Industry Deep Dive

At the most basic level start by thinking about how a dollar flows end-to-end through the industry. When a dollar leaves a customer’s pocket how is it being divided up before it ends up in your target company’s cash and equivalents? Usually you can summarize/organize the different points of friction for said dollar into buyers, suppliers, competitors, and other key stakeholders. This will provide you with a general map/overview of the industry.

Starting with customers, how many different types of customers are there? What is important to the customer in the buying decision? Are they more price or performance focused and why do they fall into one category vs the other? How much power do customers have to negotiate and receive more favorable terms? Are certain customers more important to your target or is your target more important to its customers?

This feeds into competitors, once you’ve identified what the customer cares about and values, what options are available to the customer from a competitive standpoint? Are there perfect substitutes or are there key differences between competitors that favors one over others based on what you believe is most important to the customer or in specific applications? What could a competitor do to win a customer back from someone else? What is the typical gross retention rate and how long is a customer likely to be locked in for before they are more susceptible to being competed away? How aggressively do incumbents try and compete customers away from each other?

When thinking about suppliers, assume your target has won the business and that dollar has now been transferred from the customer. Who is now taking a piece of that dollar before it hits your target’s cash account? Who does your target have to pay? Employees, equipment providers, service providers, debt holders (i.e. suppliers of capital), leased asset owners, etc. Who has the power between your target and its suppliers (who is more important to the other)? Pretend you are an employee of the company, what are you using to complete your day to day job? Picture yourself in multiple different departments (sales, marketing, manufacturing, relationship management, etc.).

Other key stakeholders will typically be regulators primarily but when thinking about other stakeholders think again about how that dollar flowing from customer to target is impacted. Who else is reaching out trying to get a piece? How do rules/regs impact how smoothly that dollar flows? What potential changes to rules/regs are being considered that would impact the flow of that dollar? Would changes in rules/regs create the potential for new suppliers (i.e. some new service provider that helps with compliance)?

If you can organize an industry in this fashion, you’ll understand 90% of it, and you should be able to gather most of these pieces via public filings and Google Search. Read through the public filings of multiple competitors in the same industry. Some will give you better disclosures than others around competitors, suppliers, customers, other stakeholders. The rest you should be able to fill in the blanks via Google searches IMO.