Elements of a Thorough Company Analysis

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 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?

A. A management team with proper incentives

B. A unique set of products or services

C. Brand loyalty

Solution

The correct answer is A.

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.

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