Page 17 - FINAL CFA II SLIDES JUNE 2019 DAY 7

READING 28: INDUSTRY AND COMPANY ANALYSIS
LOS 28.j: Evaluate the effects of
technological developments on demand,
selling prices, costs, and margins. MODULE 28.1: FORECASTING FINANCIAL STATEMENTS

Some advances in technology decrease costs of production, which will increase profit margins (at least for early adopters), and, over time,
increase industry supply and unit sales as well.

Others will either improve substitutes or introduce wholly new products (disrupt not only markets but entire industries)

One way model the introduction of new substitutes for a company’s products is to estimate a cannibalization factor, the % of new product sales
that will replace existing product sales.

As always, scenario or sensitivity analysis
using a variety of scenarios encompassing
new product introductions can be
informative.

It can be different for different sales channels and is likely to be lower for business customers than for direct purchases by consumers.

EXAMPLE: Cannibalization: Alpha, Inc., manufactures LED lightbulbs for sale to businesses as well as to households. Seventy-five percent of Alpha’s unit
sales are to business customers. Technological advances have enabled bulb manufacturers to produce a new bulb that is more energy efficient, and Alpha
is planning to introduce a bulb next year that uses this new technology. Projected sales for the new bulb are shown below:

Calculate the lost unit sales of current product due to cannibalization, assuming a cannibalization
factor of 50% for businesses and 20% for households.
Answer:
Cannibalization in business market segment = 87,000 × 0.50 = 43,500 units.
Cannibalization in household market segment = 11,000 × 0.20 = 2,200 units.
Total lost unit sales = 45,700 units.