Los Angeles Research Group’s industry risk reports provide users with quick summaries of market conditions and risk factors. Risk scores are centered on Michael Porter’s Five Forces framework and statistical factors, such as revenue volatility, capital intensity, employment trends and growth rates. LARG also evaluates market share concentrations, business structure (e.g., corporations, sole-proprietorships, partnerships), key economic indicators, supply chain data, debt ratios, and new entrant trends, including survivor rates (i.e., percentage of new businesses that last longer than five years).
Why Industry Information Matters
Statistical evidence confirms the importance of industry trends in explaining both firm profitability and stock market performance. It also suggests that market attributes are important in explaining the dispersion of profitability between industries. According to research conducted by Michael C. Porter and Anita M. McGahan, industry performance accounts for nearly 40.0% of explained variation in business-specific profits.
The intensity of competition among businesses is often determined by an industry’s structure, which is highlighted by Michael Porter’s Five Forces – Bargaining Power of Suppliers, Threat of New Entrants, Bargaining Power of Customers, Threat of Substitute Products and Competitive Rivalry within an industry. These factors differ among sectors, but each is influenced by an industry’s life cycle.
The attractiveness of an industry is determined by the industry’s life cycle. Industry life cycles are separated into four main stages – introduction, growth, maturity and decline. The introduction phase is characterized by high prices and low margins, as operators are unable to take advantage of economies of scale. Firms also require high levels of capital for research and development (R&D) and marketing. As a result of rapid market changes and capital requirements, this sector generally has a high degree of risk.
In contrast, as product penetration rises and the buyer market widens, and industry begins to enter into a period of growth. Growth industries are characterized by high margins, strong sales and rapid expansion. Risk is low as firms benefit from strong demand and high prices. As market saturation increases and the number of industry operators rises, an industry begins to move into a mature cycle. During this period, industry risk slowly increases as prices fall and margins dwindle. Firms that retain strong brand recognition and superior product quality experience slow steady growth, while smaller players consolidate with rivals to build scale.
As consolidation continues, and a product becomes commoditized, an industry begins to enter into a period of decline. During this phase, risk is high as firms are at the mercy of buyers. Margins dwindle as firms compete aggressively on price. Smaller operators that are unable to build scale leave the market, or consolidate with larger rivals in order to stay afloat. Meanwhile, larger operators often falter as revenue stagnates and future growth prospects decline. As evident by the characteristics of each industry life cycle, it is important for banks, brokers and other lenders to evaluate industry conditions when determining an individual company’s risk.
Industry Risk Reports
LARG's risk reports contain brief summaries of market conditions and risk factors affecting various industry operators. These specialized summaries are perfect for banks, brokers and loan officers evaluating lending risks and default exposures.