Industry Analysis Flashcards
Industry analysis enables the analyst to…
refine historical growth estimates
Motivation for industry analysis: Companies’ growth prospects are defined by their industries
Implications and information needs: Analyze competitive conditions in the industry
Motivation for industry analysis: The company’s position within the industry determines its opportunities
Implications and information needs: Relative market share of competing girms. Growth patterns of firms in the industry
Motivation for industry analysis: Industry analysis probides a benchmark for evaluating performance
Implications and information needs: Define performance criteria and compare firms in the industry (for example: gross profit/sales, return on equity)
Obtain information about the firm’s industries and its performance in those industries from…
- Annual report (10k) - description of business and management discussion and analysis
- Proxy statement - the SEC requires comparision of company with its peers as part of the information on executive compensation
- Segment disclosures in notes to the financial statements (financial results from industries and geographical operations)
Porter’s Five Forces
- Rivalry among existing firms: direct competition now
- Threat of new entrants: direct competition later
- Threat of substitute products: indirect competition
- Buyers’ bargaining power
- Suppliers’ bargaining power
Analyze Dell using Porter’s Five Forces model
- Strong rivalry among existing firms. Growth may be slow. Pressure on profit margins.
- High threats of new entrants - difficult to generate high profitable growth.
- Substitutes are here or on the horizon (tablets and phones).
- Buyers are less and less inclined to pay premium prices. Gross margins are likely to be lower.
- Microsoft and Intel are dominant suppliers - chip manufacturers and software suppliers (high cost). However, many hardware suppliers with low bargaining power, so there are some costs that can remain low.
What are the implications of Dell’s Five Forces model?
- Increasing growth may be difficult
- Increasing profit margins may be hard
- Inference for supernormal and steady-state growth
Porter’s Five Forces for the Personal Computer industry are…
Negative (strong rivalry, high threat of new entrants, strong buyer bargaining power)
and Neutral (low hardware costs contrasted with high software and chip costs - supplier bargaining power)
Cost Leadership
- Scale economies
- Simple product design, lower production cost
- Lower input cost
- Lower distribution cost
- Lower customer support cost
- Low R&D and advertising cost
- Tight cost control
Product Differentiation
- High product quality
- Greater product variety
- Better customer service (ex: flexible delivery)
- R&D investment
- Advertising - brand investing
- Systems to encourage innovation
Common-size financial statements provide insights on the firm’s performance relative to its peers and over time
Income Statement: Sales=100%, express all items as a percentage of sales
Balance Sheet: Total Assets=100%, express all items as a percentage of total assets
ROE Formula (DuPont Analysis)
ROE=Net Income/Common Equity
ROE=(Net Income/Sales)(Sales/Assets)(Assets/Common Equity)
Profit Margin
Net Income/Sales
Management performance as a seller of goods and services
Asset Turnover
Sales/Total Assets
Management efficiency in employing its assets to generate sales revenue
