Business Environment

1

• Business Environment
• (chapter 9)

2
Dimensions of the Economy

• As the economy goes, so goes the businesses and
  their stock
• Macroeconomic Analysis
• aggregate economic activity
• Gross Domestic Product
• Interest rates
• Consumer spending, consumer income
• employment
• Microeconomic Environment
• industry, firm, plant, or product level
• Industry specific regulation
• Material prices (aluminum, wheat, oil, etc.)

3
Purpose of Economic Analysis

• 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

4
Forces Driving the Economy

• 1) Demographics
• Baby boom generation
• Born 1946 through 1964

• Significant impact on society
• spending
• saving
• working/retirement
• housing

5

• 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
• Computers, Internet, etc.

6

• 3) International Trade
• Imports
• Exports

7
Business Cycles

• Pattern of economic recession and expansion
• Periods of economic expansion are followed by
  periods of contractions
• Recession
• 2 or more concessive quarters of contraction
• Higher unemployment
• Restricted credit
• Reduced output
• Depression
• Severe recession (no official definition)

8
Economic Indicators

• Data series that successfully describe the
  pattern of projected, current, or past economic
  activity.
• Leading indicators
• Money Supply, building permits, manufacturers
  new orders, initial claims for unemployment
• Lagging Indicators
• Consumer price index, inventories, labor cost
• Coincident Indicators
• Industrial production, personal income, payrolls

9
Grouping and Classifying the Economy and Companies
Code Industry 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
54 Professional, Scientific and Technical
Services 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 principal activity in
  which they are engaged.
• North American Industry Classification System
  (NAICS)
• US Census Bureau
• Two to six digits

10
Competitive Environment

• Industrys market structure
• Current stage of the industry life cycle
• How cyclical it is
• Number and size of competitors
• Monopoly/Oligopoly
• Industry sales and profitability
• RD and technology
• Competitive advantage

11
Michael Porter characterizes the competitive
environment -- five forces

• Rivalry among existing competitors
• Threat of new entrants
• Pressure from substitute products
• Bargaining power of customers
• Bargaining power of suppliers

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Measuring Competitiveness

• Concentration ratios
• Measures the percentage market share concentrated
  in an industrys top four, eight, twenty, or more
  firms.
• 0 to 100
• Low numbers indicate vigorous competition
  greater than 80 means highly concentrated
• Herfindahl Hirschmann Index (HHI)
• A measure of competitor size inequality
• 0 to 10,000

13
Legal Environment

• Regulation
• All sectors of the US economy are regulated to
  some degree.
• OSHA, EPA, etc.
• Some industries have high regulation
• Banks, utilities, etc.
• Costs of regulation are very high