Tomado de: Penman, Stephen H., Financial Statement Analysis &
Security Valuation, McGraw-Hill – Irwin, 2001, pp. 486-487
Knowing
the Business
There
are many details of a business with which the analyst must be familiar. To
focus his thinking he first identifies the business strategy-sometimes
also referred to as the business concept or the business model. What
is the firm aiming to do? How does it see itself to be generating value? And
what are the consequences of the strategy? These questions are often answered
in terms of how the firm represents itself to its customers. Home Depot, the
warehouse retailer of home-improvement products. follows the concept of
providing high-quality materials for do-it-yourselfers at discount prices, but
with training and advice. As a consequence, the combination of discount prices
with added customer servicing costs implies that the firm must be very
efficient in its purchasing, warehousing, and inventory control. The Gap, Inc.,
aims to present dress-down clothing as fashion items at reasonable prices in
attractive stores, a different concept from warehouse retailing. As a
consequence, it must manage image through advertising and be creative in
fashion design while at the same time keeping production costs low. With
considerable retail space both firms require high asset turnover.
Once
the business concept is clearly in mind, the analyst turns to master the
details. There are many details of the business to discover, but you can think
of them under five categories.
1)
Know the firm's product.
a)
Type of product.
b)
Consumer demand for the product.
c)
Price elasticity of demand for the
product.
d)
Substitutes for the product. Is it
differentiated? On price? On quality?
e)
Brand name association of the product.
f)
Patent protection for the product.
2)
Know the technology required to bring
the product to market.
a)
Production process.
b)
Marketing process.
c)
Distribution channels.
d)
Supplier network.
e)
Cost structure.
f)
Economies of scale.
3)
Know the firm's knowledge base.
a)
Direction and pace of technological
change and the firm's grasp of it.
b)
Research and development program.
c)
Tie-in to information networks.
d)
Managerial talent.
e)
Ability to innovate in product
development.
f)
Ability to innovate in the production
technology.
4)
Know
the competitiveness of the industry.
a)
Concentration in the industry, the
number of firms, and their sizes.
b)
Barriers to entry in the industry and
the likelihood of new entrants and substitute products.
c)
The firm's position in the industry. Is
it a first mover or a follower in the industry? Does it have a cost advantage?
d)
Competitiveness of suppliers. Do
suppliers have market power? Do labor unions have power?
e)
Capacity in the industry. Is there
excess capacity or undercapacity?
5)
Know the political, legal, and
regulatory environment.
a)
The firm’s political influence.
b)
Legal constraints on the firm including
antitrust law, consumer law, labor law, and environmental law.
c)
Regulatory constraints on the firm
including product and price regulations.
These
features are sometimes referred to as the economic factors that drive
the business. You have studied many of these factors, and more, in courses on
business economics, strategy, marketing, and production. We cannot deal with
the detail or the subtleties here. Rather we provide a way of organizing your
business knowledge in a form that can be used for forecasting.