Industry analysis generally discusses things like the result of the implication of plan priorities and plan expenditures for various industries, the implication of projected growth in the gross national product of various industries, and the implication of industrial and fiscal policies of the government for an industry. In industrial analysis macroeconomic elements like overall industry input and output, the analysis would be conducted.
Uses of Industry Analysis
The main uses of industry analysis are:
a. To understand a company’s business environment. The companies work in an environment, and to understand a company’s business, its environment also needs to be analyzed. Industry analysis provides a good idea about growth opportunities, threats, competitive dynamics, strengths, weaknesses, etc.
b. To identify the active equity investment opportunity. This can be done using the top-down approach, where, first the industries with a positive outlook for growth and profitability are identified, and then, from within those industries the best stocks are chosen. The investors can outperform by correct industry and sector rotation, rather than relying completely on the security selection.
c. Portfolio Performance Attributions. Industry analysis helps in addressing the source of return on the portfolio in comparison to the return on its benchmark. The reasons for the outperformance or underperformance of the portfolio may be the choices of stocks for the investment, industry selection and rotations, sector selection and rotation, etc. Thus, it is not always the superior stock selection, but also the industry and sector selection, which may help in the superior performance of the portfolio. And industry analysis helps in making such selections.