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Accounting 101

In: Business and Management

Submitted By luco
Words 827
Pages 4
\Acct310 Week 1

Process of Fundamental Analysis
• Understand the business
• Analyse the information
• Forecasting payoffs
• Convert forecasts to valuations
• Make an investment decision

6 Step Process

Issues:
• Careful analysis of qualitative and quantitative info needed.
• Accounting policies affect the numbers.

STEP 1: Identify the Industry Economic Characteristics
• Economic characteristics and competitive dynamics influences the strategies firms will employ.

Value chain analysis
For pharmaceutical companies
• Research to discover drugs
• Approval of drugs by government regulators
• Manufacture of drugs
• Creation of demand for drugs
• Distribution to consumers

Porter’s 5 forces classification framework

Horizontal Competition

• Rivalry among existing firms o Industries characterised by concentrated rivalry and diffuse rivalry o Greater the industry concentration, the lower the competition between rivals, thus the more profitable the firms will be
• Threat of new entrants o How easily can new firms enter market? o Are there entry barriers? o Do existing rivals have competitive advantage making it difficult for other firms to enter and compete?
• If so, firms in industry will likely generate higher profits than if new entrants can enter easily.
• Threat of substitutes o How easily can customers switch to substitutes? o How likely to switch? o With close substitutes, competition increases and profitability decreases o Unique products with few substitutes enhance profitability.

Vertical Competition

• Buyer power o Relates to relative number of buyers and sellers in the industry and the leverage buyers have with respect to price o Buyers price sensitivity and the elasticity of demand o Are the buyers price takers or price setters?
• Supplier power o Leverage in negotiating input prices from suppliers o If…...

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