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Financial Literacy > Industrial Analysis > Flashcards

Industrial Analysis Flashcards

1
Q

Classification of industry?

A

1) growth industries
2 ) Cyclical industries
3) defensive industries
4) cyclical growth industries

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2
Q

What is growth industries?

A

It has higher than average growth rate .
It is nee or pioneer industries

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3
Q

Is growth industries or volatile,risks or stable, risk free?

A

Volatile and risky

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4
Q

Characteristics of growth industries?

A

Consistent and Growing sales, influx of investments and press hype

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5
Q

What are risks of growth industries?

A

1) high rates of cash burn
2) lack of profitability despite consumer demand
3)bubbles
4) technological setbacks

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6
Q

What are the examples of growth industry?

A

B

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7
Q

What is cyclical industries?

A

It is sensitive to buisness cycle

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8
Q

Examples of cyclical industries?

A

1)durable goods like raw materials and heavy equipment
2) consumer discretionary goods

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9
Q

What is defensive industries?

A

Industries which makes products and services that are essential. Sales and earnings of companies remain stable during all buisness cycles.

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10
Q

Examples for defensive industries?

A

Consumer staples, energy, utilities,telecommunications services and health care

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11
Q

Cyclical growth industries?

A

Posses characteristics of cyclical industries and growth industries

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12
Q

Examples of cyclical growth industries?

A

Automobile industries

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13
Q

What are porters five force model?

A

1) competition in the industry
2) Threat of potential new entry
3) Threat of substitute product and services
4) Bargaining power of supplier
5) bargaining power of customer

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14
Q

What happens when competitions increases in the industry?

A

Pro:
1) efficiency
2) product improvement
3 ) innovation
Cons:
1) price wars
2) higher advertising spends
3) lower margin
4) smaller profits

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15
Q

Factors affecting industrial rivalries?

A

1) equals balanced competitors
2) slow industry growth
3) Demand
4) cost structure of industry
5) switching cost
6 ) product differentiation
7) economies of scale
8) Exit barriers
9) Industry profitability

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16
Q

How cost structure of industry affects industrial rivalry?

A

Higher the fixed cost component , higher is the sales volume necessary to achieve breaker point

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17
Q

How to increase sales?

A

Price cuts and higher advertising.

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18
Q

What happens when switching cost is low in industrial rivalry?

A

Rivalry increases

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19
Q

How product differentiation affects industrial rivalry?

A

If product differentiation is low . Rivalry increases as consumers buyers makes choice on product prices.

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20
Q

How economies of scale affect industries rivalry?

A

High economies of scale , causes production to exceed demand which results in price reduction

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21
Q

How exit barriers affect industrial rivalry?

A

High exit barriers causes fierce competition.

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22
Q

Some examples of exit barrier from industry?

A

Specialised assets, High fixed cost of exit, strategic factors, government restrictions and emotional barriers

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23
Q

How industry profitability affects industry rivalry?

A

If particular industries are more profitable, more new companies enter so competition increases

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24
Q

What are the factors affects that affects new entrants to the industry?

A

1) Economies of scale
2) Capital Requirement
3) Government policy
4) cost disadvantage independent of size
5) product differentiation and brand loyalty?
6) switching costs
7) Access to distribution channel
8) Cost of capacity addition
9) Expected retaliation?
10) Industry profitability?
11) Legal patents
12) Stage in industry life cycle

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25
Q

How economies of scale affects new entrants?

A

Higher Economies of scales acts as good entry barrier because average costs will be higher than that of already existing companies which are benefiting from economies of scale

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26
Q

How capital requirements affect industries rivalry?

A

Low capital requirement have fierce competition and large number of competitors.

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27
Q

How capital requirements affects new entrants?

A

High capital investments require large capital base and high fixed cost structure so few competitors make entry.

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28
Q

How government policy affect new entrants?

A

Government policy can limit new entrants because of licensing requirements , limits to access of raw materials.

29
Q

How cost disadvantage independent of size affect new entrants?

A

When established companies may have cost advantages that cannot be replicated by potential entrants.
Example: factors include the learning, experience curve, proprietary product technology ,access to raw materials, favourable location and subsidies.

30
Q

How product differentiation and brand loyalty affect new entrants?

A

Established company often develop consumer loyalty through establishing a strong brand image and this provides good entry barriers and new entrants is forced to spend heavily on advertising to overcome these loyalties.

31
Q

How switching costs affect new entrants?

A

High switching costs provide good entry barrier.under such cases the new company has to offer a product which is either too cheap without compromise in quality or the product offering tremendous improvement.

32
Q

How access to distribution channel affect new entrants?

A

Difficulty in securing access to distribution channels can be an entry barrier.

33
Q

How cost of capacity addition affects new entrants?

A

Cost of capacity addition is higher entry barrier is high

34
Q

How expected retaliation affect new entrants?

A

High expected retaliation increases entry barrier

35
Q

How industry profitability affect new entrants?

A

High industry profitability low entry barrier

36
Q

How legal parents affect new entrants?

A

Legal patents serve as good entry barrier

37
Q

How state in industry life cycle affect new entrants?

A

If industry is new or emerging, completion will increase. If industry is mature or declining entry barrier is high

38
Q

What are substitute products or services?

A

Products with same functionality or quality but lesser price .
Or products of the same price but of better quality or providing more utility.

39
Q

How substitute product or service affect investing decision?

A

If In a particular industry threat of substitution is higher one must be careful while investing in that industry.

40
Q

What are factors that affects how much is the threat of substitution?

A

1) Ease of substitution
2) Availability of substitutes
3 ) switching costs
4) Relative price performance of substitute
5) Relative quality performance of substitute
6) Product Differentiation and Brand loyalty

41
Q

How switching costs affects threat of substitution?

A

High switching costs results in low threat of substitution.

42
Q

How price of product affects threat of susubstitue?

A

For similar quality product , if price of substitute is lower , competitive threat increases.

43
Q

How quality of product affects threat of substitute?

A

For similarly priced product or service , if quality of substitute is better, competitive threat increases

44
Q

How Product differentiation and brand loyalty affect threat of substitution?

A

Higher the brand loyalty and brand image , less is the threat of substitution.

45
Q

What are the factors affecting bargaining power of a supplier?

A

1) Existence of monopoly
2) Demand
3) Switching cost
4) Available of substitute
5) Importance of product and services
6) Threat of vertical integration

46
Q

How threat of vertical integration affects bargaining power of supplier?

A

If a supplier has power to integrate vertically, bargaining power of supplier increases

47
Q

What are the factors affecting bargaining power of customer?

A

1) concentration of customer
2) Demand
3) Switching cost
4) Availability of substitutes
5) Volume of purchase
6) Buyers information
7) threat of backward integration
8) Product Differentiation
9) Bargaining power

48
Q

What are the important factors to watch out while selecting an industry for investment?

A

1) Stages in life cycle of industry
2) Growth prospects of industry
3) Profitability of the industry
4) Nature of competition
5) Demand supply gap
6 ) Permanence
7 ) Cost structure of the industry
8) Attitude of the government towards the industry
9) Availability of raw materials
10) Labour conditions and other industrial problem
11) Severity of pollution hazard?
12) Industry valuation

49
Q

Is it good to invest during company’s growth state?

A

Yes

50
Q

Whether to invest or divest during company’s maturity stage or start of the decline stage.

A

Divest

51
Q

Is it better to invest when growth prospects of industry is higher?

A

Yes

52
Q

How to invest based on the profitable of the industry?

A

It is better to invest in industries which are able to maintain their profitability, even during tough times

53
Q

Is it wise to invest in industry which has fierce competition?

A

No because less profit margin and huge advertising costs .

54
Q

Is it wise to invest in industry when gap between supply and demand is higher ( demand>supply)?

A

Yes

55
Q

What to do when gap between supply and demand vanishes or supply exceeds demand?

A

Disinvest

56
Q

How to invest in industry based on permanence?

A

Invest in industry which has high degree of permenance

57
Q

What is cost structure of industry?

A

It refers to the proportions of fixed and variable costs that a business Incurs

58
Q

If fixed component is low compared to the variable cost , ( and vice Versa) what will be the break even point?

A

High fixed cost means break even point will be higher.( need high sales volume)
Lower fixed cost means lower break even point.

59
Q

Is it wise to invest in industry which has better cost structure and lower break even point?

A

Yes

60
Q

How governments encourage the growth of certain industries?

A

By providing incentives, assistance, less taxation, favourable legislation (I.e exports oriented industries)

61
Q

How government discourage the growth of certain industries?

A

By heavy taxation, permit and control regime( I.e alcoholic,cigarettes and polluting industries)

62
Q

How to invest based on availability of raw materials?

A

Invest in industries where supply of raw materials is fairly stable in long term. Because scarcity in raw materials can cause hime in raw materials prices thereby affecting profit margins of the entire industry.

63
Q

Is it better to invest in industry which is labour intensive?

A

No . Because labour strike always looms

64
Q

Is better to invest in industry which has high storage cost, high transportation cost, high employee attrition rate?

A

No In all cases

65
Q

What is employee attrition rate?

A
66
Q

Does high environmental regulation affects profitability?

A

Yes

67
Q

Is it better to invest in industry or sectors which are less prone to effect of environmental regulation.

A

Yes

68
Q

What to do when current prices are very high relative to the futures earning growth?

A

Avoid investing

Financial Literacy (5 decks)

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