Introduction to Industry Research
Industry research, industry intelligence, industry information, industry analysis, market research, business intelligence … there are lots of terms that get lumped together. While they may not all mean exactly the same thing, industry research is generally a collection of information detailing economic, market and (sometimes) political factors that influence industries, which in turn affect sectors and economies.
Ok, great. But, let’s back up a second … what is an industry?
An industry is a group of enterprises primarily engaged in the same kind of economic activity regardless of their types of ownership.
So, companies and enterprises roll up into industries and industries roll up into sectors, which are larger parts of the economy.
Let’s look at an example for a breakdown in the United States Manufacturing sector.
Note: Individual companies are classified into an industry based on their largest source of revenue. For example, while a brewery might operate a small restaurant that contributes a small percentage to their overall revenues, the company would be classified in the brewery industry by most classification systems.
We’ll get into more detail about industry classification systems a little further down.
Back to industry research …
When someone is seeking industry research, they are likely looking for information about a particular industry (or set of industries) in order to:
Where can you find industry information?
A lot of information can be found online about an industry – there are industry associations and trade groups, industry consultants, lobbyists, company websites that may contain industry information, random articles, third-party companies that perform industry research and more.
However, it’s hard to know what is accurate, unbiased, and up-to-date when searching through online search results.
No matter how or where you find it, industry information should inform you about:
Industry Research vs. Market Research
While a lot of the terms mentioned at the beginning of this article could be used interchangeably, one to keep separate is market research.
For some, market research conjures up images of panels of people taste-testing the newest noodle bowl or smelling a new fragrance. And while this is one area of market research, in the context of industry research, market research is a focus on a group of potential customers, whether that is by geography, demographics, psychographics (attitudes, interests, etc.), or any combination of those.
While conducting market research analysis can go hand-in-hand with industry research, market research usually looks at:
If you’re looking for industry research, be sure that’s what you actually find, and don’t get it confused with market information.
Why is Industry Research Important?
Industry research is a topic you may not think much about, but if you’re an entrepreneur, a marketer, a sales person, a banker, or any number of professional roles, you SHOULD.
Industry intelligence will help you gain an intimate understanding of the environment in which you’re operating and provide information you need to put companies in context within their environment.
Here are 7 reasons why industry research is important:
No Industry Operates in Isolation
In addition, using industry research, you can look into the future to predict changes the industry is likely to see and how that might affect related/dependent industries. For example, consider a drop in crude oil. There are at least 28 industries directly impacted (not all pictured here) by a drop in crude oil prices!
The ability to predict and understand such changes will give you the opportunity to react strategically. Remember:
“No industry operates in isolation; it is part of a chain of suppliers and customers each with different operating conditions, threats and opportunities…” Phil Ruthven, Founder and Director of IBISWorld
Now you have an overview about industries and industry research. Let’s get into the nitty gritty about industries.
How are Industries Classified?
Industries are often classified using a Standard Industry Classification (SIC) system. SIC is a production-oriented system, where the system of production used dictates what industry an enterprise belongs to. This is opposed to a market-oriented system, which might consider the function of the end product itself and what need it satisfies.
Using the production-oriented method, instead of the market, has many benefits:
To put it simply, industry classification systems help to organize an economy and facilitate regional trade.
For example, in North America, the North American Industry Classification System (NAICS) makes US, Canadian and Mexican industries comparable based on definition and activities covered.
Understanding how industries are classified helps you better understand both the micro and macro environments of economies and businesses.
The mechanics of industry classification systems
At a high level, industry classification codes consist of number and letter combinations indicating the scale of a particular economic activity. Industry classification systems begin with economic sectors, which are clusters of similar economic activities.
Sectors are organized by goods (for example: agriculture, mining, manufacturing) then services (such as retail, professional services, technology).
One way to think about the hierarchy of classification systems is to relate them to history. Across all major systems, agriculture is the first sector in the hierarchy because it is the oldest and most necessary of industries.
Generally, industry codes and the level of granularity have an inverse relationship, where the longer the code, the more specific the economic activity and vice versa. Here are some specific examples:
North America (NAICS)
Under NAICS, two-digit codes typically refer to sector level activity such as manufacturing (which as a code of 33). A five-digit code would specify an industry (i.e. 33611 - Automobile and Light Duty Motor Vehicle Manufacturing).
Some systems get even more granular. For example, within the NAICS system, a sixth digit indicates a more specific economic activity such as 336111 - Automobile Manufacturing or 336112 - Light Truck and Utility Vehicle Manufacturing.
These additional levels of granularity help to show what activities are included in a sector and how much they contribute to sector-level output.
How industry codes are organized
Major industry classification systems are categorized in ascending order with economic activity organized from raw materials to finished goods and services.
Sectors are categorized based on the nature of their operations and designated as either primary, secondary, tertiary or quaternary.
Overall, this broad categorization of economic activity into four sector designations assists in grasping the diverse functions of a modern economy.
Now that you understand how industries and sectors are organized, let’s look at how to incorporate industry information into your strategy and decision making.
Leveraging Industry Research in Your Business Strategies
Industry research is designed to help businesses develop strategies. It’s often helpful to use a common framework (like, PESTLE, SWOT and Porter’s Five Forces) to gauge competition and highlight opportunities and threats that may influence profitability within an industry. While you may already know your company’s strengths and weaknesses, putting it all down on paper can keep you from overlooking key factors.
Here are 3 of the most common frameworks:
1. PESTLE
What does it cover?
PESTLE analysis accounts for the political, economic, social, technological, legal, and environmental factors that affect a business.
The PESTLE framework offers the most support during the idea phase. In business planning, product development, product launches and new market entry, PESTLE analysis helps businesses grasp the external environment and strengthen their strategies by finding areas of opportunity. While researching each of the six topics can seem daunting at first, industry research reports often do the legwork for you. The data and analysis laid out in these comprehensive reports often fit neatly into the PESTLE template.
2. SWOT
What does it cover?
SWOT analysis covers the strengths, weaknesses, opportunities and threats within an industry.
The SWOT framework is an integral part of business planning. This model is especially useful when planning strategies or considering investment opportunities, product development and outsourcing. SWOT helps businesses take stock of their resources and determine what can be leveraged to gain a foothold in the market. Through SWOT, businesses also grasp the underlying threats that may harm their growth potential and cut into profitability.
But where do businesses find this information? Industry research reports go hand in hand with SWOT analysis, making it easy to fill in the gaps. When done right, SWOT analysis can help a business achieve its fullest potential while enhancing its market competitiveness.
Learn more about the SWOT formula and questions you can ask to gain better insights into strengths, weaknesses, opportunities, and threats.
3. Porters Five Forces
What does it cover?
The Five Forces model includes the:
Businesses strategies are often driven by the Five Forces model. To help companies flesh out this template, good industry reports will highlight key data points that fall squarely into the five categories.
Ultimately, the framework aims to determine the competitive intensity and attractiveness of an industry in terms of its profitability.
Taking stock of the forces at play can help shape a company’s approach to serving customers and aid strategic planning. With the Five Forces model, businesses can assess various opportunities and threats to better understand their competitive advantage, mitigate risks and reduce costs.
Threat of New Entrants
Some industries are easier to enter than others. When industries are easier to break into, operators are at risk of being edged out by new competition.
Buying Power of Customers
Buying power, also called bargaining power, refers to the customer’s ability to negotiate for higher quality, better customer service or lower prices. Companies that sell to diverse downstream buying markets and have a large customer base are often less influenced by individual buyers. On the other hand, companies that operate at the mercy of buyers have little pricing power.
Supplier Power
An upstream supplier’s power is strongest when the supplier is considered a frontrunner in a highly concentrated industry. When suppliers are dominant, they give customers little choice but to accept the prices offered. This situation can complicate a company’s upstream supply chain.
Threat of Substitutes
Substitutes can act as replacements for a company’s product or services, making them a threat to revenue generation and – in extreme cases – business continuity.
When companies enter into industries with numerous substitute products or services, they run the risk of becoming obsolete. This is especially true when the substitute products present several benefits that the company’s offering lacks.
Industry Competitors
A company’s success ultimately depends on its position in the market, which largely hinges on the level of competition. Competition is driven upward when there are large, established companies dominating an industry. Before breaking into an industry, newer, less established companies should consider whether they’ll be able to steal the limelight from existing competition. If their product or service is not distinguished enough to divert business away from competitors, their chances of thriving are low.
Going hand-in-hand with PESTLE, SWOT and Porter’s Five Forces is competitive analysis. We’ll dive into that next …
How Does Industry Research Fit in with Competitive Analysis?
A competitive analysis (or competitive research or competitive intelligence) shows how companies within an industry compete. The analysis considers factors like price, quality, brand and proximity, among many others.
It is an important part of industry research because it helps you understand how some businesses use their competitive advantages to get ahead.
Competitive analysis involves much more than just checking out competitors’ websites or social media accounts. Performing in-depth competitive research will help you:
Competitive Analysis Example
Competitive Advantage
For example, within the Car & Automobile Manufacturing industry, Tesla has leveraged its competitive advantage of specializing in electric vehicles to increase its market share.
In addition to product factors like price and quality, companies must also consider shifting consumer preferences, or “the market,” for their products. Today’s consumers are more environmentally conscious, so Tesla again has an advantage as a “green” car option.
Trends
Continuing with our example of a competitive analysis within the auto manufacturing industry, companies bet on emerging trends and thus compete on the basis of market assumptions. Tesla’s early investment in electric vehicle production is a component of their competitive advantage in the industry. This is often referred to as a first-mover advantage, when a company bets on a nascent trend and emerges as a frontrunner.
Forces
Both market forces and product factors are important components of a competitive analysis. Ultimately, correctly adjusting product factors in anticipation of market forces is the business objective and one in which a competitive analysis is useful.
Industry Impacts
On a broader level, industry characteristics influence an industry’s basis of competition. Market share concentration has the biggest effect on the level of competition within an industry.
Fragmented Industries vs. Concentrated Industries
Fragmented industries are typically competitive on a localized level. For example, car dealerships often operate on a regional basis and thereby compete with other regional car dealerships.
Conversely, concentrated industries, in which a handful of companies generate more than half of an industry’s revenue, are generally more competitive. For example, the highly-concentrated Wireless Telecommunications Carriers industry is notoriously competitive because of the low differentiation of its services. In turn, companies in the industry compete on price, coverage and reliability.
Now that we understand the broad frameworks and analysis used to assess external forces and competition, it’s time to dig into the details of industry financial information.
Getting Started – The Basics of Financial Ratios
Financial statements are packed with numbers and figures that may seem confusing at first glance. That’s why you need a game plan. Using financial ratios will help you distill financial data into easy-to-use percentages that can be compared across companies or the broader industry.
Not sure which ratios to use? The 10 most common financial ratios fit into four broad categories:
Liquidity Ratios consider the value of liquid assets companies have on hand. Without quick access to cash, how will companies pay off short-term debts? This is why liquidity ratios matter.
1. Current Ratio: Current Assets / Current Liabilities
2. Quick Ratio: Liquid Current Assets / Current Liabilities
Profitability Ratios measure a company’s ability to generate profit relative to revenue. Does the company use its assets wisely to drive up profit and build value for shareholders? There are a few ways to tell.
3. Return on Equity: Net Income / Shareholder’s Equity
4. Return on Assets: Net Income / Total Assets
5. Profit Margin: Operating Profit / Net Sales
Leverage Ratios reveal how much capital comes in the form of debt or loans. Does the company rely too heavily on debt to finance their operations? Unsustainable debt levels can jeopardize financial health.
6. Debt Ratio: Total Liabilities / Total Assets
7. Debt-to-Equity Ratio: Total Liabilities / Shareholder’s Equity
8. Debt-to-Net Worth: Total Debt / (Total Assets – Total Liabilities)
Efficiency Ratios help assess how well a company uses its assets to manage its liabilities. How much time does the company need to generate cash from liquidating inventory?
9. Asset Turnover Ratio: Net Sales / Total Assets
10. Inventory Turnover: Cost of Goods Sold ÷ ((Beginning Inventory + Ending Inventory)/2)
Putting Your Findings to Use with Benchmarking
Once you’ve calculated financial ratios, you’ll need something to compare them against. That’s where benchmarking comes in. Benchmarking can be used to compare financial ratios and other performance metrics against industry-wide or competitor best practices. It allows for detailed comparisons between companies and industries to pinpoint successes, failures and areas needing improvement.
When benchmarking financial ratios, best practices may differ from industry to industry. For example, the financial sector’s debt-to-equity ratios are often higher than other service industries because they regularly borrow large sums of money for lending. Before you start benchmarking, make sure your criteria reflect industry standards.
Other common metrics to benchmark include cost allocations within an industry, overall industry performance and external variables and drivers.
When assessing competition and benchmarking, another element you need to take into account is the industry’s lifecycle.
What are Industry Lifecycles?
Industry lifecycles are the stages of growth and decline that industries exhibit over the long-term (typically decades). IBISWorld categorizes the lifecycle of an industry as growing, mature or declining. You may also see phases like development, introduction and shakeout, depending on what resource you’re using, but for now, we’ll stick with the three we use. These stages can help you understand an industry on a more granular level.
It’s interesting to note the following:
Why are Industry Lifecycles Important?
Understanding which stage an industry is in helps to explain an industry’s past, present and future performance. Industry lifecycles are a useful tool for understanding an industry from a top-down perspective. A top-down analysis generally considers the overall state of the economy and long-term industry trends to provide industry insights.
An industry’s life cycle also reveals important information about the industry’s product strategy, growth prospects, opportunities and challenges, and its supply chain. It is also a very important indicator of individual company performance.
How to Determine Industry Lifecycles
At least ten years of industry data is required to accurately determine an industry’s lifecycle.
Industry Lifecyle Determinations:
Other key statistics and industry characteristics are also considered when determining a lifecycle including the number of companies within an industry and the number of new products introduced.
Similarly, certain qualitative characteristics are taken into consideration including the degree of technological change, consumer preferences and geographic expansion.
Examples of Industry Lifecycles
Growing
An industry in the growing stage of its lifecycle is characterized by rising product innovation and expanding markets.
A growing industry expands faster than GDP, exhibits a growing number of firms and products, and speedily develops new supply-chain technology. Consumers increasingly accept the product or service as it becomes integrated into their lifestyle.
Most growth industries are in the new economy sectors, such as professional services (finance, insurance and property) and personal services (recreation and household outsourcing). Growth industries generally have lower risks, but risks can change more frequently as products, markets and technology consolidate.
Growth industries need resources, which usually come as capital and will be used to fund wages, capital goods (buildings or machines) or services (marketing, IT, accounting).
Mature
Mature industries are typically older and more established than growing industries.
At maturity, firms begin to consolidate, meaning weaker companies go out of business or owners may make strategic sales or purchases.
Mature firms begin to seek to innovate with new products, repositioning a current product or moving into foreign markets.
Declining
Declining industries are those that are consistently underperforming the overall economy. This occurs through product and service obsolescence and/or changes in consumer preferences.
However, the decline stage is often accompanied by relatively healthy profit margins for surviving operators because companies tend to leave the industry at a faster rate than the market declines.
Because a declining industry is characterized by falling per capita consumption of the good or service produced, along with mostly cosmetic product development, even surviving enterprises must adapt or die.
Companies in declining industries must invest in product and process development to prolong or re-energize the industry life cycle.
What Do We Mean by Market Share?
Market share represents the percentage of revenue a company captures within a specific industry.
A company’s market share can be evaluated globally, nationally, regionally or locally and may differ significantly across these different markets. For example, a hair salon with a strong presence in its community may capture a significant portion of revenue within the local market. However, that same hair salon does not stand out in the billion-dollar global market because it captures only a tiny fraction of the revenue generated across the world.
When calculating market share, it’s important to remember that some companies operate across several industries and serve numerous geographies. In such cases, you’ll have to segment out the industry-specific revenue for the correct geography rather than inserting the company’s total revenue into the equation:
(Industry-specific Company Revenue ÷ Total Industry Revenue) * 100 = Company’s Industry Market Share
Example: The Movie Theaters industry has a medium level of market share concentration, with the three largest companies accounting for an estimated 51.6% of industry revenue in 2019
Taking a company’s total consolidated revenue figure for only one of the many industries they operate in would yield an inaccurate, overblown market share. While segmenting out a company’s industry-specific revenue can be time-consuming, industry research reports often do this work for you—at least for the largest companies in the industry.
The market share of major players in the US Movie Theater industry
Why is market share important?
A company’s market share ultimately determines its position in the industry. Within an industry, the company with the most market share is considered the market leader. Some industries have clear market leaders, while others are fragmented across a wide range of companies that capture small portions of industry revenue.
In fragmented markets, individual companies have less influence on the competitive landscape. Conversely, some industries have powerful market leaders that are able to use their dominance to affect the competitive landscape and steer the market in one direction or another. Industries with influential market leaders are considered concentrated, rather than fragmented.
More on market share concentration
A company’s individual market share provides insight into the overall concentration level of an industry, making it an important part of the larger picture. The market share concentration level is a measure of the percentage of industry revenue top players within that industry hold. The top players are—you guessed it—the market leaders. By summing the market share figures of market leaders, you can see whether an industry is fragmented, concentrated or somewhere in between.
To ensure you come up with an actionable market share concentration figure, you’ll have to lay down some ground rules:
Zero in on a small group of firms
Common market share concentration ratios consider the top three, four, five or eight players in the industry.
Develop a hierarchy (low, medium, high)
When it comes to the level of market share concentration, different parameters may be used, but your system should be standardized. In general, industries where top players hold more than 50% of the revenue are considered moderately or highly concentrated.
Why does market share concentration matter?
From accountants to consultants (and professions between), market share figures play an important role in understanding the competitive environment in which a company operates.
Knowing a client’s market share is essential to understanding the risks and opportunities their company faces in regard to their position in the industry.
This ties back to our earlier discussion of competitive analysis and the frameworks, such as Porter’s Five Forces. In general, new operators within a highly concentrated industry will face higher barriers to entry since the market leaders are well-established.
Consider the wireless telecommunications industry, which is notorious for its high concentration in various global markets. For example, the wireless telecom industries in the United States, China and Australia all operate as oligopolies. With big names capturing significant portions of industry revenue and scooping up smaller competitors to maintain their high market share, new operators would have a difficult time competing.
Understanding Market Sizing
Market sizing can be broken down into two questions:
The product of those two answers will give you a basic market size for a product or service.
Another way of thinking about market sizing is that it’s essentially a measure of business potential. Specifically, a market’s size represents the value of all customers interested in purchasing a product or service at any given time, typically a year.
So, for example, the value of running shoes sold in 2019 is an example of the market for running shoes in 2019. Markets can further be specified by:
Yet, the more granular a market becomes, the harder it is to find data to size that market. Typically, markets are defined by product and geography such as total US sales of running shoes in 2019. Understanding this total is the first step in determining the potential to capture a part of that market.
Why market sizing is important
Market sizing is important because it gives a business an idea of the potential opportunities for new products or services. It is often a critical step in developing a sound business case. A clearer view of a market’s potential allows you to better weigh the risk and rewards of a new venture or product launch.
From a broader perspective, looking into the components that make up a market can provide insights into the industries involved and the overall competitive landscape of that market.
Market for running shoes in the US = [retails sales (x industry) + e-commerce sales (y industry) + direct-to-consumer sales (y industry)]
Approaches to market sizing
Market sizing involves piecing together components of the market (bottom-up) or deducing its size from larger data sources (top-down).
In a bottom-up analysis, you can consider the sales of large companies participating in the market to come to an initial estimate.
From a top-down approach, broader markets are broken down into more specific markets using other data sources like surveys and sales data.
Industry Risk
We all know what risk is, but what does it mean in a business sense? Industry risk is made up of several parts but really can be summed up as measuring all the possible threats to a business.
IBISWorld rolls up these threats into one risk score to make it easier to understand what challenges an industry faces. Measuring risk in this way is important because it helps you anticipate negative impacts before they happen. So, how are these risk scores determined?
How risk scores are calculated
A risk score is the combination of three key risk areas:
Weights and scoring
Weights are applied to these risk areas to consider how impactful changes in each respective risk area affect an industry.
Structural and Growth Risk both are considered internal factors since they are measuring the industry itself. Sensitivity risk is an external factor since it looks at the big picture of the economy the industry operates in.
IBISWorld assigns a greater weight to external factors (50%) since the changes in external factors have a more severe impact on an industry than internal factors.
The combination of these risk areas results in a score from 1 to 9, with 1 being low risk and 9 being high risk.
Why risk scores are important: narrative and data
Now that you know how risk scores are calculated, it’s easy to understand how these scores can be useful to you and your organization. The most common use for risk scores is when a bank is determining who to lend to. However, IBISWorld’s risk rating reports provide for greater application because they contextualize the data that the score is based on. This context attaches a narrative to the data and makes it useful beyond banking and into management decisions and supply chain diversification, to name a few. Learn more about how to measure industry risk with industry research.