Tuesday, October 3, 2006

Porter's model for analysis

While analyzing a company a lot of number crunching is done. P/E ratios, dividend yields, profitability ratios, efficiency ratios, and what not. And for a new initiate, it can be a damning and confounding exercise.

Moreover this exercise leads to confusing the trees with the forest! I mean shouldn't we be interested in the larger picture instead of just number crunching.

I would think of taking a qualitative insight into a company and look at it's Management team, Competitive advantage and a look at the industry in which the company operates.

I have done a BCG model for ITC which you can see and comment.

Another model that is popularly used is the "Porter's Analysis" which is an environmental analysis of the industry. It takes into account 5 factors of competitive advantage. Let's look at it from the view point of ITES industry.
  1. Entry Barriers : The entry barriers in the software industry are low. For instance, to set up an ITES business, the initial investments are lower than the revenue realisation per seat.
  2. Inter firm rivalry: The Indian ITES industry has intense competition among themselves.
  3. Bargaining power of suppliers: All suppliers have high level of maturity (SEI-CMM level 4/5). So it doesn't appear relevant.
  4. Bargaining power of Buyers: The competition makes it vey high for buyers.
  5. Threat from unorganised sector: Since quality is a key factor here, the competition will not allow the organised sector to survive.
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