Australian Industries With a Natural Advantage or Defensibility

What companies make the most sense to focus and list locally

Some companies are meant to be global and end up on international stock exchanges like the NASDAQ. Others are better suited to focusing on local markets and exchanges like the ASX. But how do you know which companies are suited to which strategy?

We have a hypothesis that this comes down to the industry or domain (a subsection of an industry). We want to test this hypothesis with some data.

We want to find out which industries give a company a more natural advantage and defense against global competition. 

Rather than just make statements based on anecdata we want to take a robust and rigorous approach to this analysis. 

The method we’re going to follow will be:

1. Identify Industry Attributes

2. Design Industry Data Collection Method

3. Build Industry Data Set

4. Analyse Data

5. Test Attributes Against Industries/Companies 

6. Review Results

This body of research requires some time, so we will publish in stages as we work through it. We’d love to hear your thoughts as we go because we know there are talented people who have done similar work in the Mopoke community.

Today’s post will focus on Identifying Industry Attributes and the Design of the Industry Data Collection Method.

Identify Industry Attributes

For the Industry Attributes, we will consider what makes an industry or economic activity more naturally defensible against international competition.

Industry attributes that are barriers or dynamics will make it difficult for another player to enter the market. We want to think about the incentives, like factors that affect market entry or indicators of a lack of opportunity.

The attributes that we believe are likely to be of interest, in no particular order, are:

• Market Size ($): Bigger markets are more attractive and therefore more likely to invite competition. With a larger market, it is easier to justify the cost of entry.

• Competition (Number of Firms): Existing competition may have a bearing on how defensive an industry might be, possibly in relation to market size. We’ll use the number of firms as a proxy for competition.

• Market Growth: A growing market is likely to be more attractive to international competition. 

• Regulation: the extent to which local regulation requires unique changes to products or services in order to be viable. 

• Local Service: Some industries, due to regulation or other reasons, require or heavily prefer local service providers.

• Physical Distance: where products or services in an industry are required to travel or be sold across larger physical distances there are likely to be barriers to entry or leverage of existing capability in other regions. 

• Customer Type: the size and nature of the type of customer may have a bearing on international competition.

• Buying Cycle: where buying cycles take longer it may be harder for out-of-region competition to get a foothold. 

We are not conducting a more general assessment of the attractiveness of an industry. That is, we aren’t doing a something like a PESTEL or Porter’s Five Forces analysis to determine whether an industry itself is attractive. We are looking at defensiveness or natural advantages for companies that focus locally (regardless of whether the industry itself is attractive). 

We suspect there may be some overlap but it isn’t something we will cover.

We are also going to focus on Australia and, to a lesser extent, New Zealand.

Design Industry Data Collection Method

If we want to build a useful data set then we are going to have to 

Define An Industry List

To do this we need to start with a comprehensive view of Australian industry. 

This is provided to us by the Australian Bureau of Statistics and Statistics New Zealand who co-developed the Australian and New Zealand Standard Industrial Classification (ANZSIC). 

ANZSIC provides a way to categorize businesses in Australia and New Zealand as well as the world so that statistics can easily be compared. It is based on and compatible with the International Standard Industrial Classification of All Economic Activities (ISIC) developed by the United Nations and the North American Industry Classification System (NAICS) used in the United States, Canada and Mexico.

The only other available alternative in Australia and New Zealand with some level of rigor behind it is the Australian Tax Office’s Business Industry Codes but these are just derived from ANZSIC, so we will use ANZSIC. 

ANZSIC will help us categorize and analyze businesses by their economic activities. ANZSIC classifies businesses by:

1. 19 Divisions: broad macroeconomic activities (e.g. “Agriculture, Forestry and Fishing”)

2. 86 Subdivisions: further refinement of the broad macroeconomic activities (e.g. “Agriculture”, “Forestry” and “Fishing”)

3. 214 Groups: more specific economic activities (e.g. “Fruit and Tree Nut Growing”)

4. 508 Classes: most specific economic activities (e.g. “Olive Growing”)

Attribute Data

We will collect the attribute data as per the table below:

For some of the attributes we will use professional judgement to classify the industries:

• Physical Distance: Short (< 10km), Moderate (10km - 100km), Large (100km+)

• Customer Type: Small (0-19 employees), Medium (20-199), Large (200+), Government (government-owned or controlled agencies). 

• Local Service: Yes, No, Optional

• Buying Cycle: < 1 month, 3 months, 1 year, > 1 year

Next Steps

We are going to collect data on these attributes for a sample of industry domains to see what sort of insights we can gain.

If you want to follow along then please subscribe. If you want to share your thoughts, please hit reply.