Vicentiu Covrig Business Environment chapter 9 1 Vicentiu
Vicentiu Covrig Business Environment (chapter 9) 1
Vicentiu Covrig Dimensions of the Economy n n n As the economy goes, so goes the businesses and their stock… Macroeconomic Analysis - aggregate economic activity u. Gross Domestic Product u. Interest rates u. Consumer spending, consumer income uemployment Microeconomic Environment - industry, firm, plant, or product level u. Industry specific regulation u. Material prices (aluminum, wheat, oil, etc. ) 2
Vicentiu Covrig Purpose of Economic Analysis n n Understand the impact of recent economic trends on company you need to value Develop a perspective on how future economic trends will affect profitability and risk of subject company: - current stage of the business cycle - economic growth expectations - supply and demand conditions - inflation expectations - investment and credit conditions - political and regulatory events 3
Vicentiu Covrig Forces Driving the Economy 1) Demographics - Baby boom generation u. Born 1946 through 1964 Significant impact on society: • spending • saving • working/retirement • housing 4
Vicentiu Covrig 2) Productivity - The ability to produce more products and services with the same number of people. - When productivity growth is robust, the standard of living increases. - Gains are often made from advances in technology u Computers, Internet, etc. 5
Vicentiu Covrig n n 3) International Trade Imports Exports 6
Vicentiu Covrig Business Cycles n Pattern of economic recession and expansion - Periods of economic expansion are followed by periods of contractions u. Recession Ø 2 or more concessive quarters of contraction ØHigher unemployment ØRestricted credit ØReduced output u. Depression ØSevere recession (no official definition) 7
Vicentiu Covrig Economic Indicators n Data series that successfully describe the pattern of projected, current, or past economic activity. - Leading indicators u Money Supply, building permits, manufacturer’s new orders, initial claims for unemployment - Lagging Indicators u Consumer price index, inventories, labor cost - Coincident Indicators u Industrial production, personal income, payrolls 8
Vicentiu. Grouping Covrig and Classifying the Economy and Companies Code n 11 Agriculture, Forestry, Fishing, and Hunting 21 Mining 22 Utilities 23 Construction 31 Manufacturing 42 Wholesale Trade 44 -45 Retail Trade 48 -49 Transportation and Warehousing 51 Information 52 Finance and Insurance 53 Real Estate and Rental and Leasing u US Census Bureau 54 Professional, Scientific and Technical Services u Two to six digits 55 Management of Companies and Enterprises 56 Admin. and Support, Waste Mgmt, and Remediation 61 Educational Services 62 Health Care and Social Assistance 71 Arts, Entertainment and Recreation 72 Accommodation and Food Services 81 Other Services (except Public Administration) 92 Public Administration Industry Classifications - Categorize companies by the - Industry principal activity in which they are engaged. North American Industry Classification System (NAICS) 9
Vicentiu Covrig Competitive Environment n Industry’s market structure - Current stage of the industry life cycle - How cyclical it is - Number and size of competitors - Monopoly/Oligopoly - Industry sales and profitability - R&D and technology n Competitive advantage 10
Vicentiu Covrig Michael Porter characterizes the competitive environment -- five forces n n n Rivalry among existing competitors Threat of new entrants Pressure from substitute products Bargaining power of customers Bargaining power of suppliers 11
Vicentiu Covrig n Measuring Competitiveness Concentration ratios - Measures the percentage market share concentrated in an industry’s top four, eight, twenty, or more firms. u 0 to 100 u. Low numbers indicate vigorous competition: greater than 80% means highly concentrated n Herfindahl Hirschmann Index (HHI) - A measure of competitor size inequality u 0 to 10, 000 12
Vicentiu Covrig Legal Environment n Regulation - All sectors of the US economy are regulated to some degree. u. OSHA, EPA, etc. - Some industries have high regulation u. Banks, utilities, etc. - Costs of regulation are very high 13
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