Financial Statement Analysis Tutorial
Tutorial Applicable to Week 2
CH2
Q2) What are the critical drivers of industry profitability? 1. Rivalry among existing firms
The greater the degree of competition of firms in an industry, the lower their average. Existing firm rivalry is influenced by: industry growth rate, concentration and balance of competitors, degree of differentiation and switching costs, scale/learning economies (if your working at maximum productivity you can bring costs down) and the ratio of fixed to variable costs, and excess capacity and exit barriers.
2. Threat of new entrants
New entrants can force firms to set prices to keep industry profits low. The threat of new entrants can be eased by economies of scale, the first mover advantage, greater access to channels of distribution and existing customer relationships and legal barriers to entry.
3. Threat of substitute products
The threat of substitute products can force firms to set lower prices which in turn reduces industry profitability. The importance of substitutes will depend on the price sensitivity of buyers and the degree of substitutability among the products.
4. Bargaining power of buyer
The greater the bargaining power of buyers, the lower the industry’s profitability. Bargaining power of buyers is determined by the price sensitivity of the buyer and the importance of the sale/purchase to both parties. Bargaining power is also determined by the number of buyers relative to the number of seller; as the volume of purchases by a single buyer increases their bargaining power will increase.
5. Bargaining power of suppliers
The greater the bargaining power of suppliers, the lower the industry’s profitability. Suppliers bargaining ability increases when there are new firms and new substitutes available. Suppliers have a lot of power over buyers when the product/service they have on offer is critical to the buyer’s business. They also have more power when they pose a credible threat of forward
CH2
Q2) What are the critical drivers of industry profitability? 1. Rivalry among existing firms
The greater the degree of competition of firms in an industry, the lower their average. Existing firm rivalry is influenced by: industry growth rate, concentration and balance of competitors, degree of differentiation and switching costs, scale/learning economies (if your working at maximum productivity you can bring costs down) and the ratio of fixed to variable costs, and excess capacity and exit barriers.
2. Threat of new entrants
New entrants can force firms to set prices to keep industry profits low. The threat of new entrants can be eased by economies of scale, the first mover advantage, greater access to channels of distribution and existing customer relationships and legal barriers to entry.
3. Threat of substitute products
The threat of substitute products can force firms to set lower prices which in turn reduces industry profitability. The importance of substitutes will depend on the price sensitivity of buyers and the degree of substitutability among the products.
4. Bargaining power of buyer
The greater the bargaining power of buyers, the lower the industry’s profitability. Bargaining power of buyers is determined by the price sensitivity of the buyer and the importance of the sale/purchase to both parties. Bargaining power is also determined by the number of buyers relative to the number of seller; as the volume of purchases by a single buyer increases their bargaining power will increase.
5. Bargaining power of suppliers
The greater the bargaining power of suppliers, the lower the industry’s profitability. Suppliers bargaining ability increases when there are new firms and new substitutes available. Suppliers have a lot of power over buyers when the product/service they have on offer is critical to the buyer’s business. They also have more power when they pose a credible threat of forward