Introduction to Industry Analysis and Competitive Analysis

__Industry analysis__ centers around analyzing a particular area of manufacturing, service, or trade, and provides an important foundation for the analysis of individual companies.

Incorrect.

Exactly!

Michael Porter's description of the two main competitive strategies that companies can pursue is helpful in company analyses. Companies focused on a _low-cost strategy_ are determined to offer their products or services at costs below those of their competitors and earn attractive returns. To do so, they must be disciplined with a keen eye on cost controls, and they need to focus on maximizing efficiency in their operations. They also need to raise capital at the lowest cost possible. Alternatively, _differentiation strategies_ involve companies seeking to sell products or services that are distinctly unique in terms of quality or design, or that have some other special attribute. Companies that pursue differentiation strategies can often command higher prices for their products or services.

Suppose the fast-food company you are evaluating recently introduced a seafood patty sandwich, a menu item that is without precedent in an industry that typically sells greasy beef burgers. If the company thinks the sandwich is worthy of a premium price on its menu, which of Porter's competitive strategies do you think the company would be pursuing?

Correct.

Incorrect.

What might be an example of an external force which would alter a fast-food company's competitive strategy?

A company that is embroiled in an accounting scandal may find it challenging to attract high-quality job applicants for managerial positions. The company's reputation could be badly damaged, and personnel issues may be only one concern for the company. But that is not an example of an external force impacting the company's business. However, a fast-food company can be subject to changing social conditions, like when an increasingly health-conscious society begins to shun fast-food options, in which case the company would be subject to the forces of its external environment. It is unlikely that a fast-food company would have much sway over a society's food consumption preferences, so this is indeed an example of an external factor influencing the industry's, and the company's, competitive structure.

In summary: [[summary]]

This company is clearly looking to be the first fast-food retailer in the market with its one-of-a-kind sandwich choice and, in doing so, would be pursuing a differentiation strategy. In an industry in which beef burgers are clearly the product of choice for its competitors, this company is trying to be the big fish in the sea by expanding its menu to include seafood items. Alternatively, if the company had simply been trying to undercut its competitors by selling lower-cost products presumably after uncovering strategies to reduce its overall cost structure, it would be utilizing a low-cost, or cost leadership, strategy.

What sounds like a good summary word for industry analysis?

Not really; it's more general to everything surrounding those sales.

Right. Industry analysis has several uses in company analysis, and one of these is understanding a company's business environment. Knowing about a company's growth prospects, competitive interactions, and business risks offers insight into the stock selection and valuation processes. Another use is identifying equity investment opportunities, since a top-down approach will identify industries with favorable, or unfavorable, growth and profit outlooks. An investment strategy can then be tailored accordingly, relative to an investment benchmark. Third, industry analysis is useful in portfolio performance attribution, which focuses on the sources of a portfolio's returns.

That's more specific to the firm, rather than general to all firms in a certain area.

As an analyst, you can only begin to perform a __competitive analysis__ after gaining an understanding of the environment in which a company operates. How a company responds to external conditions in the marketplace is referred to as its __competitive strategy__.

A low-cost strategy

A differentiation strategy

An accounting scandal involving the company may have made it difficult for it to attract quality management candidates

Consumers may have demonstrated a preference toward eating healthier in recent years, thereby affecting their selection of meal purchases

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Sales

Environment

Senior management

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