securities Transaction Tax, paid on sale of securities. Discourages short-term trading. Hits traders and brokers.
Industry journals and media reports
The Management Discussion and Analysis section
Their publications
Websites and publications
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