Peer Group Analysis
Peer Group Analysis is the practice of comparing a firm's results to those of similar companies or competitors. We can say for competitive analysis, peer group analysis is important. Peer group analysis is part of establishing a compensation strategy. In a nut shell peer group analysis is mainly used to evaluate compensation. Performing in-depth peer analysis is essential to investment research and market positioning. Companies most commonly use peer group analysis to evaluate compensation plans at other organizations and make sure theirs are competitive. Companies identify their peers using factors such as industry, number of employees and geographic location, and then study the practices of those peers to make sure their own pay is up to execute.
In today’s scope, a company’s business strategy is incomplete until it is well aware of its competition. There are 3 steps to understand about their true peer groups.
Graphical representation of Peer Group
1. Creation of custom peer groups
- Identification of relevant companies by specific criteria, such as industry, lines of business, having similar sized portfolios, geography including local, regional, national, and international, size of business like terms of revenue, performance criteria, etc.
- Providing a brief overview of the industry in which the companies operates, the entry-exit parameters, intensity of competition in the industry, key players, market mechanisms.
2. Analyzing the peers
- Definition of the relevant criteria for the comparison of the peers like financial ratios, key performance indicators of the business, set-up of business model, business strategy, advanced technology employed with the client
- Comparison across selected criteria for peer group companies
- On the basis of ranking of companies and identification of best practice areas, helps the client to go ahead of the competition by being aware of their business challenges, competitors and business processes.
3. Learning from the best
- Deduction of key learning for the clients business and strategy
- Compilation of a list of specific measures as quick wins and long term measures
Compilation of Peer Group Data
Peer group data depends on the cost of compiling these data and in easy way. So, they can be reorganized to serve various analytical needs. Peer group data, should be compiled that allows quick, flexible, and low-cost data aggregation. Under such an approach, peer group data can potentially be compiled using the same principles as sector-level data. For example, intra group income and expense items and, depending on data availability, intra group equity holdings could be eliminated in constructing peer group data.
Peer group data could be compiled for groupings of deposit takers based on the following major characteristics:
Size of asset or revenues. The size of institutions might affect market competitiveness or market power.
Line of business. As for example, retail banks could be distinguished from advanced banks.
Type of ownership. For example, publicly controlled deposit takers might be distinguished from
Privately controlled deposit takers.
Types of Peer Groups
Depending on analytical needs and data availability, different types of peer groups may be constructed. For example, Ad Hoc Peer Groups that will cover recent entrants into the market, deposit takers with low capital ratios, with high levels of nonperforming loans, and concentrate on lending to particular types of borrowers. Other peer groups might be created on basis of total assets such as such as groups of similarly sized Deposit Takers
Descriptive Statistics Technique is useful in Disseminating Peer Group
Types of data available and the ease of using them, and any limitations on revealing information on specific institutions required statistics technique. Flexibility in selecting techniques should be maintained. However, in disseminating information to the public, some types of descriptive statistics may prove particularly useful, because they can describe concentration and dispersion without revealing information on individual institutions.
This example guides to find the conception of Peer Group Analysis in an easier way.
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