A thorough company analysis will involve an examination of the company’s financial position, products/services, and competitive strategy (a company’s plans for responding to external threats and opportunities). There are two primary competitive strategies: a low-cost strategy and a product/service differentiation strategy. The low-cost strategy generally requires the company to have tight cost controls, efficient operating and reporting systems, and appropriate managerial incentives. Companies that focus on product/service differentiation usually charge a premium for differentiation that is valuable to the consumer.
Elements of a Thorough Company Analysis
- Provide an overview of the company: major products/services, current positioning, and history, composition of sales, product life-cycle stages, R&D, past and planned capital expenditures, board structure, analysis of management, employee benefits, labor relations, insider ownership, legal actions, and other special strengths/weaknesses.
- Explain relevant industry characteristics: life-cycle stage, business-cycle sensitivity, product life cycles, brand loyalty, entry/exit barriers, industry supplier considerations, number and concentration of companies within an industry, differentiation opportunities, technologies used, government regulation, labor relations, and other industry problems/opportunities.
- Analyze demand for products/services: sources of demand, product differentiation, past influences, and outlook.
- Analyze supply for products/services: sources of supply, industry capacity outlook, import/export considerations, and proprietary products or trademarks.
- Explain pricing environment: past relationships of demand/supply/prices, significance and outlook for raw material and labor costs, and anticipated future trends.
- Present and interpret relevant financial ratios: activity ratios, liquidity ratios, solvency ratios, profitability ratios, and financial statistics.
Question
Which of the following characteristics is the most important for a company following a low-cost strategy?
- Brand loyalty.
- A unique set of products or services.
- A management team with proper incentives.
Solution
The correct answer is C.
While unique products/services and brand loyalty can usually be beneficial to a cost-leader, a management team that is well motivated to keep costs low is usually very important in successfully becoming a cost-leader within an industry.