K: Describe the elements that should be covered in a thorough company analysis

Question 1

Company analysis should include an overview of the firm, industry characteristics, and analysis of product demand, product costs, the pricing environment, the firm’s financial ratios, and projected financial statements and firm valuation. The analysis should describe the company’s competitive strategy.

Answer 1

Company analysis include the following elements: (see page 233 ‐
234)
– Firm overview ‐ operations, governance, and strengths and
weaknesses
– Industry characteristics
– Product demand
– Product costs
– Pricing environment
– Financial ratios, with comparisons to other firms and over time
– Projected financial statements and firm valuation
• ROE should be part of the financial analysis. It is a function of
profitability, total asset turnover, and financial leverage.

Question 2

Companies can employ a cost leadership (low-cost) strategy or a product or service differentiation strategy. A cost leadership firm seeks to have the lowest costs of production in its industry, offer the lowest prices, and generate enough volume to make a superior return. A differentiating firm’s products and services should be distinctive in terms of type, quality, or delivery.

Answer 2

• Financial condition
• Products and services
• Competitive strategy – how firm responds to opportunities and
threats of the external environment

Question 3

• Porter identified two important competitive strategies

Answer 3

– Cost leadership (low‐cost) strategy
• Use defensively to protect market share
• Offensively to gain market share
• Predatory pricing ‐ drive out competitors and later increase prices
– Product or service differentiation strategy
• Differentiation strategy, the firm’s products and services should be
distinctive in terms of type, quality, or delivery
• Cost of differentiation must be less than the price premium buyers
place on product differentiation

Question 4

An aggressive price reduction to gain market share is most likely to be associated with a: cost leadership strategy.

Answer 4

Michael Porter identified two competitive strategies: cost leadership and product or service differentiation. A firm that uses a cost leadership or low-cost strategy seeks to have low production costs that will enable it to offer lower prices than its competitors to protect or gain market share. A product or service differentiation strategy seeks to gain a price premium for its products by making them distinctive to the consumer.

Question 5

A firm that pursues a differentiation strategy is most likely to emphasize: market research.

Answer 5

A firm that follows a product or service differentiation strategy needs to emphasize market research to identify needs for which customers are willing to pay a premium. Market share and operating efficiency are more of a focus for firms that pursue a low-cost strategy.