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Porter's Five Forces Analysis: Define the Industry

Strategies and resources for creating a Five Forces Analysis

Define the Industry

The first step in a Five Forces analysis is to define the industry in which a company operates. Do this by looking at what the company says in its 10-K report (Item 1 - Business). Business databases that classify and assign codes to companies based on their principal activity or market can also be helpful. In some cases, industry boundaries will have to be set and focus placed on a particular industry sector (e.g., craft beer industry, rather than beer or alcoholic beverages). The definition will determine competitors and the size and scope of of the market analysis.

Define the Industry with NAICS

One way to define your industry is to use the North American Industry Classification System (NAICS). NAICS (pronounced "nakes", rhymes with "snakes") codes are used by government agencies (for example,when collecting Economic Census data) and by business databases to classify companies by their lines of business.

NAICS codes classify establishments based on similar processes or means of production. Codes use a two to six digit level of detail, from broad sectors like manufacturing and retail (2-digit codes) to individual industries (6-digit codes). Revenue or value of shipments data is used to determine an establishment's primary business activity.

Define the Industry with GICS

The Global Industry Classification Standard (GICS), was developed by Standard & Poor's and Morgan Stanley Capital International for use by financial analysts, investors and portfolio managers. It classifies public companies listed worldwide using a market-based approach based on how they earn their revenues. Many stock exchanges use GICS to develop industry/sector indexes.

Look up your company in S&P Capital IQ or Bloomberg to find its GICS classification.

Bloomberg terminals are available on the lower-level of the Library on the LIU Trading Floor, LB 132.

Find Industry Profiles

Begin researching by building a basic understanding of how an industry operates. Industry profiles are found in many business databases. They provide information on current market forces and trends, analyze industry performance, identify leading companies, and gather aggregate financial data and forecasts.

SEARCH TIP: Databases are often selective regarding the industries they choose to cover. The industry you are researching may not appear in every database listed.

Find Industry News

Business news databases provide access to articles from the best business newspapers, trade journals and magazines. News databases are particularly useful in identifying current industry trends and researching the political, legal technological and environmental issues that affect industry operations.