How a Company's Industry Can Influence Its Value - dummies

How a Company’s Industry Can Influence Its Value

By Matt Krantz

The battle for companies, and entire industries, to remain relevant in light of new ways of doing things is something you need to account for in your fundamental analysis.

The rise and fall of companies and industries follows a pretty standard script. Generally, things kick off when entrepreneurs get frustrated with existing products that don’t seem to fit some kind of need they have. By tinkering on the kitchen table or in the garage, these entrepreneurs may create a prototype of a product and often literally sell it out of the back of their cars.

Before you know it, this little company grows and the product might get so popular it threatens the survival of the companies that sold the undesirable products in the first place. Entire industries are born, and sometimes destroyed, by this constant upheaval in our economic system.

You want to be aware when a company you’re investing in might be threatened by a game-changing company or new technology. Almost overnight, all the revenue and earnings on the financial statements might not be meaningful if the business model, or way the company makes its money, is turned upside down. This is often referred to as disruption.

The constant assault against established industries is part of our capitalist system. Remember, air travel threatened railroads, personal computers threatened large mainframe systems used in business, and the Internet is an attack on traditional media.