Please answer questions 1-4. I cannot award credit if all questions are not answ
ID: 2605668 • Letter: P
Question
Please answer questions 1-4. I cannot award credit if all questions are not answered
1.How does the Porter’s Five Forces Applied affect the business/industry
2. What is the common size and comparative analysis and how does it measure a company financial performance?
3. . Please define the Porter’s Five Forces applied to Coca Cola and what is the
impact.
4. Please search for a set of financial statement that the company you interest in by applying the
common size for Income Statement and comparative analysis for Balance Sheet
Explanation / Answer
1.
Porter’s Five Forces theory describes core external competitive threats to an organization by his five forces model. The theory and the model tries to identify the level of competition an organization is facing by assessing how much the five forces are relevant in the organizational context.
If the forces are high meaning that there is high competition an industry naturally becomes unattractive and difficult for the companies to survive and perform, on the other hand if the forces are low that results in less severe competition making the industry very attractive for companies to perform and survive.
2. Common size financial statement displays all financial statement items as percentages of a common base figure. This type of financial statement allows for easy analysis between industry peers or between time periods of a company. The values on the common size statement are expressed as percentages of a statement component, such as revenue.
It is an extremely useful tool to compare two or more companies of differing size. Formatting financial statements in this way reduces the bias that can occur and allows for the analysis of a company over various time periods. Using common-size financial statements helps the reader’s to identify trends that a raw financial statement may not uncover.
3. The five forces are summarized as follows and it will affect the coca cola company and the associated industry as below.
1.The threat from new entrants.
2.The bargaining power of buyers.
3.The bargaining power of suppliers.
4.The threat from substitute products.
5.The extent of competitive rivalry.
1. The threat from new entrants
This defines how easily competitor can enter the business industry as they will be able to put a ceiling on company performance and profits. Therefore, the greater the threat from new entrants entering the sector, the higher the levels of competition. It is largely determined by the extent of the barriers to entry.
The following summarizes the main barriers to entry to the company
Capital cost of entry. The higher the capital cost, the greater the difficulty for someone to enter the business and, therefore, the likelihood of competition being less than in industries where it is much cheaper to set up business.
Economies of scale. This will apply if a substantial investment is needed to allow a new entrant to achieve cost parity. Therefore, anyone entering the segment that cannot match the economies of scale will be at a substantial cost disadvantage from the start.
Differentiation. Differentiation is said to occur if consumers perceive a product or service to have properties, which make it unique or distinct from its rivals. The differentiation can be in the appearance of the product, its brand name or services attached to the product
Switching costs - This is the cost not incurred by a new company wishing to enter the market but by the existing customers. If the buyer will incur expense by changing to a new supplier, they may not wish to change. For example, when the compact disc was invented consumers had to incur a cost of a CD player, as the new compact discs would not work on a conventional record player.
Legislation - There might be patent protection for a product or the government might only license certain companies to operate in certain segments
Therefore, in summary, if there is low barriers to entry and the industry is very easily reachable coca cola will have to face severe competition consistently and high competition will have constraints on organizational performance and profits. On the other hand If there is high levels of artificial (legal) or natural barriers for new entrants automatically Coca cola will have dominance in the industry and hence smooth performance and high potential to exploit profits.
2. The bargaining power of customers
This defines whether buyers of the product have the power to affect the company product prices. Customers will have power if they are concentrated and can exert pressure on the supplier or if the buyer has a choice of alternative sources of supply.
If coca cola’s customers have alternative options with regards to the company products and they are able to switch to alternative products easily they will exercise high power over the company creating an unfavourble environment.
3. The bargaining power of suppliers
The extent of the power of the suppliers will be mainly affected by the concentration of , the level of importance attached to the buyer by the supplier and The switching costs of moving to another supplier.
If Coca cola is depending on very few key supplies and if it is difficult to switch between suppliers due to high dependence over them Coca can exercise very low power over their suppliers prices and service creating and unfavorable situation for the company.
4. The threat from substitute products
If there are high amount of similar products that can be used as substitute then the demand for the product will increase or decrease as it moves upwards or downwards in price relative to substitutes.
If coca cola’s products are easily substitutable and easily available in the market automatically the competition is high creating threats for demand and profits for the company. If Coca cola’s products are not able to differentiate form the other products it will have to face high threats of completion creating an adverse situation from the external environment on demand.
5. The extent of competitive rivalry
High amount of competitors or players in a market will automatically make an industry difficult to service and companies will have to compete against each other for demand and profits.
If coca cola’s soft drink industry is consistent with a lot similar sized players in the market it will create high competition and an unattractive external environment.