Updated for the 2026-2027 CFA® Level I curriculum.
Industry and competitive analysis is the process analysts use to understand the environment a company operates in before judging the company itself. It matters because a company's performance depends heavily on the structure and dynamics of its industry, not just its own management decisions.
After this note, you should be able to explain why analysts conduct this analysis, list the steps involved, and apply industry-level findings to company-level judgments without mixing the two.
Quick Answer
Industry and competitive analysis identifies the factors that drive profitability and risk within an industry, then applies those factors to a specific company.
The process has four general steps: define the industry's scope and boundaries, evaluate industry structure and competitive dynamics, assess external influences like macroeconomic and regulatory factors, and translate findings into a company-specific analytical framework.
Analysts use this process to explain performance differences and support forecasts, not to value a company directly.
Key Takeaways About Purpose and Steps in Industry and Competitive Analysis
Industry analysis explains why companies in the same industry often show similar performance patterns.
The process moves from broad industry structure to specific competitive positioning.
Analysts use industry analysis to inform, not replace, company-level analysis.
A well-defined industry scope prevents comparing companies that do not actually compete.
External factors like regulation and macroeconomic conditions shape industry profitability independent of any single company's actions.
Industry conclusions describe averages and tendencies. Company conclusions describe specific performance versus that industry baseline.
Skipping the industry step often leads to overestimating a company's competitive advantage.
What You Need to Know for CFA Level I
Explain why analysts perform industry and competitive analysis before evaluating individual companies.
List and describe the steps in a structured industry analysis.
Explain how industry-level findings feed into company analysis.
Distinguish an industry-level conclusion from a company-level conclusion in exam scenarios.
Recognize when a question is testing industry structure versus company-specific performance.
Why Industry and Competitive Analysis Is Performed
Company performance rarely happens in isolation. Two companies with similar management quality can post very different margins simply because they operate in industries with different competitive intensity. Industry analysis isolates that effect.
Analysts perform this analysis for three practical reasons.
Explain Past Performance
Industry analysis helps determine why a company performed the way it did. If a company's margins declined, the analysis can show whether the decline came from industry-wide pricing pressure or company-specific problems.
Support More Realistic Forecasts
Industry growth rates, cost structures, and competitive intensity set realistic boundaries for a company's future revenue and margin assumptions.
Improve Comparability Between Companies
Grouping companies by industry allows analysts to benchmark a company against peers that face similar structural conditions.
Without this step, an analyst risks crediting management for results that are actually industry-driven or blaming management for weakness that affects the entire industry.
The Steps in a Structured Industry Analysis
A structured industry analysis follows a consistent sequence. Each step narrows the analysis from broad context to specific competitive conditions.
Step | What the Analyst Does | Why It Matters |
|---|---|---|
1. Define the industry | Set clear boundaries for what companies belong in the industry and what the industry produces or provides | Prevents comparing companies that do not truly compete |
2. Analyze industry structure | Study the number of competitors, barriers to entry, and degree of product differentiation | Explains typical profitability levels within the industry |
3. Assess external influences | Evaluate macroeconomic conditions, government regulation, technology, and demographic trends | Identifies forces that affect all companies in the industry regardless of individual strategy |
4. Apply findings to companies | Use industry conclusions as a baseline, then identify how a specific company performs relative to that baseline | Connects industry-level work to company-level analysis |
These steps are not a rigid checklist to memorize word for word. The exam tests whether you understand the logical flow: define scope, understand structure, account for outside forces, then apply findings to a specific company.
How Industry Findings Support Company Analysis
Industry analysis sets the baseline. Company analysis measures how a specific firm performs against that baseline.
Use Industry Benchmarks to Evaluate Performance
Consider industry profitability. If an industry historically supports 8% operating margins because of intense competition and low switching costs, an analyst uses that figure as a reference point. A company earning 15% margins in that industry needs a specific, defensible explanation, such as a durable cost advantage or a differentiated product. Without industry context, that 15% margin looks simply "good." With industry context, it becomes a signal worth investigating.
The same logic applies to growth. An industry growing at 3% annually sets realistic limits on how fast most companies within it can grow organically. A company projecting 12% growth in a 3% industry needs to justify that gap with market share gains, geographic expansion, or a new product category.
Use Industry Structure to Assess Risk
Industry analysis also supports risk assessment. High barriers to entry suggest lower competitive risk for incumbents. Low barriers suggest the opposite, regardless of how well any single company currently performs.
How to Avoid Mixing Industry-Level and Company-Level Conclusions
This is where Level I candidates lose points. Industry analysis and company analysis answer different questions, and exam questions often test whether you keep them separate.
Separate Industry Conditions From Company Performance
An industry-level conclusion describes conditions that apply broadly across firms. Example: "The airline industry has low pricing power due to high fixed costs and intense competition."
A company-level conclusion describes how one company performs relative to that industry condition. Example: "Airline X maintains higher margins than industry peers due to a regional route monopoly."
The first statement explains the environment. The second explains a specific company's position within that environment. Treating the first statement as if it applies uniformly to every company in the industry, or treating one company's result as evidence about the whole industry, is a common analytical and exam error.
Worked Example
An analyst is reviewing two companies in the packaged food industry, Company A and Company B.
Industry-level facts:
The packaged food industry has low product differentiation and moderate barriers to entry.
Average industry operating margin over the past five years is 6%.
Industry revenue growth has averaged 2% annually, tracking population growth and inflation.
Company-level facts:
Company A has an operating margin of 6.2% and revenue growth of 2.1%.
Company B has an operating margin of 11% and revenue growth of 7%, driven by a proprietary packaging technology that reduced spoilage and extended shelf life.
Step 1: Apply the industry baseline
Company A's results closely match industry averages. This suggests Company A performs in line with typical industry conditions rather than showing a distinct competitive advantage.
Step 2: Identify the deviation
Company B's margin and growth significantly exceed the industry baseline. This deviation demands a specific explanation rather than being dismissed as industry strength.
Step 3: Connect the explanation to a competitive factor
Company B's proprietary packaging technology is a company-specific advantage, not an industry-wide condition. It explains the gap between Company B's results and the industry baseline.
Company A is a industry-average performer, so its results are best explained by industry conditions. Company B outperforms the industry baseline, so its results require a company-specific explanation, in this case a technological advantage.
An analyst who ignored the industry baseline might mistakenly conclude the entire packaged food industry is highly profitable, when in fact only Company B benefits from a firm-specific edge.
Common Exam Traps
Confusing industry conditions with company performance
A question may describe industry-wide margin pressure, then ask whether a specific company's declining margin is a company problem. If the entire industry is affected, the correct interpretation points to industry conditions, not company mismanagement.
Memorizing the four steps without applying them
The exam rarely asks candidates to list the steps directly. It presents a scenario and expects you to identify which step is being described or which step was skipped.
Using industry averages as if they apply to every firm
Industry analysis sets a baseline. It does not mean every company in that industry performs identically. A question testing this trap will present a company that deviates from the industry norm and ask for the reason.
Giving a conclusion without an analytical reason
If a question asks why a company outperforms its industry, an answer without a specific competitive reason, such as cost advantage, differentiation, or regulatory protection, is incomplete. The exam expects a reasoned link, not just a directional statement.
Practice Question
An analyst notes that the specialty retail industry has experienced declining average operating margins over the past three years due to increased online competition and price transparency. One company in this industry, Retailer Z, has maintained stable margins over the same period due to a loyalty program that increases repeat purchase rates and reduces marketing costs per sale.
Which statement best reflects the correct application of industry and competitive analysis?
Retailer Z's stable margins indicate the specialty retail industry is not actually facing margin pressure.
The industry-wide margin decline explains general conditions, while Retailer Z's stable margins result from a firm-specific advantage.
Since Retailer Z is part of the specialty retail industry, its stable margins should be attributed entirely to favorable industry conditions.
Correct Answer: B
The industry-wide decline in margins reflects a structural condition affecting most firms in the industry. Retailer Z's ability to maintain stable margins despite that pressure indicates a company-specific factor, in this case a loyalty program, that offsets the industry trend. This is the correct separation of industry-level and company-level conclusions.
Option A: Incorrect. One company's performance does not override an industry-wide trend. This choice ignores the industry-level evidence in favor of a single data point.
Option C: Incorrect. This choice attributes company-specific performance to industry conditions, reversing the correct relationship between the two levels of analysis.
Continue Your CFA Level I Prep With KeyPoint
Use structured lessons, practice questions, mock exams, and progress tracking to focus on the time you have left
FAQs About Purpose and Steps in Industry and Competitive Analysis
What is the main purpose of industry analysis in equity research?
Industry analysis establishes the competitive and economic context a company operates in. It helps analysts explain past performance, set realistic forecast assumptions, and identify whether a company's results come from industry conditions or firm-specific factors.
How many steps are in a structured industry analysis?
Level I frames the process as four general steps: defining the industry, analyzing its structure, assessing external influences, and applying findings to a specific company. The exam tests the logic of this sequence rather than exact step counts.
Why do industry-level and company-level conclusions need to stay separate?
Industry-level conclusions describe conditions affecting most firms in the industry. Company-level conclusions describe how a specific firm performs relative to those conditions. Mixing the two leads to incorrect attribution, such as crediting a company for industry-wide trends it did not create.