Equity valuation lives or dies on the industry view. Get the industry wrong and the company forecast collapses, regardless of how clean the model looks.
Industry and competitive analysis is the bridge between the macro outlook and the company forecast. The standard sequence is:
- Define the industry and the peer set. Specify product, geography, and customer.
- Classify the companies using a recognized scheme (GICS or similar).
- Size the industry and measure growth, profitability, and market share dynamics.
- Map structure with Porter's Five Forces to gauge sustainable economics.
- Scan external influences with PESTLE for political, regulatory, technological, and environmental shocks.
- Forecast revenues, margins, and capital intensity for the company in light of steps 1 to 5.
- Value the company using the forecast.
KEY: The analyst's edge comes from steps 1 to 5. A discounted cash flow that ignores rivalry or regulation produces precise nonsense.
Three broad approaches group companies. Each has trade-offs.
Products and services classification. Groups firms by what they sell. Dominant commercial systems include the Global Industry Classification Standard (GICS), the Industry Classification Benchmark (ICB), and Thomson Reuters Business Classification...
Common mistakes
- Treating macro shocks as a sixth Porter force. Politics, taxes, and FX belong in PESTLE. Trap answer: "government regulation is the sixth force." Porter has exactly five.
- Confusing CR4 with HHI. CR4 sums only the top four shares. HHI sums squared shares of every firm. Trap: reporting CR4 of 80% as HHI of 80, missing the squaring step that produces values up to 10,000.
- Averaging instead of compounding growth. Revenue up 40% over four years is a CAGR of 8.78%, not 40% / 4. Trap: 10%, the simple average, which overstates growth. Also count years, not data points: 2021 to 2025 is n = 4.
Bottom line
- Top-down process: define industry, classify peers, size the market, map structure, assess external forces, then value the company
- Three industry classification methods: products/services (GICS, ICB, TRBC commercial; NAICS, NACE governmental), business cycle sensitivity (cyclical vs. defensive), statistical clustering
- Industry life cycle: embryonic, growth, shakeout, mature, decline. Each stage has its own growth and profitability profile
- Size = units × average price. Growth: CAGR = (end / begin)^(1/n) − 1, and 1 + revenue growth = (1 + volume growth)(1 + price growth)
Exam shortcut
Memorize the seven-step process and the five life-cycle stages. For any vignette, write the five Porter forces down the left margin and rate each high/medium/low before answering. If the question mentions regulation, taxes, demographics, or climate, route it to PESTLE, not Porter. For growth questions, count the years between the first and last value to get n, and compound rather than average.
The full lesson (about 4,123 words, 27 min read) adds 9 worked examples, all 7 common mistakes, a self-check, free in the app.
Learning objectives
- industry and competitive analysis
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