MBA (Finance) – IV Semester, Investment and Portfolio Management, Unit 2.2
Factors to be Considered
Apart from industry life cycle analysis, the investor has to analyse some other factors too. They are as listed below
Factors to be Considered
Apart from industry life cycle analysis, the investor has to
analyse some other factors too. They are as listed below
Growth of the industry
Cost structure and profitability
Nature of the product
Nature of the competition
Government policy
Labour
Research and development
Growth of the Industry
The historical performance of the industry in terms of growth and
profitability should be analysed. Industry wise growth is published
periodically by the Centre for Monitoring Indian Economy. The past variability
in return and growth in reaction to macro economic factors provide an insight
into the future. Even though history may not repeat in the exact manner,
looking into the past growth of the industry, the analyst can predict the
future. The information technology industry has witnessed a tremendous growth
in the past so also the scrip prices of the IT industry. With the Y2K
millennium bug creating a huge business opportunity even beyond the year 2000,
the sector is expected to maintain its growth momentum.
Cost Structure and
Profitability
The cost structure, that is the fixed and variable cost, affects the cost of production and profitability of the firm. In the case of oil and natural gas industry and iron and steel industry the fixed cost portion is high and the gestation period is also lengthy. Higher the fixed cost component, greater sales volume is required to reach the firm’s breakeven point. Once the breakeven point is reached and the production is on the track, the profitability can be increased by utilizing the capacity to full. Once the maximum capacity is reached, again capital has to invest in the fixed equipment. Hence, lower the fixed cost, adjustability to the changing demand and reaching the break even points are comparatively easier.
Nature of the Product
The products produced by the industries are demanded by the
consumers and other industries. If industrial goods like pig iron, iron sheet
and coils are produced, the demand for them depends on the construction
industry. Likewise, textile machine tools industry produces tools for the
textile industry and the entire demand depends upon the health of the textile
industry. Several such examples can be cited. The investor has to analyse the
condition of related goods producing industry and the end user industry to find
out the demand for industrial goods.
In the case of consumer goods industry, the change in the consumers’ preference, technological innovations and substitute products affect the demand. A simple example is that the demand for the ink pen is affected by the ball point pen with the change in the consumer preference towards the easy usage of pen.
Nature of the Competition
Nature of competition is an essential factor that determines the
demand for the particular product, its profitability and the price of the
concerned company scrips. The supply may arise from indigenous producers and
multinationals. In the case of detergents, it is produced by indigenous
manufactures and distributed locally at a competitive price. This poses a threat
to the company made products. The multinational are also entering into the
field with sophisticated product process and better quality product.
Government Policy
The government policies affect the very nerve of the industry and
the effects differ from industry to industry. Tax subsidies and tax holidays
are provided for export oriented products. Government regulates the size of the
production and the pricing of certain products. The sugar, fertilizer and
pharmaceutical industries are often affected by the inconsistent government
polices. Control and decontrol of sugar price affect the profitability of the
sugar industry. In some cases entry barriers are placed by the government. In
the airways, private corporate are permitted to operate the domestic flights
only. When selecting an industry, the government policy regarding the
particular industry should be carefully evaluated. Liberalization and
delicensing have brought immense threat to the existing domestic industries in
several sectors.
Labor
The analysis of labor scenario in a particular industry is of great
importance. The number of trade unions and their operating mode has impact on
the labour productivity and modernization of the industry. Textile industry is
known for its militant trade unions. If the trade unions are strong and strikes
occur frequently, it would lead to fall in the production. In an industry of
high fixed cost, the stoppage of production may lead to loss.
When trade unions oppose the introduction of automation, in the
product market the company may stand to lose with high cost of production.
Skilled labour is needed for certain industries. In the case of
Indian labour market, even in computer technology or in any other industry
skilled and well-qualified labour is available at a cheaper rate. This is one
of the many reasons attracting the multinationals to set up companies in India.
Research and Development
For any industry to survive the competition in the national and
international markets, product and production process have to be technically
competitive. This depends on the R & D in the particular company or industry.
Economies of scale and new market can be obtained only through R & D. the
percentage of expenditure made on R & D should be studied diligently before
making an investment.
Pollution Standards
Pollution standards are very high and strict in the industrial
sector. For some industries it may be heavier than others; for example, in
leather, chemical and pharmaceutical industries the industrial effluents are
more.
SWOT Analysis
The above mentioned factors themselves would become strength, weakness, opportunity and threat (SWOT) for the industry. Hence, the investor should carry out a SWOT analysis for the chosen industry. Take for instance, increase in demand for the industry’s product becomes its strength, presence of numerous players in the market, i.e. competition becomes the threat to a particular company in the respective industry. The progress in the research and development in that particular industry is an opportunity and entry of multinationals in the industry and cheap imports of the particular products are threat to that industry. In this way the factors have to be arranged and analysed. To make the industry analysis more explanatory it has been carried out on the pharmaceutical industry and SWOT analysis results are also given.
