2. Industry Landscape: Where a Business Competes

Understanding an industry is understanding the environment around a business — the forces that shape demand, profitability, growth, and long-term durability.
A great business in a weak industry struggles.
An average business in a strong industry can thrive.

This section teaches the essential lenses.

1. Market Size (TAM / SAM / SOM)

Market size tells you how big the opportunity really is.

TAM — Total Addressable Market

The full theoretical market if the company captured 100% of demand.
Reflects:
• Broadest definition of customers
• Long-term ceiling for the industry
Key question: “How big could this market be at absolute maximum?”

SAM — Serviceable Available Market

The portion of TAM the business can actually serve based on:
• Geography
• Business model
• Product features
• Customer segment
• Regulatory limits
Key question: “How much of the market realistically fits what we do?”

SOM — Serviceable Obtainable Market

What the company can realistically win in the next few years.
Reflects:
• Competitive intensity
• Sales capacity
• Brand strength
• Pricing power
Key question: “What portion of the market can we realistically capture?”

2. Competition & Substitutes

Competition determines how hard it is to win and keep customers.

Direct Competitors

Solve the same problem in the same way.
• Similar features
• Similar pricing
• Same customer
Affects market share, pricing power, and retention.

Indirect Competitors

Solve the same problem in a different way.
Examples:
• Ride-share vs. public transportation
• Frozen meals vs. meal kits
• Accounting software vs. bookkeepers

Substitutes

Replace the need entirely.
Examples:
• Zoom replacing business travel
• Automation replacing manual labor
• AI replacing human tasks

Substitutes often reshape entire industries.

3. Competitive Advantage & Moats

A moat protects a business from rivals. Strong moats mean durable margins.

Major moat types:
1. Brand & Trust – Pricing power, loyal customers (Apple, Nike)
2. Cost Advantage – Lowest cost producer (Walmart)
3. Switching Costs – Hard to leave (software, logistics contracts)
4. Network Effects – More users → more value (Visa, marketplaces)
5. Unique Assets – Patents, rights, specialized expertise

Businesses with moats stay strong for decades.

4. Customer Behavior & Demand Drivers

Why Customers Buy

Every purchase solves a job:
• Convenience
• Cost savings
• Reliability
• Status / identity
• Safety / compliance
• Time savings

High-value needs → stronger demand.

Demand Depends on Product Type

Essential goods: utilities, healthcare, basic food
Discretionary goods: travel, luxury, entertainment
Essential goods = stable revenue, even in downturns.

Frequency & Repeat Purchases

Predictable revenue comes from:
• Consumables
• Subscriptions
• Recurring services

5. Regulatory Forces

Regulation defines what a business can and cannot do.

Protective Regulations

• Licensing
• Safety standards
• FDA / compliance
• Foreign competition limits
These raise barriers and protect incumbents.

Constraining Regulations

• Price caps
• Data privacy
• Environmental rules
• Labor laws
These raise costs and complexity.

Heavily Regulated Industries

Healthcare, finance, transportation, utilities, energy, education.
High compliance costs → fewer competitors.

6. Economic Forces

Industries move with the larger economy.

Macroeconomic Conditions

Influence consumer spending and business investment.
Key indicators:
• GDP
• Jobs
• Wage growth
• Consumer confidence
• Business investment

Inflation

Raises costs, reduces purchasing power, compresses margins.

Interest Rates

Affect:
• Borrowing costs
• Construction
• Capital-intensive sectors
• Large purchases

Currency Movements

Affect global companies with international costs & revenues.

7. Defensive vs. Cyclical Industries

Defensive Industries

Stable regardless of economic conditions.
Examples:
• Healthcare
• Utilities
• Telecom
• Basic consumer goods
• Insurance
Characteristics:
• Essential services
• Habitual purchasing
• Regulated pricing
• Low price sensitivity

Mixed Industries

Part cyclical, part defensive.
Examples:
• Consumer tech (stable services + cyclical hardware)
• Real estate (rent + development)
• Food service (essential + discretionary)

8. Porter’s Five Forces

A timeless way to evaluate industry profitability.

1. Threat of New Entrants

High barriers → stable margins
Low barriers → constant pressure
Barriers include: capital, regulation, scale, brand, patents.

2. Supplier Power

High supplier power → higher costs.
Power rises when:
• Inputs are unique
• Few suppliers exist
• Switching is costly

3. Buyer Power

Strong buyers force lower prices or better terms.
Higher when:
• Buyers have alternatives
• Purchases are large
• Customers are concentrated

4. Threat of Substitutes

More substitutes → more pricing pressure.

5. Industry Rivalry

High rivalry reduces margins.
Influenced by:
• Slow growth
• Many similar competitors
• Commoditized products
• High fixed costs

THE PURPOSE OF THIS SECTION

To teach people:
“A business doesn’t operate in a vacuum — it operates in an ecosystem.”

When they understand the ecosystem, they can evaluate:
• Growth potential
• Margin durability
• Pricing power
• Risk exposure
• Long-term sustainability

This is how investors and operators think.