Business Analysis

1
Business Analysis
Where We Are Going

• We will study the first phase of business
  analysis, focusing on internal and external
  analysis

Chapter 3
2
Business analysis lies at the heart of security
analysis. It is the most important aspect of
valuing a stock. Without a firm grasp of a
companys business model and its potential market
place, you cannot begin to understand the value
of the business. --Michael Mauboussin, CSFB
3
First Phase of Security
Analysis
Business Analysis
GAAP Financial Statements
Financial Statement Analysis
Forecast Assumptions
Valuation
Time
Historical Periods
Valuation Date
Forecast Periods
4
Internal Analysis Studies a Firms. . .
Mission
Human resources
Product life cycle
Marketing and selling
Pricing and differentiation
Finance/Accounting
Supply chain
Investment priorities
Products and services
5
External Analysis Analyzes

• Industry economics
• Individual competitors
• Customers
• Governmental regulations

6
External AnalysisIndustry Economics

• This study determines the target firm's
• Returns
• Profitability
• Cash flow

7
External AnalysisIndividual Competitors
Goal

• To understand the existing rivalry on a
  macroeconomic level

8
Porter's Five Forces Framework Forces
Driving Industry Competition
Potential Entrants
Existing Competitive Rivalry
Suppliers
Buyers
Substitutes
9
External AnalysisPotential Entrants

• Goals
• To know numbers of potential competitors
• How they will affect competitive rivalry

10
External AnalysisSubstitute Products

• Goals
• To understand how substitute products can remove
  profits
• To consider the available substitute products

11
External AnalysisBuyers

• Goal
• To understand the customers' strong bargaining
  position

12
External AnalysisSuppliers

• 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.

13
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

14
Individual Competitor Assessment
Continued

• Includes
• Strategies
• Products
• Marketing
• Supply chain
• Profitability

15
Customer Analysis

• Goal
• To understand how the customers needs drive
  demand

16
Governmental and Regulatory Analysis

• Goal
• To understand the governmental and regulatory
  environment of a firm

17
Internal Analysis

• Mission

Products and services
Product life cycle
Pricing and differentiation
Marketing and selling strategies
Supply chain
Human resources
Investment priorities
Finance/accounting
18
Internal AnalysisMission

• What the firm hopes to accomplish

19
Internal AnalysisProducts and Services

• What do these do?
• How does the customer use them?
• What is the market scope?

20
Internal AnalysisProduct Life Cycle
Sales
Introduction Growth Maturity
Decline Phase
21
Internal AnalysisPricing and Differentiation

• The more differentiated the product, the less
  competition focuses on price

22
Internal AnalysisMarketing and Selling
Strategies

• Goal
• To understand the firm's strategy for bringing
  the product to the customer

23
Internal AnalysisSupply Chain

• Goal
• To understand how each part works in order to
  project future cash flow

24
Internal AnalysisSupply Chain Includes

• Purchasing
• Manufacturing
• Research and development
• Distribution

25
Internal AnalysisHuman Resources

• Goal
• To understand the strengths and weaknesses on the
  people side

26
Internal AnalysisInvestment Priorities

• Goal
• To know what makes a firm successful through
  understanding its investment priorities

27
Internal AnalysisFinance/Accounting

• Goal
• To understand how the firm's accounting methods,
  estimates, and judgments affect the financial
  statements

28
Summary

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

29
Summary Continued

• How to prepare an internal analysis of the firm
• Where to get information for business analysis