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Lesson 3 of 5 11–14% of the exam

You are reading the 2026 curriculum (exams up to November 2026). Sitting in February 2027 or later? Go to the 2027 Equities guide.

Industry size, growth, profitability and concentration

Size an industry by annual sales of the relevant product, measure growth as a compound annual rate and call it growth or mature, defensive or cyclical. Judge profitability by the spread of return on invested capital (ROIC) over time, and concentration with the Herfindahl-Hirschman Index: the sum of squared market shares.

6 min cram, 28 min full read. Based on the 2026 CFA® Program Level I curriculum, Equity Investments, Learning Module 6. This is the 2026 version of the lesson. Sitting in February 2027 or later? Read the updated 2027 version.

Tailor this to you: take the self-assessment

Before this: Industry classification: GICS, ICB, TRBC and other groupings, Concentration ratio and Herfindahl-Hirschman index

On the exam

  • Determine an industry’s size, growth characteristics, profitability, and market share trends

Determine an industry's size, growth characteristics, profitability and market share trends. Expect: compute a compound annual growth rate (CAGR) or an HHI (and the effect of a merger); place an industry in the growth style box; read profitability and share trends.

How deeply to learn each part
Know the idea
Understand it in general. It frames other topics, but you will not calculate with it.
Use it
Understand it well enough to solve a question with it. Recognize when it applies.
Memorize
Learn it by heart. The exam will not give it to you.

You know this one. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still do.

You tested strong here. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still know it.

Cram mode: the one-screen version of this lesson. Switch to Full for the explanations, worked examples and interactives.

How big is the industry, and how fast is it growing?

Industry size is the total annual sales of the product, measured from the product or customer view. It is not the sum of every constituent’s total sales, because a constituent may have segments in other industries. A carmaker’s insurance arm, for instance, does not count toward the size of the car industry.

Many industries include private companies and small businesses that publish no figures. Analysts then estimate size from government statistics, consultancy surveys or issuers’ presentations, and check that the estimates are reasonable.

Growth is measured year by year or as a compound annual growth rate (CAGR) over several years. Where possible, split it into volume and price/mix, because a market growing on price alone is a different story from one growing on units.

Compound annual growth rate Memorize
g=(SNS0)1/N−1g = \left(\frac{S_N}{S_0}\right)^{1/N} - 1
Rearrange itCompound annual growth rate: solve for any one
The question asks for
An industry's annual sales grew from 42.00 to 55.30 over 5 years. Its compound annual growth rate is closest to:

(55.30 ÷ 42.00)^(1/5) − 1 = 5.66%

Compound annual growth rate5.66%

On your calculator
  1. 55.3÷42=y^x51/x=−1=

y^x power · 1/x reciprocal

  1. 55.3ENTER42÷51/xy^x1−

ENTER enter (on the HP, puts the number on the stack) · 1/x reciprocal · y^x power

InteractiveA regional cement market: how big, how fast, how concentrated?

Try this 0 of 3

  • Concentration: merge the two largest firms and compare the jump with the 20% + 10% merger
  • Concentration: type the shares as decimals (0.35, 0.25 ...) and read the HHI
  • Growth: place all four industries in the right box

Market shares in the regional cement market. Tick two firms to test a merger.

Shares add up to 100%.

Each firm's squared share (its contribution to the HHI)

01,5002,5006,000lowmoderatehigh2,450 → 2,850
HHI2,450
After C + D merge2,850
Change+400
Monopoly (100²)10,000

Before: 2,450, moderately concentrated. If C and D merge: 2,850, highly concentrated (+400, which is 2 × 20 × 10). A rise of more than 200 points in a highly concentrated market is likely to face a regulatory challenge.

Show working

Use whole-number shares: 35, 25, 20, 10, 10.

HHI = 35² + 25² + 20² + 10² + 10² = 1,225 + 625 + 400 + 100 + 100 = 2,450 (moderately concentrated).

If C and D merge they hold 30%: new HHI = 2,850. Change = 30² − 20² − 10² = 2 × 20 × 10 = +400.

Thresholds used by some regulators: 1,500 to 2,500 moderately concentrated, above 2,500 highly concentrated; a rise of more than 200 points in a highly concentrated market is often challenged.

HHI on your calculator
  1. 35x²+25x²+20x²+10x²+10x²=HHI 2,450
  2. 2×20×10=change if C and D merge, +400

x² square

  1. 35ENTER×25ENTER×+20ENTER×+10ENTER×+10ENTER×+HHI 2,450
  2. 2ENTER20×10×change if C and D merge, +400

ENTER enter (on the HP, puts the number on the stack)

Squaring the shares makes big players count most: two mid-sized firms merging can tip a market into 'highly concentrated'.

Is it a growth or a mature industry, defensive or cyclical?

Comparing the industry’s growth with the broader economy, in recessions and expansions, characterizes it on two separate dimensions. Together they give the industry growth style box .

A growth industry has not yet reached full saturation of its addressable market, so it has growth drivers of its own, often a new technology. The key questions are how long high growth will last and where penetration will peak, and both are harder to answer the newer the industry is. A mature industry has fully penetrated its market. Its growth is in line with the economy or falls as customers move to a substitute, so the questions are about disruption, the intensity of competition and the speed of decline.

DefensiveCyclical
Growthnot yet saturated, little cycle sensitivity (specialty medicines, subscription software)not yet saturated, but sensitive to the cycle (chip making, online advertising)
Maturesaturated and steady (utilities, soft drinks)saturated and cycle driven (oil and gas, freight, cement)

Sensitivity to the business cycle comes from the business models in the industry.

What makes an industry cyclical
Sensitivity to the business cyclea feature of the business models in the industry
  • Discretionary versus necessary sales Memorize purchases that can wait are cyclical
  • Pricing power Use it weak pricing power amplifies the swings
  • Interest rate exposure of the business model Memorize credit-funded purchases and borrowers
  • Durable or capital goods versus recurring purchases Memorize consumables and subscriptions are steadier

Be careful with the labels. A severe downturn hurts almost every company, so the difference is often of degree. And a young firm with a new technology can keep growing inside a cyclical industry.

Exam tip Two separate questions, two separate answers. “Slow growth” does not make an industry defensive, and “sensitive to the cycle” does not make it a growth industry.

How profitable is the industry?

Industry profitability is best shown by the distribution of ROIC across the industry’s companies over time, for example the 25th, 50th and 75th percentiles each year. ROIC captures after-tax operating profit per unit of capital and does not depend on how the companies are financed. The data are rarely available for private companies, so analysts commonly measure the public companies and assume that private rivals are similar, estimate the private ones from production costs and prices, or use government or consultancy surveys of margins.

A profitable industry is better than an unprofitable one, but the trend matters more than the level. If profitability is rising or falling, the analyst needs to know why.

Who has the market share, and how concentrated is the industry?

Market share is a company’s annual sales divided by the industry size, calculated each year.

Market share Memorize
s=company salesindustry sizes = \frac{\text{company sales}}{\text{industry size}}

Because the industry size is itself an estimate, read shares as a range. The trend is again more informative than the level: it shows whether customers are choosing a company’s products over its rivals’. Check how a share gain was made. Buying a competitor is a share gain, but what matters is whether the company is gaining share organically.

Rearrange itMarket share: solve for any one
The question asks for
A producer has sales of 19.36 in an industry with annual sales of 55.30 (same units and period). Its market share is closest to:

19.36 ÷ 55.30 = 35.01%

Market share35.01%

On your calculator
  1. 19.36÷55.3=
  1. 19.36ENTER55.3÷

ENTER enter (on the HP, puts the number on the stack)

Industry concentration says how much of the industry sits with a few firms. Low concentration (many small competitors) usually means intense competition, unless the industry is service-oriented, local or highly differentiated. Rising concentration (consolidation) is associated with weaker competition and higher profitability. The usual measure is the Herfindahl-Hirschman Index (HHI) .

Herfindahl-Hirschman Index Memorize
HHI=∑i=1nsi2HHI = \sum_{i=1}^{n} s_i^2

Shares go in as whole numbers: a 50% share is 50, not 0.50. A monopoly scores 100² = 10,000. Equal firms score 10,000 ÷ n, so four equal firms score 2,500. Antitrust regulators in some countries treat an HHI of 1,500 to 2,500 as moderately concentrated and above 2,500 as highly concentrated. As a rule of thumb, a merger in a highly concentrated market that raises the HHI by more than 200 points often gets challenged.

The change from a merger depends only on the two firms that merge, because squaring (a + b) adds an extra term 2ab.

Change in HHI from a merger Use it
ΔHHI=2 sA sB\Delta HHI = 2\,s_A\,s_B
Rearrange itHHI after a merger: solve for any one
The question asks for
An industry has an HHI of 2450. Two firms with market shares of 20% and 10% merge, and no other share changes. The HHI after the merger is closest to:

2450 + 2 × 20 × 10 = 2850

HHI after the merger2850

On your calculator
  1. 2×20×10+2450=
  1. 2ENTER20×10×2450+

ENTER enter (on the HP, puts the number on the stack)

Merging the two 10% producers instead adds 2 × 10 × 10 = 200, taking the HHI to 2,650: highly concentrated, but exactly at, not over, the 200-point rule of thumb. Any merger raises the HHI, and the bigger the merging firms, the bigger the jump.

What an industry survey measures
Industry surveystep 2 of industry and competitive analysis
  • Size Use it annual sales of the product, from the customer or product view
  • Growth rate and character Memorize year-over-year or compound annual; split into volume and price/mix
    • Growth versus mature Memorize saturation of the addressable market
    • Defensive versus cyclical Memorize sensitivity to the business cycle
  • Profitability Use it ROIC distribution over time; the trend matters more than the level
  • Market share trends and concentration Memorize organic versus acquired; HHI
Go deeper Why industry size is often an estimate

Where small and private firms make up much of an industry, no one counts their sales exactly. Analysts triangulate: a government census of businesses, a consultant’s survey and the investor presentations of large players. When three sources land close to each other, confidence rises. When they do not, say so and treat the size, and therefore every market share, as a range.

Go deeper Why a share bought by acquisition says little

A company that buys a rival adds the rival’s share overnight, but its own products have not become more attractive. Organic share, the change excluding acquired sales, shows whether customers are choosing the company. Also watch for a disruptive entrant: a pioneer that wins a large share of a new channel is a threat to the established players even while they still hold most of the total.

Memorize this

MemorizeIndustry growth style box

DefensiveCyclical
Growthnot saturated, little cycle sensitivity (specialty medicines, subscription software)not saturated, cycle sensitive (chip making, online advertising)
Maturesaturated, steady (utilities, soft drinks)saturated, cycle driven (oil and gas, freight, cement)

Memory hook Two questions place any industry: has it filled its market (growth or mature)? Does it follow gross domestic product, or GDP (cyclical or defensive)?

Know it cold Growth industries: how long will growth last, and what is peak penetration? Mature industries: watch for disruption, competitive intensity and the speed of decline.

MemorizeFormulas to recall

MeasureFormulaWatch
CAGR(end ÷ start)^(1/years) − 1not total growth ÷ years
Market sharecompany sales ÷ industry sizerange, not a point; organic vs acquired
HHIΣ share² (whole numbers)monopoly 10,000; decimals give a number below 1
Merger effectΔHHI = 2 × share A × share Balways positive

Memory hook Squaring makes big firms count most: equal firms give 10,000 ÷ n, so four equal firms give 2,500.

Know it cold HHI 1,500 to 2,500 moderately concentrated; above 2,500 highly concentrated; a merger adding more than 200 in a highly concentrated market draws scrutiny.

What an industry survey measures
Industry surveystep 2 of industry and competitive analysis
  • Size Use it annual sales of the product, from the customer or product view
  • Growth rate and character Memorize year-over-year or compound annual; split into volume and price/mix
    • Growth versus mature Memorize saturation of the addressable market
    • Defensive versus cyclical Memorize sensitivity to the business cycle
  • Profitability Use it ROIC distribution over time; the trend matters more than the level
  • Market share trends and concentration Memorize organic versus acquired; HHI
What makes an industry cyclical
Sensitivity to the business cyclea feature of the business models in the industry
  • Discretionary versus necessary sales Memorize purchases that can wait are cyclical
  • Pricing power Use it weak pricing power amplifies the swings
  • Interest rate exposure of the business model Memorize credit-funded purchases and borrowers
  • Durable or capital goods versus recurring purchases Memorize consumables and subscriptions are steadier
Compound annual growth rate Memorize
g=(SNS0)1/N−1g = \left(\frac{S_N}{S_0}\right)^{1/N} - 1
Quick example

Industry sales fall from 12.0 to 9.6 over 3 years. (9.6 ÷ 12.0)^(1/3) − 1 = −7.17% a year. The simple average, −20% ÷ 3 = −6.67%, is the trap.

On your calculator
  1. 9.6÷12=y^x31/x=−1= −0.0717

y^x power · 1/x reciprocal

  1. 9.6ENTER12÷31/xy^x1− −0.0717

ENTER enter (on the HP, puts the number on the stack) · 1/x reciprocal · y^x power

Market share Memorize
s=company salesindustry sizes = \frac{\text{company sales}}{\text{industry size}}
Quick example

A producer with sales of EUR 6.6 billion in an industry of EUR 55.3 billion. 6.6 ÷ 55.3 = 11.9%. Use the same units and the same period.

On your calculator
  1. 6.6÷55.3= 0.1194
  1. 6.6ENTER55.3÷ 0.1194

ENTER enter (on the HP, puts the number on the stack)

Herfindahl-Hirschman Index Memorize
HHI=∑i=1nsi2(si as whole numbers)HHI = \sum_{i=1}^{n} s_i^2 \quad (s_i \text{ as whole numbers})
Quick example

Five equal firms with 20% each. 5 × 20² = 2,000. A 50% share is typed as 50, never 0.50. Monopoly = 100² = 10,000.

On your calculator
  1. 20x²+20x²+20x²+20x²+20x²= 2000

x² square

  1. 20ENTER×20ENTER×+20ENTER×+20ENTER×+20ENTER×+ 2000, ENTER then × squares

ENTER enter (on the HP, puts the number on the stack)

Change in HHI from a merger Use it
ΔHHI=2 sA sB\Delta HHI = 2\,s_A\,s_B
Quick example

Firms with 25% and 15% shares merge. 2 × 25 × 15 = +750. Check: (25 + 15)² − 25² − 15² = 1,600 − 625 − 225 = 750.

On your calculator
  1. 2×25×15= 750
  1. 2ENTER25×15× 750

ENTER enter (on the HP, puts the number on the stack)

How it is asked

  1. Compute the HHI

    Shares of 40%, 30%, 20% and 10%. HHI?

    1,600 + 900 + 400 + 100 = 3,000. Decimal shares (0.30) and summing the shares (100) are the traps.

  2. Compute the CAGR

    Sales rose from 18.0 to 24.0 over four years.

    (24 ÷ 18)^(1/4) − 1 = 7.46%. Total growth ÷ 4 (8.33%) is the trap.

  3. Place it in the style box

    Fully penetrated market; sales fall sharply in recessions.

    Mature and cyclical. Saturated means mature; the recession drop means cyclical.

  4. Merger effect on concentration

    The leader buys its closest rival. What happens to the HHI?

    It rises. Fewer firms and a bigger share for the leader; locations and store counts do not matter.

Exam traps

  • Using decimal shares in the HHI (0.35² and so on), which gives a value below 1. This module uses whole numbers, so 50% is 50.
  • Using the simple average of yearly growth, or total growth divided by years, instead of the compound annual growth rate.
  • Reading a high current margin as attractive without checking its trend: the direction of profitability matters more than the level.
  • Reading a share gained by acquisition as competitive strength: look at organic share change.
  • Calling a slow-growth industry defensive. Growth versus mature and defensive versus cyclical are two separate questions.

Checkpoint

3 exam-style questions. About 90 seconds each.

  1. 1An industry has four firms with market shares of 40%, 30%, 20% and 10%. Its Herfindahl-Hirschman Index is closest to:

  2. 2An industry's sales grew from USD 18.0 billion to USD 24.0 billion over four years. Its compound annual growth rate is closest to:

  3. 3An industry that has fully penetrated its market and whose sales fall sharply in recessions is best described as:

Key takeaways

  • Industry size is annual sales of the product, not the sum of every constituent's total sales. Grow it with the CAGR.
  • Style box: growth or mature, defensive or cyclical.
  • Profitability: the distribution of ROIC across the industry over time, and above all its trend.
  • HHI = sum of squared shares as whole numbers. Above 2,500 is highly concentrated.
Compound annual growth rate Memorize
g=(SNS0)1/N−1g = \left(\frac{S_N}{S_0}\right)^{1/N} - 1
Quick example

Industry sales fall from 12.0 to 9.6 over 3 years. (9.6 ÷ 12.0)^(1/3) − 1 = −7.17% a year. The simple average, −20% ÷ 3 = −6.67%, is the trap.

On your calculator
  1. 9.6÷12=y^x31/x=−1= −0.0717

y^x power · 1/x reciprocal

  1. 9.6ENTER12÷31/xy^x1− −0.0717

ENTER enter (on the HP, puts the number on the stack) · 1/x reciprocal · y^x power

Market share Memorize
s=company salesindustry sizes = \frac{\text{company sales}}{\text{industry size}}
Quick example

A producer with sales of EUR 6.6 billion in an industry of EUR 55.3 billion. 6.6 ÷ 55.3 = 11.9%. Use the same units and the same period.

On your calculator
  1. 6.6÷55.3= 0.1194
  1. 6.6ENTER55.3÷ 0.1194

ENTER enter (on the HP, puts the number on the stack)

Herfindahl-Hirschman Index Memorize
HHI=∑i=1nsi2(si as whole numbers)HHI = \sum_{i=1}^{n} s_i^2 \quad (s_i \text{ as whole numbers})
Quick example

Five equal firms with 20% each. 5 × 20² = 2,000. A 50% share is typed as 50, never 0.50. Monopoly = 100² = 10,000.

On your calculator
  1. 20x²+20x²+20x²+20x²+20x²= 2000

x² square

  1. 20ENTER×20ENTER×+20ENTER×+20ENTER×+20ENTER×+ 2000, ENTER then × squares

ENTER enter (on the HP, puts the number on the stack)

Change in HHI from a merger Use it
ΔHHI=2 sA sB\Delta HHI = 2\,s_A\,s_B
Quick example

Firms with 25% and 15% shares merge. 2 × 25 × 15 = +750. Check: (25 + 15)² − 25² − 15² = 1,600 − 625 − 225 = 750.

On your calculator
  1. 2×25×15= 750
  1. 2ENTER25×15× 750

ENTER enter (on the HP, puts the number on the stack)

Questions about this lesson?

Where this comes back

Questions candidates ask

How do you calculate the Herfindahl-Hirschman Index?

Square each firm's market share in whole numbers and add the results. Four firms with 25% each give 4 × 625 = 2,500. A monopoly gives 10,000.

What is the difference between a growth and a mature industry?

A growth industry has not yet saturated its market, so it grows for reasons of its own. A mature industry has, and it grows with the economy or declines as customers move to substitutes.

How do analysts measure industry profitability?

Ideally by the distribution of returns on invested capital across companies over time. When that is unavailable they use the margins of public companies or survey data, and focus on the trend.

Spotted an error? Tell us and we will fix it.

  1. Why analyze an industry, and the steps to do it
  2. Industry classification: GICS, ICB, TRBC and other groupings
  3. Industry size, growth, profitability and concentration
  4. Porter's Five Forces and PESTLE analysis
  5. Competitive strategy: cost leadership, differentiation and focus

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