Forensic Analysis - Financial Soldier Series Part-1 Article-5

PORTER’S five Forces Model as a tool for systematic gaining of Business Knowledge

Continuing with our series,

Article-1 Basics of Financial Analysis

Article-2 Basics of Understanding Business and Industry

Article-3 SWOT Matrix as a tool for understanding business

Article-4 PESTEL Matrix as a tool for understanding business

In the last article, PESTEL Analysis was discussed. The Same way SWOT & PESTEL matrix is used, Porter’s 5 forces model is used to understand the competitiveness of any organization in Industry. It specifically takes into consideration only 5 factors which are of prime importance to any business which shapes any industry and helps in determining an industry’s weaknesses and strengths which in turn also affect operations of any entity. In that way, this model differs from SWOT and PESTEL matrix.

PORTER’S FIVE FORCES

Following five factors are considered, of which intensity is identified as High/Low/Medium

ü  Threat of new entrants

ü  Threat of substitutes

ü  Bargaining power of customers

ü  Bargaining power of suppliers

ü  Industry rivalry

THREAT OF NEW ENTRANTS

This factor takes into consideration probability of entry of competitors in the market. It is very obvious that highly profitable markets with high returns on investment may attract more and more new entrants until industry reaches to perfect competition.

E.g. more and more companies entered in the auto sector is increased demand for cars, another example could be of telecom sector wherein Reliance Jio has disrupted the whole industry so there will be no new entrants being survival and profitability in question rather one may be forced to leave the industry.

How much threat new entrants my pose depends on several factors, some of them listed below:

·    The existence of barriers to entry (patents, rights, etc.). The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily.

·         Government policy

·         Capital requirements

·         Absolute cost

·         Cost disadvantages independent of size

·         Economies of scale

·         Economies of product differences

·         Product differentiation

·         Brand equity

·         Switching costs or sunk costs

·         Expected retaliation

·         Access to distribution

·         Customer loyalty to established brands

·         Industry profitability (the more profitable the industry the more attractive it will be to new competitors)

·         Network effect

THREAT OF SUBSTITUTES

This factor takes into consideration tendency of Consumer, how they percept or to think or consumption or usage habits etc.

E.g. Chinese mobile industry disrupted Indian smartphone market. More and more people turning towards that brands as compared to well-established brands being the Lower price, not much quality variation, increasing innovation etc.

There are other numerous factors like quality, price, availability etc., which directly affect the tendency of consumers, some of them are:

·         Buyer propensity to substitute

·         Relative price performance of substitute

·         Buyer switching costs

·         Perceived level of product differentiation

·         Number of substitute products available in the market

·         Ease of substitution

·         Substandard product

·         Quality depreciation

·         Availability of close substitute

BARGAINING POWER OF CUSTOMERS

 As famous saying state that “Customer is a king” but not all the time, but majorly. This factor takes into consideration customers’ sensitivity and willingness to pay for. If more substitutes are available then bargaining power of customer will be high. The company needs to take various measures to retain its customers.

Some of the factors are,

·         Buyer concentration to firm concentration ratio

·         Degree of dependency upon existing channels of distribution

·         Bargaining leverage, particularly in industries with high fixed costs

·         Buyer switching costs relative to firm switching costs

·         Buyer information availability

·         Force down prices

·         Availability of existing substitute products

·         Buyer price sensitivity

·         Differential advantage (uniqueness) of industry products

·         RFM (customer value) Analysis (it is a method for analyzing consumer behavior)

·         The total amount of trading

               

BARGAINING POWER OF SUPPLIERS

To produce output, every company requires certain resources like raw material, labor availability, electricity etc. They have also command on price if there few substitutes.

E.g. every company requires electricity to run plant and machinery if the price is hiked by electricity companies then very few option left with the company or pay a higher price for electricity.

Some of the factors are,

·         Supplier switching costs relative to firm switching costs

·         Degree of differentiation of inputs

·         Impact of inputs on cost and differentiation

·         Presence of substitute inputs

·         Strength of distribution channel

·         Supplier concentration to firm concentration ratio

·         Employee solidarity (e.g. labor unions)

·         Supplier competition: the ability to forward vertically integrate and cut out the buyer.

INDUSTRY RIVALRY

This factor takes into consideration intensity of competition prevailing presently in the marketplace. I.e. no. of competitors, their products and services status, their strategies etc.

E.g. Think almost similar product is sold by two companies. One of them, spending a huge amount on product branding and marketing so as to reach end customers. In that case, even though similar price and quality of product, company who has strong marketing campaign will be a winner.

Some of the factors which help in understanding competitiveness.

·         Sustainable competitive advantage through innovation

·         Competition between online and offline companies

·         Level of advertising expense

·         Powerful competitive strategy

·         Firm concentration ratio

·         Degree of transparency

EXAMPLE

Porter’s Five Forces for Pharmaceutical Company (source: ibef)

Threat of New Entrants

ü  Strict government regulations thwart the entry of new players

ü  Difficult to survive because of the high gestation period

Threat of substitutes

ü  Threat to substitute products is low; however, homeopathy and Ayurvedic medicines can act as a substitute

Bargaining power of customers

ü  Generic drugs offer a cost-effective alternative to drugs innovators and significant savings to customers

ü  Bio-similars offer significant cost saving for insurance companies in India

Bargaining power of suppliers

ü  Difficult-to-manufacture APIs such as steroids, sex hormones, and peptides give bargaining power to suppliers. However, generic APIs do not have much of that power

Industry rivalry

ü  Growth opportunities for pharma companies are expected to grow in next few years, with many drugs going off-patent in the US and other countries, thus increasing competition

ü  Indian pharma companies will face competition from big pharma companies, backed by huge financial muscle

IMPORTANT RESOURCES

ü  https://www.ibef.org (freely available government source, almost for all industries available)

ü  https://www.mindtools.com

      

       The author can also be reached at tehsinblog@gmail.com

      Note: No part of this article or any article in series is allowed to be copied and share in public (e.g. on any blog or website) without written prior permission of the author in whatsoever manner and, this article strictly meant for Personal use only, not for commercial purpose.

How to Search Company or LLP Master data?

Ministry of Corporate Affairs (Commonly known as MCA) is the regulator of Companies operating in India. Anyone can check or verify details of any company registered in India through this portal. Master data search provides basic company profile, Charges, and director/signatory details (current).
Following is the process of Master data search of any company or LLP.

You can refer my video on Youtube for this or You can read full stepwise process here:

OR

Step-1
Go to http://www.mca.gov.in/

Step-2
The following screen will appear:

Step-3
Click on "View Company/LLP Master Data" option as visible in step-2, following screen will appear:

You can search company details by:
1. Company/ LLP Name (Searching by name, click on search button visible at right corner to the box) or
2. Company CIN / LLPIN

Step-4
If I say, searching by name "Reliance" in screen visible in Step-3 then the following screen will appear:

Based on name matching, list of Company or LLP name will be available. Clicking on Company name gives you master data (for detail refer next step)

or

I can also search by CIN directly, for example taking CIN of Reliance Industries Limited (L17110MH1973PLC019786): Just enter CIN and captcha then submit

Step-5 Following output will be there after step-4:
Basic Company profile

Charges

Directors/ Signatory Details

Forensic Analysis - Financial Soldier Series Part-1 Article-4

 PESTEL Matrix as a tool for systematic gaining of Business knowledge

Continuing with Series, 

Part - 1 Financial Analysis

Article-1 Basics of Financial Analysis

Article-2 Basics of Understanding Business and Industry

Article-3 SWOT Matrix as a tool for understanding business

In last article, SWOT Analysis was discussed. SWOT Analysis covers broader scope. PESTEL Analysis can be referred as Comprehensive version of SWOT Analysis. Rather PESTEL Analysis complements SWOT Analysis since PESTEL deals with specific external factors which may be classified under Opportunities and Threats. Now we will discuss PESTEL Analysis which can also be used as a tool for systematic understanding of a business.  

PESTEL ANALYSIS

PESTEL refers to,

P – Political

E – Economic

S – Social

T – Technological

E – Environmental

L – Legal

POLITICAL

This factor takes into consideration role of Government. It includes taxation policies, environmental and labour laws, foreign trade policies etc. These factors affect how business operates.

For example, government has high intervention specifically healthcare, education, infrastructure and agriculture sector. For pharma industry, NPPA (national pharmaceutical pricing authority) notifies list of essential medicines (i.e. NLEM) for which drug prices are controlled.

ECONOMIC

This factor takes into consideration GDP growth, interest rate changes, exchange rates, inflation rate, disposal income of consumers, per capita income etc. This factors can be further bifurcated in Macro and Micro factors.

For example, changes in interest rate cause changes in bankers’ lending rate which in turn affect borrowing cost of company.

SOCIAL

This factor takes into consideration population growth, age distribution, living standards, health consciousness, and also includes cultural aspects as well.

For example, India has highest growth for smartphone demands being India has younger population.

TECHNOLOGICAL

This factor takes into consideration Innovation, increasing automation, cyclical change of technology, research and development activities, and technology incentives etc. It affect to decision making of any organisation.

For example, Mobile manufacturing Industry faces continuous technological innovations. Reliance Jio is a latest example who disrupted telecom market by launching 4G LTE services when there is no proper services for 3G available.

ENVIRONMENTAL

This factor takes into consideration weather, climate changes, availability of resources, pollution levels etc. which will have direct bearing to companies operations.

For example, India has good amount of resources, e.g. availability of labour, availability of important resources like water, electricity etc.     

LEGAL

This factor takes into consideration consumer law, various health and safety laws, employment related laws, and business practices etc.

For example, Payment of wages act & Minimum wages act which provides various rules and regulations, which need to be followed by every company based on prescribed criteria.

PESTEL ANALYSIS EXAMPLE: Any banking Company

Any banking company like ICICI, SBI, Axis, HDFC bank etc. covers under service Industry. Below mentioned are various factors which either affect negatively or positively to business of a company.

Political Factors

• Financial Inclusion Campaign by Mr. Narendra Modi (Prime minister) which positively resulted into business of banking. Pradhan Mantri Jan Dhan Yojana (PMJDY) was also a part of Financial Inclusion objective to provide affordable banking services to people who are out of banking coverage.
• Digital India Campaign by Mr. Narendra Modi aims to increase use of technology and internet so that county is digitally empowered. This led to increase in use of various wallets, Credit-Debit card, Internet banking etc. which is beneficial for banking industry. Rather it is also positive for telecom sector.

Economic Factors

• Global factor like changes in Fed rate affect Indian banking industry.
• RBI monetary policy; increase in bank rate increases the cost of borrowings which results in the reduction in credit volume to the bank so supply of money declines. This increase in bank rate is the symbol of tightening of RBI monetary policy.
• Other various economic indicators like GDP growth rate, IIP and Manufacturing Index changes, Increase in NPA, Various schemes to deal with NPAs by RBIs.  

Social Factors

• Social factors are also influenced by Political factors. For example, Jandhan Yojna & digital india campaign led to increased awareness among rural areas about use and benefits of banking services. 
• Present era is of Internet of Things (IoT). Now gaining knowledge becomes much easy as compare to what was before 10 years. Increase in literacy ratio also contributes positively to this sector.

Technological Factors

• Increase use of Artificial Intelligence can be big thing for Banking Industry. For example, HDFC bank will use robots called “humanoid” to answer general queries and basic information to customers as a part of an Artificial Intelligence project. Further, more focus is shifted to easy banking availability like SMS banking, Chatbots, smartkeys etc.
• There is a big revolution coming to Banking Industry worldwide, which is called “Blockchain Technology”. ICICI bank becomes first one to use this technology for international trade transactions and overseas remittances in India.

Legal Factors

•        Since Indian banking system is large as Indian economy size, so it employs thousands of employees from diversified and different culture people, gender, background etc. Sexual harassment at workplace is one of the example where they have to comply with legal requirements.
•     Other legal requirements can be compliance with Information Technology Act, whistle blower policy and various RBI regulations etc.

Environmental Factors

•       Since, banking is service industry so there is minimal pollution. They don’t pollute as like Manufacturing Industry. Therefore, there is no compliance requirement like waste control and disposal, noise pollution etc.

IMPORTANT RESOURCES

Various readily available company templates are there for reference on following website which can be useful in understanding and practicing PESTEL Matrix:

http://pestleanalysis.com

www.swotandpestle.com

Stay tuned for upcoming articles...

Compiled By: Tehsinkhan Pathan (CA, CMA, DISA(ICAI), B.Com) 

Note: No part of this article or any article in series is allowed to be copied and share in public (e.g. on any blog or website) without written prior permission of author in whatsoever manner and, this article strictly meant for Personal use only, not for commercial purpose.