Building a sector overview report

What you will learn

• A standard structure for a one- to three-page sector overview
• How to measure market size, growth and concentration (CR4 and HHI)
• How to summarise drivers, cycle position and valuation without predicting prices
• How to define watch indicators and scenarios that keep the report useful

Explanation

A sector report is a tool for your own decisions: it tells you how an industry makes money, what moves it, and what to watch. It is not a buy or sell recommendation. Use the same structure for every sector so that reports stay comparable.

Recommended structure

1. Scope: which sub-industries and regions you cover, and which index or classification you use.
2. Size and growth: market size in euros and growth over several years. Use the compound annual growth rate (CAGR): (end value ÷ start value)^(1 ÷ years) − 1.
3. Structure: number of competitors and concentration (see below), plus your five-forces scorecard and value-chain profit pool from lesson 10.
4. Drivers: the three to five variables that explain most of the results, for example order intake for industrials, volume and pricing for staples, ARPU for telecoms, interest rates for real estate.
5. Cycle position: evidence, not opinion: margins compared with their 10-year range, capacity utilisation, book-to-bill, inventory levels.
6. Key metrics and peers: a peer table built as in lesson 11.
7. Valuation: the sector's current multiple compared with its own history and with the overall market. State the source and date of each figure.
8. Risks: regulation, technology change, input costs, debt and refinancing, currency.
9. Watch indicators and scenarios: what would change your view.

Measuring concentration

The concentration ratio CR4 is the combined market share of the four largest companies. The Herfindahl-Hirschman Index (HHI) is the sum of the squared market shares of all companies, with shares in percent. It ranges from close to 0 (many tiny firms) to 10,000 (one firm with 100%). Squaring gives large firms more weight, so the HHI reacts more strongly than CR4 when one leader dominates.

Competition authorities use HHI thresholds to review mergers, and these thresholds differ between authorities and change over time. For example, the US merger guidelines published in 2023 describe markets above 1,800 as highly concentrated. For your report, use HHI mainly to compare sectors and track changes over time; check current official guidance if you need the legal thresholds.

Higher concentration often means less price competition (lower rivalry), but it also invites regulatory attention.

Watch indicators and scenarios

Write two or three simple scenarios (for example, "base", "weaker demand", "cost shock") and, for each, the observable data that would tell you it is happening: a book-to-bill below 1 for two quarters, negative volume growth, a refinancing at much higher rates. Then set a review date. This turns the report into a monitoring tool instead of a forecast.

Writing rules

• Separate facts (with source and date) from your interpretation.
• Write historical observations as history, not as expectations: "margins ranged from 8% to 14% over the last ten years" rather than "margins will return to 14%".
• Keep it short. If a section does not help a decision, remove it.

Worked example

Hypothetical example: a European elevator and escalator industry. All figures are invented round numbers.

1. Size and growth: market size grew from €34bn to €40bn over 3 years. CAGR = (40 ÷ 34)^(1/3) − 1 = 1.0557 − 1 = 5.6% per year.
2. Market shares: 30%, 25%, 20%, 15% and 10% for five companies.
3. CR4 = 30 + 25 + 20 + 15 = 90%.
4. HHI = 30² + 25² + 20² + 15² + 10² = 900 + 625 + 400 + 225 + 100 = 2,250.
5. Drivers: new-building construction (cyclical) and maintenance contracts (recurring, about half of revenue in this hypothetical case).
6. Cycle evidence: new-installation orders falling for three quarters; maintenance revenue still growing.
7. Watch indicators: new-installation book-to-bill, maintenance contract renewal rates, steel prices.

Summary line: "A concentrated industry (HHI 2,250) with a recurring maintenance base that softens the construction cycle; new-installation orders are the main indicator to watch."

Common mistake

Practice activity

Using the hypothetical elevator industry above, the companies with 15% and 10% market share agree to merge. On paper: (a) calculate the new CR4 and HHI; (b) calculate the HHI change; (c) write one sentence for the "Structure" section of the report.

Key takeaways

• Use one fixed structure: scope, size, structure, drivers, cycle, peers, valuation, risks, watch list.
• CAGR measures growth; CR4 and HHI measure concentration.
• Describe the cycle with evidence and state the source and date of every figure.
• Scenarios with observable triggers make the report a monitoring tool, not a forecast.

Next step

Continue with the course "Market History: Bubbles, Crashes & Lessons" to see how sectors and whole markets behaved during past booms and crises.