All companies have a competitive strategy, whether intentional or not. An intentional strategy results from company-wide planning, performance measurement, and feedback loops to sharpen the strategy. An unintentional strategy results from various teams within a firm pursuing their own incentives, doing whatever they did in prior years, or following industry or professional norms. An unintentional…
External Influences on Industry Growth Analysing the structure of an industry primarily involves looking inside the industry and at close adjacencies such as customers, suppliers, and substitutes. It is important for analysts to look outside the industry for factors that influence the industry’s economic outcomes. One framework for this purpose is a PESTLE analysis of the political, economic, social, technological, legal, and environmental influences on an…
Industry Size and Historical Growth Rate Industry size is typically measured by total annual sales from the product or customer perspective, which is not necessarily all sales of each industry constituent. Except for some industries that are dominated by large, publicly traded companies (e.g., autos, smartphones, airlines, pharmaceuticals), industry size will often include a potentially…
Third-Party Industry Classification Schemes Early third-party industry classification schemes such as SIC, NACE, and ISIC were devised by government agencies, tended to be country-specific, and grouped companies by their production characteristics into industries such as agriculture, manufacturing, distribution, retail, and services. GICS, ICB, and TRBC also have slightly different rules for companies operating in multiple…
Why Analyse an Industry Many industry participants have similar business models. They often compete in the same or similar product markets as sellers and in factor markets as buyers, so they tend to be exposed to the same demand and supply opportunities and risk factors. As will be discussed later with Porter’s Five Forces model,…
Sources and Uses of Capital Evaluating Capital Investments and Capital Structure Returns on invested capital over the longer run, compared with investors’ required rates of return, can be used to evaluate whether management has used investors’ capital wisely. Risks related to the capital structure can be measured using leverage and coverage ratios, credit ratings by…
Operating Costs and Their Classification Generally, operating costs are incurred in generating—or are otherwise related to—current period revenue: all costs related to the acquisition, production, sale, improvement, and delivery of goods and services; the management of business activities; and compliance with laws and regulations. Behaviour with Output: Fixed and Variable Costs Using a fixed/variable operating cost…
Revenue Drivers The analysis involves identifying drivers, which are causative factors that explain the level of and changes in an output variable (here, revenues), and understanding the evolution of the drivers over time. Analysts can take a bottom-up or top-down approach to determining revenue drivers. A bottom-up approach decomposes revenues into drivers such as sales…
Determining the business model is the first step in our industry and company analysis framework because it summarises important drivers of an issuer’s financial results and position, focuses the analyst on what requires further investigation, and should begin setting the analyst’s expectations for the issuer. Information sources that analysts use to answer these questions include…
Analysts value and make investment recommendations on issuers’ equity securities using scenarios of future earnings, cash flows, and financial position. These future scenarios are structured in the form of financial statements and are known as financial statement models. While a financial statement model is quantitative, it is not a mathematics problem to solve with a…