Industry Comparison (Internal Factors)
The table below discusses three industries using the characteristics we have discussed so far. Analyze and test your understanding for the reasoning behind the characteristic. For instance, barriers to entry for branded pharmaceutical companies are high because it requires substantial financial and intellectual capital. A new entrant would require a sizeable investment in R&D and manufacturing facility.
|Industry Comparison (Internal Factors)|
|Branded Pharma||Oil Services||Confections/Candy|
|Major companies||Pfizer, Novartis, Merck, GlaxoSmithKline||Schlumberger, Halliburton||Cadbury, Nestle, Hershey, Mars|
|Barriers to success/entry||Very high||Medium||Very high|
|Level of concentration||Concentrated: small no. of companies control majority of the global market.||Fragmented||Very concentrated: top four companies control most of the global market.|
|Impact of Industry Capacity||NA||Medium/High||NA|
|Industry Stability||Stable||Unstable||Very stable|
|Life Cycle||Mature: no rapid change in demand year on year.||Mature||Very mature: demand varies according to population growth and pricing.|
The five external factors affecting an industry’s growth are macroeconomic, technological, demographic, governmental, and social influences.
Macroeconomic Factors: Demand for products and services are affected by overall economic activity at any point in time. Economic variables that affect an industry’s revenues and profits are: GDP, level of interest rates, inflation, and how easily money is available to businesses. Example: People cut down on discretionary spending during the festive/holiday season if inflation is very high (emerging economies), or if the economy is in a recession leading to job cuts.
Technological Influences: New technologies can rapidly change an industry or push them into the decline stage faster. Examples: Invention of the microchip and the evolution of the computer hardware industry; impact of digital imaging technology on the photographic film industry, USBs on DVD/CD, digital music on cassette player industry.
Demographic Influences: Changes in population size, age, and gender ratio.
Examples: Surge in retirement-oriented investment products in the U.S. between 1990 and 2000 to cater to the baby boomers. Impact of Japan’s aging population on local economy. Impact of India’s young population on several sectors of the economy: education, housing, consumer spending, hospitality, technology, etc.
Governmental Influences: Tax rates and rules set by governments affect an industry’s revenues and profits. Similarly, regulatory changes such as environmental restrictions, how much of foreign investment is allowed in an industry, or restrictions on gold imports influence an industry’s performance. Examples: Governments control, through regulations, how much money financial institutions can accept from investors for issuing securities and savings deposits. The objective is to protect investors from fraudulent practices. Patients in developed countries can be treated and prescribed treatment only by certified doctors.
Social Influences: How people work, spend their money and leisure time pursuing hobbies, and travel affect various industries. For example, more women entering the workforce worldwide has spun many new industries, while boosting others. Restaurants, work wear for women, home and child care services, and demand for more cars are some of the effects of this trend.
Environmental Influences: In recent times, the need to evaluate and mitigate environmental impact has become an important consideration for industries. Climate change poses a real threat to the growth and profitability of many industries. For example, public awareness about the environmental impact of livestock and protection of animal rights has been increasing. Many people are shifting towards healthier and plant-based diets. These factors will impact the agriculture industry.
Now, we analyze the impact of these external factors for the same three industries.
|Industry Comparison (External Influences)|
|Branded Pharma||Oil Services||Confections/Candy|
|Demographic Influences||Population increasing. Demand for drugs is high.||Low||Low|
|Government and Regulatory Influences||Very high as it requires govt. approval.||Medium||Low|
|Growth vs. Defensive vs. Cyclical||Defensive||Cyclical||Defensive|
Company analysis involves analyzing a company’s financial position, products and/or services, and competitive strategy. Porter has identified two chief competitive strategies: low-cost strategy (also called price leadership) and a product/service differentiation strategy.
Low-cost Strategy/Price Leadership
Examples: low cost airlines, cheap alternatives of iPad/iPhone.
Example: full service airlines use this strategy to compete against low cost carriers to protect lucrative routes.
Some of the important points that should be covered in the research report for a company are listed below:
Spreadsheet modeling is a widely used tool by analysts in company analysis, but it has certain limitations:
Here is what an analyst can do to determine whether a model is valid: