Industrial Analysis Flashcards
Classification of industry?
1) growth industries
2 ) Cyclical industries
3) defensive industries
4) cyclical growth industries
What is growth industries?
It has higher than average growth rate .
It is nee or pioneer industries
Is growth industries or volatile,risks or stable, risk free?
Volatile and risky
Characteristics of growth industries?
Consistent and Growing sales, influx of investments and press hype
What are risks of growth industries?
1) high rates of cash burn
2) lack of profitability despite consumer demand
3)bubbles
4) technological setbacks
What are the examples of growth industry?
B
What is cyclical industries?
It is sensitive to buisness cycle
Examples of cyclical industries?
1)durable goods like raw materials and heavy equipment
2) consumer discretionary goods
What is defensive industries?
Industries which makes products and services that are essential. Sales and earnings of companies remain stable during all buisness cycles.
Examples for defensive industries?
Consumer staples, energy, utilities,telecommunications services and health care
Cyclical growth industries?
Posses characteristics of cyclical industries and growth industries
Examples of cyclical growth industries?
Automobile industries
What are porters five force model?
1) competition in the industry
2) Threat of potential new entry
3) Threat of substitute product and services
4) Bargaining power of supplier
5) bargaining power of customer
What happens when competitions increases in the industry?
Pro:
1) efficiency
2) product improvement
3 ) innovation
Cons:
1) price wars
2) higher advertising spends
3) lower margin
4) smaller profits
Factors affecting industrial rivalries?
1) equals balanced competitors
2) slow industry growth
3) Demand
4) cost structure of industry
5) switching cost
6 ) product differentiation
7) economies of scale
8) Exit barriers
9) Industry profitability
How cost structure of industry affects industrial rivalry?
Higher the fixed cost component , higher is the sales volume necessary to achieve breaker point
How to increase sales?
Price cuts and higher advertising.
What happens when switching cost is low in industrial rivalry?
Rivalry increases
How product differentiation affects industrial rivalry?
If product differentiation is low . Rivalry increases as consumers buyers makes choice on product prices.
How economies of scale affect industries rivalry?
High economies of scale , causes production to exceed demand which results in price reduction
How exit barriers affect industrial rivalry?
High exit barriers causes fierce competition.
Some examples of exit barrier from industry?
Specialised assets, High fixed cost of exit, strategic factors, government restrictions and emotional barriers
How industry profitability affects industry rivalry?
If particular industries are more profitable, more new companies enter so competition increases
What are the factors affects that affects new entrants to the industry?
1) Economies of scale
2) Capital Requirement
3) Government policy
4) cost disadvantage independent of size
5) product differentiation and brand loyalty?
6) switching costs
7) Access to distribution channel
8) Cost of capacity addition
9) Expected retaliation?
10) Industry profitability?
11) Legal patents
12) Stage in industry life cycle
How economies of scale affects new entrants?
Higher Economies of scales acts as good entry barrier because average costs will be higher than that of already existing companies which are benefiting from economies of scale
How capital requirements affect industries rivalry?
Low capital requirement have fierce competition and large number of competitors.
How capital requirements affects new entrants?
High capital investments require large capital base and high fixed cost structure so few competitors make entry.
How government policy affect new entrants?
Government policy can limit new entrants because of licensing requirements , limits to access of raw materials.
How cost disadvantage independent of size affect new entrants?
When established companies may have cost advantages that cannot be replicated by potential entrants.
Example: factors include the learning, experience curve, proprietary product technology ,access to raw materials, favourable location and subsidies.
How product differentiation and brand loyalty affect new entrants?
Established company often develop consumer loyalty through establishing a strong brand image and this provides good entry barriers and new entrants is forced to spend heavily on advertising to overcome these loyalties.
How switching costs affect new entrants?
High switching costs provide good entry barrier.under such cases the new company has to offer a product which is either too cheap without compromise in quality or the product offering tremendous improvement.
How access to distribution channel affect new entrants?
Difficulty in securing access to distribution channels can be an entry barrier.
How cost of capacity addition affects new entrants?
Cost of capacity addition is higher entry barrier is high
How expected retaliation affect new entrants?
High expected retaliation increases entry barrier
How industry profitability affect new entrants?
High industry profitability low entry barrier
How legal parents affect new entrants?
Legal patents serve as good entry barrier
How state in industry life cycle affect new entrants?
If industry is new or emerging, completion will increase. If industry is mature or declining entry barrier is high
What are substitute products or services?
Products with same functionality or quality but lesser price .
Or products of the same price but of better quality or providing more utility.
How substitute product or service affect investing decision?
If In a particular industry threat of substitution is higher one must be careful while investing in that industry.
What are factors that affects how much is the threat of substitution?
1) Ease of substitution
2) Availability of substitutes
3 ) switching costs
4) Relative price performance of substitute
5) Relative quality performance of substitute
6) Product Differentiation and Brand loyalty
How switching costs affects threat of substitution?
High switching costs results in low threat of substitution.
How price of product affects threat of susubstitue?
For similar quality product , if price of substitute is lower , competitive threat increases.
How quality of product affects threat of substitute?
For similarly priced product or service , if quality of substitute is better, competitive threat increases
How Product differentiation and brand loyalty affect threat of substitution?
Higher the brand loyalty and brand image , less is the threat of substitution.
What are the factors affecting bargaining power of a supplier?
1) Existence of monopoly
2) Demand
3) Switching cost
4) Available of substitute
5) Importance of product and services
6) Threat of vertical integration
How threat of vertical integration affects bargaining power of supplier?
If a supplier has power to integrate vertically, bargaining power of supplier increases
What are the factors affecting bargaining power of customer?
1) concentration of customer
2) Demand
3) Switching cost
4) Availability of substitutes
5) Volume of purchase
6) Buyers information
7) threat of backward integration
8) Product Differentiation
9) Bargaining power
What are the important factors to watch out while selecting an industry for investment?
1) Stages in life cycle of industry
2) Growth prospects of industry
3) Profitability of the industry
4) Nature of competition
5) Demand supply gap
6 ) Permanence
7 ) Cost structure of the industry
8) Attitude of the government towards the industry
9) Availability of raw materials
10) Labour conditions and other industrial problem
11) Severity of pollution hazard?
12) Industry valuation
Is it good to invest during company’s growth state?
Yes
Whether to invest or divest during company’s maturity stage or start of the decline stage.
Divest
Is it better to invest when growth prospects of industry is higher?
Yes
How to invest based on the profitable of the industry?
It is better to invest in industries which are able to maintain their profitability, even during tough times
Is it wise to invest in industry which has fierce competition?
No because less profit margin and huge advertising costs .
Is it wise to invest in industry when gap between supply and demand is higher ( demand>supply)?
Yes
What to do when gap between supply and demand vanishes or supply exceeds demand?
Disinvest
How to invest in industry based on permanence?
Invest in industry which has high degree of permenance
What is cost structure of industry?
It refers to the proportions of fixed and variable costs that a business Incurs
If fixed component is low compared to the variable cost , ( and vice Versa) what will be the break even point?
High fixed cost means break even point will be higher.( need high sales volume)
Lower fixed cost means lower break even point.
Is it wise to invest in industry which has better cost structure and lower break even point?
Yes
How governments encourage the growth of certain industries?
By providing incentives, assistance, less taxation, favourable legislation (I.e exports oriented industries)
How government discourage the growth of certain industries?
By heavy taxation, permit and control regime( I.e alcoholic,cigarettes and polluting industries)
How to invest based on availability of raw materials?
Invest in industries where supply of raw materials is fairly stable in long term. Because scarcity in raw materials can cause hime in raw materials prices thereby affecting profit margins of the entire industry.
Is it better to invest in industry which is labour intensive?
No . Because labour strike always looms
Is better to invest in industry which has high storage cost, high transportation cost, high employee attrition rate?
No In all cases
What is employee attrition rate?
Does high environmental regulation affects profitability?
Yes
Is it better to invest in industry or sectors which are less prone to effect of environmental regulation.
Yes
What to do when current prices are very high relative to the futures earning growth?
Avoid investing
