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Industry analysis- Fundamental analysis

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Different stages
Characteristics
SWOT analysis
S curve

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Industry analysis- Fundamental analysis

  1. 1. Life cycle of an Industry Four distinct Phases  pioneering stage, expansion stage,  stagnation stage, declining stage. The specific phase of an industry can be understood in terms of its sales (volume and value) and profitability.
  2. 2. Pioneering stage The first stage in the industrial life cycle of a new industry Industry is not yet established technology as well as the product are relatively new may actually make losses with large injections of capitaland has not many competitors rapid growth in demand for output of industry. a scenario where weak firms are ultimately eliminated and a lesser number of businesses survive
  3. 3. Expansion stage  Industry is established  New companies start entering Competition increases Development of Strategies , new innovations to offer improved product at lower price Demand is more than supply High return for investor at lower risk as Companies will earn increasing amounts of profitsand pay attractive dividend.
  4. 4. Stagnation stage Stage the growth of industry stabilizes Sales may be increasing though at a slower rate due to o changes in social habits and o development of improved technology. emphasis on increasing profit rather than achieving growth. Stagnation has either an abrupt ending by a new innovation or could lead to declining stage Debts are normally re-paid out of internal accruals. Maturity slowly degenerates into stagnation and sometimes even creeps into decline.
  5. 5. Declining stage Products are no longer popular. A typical mature company loses its competitive nerve, it declines over a period of time into bankruptcy and winding up. At this bleak stage, there will be no takers The risk at this time in investing in these companies is high but the returns are low, even negative. An investor should get out of the industry before the onset of the declining
  6. 6. S curve
  7. 7. S Curve  Initial Phase – High level of uncertainty, slow rate of sales growth  Growth Phase -- Rising demand · Greater predictability in market demands and technology Entry of competition.  Maturity Phase---- Low market growth , Relative stability in technology · Intense competition , Imbalance in capacity related to business cycle.  Decline Phase ---- Emergence of substitutes leading to a decline in sales volume · Chronic over-capacity · Low, or negative, industry profits.  The New S curve may emerge after a unplanned discontinuity
  8. 8. SWOT Analysis Financial data analysis Strengths and weakness Opportunity and threats
  9. 9. Characteristics of industry analysis Past sale and Earnings performance • Top line • Operating margin • Net margin Nature of Industry Labor conditions within the industry Attitude of government towards the industry  Competitive conditions  Stock prices of firms in the industry relative to their earning
  10. 10. Characteristics of Industry Past sales and historical figures serve as a base for forecasting the growth of the industry, the cost structure in terms of fixed and variable costs etc and break even levels. The governments attitude towards the industry in terms of legislative policies and regulations also play a big role in boosting the growth . E.g I T tax holiday, excise customs duty , subsidies etc. Labour intensive industries need to be identified as strikes could affect them adversely.  Risk return of investment in particular industry based on current stock prices of securities in the industry.
  11. 11. Market Structure of an Industry Competitiveness Absolute monopoly Perfect competition Imperfect competition Collusive oligopoly: Dominant firm oligopoly: Monopolistic competition:
  12. 12. Absolute Monopoly  Lack of choice for customers  Price Market dominance  inefficiency  destroyed by high costs, inefficiencies and powerful competition Perfect Competition numerous small firms offering an identical product or service. And no one can affect the market price profit margins tend to be very low and unattractive for newcomers
  13. 13. Imperfect competition lies between absolute monopoly and perfect competition. few suppliers who can exercise some degree of control over price. Collusive oligopoly  A few suppliers collude to form a cartel in order to avoid co -mpetition and maximize profits e.g Manufacturers of Tyres in India Dominant firm oligopoly: There is a dominant leader surrounded by a number of small competitors. E,g toothpaste Monopolistic competition: Products are differentiated e.g bath soap industry
  14. 14. Competitive conditions Product differentiation advantages through patents, brand-value, technology, market access, after-sales service, specification in purchase orders, etc. consumer durable • Absolute cost advantages through lower costs, high volumes, control over key resources, learning and experience curves. Food and Beverages • Economies of scale through high capital costs, large scale operations, massive logistics management, etc.Tata steel, Hindalco
  15. 15. MICHAEL PORTER FIVE FORCES’ MODEL  The bargaining power of the buyers  The bargaining power of the suppliers  Entry of new competitors  The threat of substitutes  The rivalry among the existing competitors.  First two are vertical forces and the last three are horizontal The collective strength of these five competitive forces determine the ability of a firm in an industry to earn, on average, rates of return on investment in excess of the cost of capital The five forces determine industry profitability because they influence the prices, costs and required Investment of firms in an industry – the elements of return on investment
  16. 16. Bargaining Power of Suppliers Inputs are needed in order to provide goods or services Negotiating power of suppliers of inputs are good when o The market is dominated by a few large suppliers rather than a fragmented source of supply, o There are no substitutes for the particular input, o The suppliers customers are fragmented, so their bargaining power is low, o The switching costs from one supplier to another are high, o There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins. This threat is especially high when the buying industry has a higher profitability than the supplying industry, o Forward integration provides economies of scale for the supplier, o The buying industry hinders the supplying industry in their development (e.g.reluctance to accept new releases of products), o The buying industry has low barriers to entry  Result is squeeze in Margins
  17. 17. Bargaining Power of Customers:  They buy large volumes, there is a concentration of buyers,  The supplying industry comprises a large number of small operators,  The supplying industry operates with high fixed costs,  The product is undifferentiated and can be replaces by substitutes,  Switching to an alternative product is relatively simple and is not related to high costs,  Customers have low margins and are price-sensitive,  Customers could produce the product themselves, The product is not of strategically importance for the customer, The customer knows about the production costs of the product  There is the possibility for the customer integrating backwards e.g vanaspati packs or oil tins
  18. 18. Threat of New Entrants  Economies of scale (minimum size requirements for profitable operations),  High initial investments and fixed costs,  Cost advantages of existing players due to experience curve effects of operation with fully depreciated assets,  Brand loyalty of customers  Protected intellectual property like patents, licenses etc,  Scarcity of important resources, e.g. qualified expert staff  Access to raw materials is controlled by existing players,  Distribution channels are controlled by existing players,  Existing players have close customer relations, e.g. from long-term service contracts,  high switching cost for customers Legislation and government action
  19. 19. Competitive Rivalry between Existing Players  This force describes the intensity of competition between existing players (companies) in an industry.   High competitive pressureresults in a market pressure on prices and margins that affects profitability.  Competition between existing players is likely to be high when: • There are many players of about the same size, • Players have similar strategies • There is not much differentiation between players and their products, hence, there is much price competition • Low market growth rates (growth of a particular company is possible only at the expense of a competitor), • Barriers for exit are high (e.g. expensive and highly specialized equipment).
  20. 20. Five Forces Analysis Statistical Analysis: Dynamical Analysis: Analysis of Options:

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