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Week 2: Equity Analysis I (SWOT (Weakness, Opportunities, Strengths,…
Week 2: Equity Analysis I
Analysis of External Environment
Macro environment (PEST)
Social
involve the beliefs, values, attitudes, opinions, and lifestyle of people in the firm's external environment
gender equality in the labor force
age distribution of the population
concern for health
Technological
creative technological adaptions
can open possibilities for new products, improvements to existing products, manufacturing and marketing
Economic
relating to the nature and direction of the economy in which firms operate (i.e: GDP growth, inflation rate, ...)
business cycle
sensitivity of earnings to business cycle (p.7)
Operating leverage: the division between fixed costs and variable costs, higher
variable costs
=> less sensitive because firms can adjust their outputs to reduce costs
Fixed costs and leverage/ Sensitivity of sales (elasticity of demand)
Financial leverage: firm's tendency to borrow, greater leverage => more sensitive to the business cycle
impact on consumption habits
Political
define the
legal and regulatory
parameters around firms' operation (i.e: minimum wage, tax programs, ...)
Ecological (not included in PEST)
threats to ecology include
loss of habitat and biodiversity
air, water and land biodiversity
global warming
Industry environment (Porter's Five Forces)
Entry barriers
Supplier power
Buyer power
Substitute availability
Competitive rivalry
Competitive strategy analysis
Porter's Generic Strategies (p.21)
Sources of competitive advantages
cost leadership: enables a firm to supply the same product or service
at a lower cost
compared to its competitors
differentiation strategy: providing products/service that is
distinct in some important respect
valued by the customer
Core competencies valued by customers
Appropriability: the ability of the firm to internalize the value created by the competency/ resource
sustainability: is there are any substitute for the firm's competency/ resource?
Durability: the continuing value of the competency or resource
Inimitably: difficult to copy
competitive superiority: is the firm's competency/ resource better than that of its competitors?
The operating environment (internal)
SWOT
Weakness
Opportunities
Strengths
Threats