Title LM06 Industry and Competitive Analysis IFT Notes.pdf ✅

LM06 Industry and Competitive Analysis 2025 Level I Notes © IFT. All rights reserved 1 LM06 Industry and Competitive Analysis 1. Introduction ........................................................................................................................................................... 2 2. Uses of Industry Analysis ................................................................................................................................. 2 3. Industry Classification ....................................................................................................................................... 4 4. Industry Survey .................................................................................................................................................... 8 5. Industry Structure and External Influences ...........................................................................................13 6. Competitive Positioning ................................................................................................................................. 16 Summary ...................................................................................................................................................................18 Required disclaimer: IFT is a CFA Institute Prep Provider. Only CFA Institute Prep Providers are permitted to make use of CFA Institute copyrighted materials which are the building blocks of the exam. We are also required to create / use updated materials every year and this is validated by CFA Institute. Our products and services substantially cover the relevant curriculum and exam and this is validated by CFA Institute. In our advertising, any statement about the numbers of questions in our products and services relates to unique, original, proprietary questions. CFA Institute Prep Providers are forbidden from including CFA Institute official mock exam questions or any questions other than the end of reading questions within their products and services. CFA Institute does not endorse, promote, review or warrant the accuracy or quality of the product and services offered by IFT. CFA Institute®, CFA® and “Chartered Financial Analyst®” are trademarks owned by CFA Institute. © Copyright CFA Institute Version 1.0
LM06 Industry and Competitive Analysis 2025 Level I Notes © IFT. All rights reserved 2 1. Introduction This learning module covers:  How an industry is defined and the challenges associated with grouping companies that operate in multiple industries.  How to determine an industry’s size, growth characteristics, profitability, and market share trends.  How to analyze the competitiveness of an industry using Porter’s Five Forces and PESTLE frameworks.  Evaluating the competitive strategy and position of a company. 2. Uses of Industry Analysis As seen in a prior exhibit, the next step in the company and industry analysis framework is ‘industry and competitive analysis’. This involves the study of the drivers of an industry’ size, profitability, and market share trends. We also evaluate a company’s competitive positioning in its industry. Why Analyze an Industry?  Companies in the same industry have similar business models. They tend to be exposed to the same demand and supply opportunities and risk factors.  In a study conducted on the relative importance of industry versus company-specific effects on profitability, it was found that industry was the most important factor in the
LM06 Industry and Competitive Analysis 2025 Level I Notes © IFT. All rights reserved 3 sustainability of economic profit. Instructor’s Note: An average company in a growing industry may perform well than a good company in a dying industry. Improve Forecasts By taking a broader industry perspective, analysts can better understand the dynamics in which a company operates and make better earnings forecasts. Without this broader perspective, analysts may underestimate competitive forces and overestimate the degree to which a company controls its destiny. Identify Investment Opportunities Assessing a company’s strength and weaknesses relative to industry peers can help uncover attractive investment opportunities. Some investors may want to gain exposure to a specific industry while diversifying away the company-specific risks. These investors may take a basket approach, investing in a number of companies from that industry with position sizes scaled according to size, liquidity, or relative attractiveness. Industry and Competitive Analysis Steps The steps in industry and competitive analysis are illustrated in Exhibit 2 of the curriculum.
LM06 Industry and Competitive Analysis 2025 Level I Notes © IFT. All rights reserved 4 3. Industry Classification An industry is commonly defined as companies that sell similar products or services, from the perspective of a customer. Defining industries and classifying companies can be challenging. To assist analysts, third party organizations maintain industry classification schemes that are widely used in investment management. Third-Party Industry Classification Schemes Classification systems are provided by both commercial entities and government agencies. However, commercial classification systems are commonly used in the investment industry because they are more frequently updated as compared to government classification systems. Three widely used commercial industry classification schemes are:  Global Industry Classification Standard (GICS) by MSCI and S&P Dow Jones Indices  Industry Classification Benchmark (ICB) by FTSE Russell  The Refinitiv Business Classification (TRBC) by Refinitiv