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How to Identify Diverging Trends in Seemingly Similar Industries

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by Robert Miles Analyst
Jun 06 2018

Context is key for understanding a business environment. When researching a specific topic, accounting for overall trends in a cursory analysis misses the real picture. Take, for example, electric power consumption in the United States. In 2018, solar, wind, hydroelectric, nuclear and coal and natural gas power operators are expected to generate $158.1 billion in total revenue, collectively growing at an annualized rate of 1.5% over the five years to 2018. In aggregate, recent revenue for energy producers paints a rosy picture; however, of these five sources of energy, two have experienced double-digit growth, two have experienced slow growth and one has declined over the past five years. What is driving these trends and what separates one industry from another?

Explaining trends through structural differences

Over the five years to 2018, solar power and wind power have grown an annualized 47.2% and 10.3%, respectively; hydroelectric power and coal and natural gas increased at annualized rates of 2.7% and 0.5%, respectively; finally, nuclear power fell an annualized 0.8% during the period. Each of these industries is exposed to similar broad macroeconomic variables that drive revenue growth, such as electric power consumption, but such variables could also account for some deviations. As a key driver of performance for coal and natural gas, wind power and solar power operators, the annualized 4.0% decrease in natural gas prices over the past five years has had a negative effect on the Coal and Natural Gas industry compared with a positive effect on the Wind Power and Solar Power industries.

diverging trends table

While external factors can provide meaningful insights, internal operating conditions enable a more nuanced understanding of less quantifiable factors. For instance, most of the performance drivers of nuclear power suggest upward pressure on revenue, but this has not proven to be the case. Despite increasing demand for, and prices of, electrical power, several nuclear power plants have closed in recent years. Industry capacity has been unable to increase fast enough, as regulations, competition and broad safety concerns have held the industry back. As a result, nuclear power has been outpaced by external competition.

Each of the five power industries has medium to low market share concentration, are exposed to heavy levels of regulation and are classified in a context of medium competition. Interestingly, year-to-year revenue volatility is lowest for nuclear power operators. The confluence of declining revenue and low volatility points to a much more pervasive decline than any single factor in isolation would suggest.

diverging trends infograph

Moving from trends to context

Diverging trends within a group of similar industries highlight the importance of in-depth analysis when undertaking a research question. Moreover, comparability and breadth of information drastically cut down the efforts required to answer even the most specific questions about industries. Higher level analysis and trends can direct research in one direction or another, but the dynamics that underscore these trends shine a light on what drives performance. Gaining a clear picture of an industry in its entirety enables research to move from simple data collection to complete knowledge formation.

Edited by Stephanie Conte. Designed by Anam Baig.