CHAPTER FOUR

ECONOMIC AND INDUSTRY ANALYSIS

ECONOMIC ANALYSIS

Monetary and Fiscal policy measures implemented by various government agencies have important influences on the aggregate economy of the country.
Monetary policies include changing interest rates and money supply, while fiscal policies deal with government spending and taxes.
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For example, rising inflation may cause the government to use monetary policies such as increasing interest rates to curb spending and capital investments.
The result is likely to be a slowdown in the economic which will then affect the industry and companies within the economy.
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INDUSTRY ANALYSIS
Some of the reasons for performing industry analysis are: 1. The rates of return of individual industry vary overtime. As such, past performance may not be used to directly project future industry performance. 2. The rates of return of companies within each industry vary. Thus, company analysis is a necessary followup

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3. The risk level of different industries vary widely. Past experience has shown that measures for different industries are fairly useful in predicting future risk.

Key Characteristics in an Industry Analysis

Past sales and earnings performance Permanence The attitude of government towards the industry Labor conditions Stock prices of firms relative to their earnings
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Industry Life Cycle Approach

The industry can be divided into three stages with different patterns of sales and profit growth, and profit margin for each stage.

Sales

Pioneering Expansion Stabilization Stage Stage Stage

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Pioneering Stage

The creation of new industry is generally brought about by the introduction of a product or service, and this new product or service is generally the fruit of some technological leap.
Expansion Stage This stage is characterized by the appearance of the firms surviving from the pioneering stage. Their competition in the expansion stage usually brings about improved products at a8

lower price.

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Stabilization Stage A newer and better substitutes enter the market, the older industries either stop growing or begin to decline. Sales may be increasing at a slower rate than that experienced by competitive industries or by the overall economy. Symptoms of this stage include changing social habits, high labor costs, changes in technology and others.
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