R.28 Industry & Company analysis

Question 1

Impact of Competitive Forces on Prices and Costs (Porter’s 5-Forces)

Answer 1

Michael Porter’s “five forces” framework:

1. Threat of substitute products
   If there are many substitutes and switching costs are low, companies have little pricing power.
2. Intensity of rivalry
   Pricing power is limited if there is a fragmented industry, limited growth, high exit barrier, high fixed costs, and identical products.
3. Bargaining power of suppliers
   The profitability is limited if suppliers can easily increase their prices or limit quantity.
4. Bargaining power of customers
   The profitability is limited if customers can dictate the price or quality. The bargaining power of customers is less with a fragmented customer base, non-standardized product, or high switching cost.
5. Threat of new entrants
   High returns will attract new entrants, which will reduce future profitability. New entrants will be limited if there are high entry barriers.

Question 2

• Top down / bottrom up
• Segments disclosures
• What are calcs and considerations in revenue and expense forecasting?

Answer 2

• Top-down approaches usually begin at the level of the overall economy.
• Bottom-up approaches begin at the level of the individual company or unit within the company (e.g., business segment).
  
  • Time-series approaches are considered bottom-up, although time-series analysis can be a tool used in top-down approaches.
• Hybrid approaches include elements of top-down and bottom-up approaches.

Question 3

• Balance Sheet forecasting? (I/S- and non-I/S-related)
• Types of return on capital?
• Impacts on margins?

Answer 3

Question 4

• Inflation impacts;
• Cannibalization;
• Factors influencing explicit forecast horizon

Answer 4

• Inflation (deflation) affects pricing strategy depending on industry structure, competitive forces, and the nature of consumer demand.
• When a technological development results in a new product that threatens to cannibalize demand for an existing product, a unit forecast for the new product combined with an expected cannibalization factor can be used to estimate the impact on future demand for the existing product.
• Factors influencing the choice of the explicit forecast horizon include the projected holding period, an investor’s average portfolio turnover, cyclicality of an industry, company specific factors, and employer preferences.