How Accurate Are Your Industry Growth Forecasts?

Industry Growth Forecasts are used more than any other area of Industry Analysis, and for obvious reasons. They’re used to determine the strategy and direction of the business over the medium to long term, to guide risk mitigation strategies, and can ultimately impact the growth rates and business projections of the company employing them. Given the implications, it would seem prudent that the validity and reliability of such forecasts are well vetted, but this isn’t always the case.

For Marketers & Strategists who understand the power of Industry Analysis in the overall Market Data & Information mix, there are a number of concerns; Geographic/ Global coverage (fit to their Market presence), level of Major Player / company detail, etc. However, during the ‘risk versus reward’ stage of the buying process, a trade off occurs. Companies are willing to sacrifice quality coverage of a single market for sweeping coverage of many markets. In a big picture context, this could be a huge mistake.

Every Market Research company; whether using off-shore Sub-Continent outsourced researchers, or in-house analysts can collect data. Putting together a report on Industry Operating Conditions, Barriers to Entry, Life Cycle, Major Players/ Companies in the Industry, the Products and Markets then guess-timating the Forecast for that Industry is par for the course. Some of the better Market Research Companies will even use Regression Analysis and other statistical models to better validate their predictions. So what’s the difference, and why does it matter?

The single most important factor is Granularity.

Granularity

Lets take the example of a Credit Risk manager at a Bank. Banks need to assess the portfolio exposure of their loan origination strategies. Too many loans to one industry can leave them over exposed to a situation where un-expected price shocks occur, such as interest rate change. With capital tied up, they then cant lend to other, safer Industries. A  clothing retailer comes to the bank for a business loan. The underwriters and portfolio analysts do some regression analysis on the company and then look at the Industry Growth forecast, and work out their current level of Risk and exposure, and reserve capital on hand based on the outlook.

If that Bank has an ‘aggregated’ Industry report, then the decision they’re making will be flawed. Here’s why: an aggregated industry report dilutes the real outlook of the Clothing Sector within overall Retail. When you take an average of all Sectors within an Industry and produce a forecast, well it’s clear you can expect an average Forecast. This is why granularity is critical. Having a clear assessment of the specific sector within an industry will enable Risk Managers to get a handle on the Clothing Retail sector, as opposed to getting the watered-down aggregate forecast for the whole of the Retail Sector.

How Does this Apply to Other Firms?

The result for the bank will be a more accurate and balanced portfolio when using granular industry Growth Forecasts. The result for other businesses will be more accurate business plans and profit projections. Say you’re a software provider that can provide pay roll services. You want to decide whether to invest efforts & capital in the Retail or Healthcare over the next 5 years. The ‘aggregate’ reports tell you Healthcare will be better than Retail. However if you had Granular reports, written to the appropriate Standard Industry Classifications (ie the level at which Industries operate, and are audited at by Government & Regulatory bodies), you may find that the largest sector of Retail will be more profitable over the next 5 years than the largest Healthcare sector. You’ve just made a decision to steer your business in a direction that will be far less profitable than it could otherwise have been.

What to Look For When Evaluating Industry Analysis & Market Research:

Quite simply, the fewer the sectors covered in any single Market/ Economy, the easier it is to identify whether Growth Forecasts will be inaccurate. These other factors that can also be of assistance.

1-      Look for Providers that detail forward-looking Key External Drivers

2-      Look for Providers that have a very large Supply Chain Collection in each Market

3-      Look for Providers that offer Granularity at the Industry Sector rather than product level (eg SIC codes)

4-      Look for providers who update reports frequently throughout the year

Key External Drivers

KED’s are the factors outside a Firms’/ Managers control. These are the Factors Michael Porter claims account for 20% in variation of a company’s profits, and having a handle on these factors will allow you to build ahead of time Risk Mitigation to adverse Market Conditions. When Regression Analysis on company growth and profitability is put against granular KED’s, you’ll get a much more accurate forward looking view of where a Sector is headed and how profitable it will be.

Supply Chain

It stands to reason that the sample size from which you draw your research and analysis will be important. A smaller, more aggregated group of Industries clusters will never yield the accuracy and reliability you can achieve from wider Market Coverage. Industries share similar supply chains, and no Company or Industry operates in isolation. The broader the market coverage the more accurate your Growth Forecast will be. Key External Drivers will affect multiple Industries within a Supply Chain, so you may want to know the impact changes in KED’s will have on your Markets and their interconnectivity. Even if you don’t operate outside a handful of Industries, those Industries all have Supply Chains of which could offer your further growth opportunities- or threaten your profitability- if you don’t have a handle on the bigger picture of your markets and clients.

SIC Codes

Standard Industry Classification codes are a fantastic way to categorise sub-sectors of Industries, and underpin the axiom that the sum of the parts are greater than the whole. If a Forecast for each sub-sector within the aggregated Retail sector is done aligned with an appropriate SIC code, then Forecasts can tell decision makers what the specific sector will yield, and much more accurately give an indication of the aggregated Retail sector outlook. Decision Makers can then tailor product and service mix and marketing to where it will reap the most reward for the business. The impact of this is greater overall profitability, and stronger competitive advantage. The other reason to look at SIC codes is that Government & Regulatory bodies need to get a handle on these Industries and the company within them to in order to levy them appropriately. Having audited results and government statistics added into Industry Analysis at the SIC level will add further reliability to the overall Forecast.

Updates

If Forecasts drive your strategy, which for most larger forms and specialist SME’s they do, then you may want Industry Analysis that’s updated frequently, even if you only look at your business plans once a year. Key External Drivers and macroeconomic factors can change quickly and cause shocks to Industries and their supply chains. What you plan now may not be as valid in 6 or 12 months. A good solution/ tool will re-assess the forward looking KED’s, Technological Changes, and Supply Chain factors, and re-write their content so that your Marketing and Business Development people ‘on the front lines’ have the most accurate and up to date issues and trend information. Going to Market using out dated information can make you look inept, and raises the level of perceived risk for clients you wish to do business with. Keeping up to date on trends and issues will ensure your clients maintain strong belief in your capability, and trust you as an expert not only on their business but the environment they operate within.

Conclusion

Firms and Decision Makers who use Industry Analysis do so to gain competitive advantage. Larger Firms who operate across multiple markets need to be wary of the ‘shotgun’ approach to Industry Analysis. Having average coverage across multiple markets will only cost you the competitive advantage you’re seeking if smaller, more lithe firms in your key markets are looking at Industry Analysis in a more targeted, granular manner, and are therefore making better strategic decisions. Take the time to consider the opportunity – and profitability- costs of having a one-size-fits-all tool.  If you have aggregated information driving your strategies and you aren’t as successful as you would like to be, at least one reason why that is should be obvious.

Summary

  • Forecasts drive your strategy, and therefore you should always ensure you have the most up to date and accurate forecast available.
  • The more Granular the Industry Sector coverage, the more likely the Industry Forecast will be accurate, and therefore the sounder your business decisions will be
  • When identifying which vendor to look to, or which forecast to trust to support your business decisions you should look for a vendor whose reports include”

–          Key External Drivers

–          Broad Supply Chain Collection

–          Standard Industry Classification codes within Industries

–          Regular Updates

  • Don’t apply a ‘shotgun’ approach to Industry Analysis for the sake of multiple market coverage; you may be trading off Key Market competitive advantage to more agile competitors who will look at one market from a Granular, end-to-end perspective.

Mike works for leading Industry Analysis publisher IBISWorld www.ibisworld.co.uk

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