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CHAPTER 9 INTRODUCTION TO INDUSTRY AND COMPANY ANALYSIS Presenter Venue Date.

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Presentation on theme: "CHAPTER 9 INTRODUCTION TO INDUSTRY AND COMPANY ANALYSIS Presenter Venue Date."— Presentation transcript:

1 CHAPTER 9 INTRODUCTION TO INDUSTRY AND COMPANY ANALYSIS Presenter Venue Date

2 USES OF INDUSTRY ANALYSIS Understanding a companys business and business environment Identifying active equity investment opportunities Portfolio performance attribution

3 APPROACHES TO IDENTIFYING SIMILAR COMPANIES Industry Classification Products and/or Services Supplied Business- Cycle Sensitivities Statistical Similarities

4 CYCLICAL AND NONCYCLICAL COMPANIES Profits strongly correlated with economic activity Expensive, nonessential products High operating leverage Cyclical Company

5 LIMITATIONS OF INDUSTRY AND COMPANY DESCRIPTORS Growth Companies Cyclical Industries Defensive Industries Growth Industries

6 COMMERCIAL INDUSTRY CLASSIFICATION SYSTEMS Global Industry Classification Standard (GICS) Russell Global Sectors (RGS) Industry Classification Benchmark (ICB)

7 REPRESENTATIVE INDUSTRY SECTORS Basic Materials and ProcessingConsumer DiscretionaryEnergyFinancial ServicesIndustrial/Producer DurablesTechnologyTelecommunicationsUtilities

8 GOVERNMENTAL INDUSTRY CLASSIFICATION SYSTEMS International Standard Industrial Classification of All Economic Activities (ISIC) Statistical Classification of Economic Activities in the European Community (NACE) Australian and New Zealand Standard Industrial Classification (ANZSIC) North American Industry Classification System (NAICS)

9 CONSTRUCTING A PEER GROUP Examine commercial classification systems Review companys annual reportReview competitors annual reportsReview industry trade publicationsCompare business activities

10 EXHIBIT 9-2 FRAMEWORK FOR INDUSTRY ANALYSIS

11 STRATEGIC ANALYSIS: PORTERS FIVE FORCES FRAMEWORK Intensity of Rivalry Bargaining Power of Customers Threat of New Entrants Threat of Substitute Products Bargaining Power of Suppliers First focus for analysis

12 EVALUATING THE THREAT OF NEW ENTRANTS AND THE LEVEL OF COMPETITION What are the barriers to entry? How concentrated is the industry? What are capacity levels? How stable are market shares? Where is the industry in its life cycle? How important is price to the customers purchase decision?

13 BARRIERS TO ENTRY Sustainable Economic Profits Potential for Greater Pricing Power High Barriers to Entry

14 INDUSTRY CONCENTRATION ABC Company XYZ Company MNO Company What percentage of the market does each of the largest players have?

15 INDUSTRY CAPACITY Tight or Limited Capacity Demand Exceeds Supply Greater Pricing Power

16 MARKET SHARE STABILITY Unstable Market Share Limited Pricing Power

17 INDUSTRY LIFE CYCLE Source: Based on Figure 2.4 in Hill and Source: Based on Figure 2.4 in Hill and Jones (2008).

18 LIMITATIONS OF INDUSTRY LIFE-CYCLE ANALYSIS Technological Changes Regulatory Changes Social Changes Demographic Changes

19 PRICE COMPETITION Price strongly affects customer purchase decisions Competition within the industry

20 MACROECONOMIC INFLUENCES ON INDUSTRY GROWTH, PROFITABILITY, AND RISK Industry Growth, Profitability, and Risk Economic Growth Interest Rates Availability of Credit Inflation

21 OTHER INFLUENCES ON INDUSTRY GROWTH, PROFITABILITY, AND RISK Invention of the microchip Digital imaging Examples of Technological Influences Baby Boomer generation Aging populations Examples of Demographic Influences Tax policies and government spending Regulation Examples of Governmental Influences Changes in tobacco consumption Women in the workforce Examples of Social Influences

22 INDUSTRY ANALYSIS FOR BRANDED PHARMACEUTICALS

23 INDUSTRY ANALYSIS FOR OIL SERVICES

24 INDUSTRY ANALYSIS FOR CONFECTIONS/CANDY

25 PORTER: COMPETITIVE STRATEGY Cost Leadership Differentiation Cost Focus Differentiation Focus Scope Narrow Broad Source of Competitive Advantage Cost Differentiation

26 COMPANY ANALYSIS Provide a company profileExplain relevant industry characteristicsAnalyze demandAnalyze supply and input costsExplain the pricing environmentPresent and interpret relevant financial ratios

27 DECOMPOSITION OF ROE Net Profit Margin Asset Turnover Financial Leverage ROE

28 SPREADSHEET MODELING Expected Optimistic Pessimistic

29 SUMMARY Uses of industry analysis Industry classification systems Establishing a peer group Strategic analysis: Porters five forces Industry and product life cycles Demographic, governmental, social, and technological influences Company analysis Cost and differentiation strategies Spreadsheet modeling


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