What framework should I use for industry analysis on the CFA exam?

Question

AcadiFi · Accepted Answer

The CFA Level I curriculum emphasizes two key industry analysis frameworks: **Porter's Five Forces** and the **Industry Life Cycle Model**. You need to know both.

**Porter's Five Forces:**
This framework assesses the competitive intensity and attractiveness of an industry:

```mermaid
flowchart TD
    A[Industry Profitability]
    B[Threat of New Entrants] --> A
    C[Bargaining Power of Suppliers] --> A
    D[Bargaining Power of Buyers] --> A
    E[Threat of Substitutes] --> A
    F[Rivalry Among Existing Competitors] --> A
```

| Force | High Force = | Example |
|-------|-------------|--------|
| New entrants | Lower profits | Low barriers in food delivery apps |
| Supplier power | Higher input costs | TSMC's dominance in chip fabrication |
| Buyer power | Price pressure | Walmart negotiating with consumer goods firms |
| Substitutes | Revenue threat | Streaming replacing cable TV |
| Rivalry | Margin compression | Airlines competing on price |

**Industry Life Cycle Model:**

| Stage | Growth | Competition | Profits |
|-------|--------|-------------|--------|
| Embryonic | Slow adoption | Few players | Negative (heavy R&D) |
| Growth | Rapid | Increasing entrants | Improving |
| Shakeout | Decelerating | Overcapacity, exits | Declining |
| Mature | Stable/slow | Consolidated, few leaders | Stable, high for leaders |
| Decline | Negative | Exiting firms | Falling |

**Combining the frameworks:**
Use the life cycle to determine where the industry stands, then apply Porter's Five Forces to assess competitive dynamics at that stage. For example, a mature industry (consolidated) typically has high barriers to entry and moderate rivalry.

**How the CFA exam tests this:**
- Given a description of an industry, identify the life cycle stage
- Evaluate which of Porter's forces is most/least relevant
- Predict how industry structure affects expected equity returns

**Exam tip:** Don't just memorize the frameworks — practice applying them to scenarios. The exam presents industry descriptions and asks you to draw conclusions about profitability, competitive position, or appropriate valuation approach.

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What framework should I use for industry analysis on the CFA exam?

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Related Questions

Practice Questions

Force	High Force =	Example
New entrants	Lower profits	Low barriers in food delivery apps
Supplier power	Higher input costs	TSMC's dominance in chip fabrication
Buyer power	Price pressure	Walmart negotiating with consumer goods firms
Substitutes	Revenue threat	Streaming replacing cable TV
Rivalry	Margin compression	Airlines competing on price

Stage	Growth	Competition	Profits
Embryonic	Slow adoption	Few players	Negative (heavy R&D)
Growth	Rapid	Increasing entrants	Improving
Shakeout	Decelerating	Overcapacity, exits	Declining
Mature	Stable/slow	Consolidated, few leaders	Stable, high for leaders
Decline	Negative	Exiting firms	Falling