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Business Analysis

Business Analysis. We will study the first phase of business analysis, focusing on internal and external analysis. Where We Are Going. Chapter 3. First Phase of Security Analysis. Business Analysis. GAAP Financial Statements. Financial Statement Analysis. Forecast

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Business Analysis

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  1. Business Analysis We will study the first phase of business analysis, focusing on internal and external analysis Where We Are Going Chapter 3

  2. First Phase of Security Analysis Business Analysis GAAP Financial Statements Financial Statement Analysis Forecast Assumptions Valuation Time Historical Periods Valuation Date Forecast Periods

  3. Understand the business Goal of this chapter is to develop a way of analyzing an unfamiliar business The Key to Developing a Forecast is to

  4. Business Analysis • Highlights issues we need to study further in the financial statement analysis stage • Business analysis usually does not provide numerical answers for valuation assumption, then what’s its purpose?

  5. Financial Statement Analysis • Identifies concerns that require more detailed business analysis

  6. Internal Analysis Studies a Firm’s. . . Mission Human resources Product life cycle Marketing and selling Pricing and differentiation Supply chain Finance Investment priorities Products and services

  7. External Analysis Analyzes • Industry economics • Individual competitors • Customers • Governmental regulations • Q: What differentiates between external and internal analysis?

  8. External Analysis—Industry Economics This study determines the target firm's • Returns • High return attract more competition • Intense competition in turn lowers return • Profitability • Cash flow Based on the Porter’s Five Forces Framework

  9. Porter's Five Forces Framework: Forces Driving Industry Competition Potential Entrants Existing Competitive Rivalry Buyers Suppliers Substitutes

  10. External Analysis—Individual Competitors Goal: • To understand the existing rivalry on a macroeconomic level • Factors to increase rivalry • More competitors • Low industry growth • Limited product differentiation • High fixed costs • Excess industry capacity

  11. External Analysis—Potential Entrants Goals: • To know numbers of potential competitors • How they will affect competitive rivalry • Barriers to entry: • Economies of scale • Product differentiations • High capital needs • Difficulty of obtaining certain resources • Access to distribution channels • Cost disadvantages • Specialized technology and patents

  12. External Analysis—Substitute Products Goals: • To understand how substitute products can remove profits • To consider the available substitute products • Example: • Coffee vs. Tea • Rice vs. Flour • Coke vs. Pepsi • …..

  13. External Analysis—Buyers Goal: • To understand the customers' strong bargaining position • Factors to increase bargaining power • Homogeneous product • Many suppliers • Customers buy large quantity • Customers act in concert

  14. External Analysis—Suppliers Goal: • Understand that suppliers generally have more bargaining power to raise prices and lower quality if there are only a few of them and if there are not many substitutions for their products. • Example: • The Major League Baseball Players Association • Microsoft?

  15. Individual Competitor Assessment Goal: • Understand specific key strategies of key competitors on a microeconomic level with an eye toward how each will affect the target company • Questions to ask when analyzing individual competitor • P. 48

  16. Individual Competitor Assessment Continued Includes: • Strategies • Products • Marketing • Supply chain • Profitability

  17. Customer Analysis Goal: • To understand how the customers’ needs drive demand • Price vs. quality • Trends in customers’ needs • Understand both the intermediate channels and the ultimate customers • Demographic trends, purchasing habits, attitudes and usage information

  18. Governmental and Regulatory Analysis Goal: • To understand the governmental and regulatory environment of a firm • Regulated industry: utilities • Pollution standards • Licensing requirements • Food and drug safety rules

  19. Mission Internal Analysis Products and services Product life cycle Pricing and differentiation Marketing and selling strategies Supply chain Human resources Investment priorities Finance/accounting

  20. Internal Analysis—Mission What the firm hopes to accomplish • Understanding the company’s mission puts these business strategies and actions in perspective so that the analyst can better predict the firm’s future

  21. Internal Analysis—Products and Services • What do products and services do? • How does the customer use them? • What is the market scope? Defined according to • Geographic area • Certain technology • Customer type • What are the depth and breadth of the firms product? • Amazon.com vs. William Wrigley Jr.

  22. Internal Analysis—Product Life Cycle Sales Introduction Growth Maturity Decline Phase • Costs vary with these stages • R&D, promotion • Firms or industries spend different amounts of time in each phase

  23. Internal Analysis—Pricing and Differentiation • The more differentiated the product, the less competition focuses on price • Differentiation vs. Price Competition • The more differentiated the product the less competition focuses on prices • Wal-Mart’s vs. Nordstrom’s • Natural Foods vs. Supermarkets

  24. Internal Analysis—Marketing and Selling Strategies Goal: • To understand the firm's strategy for bringing the product to the customer • Advertising: TV, radio, newspaper, magazines or internet? • Promotions: price discounts, free product, customer’s incentives

  25. Internal Analysis—Supply Chain Goal: • To understand how each part works in order to project future cash flow • A large percentage of costs occur in the supply chain

  26. Internal Analysis—Supply Chain Includes • Elements: importance differs for different type of firms • Purchasing • Manufacturing • Research and development • Distribution

  27. Internal Analysis—Human Resources Goal: • To understand the strengths and weaknesses on the people side • Leadership ability and style • Core competencies • The special skills and abilities that allow it to be successful

  28. Internal Analysis—Investment Priorities Goal: • To know what makes a firm successful through understanding its investment priorities • Priority of strategies: what a firm will do if a competitor tires to interfere with its business • Advertising • Pricing • Capital investment • Legal maneuvers

  29. Internal Analysis—Finance/Accounting Goal: • To understand how the firm's accounting methods, estimates, and judgments affect the financial statements • Cost structures • High margins vs. large volume

  30. Summary We have learned: • Why business analysis is crucial to security valuation • How to prepare an external analysis of the firm

  31. Summary Continued • How to prepare an internal analysis of the firm • Where to get information for business analysis • Annual reports • Magazine • Newspapers • Company web site • Government information • Analyst reports • Internet search

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