MidTerm Notes.docx - Chapter 2 u2013 Economic Industry...

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Chapter 2 – Economic + Industry Size-Up Business Size Up - Defined as a process for assessing internal and external factors + strengths or weaknesses of the firm (usually means SWOT) 1) Analyze the firm’s internal environment a) Operating activities b) Investing activities c) Financing activities 2) External a) Overall Economic Outlook b) Current Industry Trends Economic Size Up GDP - Look at GDP: Gross-Domestic Product total value of goods and services produced by a certain country - Real GDP: positive = growth, negative – shrinkage Business Cycles - Defined as cyclical changes in the business cycle; goes through a (1) Trough, (2) Expansion, (3) Peak, (4) Recession - Recession is defined as two consecutive quarters of decline in real GDP - Sector-related fluctuations can happen depending on what sector you’re looking at - Inflation: the rate at which prices increase in a country; typically measured relative to a basket of goods - Interest Rates: the yieldse2 on various debt-related financial instruments Industry Size-Up S1 = Low revenue, high potential, negative profits S2 = revenue grows rapidly, positive profits materialize typical IPO time S3 = intense competition, slower revenue growth, lower costs S4 = stabilized and mature S5 = period of decline
Porters Five Forces (The Competitive Environment) 1. The threat of new entrants - The easier it is for firms to enter your industry, the more capacity it has - This will push profit margins down - High barriers to entry is attractive to firms because they’re being safeguarded against new entrants o Ex: large CapEx, economies of scale, access to distribution channels, product differentiation, existing patents and proprietary technology 2. The threat of substitute products/services - If an industry offers a highly demanded, unique product, there is opportunity for other firms to share that profit - High prices force substitute products to emerge, causing profit margins to drop 3. The bargaining power of suppliers - Often those who are large, and concentrated in that they offer a unique good or service that can’t really be found anywhere else - They can exert pressure by raising prices 4. The bargaining power of customers - Customers who purchase large quantities may purchase a standard product from various different firms, enabling them to push down prices or demand higher quality 5. The intensity of rivalry among the current positions - This can result in lower profit margins as people compete for customers - More intense when the product/service is similar to a commodity - More intense in industries with high fixed costs PEST - Opportunities & Risks 1. Political Factors - Legislative changes that might add/eliminate regulation in a particular industry - Changes in tax or government incentives can result in lower/higher price offerings 2. Economic Factors - Cyclicality of the industry can have an effect on the profits of the company 3. Social Trends - Social trends such as healthiness, the latest fad, etc, can impact sales 4. Technological Improvements -

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