Analyzing Companies & Industries
There are many tools that can help you evaluate how a company is doing and help you predict how they will do in the future. In this unit, we present Porter’s Five Forces, SWOT Analysis, and the Broad Factor Analysis.
Porter’s Five Forces
“What I love, of course, is a big castle and a big moat with piranhas and crocodiles.” Warren Buffett
Porter’s Five Forces is a simple but powerful tool that can help assess the competitiveness of a business in their respective environment and evaluate the business’ potential profitability. This concept was developed by Harvard Business School’s professor Michael Porter and is highly regarded as one of the most prominent business strategy tools. Essentially, the goal of a business should be to build an “economic moat” by maintaining competitive advantages over its competitors and protecting its long-term profits and market share. In doing so, the business should focus on keeping Porter’s five competitive “forces” at bay, as it will help them ward off threats to their success and help them sustain their dominance.
Intensity of Industry Competition
Threat of Potential Entrants
Bargaining Power of Suppliers
Bargaining Power of Buyers
Threat of Substitutes
During a SWOT analysis, you evaluate the strengths, weaknesses, opportunities and threats that a company faces to evaluate whether they would be a good investment and fit for your portfolio. In other words, it can make you think about different factors which are important in their production and their relationship to consumers and raise red flags that you should be aware of.
Think about what makes this company and their products unique or strong in the market. Their strengths can range from an innovative supply chain and materials to their brand, management, and how consumers see them. Strengths are what makes this company strong in its market and why consumers choose it over competitors. Think about strengths as things that are unique to your company, if every company in your sector is sustainable or offers good quality products then these are not your strengths. In other words, if everyone has the same “strengths” then it is a necessity in the sector and not really something that makes the company stand out.
Broad Factors Analysis (PEST Analysis)
The Broad Factors Analysis, oftentimes also called PEST Analysis, evaluates political, economic, socio-demographic and technological factors that influence industries and sectors of the economy. Industries are always reinventing themselves, you can think of how the energy industry has changed in the past 50 years and it should be clear to you that change and innovation is the only constant in markets.