Reading 40: Introduction to Industry and Company Analysis Flashcards
Distinguish between defensive and growth industries.
Defensive or stable industries are those whose profits are least affected by fluctuations in overall economic activity. Growth industries are industries whose specific demand dynamics override economic factors in determining their performance.
Identify the characteristics of the embryonic stage of the life cycle.
Slow growth as customers are still unfamiliar with the product.
High prices as volumes are too low to achieve significant economies of scale.
Significant initial investment.
High risk of failure.
List the elements that should be covered in a thorough company analysis.
Provide an overview of the company.
Explain relevant industry characteristics.
Analyze the demand for the company’s products and services.
Analyze the supply of products and services, including an analysis of costs.
Explain the company’s pricing environment.
Present and interpret relevant financial ratios, including comparisons over time and comparisons with competitors.
Differentiate between low and high barriers.
Low barriers to entry mean that new competitors can easily enter the industry, which makes the industry highly competitive. Companies in relatively competitive industries typically have little pricing power.
High barriers to entry mean that existing companies are able to enjoy economic profits for a long period of time. These companies have greater pricing power.
List the factors that affect market shares.
Barriers to entry
New products
Product differentiation
Name the 2 main competitive strategies identified by Porter.
Cost leadership
Product/service differentiation
Identify the characteristics of the life cycle decline phase.
Negative growth.
Excess capacity due to diminishing demand.
Price competition due to excess capacity.
Weaker firms leaving the industry.
List the limitations of industry life-cycle analysis and explain each.
Technological changes:
New products developed, which replace older products
Can change the way other industries conduct operations
Regulatory changes: Impact all sectors of the economy and can be direct or indirect Social changes
Changes in how people work, spend money, enjoy leisure time, and conduct other aspects of life
Demographics:
Population size, age distribution, and gender distribution
Has important influences on economic growth and types of goods and services consumed
List the 5 forces of Porter’s framework.
- Threat of substitute products
- Bargaining power of customers
- Bargaining power of suppliers
- Threat of new entrants
- Intensity of rivalry
Name the different stages of an industry’s life cycle.
Embryonic
Growth
Shakeout
Mature
Decline
