Overview of economic industry and strategy analysis

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Overview of Economic, Industry, and Strategy Analysis **This step provides a foundation and context for later analyses Macroeconomic Analysis: Understand the general consensus about major macroeconomic factors. Industry Analysis: 1. Understand the sensitivity of the industry to key macroeconomic factors 2. Understand how the industry operates and the key performance metrics for evaluating these operations 3. Understand the competitive structure of the industry What are the main characteristics shaping competition (and profitability) in the athletic apparel industry? Porter’s Five Forces Rivalry among firms: Threat of new entrants: Treat of Substitutes: Supplier Power: Buyer Power: Session 1 Page 10 of 13
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Industry Analysis Porter’s Five Forces 1. Rivalry among existing firms – is there price pressure from existing firms? Over-capacity? 2. Threat of New Entrants – Cost of entry barriers; abnormal profitability? 3. Threat of substitutes – based on existence and relative price/performance of competing products. 4. Buyer Power (relative to the firm) – price sensitivity; relative cost of not doing business with the other party 5. Supplier Power (relative to the firm) – mirror image of buyer power. Includes relative cost of not doing business with the other party. Basic idea is to use the five forces analysis to guide your deeper strategic analysis and further research on the company. E.g. if the threat of entry is the most important factor, you should gather additional info on factors such as the costs of entering the market, firms most likely to enter, overall market growth, effect of competition on margins, etc. This type of analysis also forces you to learn and understand the industry better. So even without a definite conclusion, the analysis is useful because it provides you with a structured approach. Session 1 Page 11 of 13
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Company Strategy Analysis : Evaluating a firm’s operating strategy to evaluate how it intends to position itself within the industry and obtain future economic rents (i.e. profits). Basically to determine if the business model makes sense and will ultimately lead to profitability. Highlights strengths and weakness and potential red flags of which you should be aware. Applying strategy analysis: Is the strategy based on low-cost leadership or product differentiation? A simple but powerful characterization of firm strategies that can be examined in the financial ratios such as expected turnover and profit margins of the firm. Degree of geographical diversification. Is the firm targeting only the domestic market or international markets as well? Degree of line of business diversification (i.e. horizontal diversification). This can have an impact on value through risk, management focus, cash drain, etc. Also, there is an empirical regularity known as the diversification discount.
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  • Spring '10
  • NICHOLS,CRAIG
  • Balance Sheet, SEC FILING, Strategy analysis, effective financial analysis

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