Industry Modeling

To create and maintain stronger and more complete industry models, here are some actionable insights based on the most helpful WSO content:

1. Start with a Top-Down Approach:

   • Build a driver tree for the industry. Begin with high-level metrics like Total Addressable Market (TAM), growth rates, and key segments. Break these down into sub-segments, geographies, and revenue streams.
   • Validate your assumptions with secondary sources, industry reports, and interviews. This ensures your model is grounded in reality and not just theoretical.

2. Understand the Value Chain:

   • Map out the supply chain and profit splits within the industry. This helps identify where value is created and captured.
   • Use frameworks like Porter’s Five Forces to assess competitive dynamics and sustainability of profits.

3. Incorporate Industry-Specific Metrics:

   • Depending on the sector, include relevant KPIs. For example, in tech, you might model daily active users (DAU) or monthly active users (MAU). In healthcare, prevalence and incidence rates might be key.
   • Tailor your model to reflect these metrics and their impact on financials like revenue, margins, and growth.

4. Simplify for Communication:

   • Your model should be simple enough for a PM to understand quickly. Avoid overcomplicating with unnecessary details unless they add significant value.
   • Focus on how the company fits into TAM growth, share gains, or profit splits. This makes it easier for decision-makers to internalize your insights.

5. Stress Test and Validate:

   • Test your assumptions by comparing them to historical data, competitor benchmarks, and industry trends.
   • Use sensitivity analysis to understand how changes in key drivers impact the overall model.

6. Leverage Templates and Resources:

   • If you’re starting from scratch, look for templates that align with your industry. Many analysts recommend creating a consistent assumption sheet that can be updated easily.
   • Audit existing models (e.g., sell-side models) to understand their structure and adapt them to your needs.

7. Iterate and Maintain:

   • Regularly update your model with new data and insights. This could include quarterly earnings, industry reports, or macroeconomic changes.
   • Over time, you’ll develop a more nuanced understanding of the industry, which will improve the accuracy and utility of your model.

8. Focus on the Big Picture:

   • Remember, the goal is to predict not just short-term earnings but also long-term competitive advantages and sustainability. This is what sets apart a great industry model from a basic one.

By following these steps, you can build robust industry models that provide valuable insights and are easy to maintain.

Sources: How to convert sell-side models to your own models faster?, Hedge Fund: The Investment Life Cycle, https://www.wallstreetoasis.com/forum/investment-banking/modelling-has-to-be-the-biggest-misnomer-in-this-industry?customgpt=1, "Modelling" has to be the biggest misnomer in this industry., How do you go about modelling a company on the buy side?