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CFA Level I · CFA Level I Exam

Industry and Competitive Analysis for CFA Level I

Industry and competitive analysis studies the sector a company operates in and its position against rivals. You classify the industry, find its life cycle stage, apply Porter's five forces, judge pricing power and cyclicality, then link strategy to profitability. On the exam, read the clue in the stem and pick the matching concept.

What this chapter covers

This chapter gives you the tools to judge a company from the outside in. You begin with the industry: how it is classified, which firms are true peers, where it sits in its life cycle, and how strong its competitive forces are. You then move to the company: which strategy it follows and whether that strategy can earn returns above its cost of capital.

The chapter is mostly conceptual. You will not do long calculations. Questions give a short scenario and ask which stage, force, factor or strategy it describes. Your job is to match the facts to the framework and reject the two options that do not fit.

The chapter connects to much of the paper. In Equities, industry structure shapes forecasts of growth and margins in valuation. In Financial Statement Analysis, peer groups decide which ratios you compare. In Corporate Finance, strategy links to capital allocation and returns. In Fixed Income, cyclicality affects credit risk. Learn this chapter well and those topics become easier to reason about.

This chapter is worth the effort because it is low on maths and high on reasoning, so marks come from clear definitions and careful reading. Each question is worth the same, and there is no penalty for a wrong answer, so you should always answer. The frameworks here also recur in equity, corporate finance and credit questions, so the time you invest pays back across several topics. A candidate who can quickly name the stage, force or strategy in a scenario saves time for harder numerical questions elsewhere.

Industry and Competitive Analysis: topics in the order to study them

  1. 1Industry Classification and Peer Group AnalysisStart here because every later step depends on defining the industry and choosing the right peers.
  2. 2Industry Life Cycle AnalysisOnce the industry is defined, you place it in a stage, which sets expectations for growth, margins and competition.
  3. 3Porter's Five Forces FrameworkThis is the core tool for judging industry structure and profit potential, so it comes after you know the industry's stage.
  4. 4Industry Structure and Pricing PowerIt applies the five forces to a practical question: can firms raise prices or must they accept them.
  5. 5External Factors and Sector CyclicalityNow you add outside influences such as the economy, technology, demographics, government and social change, and separate cyclical from defensive sectors.
  6. 6Competitive Strategies and Company AnalysisFinish with the company level, where you combine industry analysis with a firm's strategy to judge its likely performance.

How to prepare Industry and Competitive Analysis

Treat this as a framework chapter. Your aim is fast recognition of each concept from a short scenario, not memorising long text.

  1. Read each topic once and write a one-line definition of every term in your own words.
  2. Build a single page that lists the life cycle stages, the five forces and the main strategies, with one example company or product for each.
  3. For each framework, write the clue words that signal it, such as rapid growth and many entrants for the growth stage, or few suppliers for strong supplier power.
  4. Practise short scenario questions and name the concept before you look at the options. Then eliminate the two options that contradict a stated fact.
  5. Note which direction each force pushes profitability. Strong forces lower profit potential; weak forces raise it.
  6. Link each idea to another topic, such as how a mature industry affects a valuation growth rate, so the ideas stick.
  7. Revise with your one-page summary twice in the final week and test yourself from memory.

Common mistakes in Industry and Competitive Analysis

  • Mixing up the life cycle stages, especially growth and shakeout.

    Fix: Anchor each stage to its growth pattern: growth is fast and expanding, shakeout is slowing growth with firms exiting.

  • Reading a strong force as good for the industry.

    Fix: Ask whether the force squeezes margins. If yes, it lowers profit potential.

  • Confusing buyer power with supplier power.

    Fix: Decide first whose side the company is on. Customers of the industry are buyers; those who sell inputs to it are suppliers.

  • Using the wrong peer group because firms look alike by name or size.

    Fix: Check what the firms actually sell, to whom, and what drives their demand and costs.

  • Treating cyclical and growth as the same thing.

    Fix: Cyclical relates to the economic cycle and repeats. Growth stage relates to the industry's life cycle and is a one-time phase.

  • Choosing a strategy answer based on the company's claims rather than its actions.

    Fix: Look at what the firm does: lowest cost per unit suggests cost leadership; premium features and brand suggest differentiation.

Last-day revision: Industry and Competitive Analysis

  • Classify a company by its principal business activity, usually the source of most of its revenue.
  • Peer groups should share similar business activities, demand drivers, cost structure and exposure to the economy.
  • Life cycle stages: embryonic, growth, shakeout, mature, decline.
  • Growth stage: fast sales growth, new entrants, margins improving as scale builds.
  • Shakeout stage: growth slows, competition rises and weaker firms leave.
  • Mature stage: slow growth, stable share, pricing and cost discipline matter.
  • Porter's five forces: rivalry, threat of new entrants, threat of substitutes, buyer power, supplier power.
  • Stronger forces mean lower profit potential for the industry; weaker forces mean higher.
  • High barriers to entry and few competitors support pricing power.
  • Cyclical sectors move with the economy; defensive sectors are steadier through it.
  • Porter's generic strategies: cost leadership and differentiation.
  • A strategy is sound only if it can earn returns above the cost of capital over time.

Industry and Competitive Analysis practice questions

Industry and Competitive Analysis in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Industry and Competitive Analysis: frequently asked questions

Is Industry and Competitive Analysis a calculation-heavy chapter?

No. It is mainly conceptual, so you spend your time on definitions, frameworks and applying them to short scenarios. Calculators are rarely needed here.

How should I remember Porter's five forces?

List them as rivalry, new entrants, substitutes, buyers and suppliers. For each, write what makes it strong and what it does to profits. Then practise naming the force from a one-line scenario.

How do I tell the life cycle stages apart in a question?

Look at growth, number of competitors and margins. Fast growth with new entrants points to growth; slowing growth with exits points to shakeout; slow stable growth points to maturity; shrinking demand points to decline.

Should I guess if I am unsure on these questions?

Yes. There is no penalty for a wrong answer, and each question has three options. Eliminate the option that contradicts a fact in the stem, then choose between the remaining two.