Structure Conduct Performance (SCP) Analysis

Another process of analyzing industries is to look at the industry structure (monopoly, oligopoly), its conduct (commoditized or specialized, seasonal or round the year, cyclical or non-cyclical etc.) and ultimately its performance (RoE, RoIC, WACC, etc.). Structure, Conduct, Performance (SCP) analysis approaches the industry assessmentprecisely with this classification.

SCP analysis may be seen as extension of Porter’s model where most likely first two points structure and conduct were captured. Under SCP model, one also goes into the financialdimension of industry from analysis outlook. Basic elements of SCP analysis are captured below in brief:

Structure analysis:

Industry structure refers to the aggressive intensity in the industry(number of players), awareness of business in industry, relationship among the various players, market size, its growth rate, etc.

In this section, analysts study:

How many players exist in the industry?

Is there domination of few players in the industry?

How is business scattered between organized and unorganized players?

Are there any threats from substitute products?

How are equations between suppliers and buyers?

Is there backward/forward integration already in existence or a possibility in future?

Consequently, for the most part coverage of analysts in this partexpands beyond with what we learn as part of Porter’s 5 Forces model and the SWOT Analysis model.

Conduct analysis:

The composition of the industry, as described above, will define the conduct ofthe businesses on characteristic such as pricing and product innovation. Each industry will have its out of the ordinary behaviour. Umbrellas and raincoats would be seasonal businesses and FMCG and Pharma would be round-the-year ones. High interest rates may discourage people from purchasing real estate and 4 wheelers, but 2-wheelers may not be impacted too much. Mining business may be commoditized but FMCG and white goods may be sold purely based on power of brands.

Hence, while looking for an industry’s conduct, analysts have to learn several factors such as:

Is business cyclical in nature?

If business is cyclical, what are the factors affecting the business – commodity prices, interest rates, currency prices or some other global factors?

Is it a highly specialized business which requires skilled labour or it is a low skill based industry?

Is there enough talent available for skilled based business?

Choosing the products/services by customers?

How will technological changes affect this business?

The dependency of business on government policies

Performance analysis:

Based on formation and manner of the industry, industry would generatefinancials for the investors/owners.

Businesses with High return on capital/equity are the ones which create wealth for shareholders/owners in the long run.

While analyzing presentation of an industry, analysts will look at several numerical ratios, which are dealt with in great detail in the unit on quantitative analysis.

   
 
Top