Page 4 - FINAL CFA II SLIDES JUNE 2019 DAY 7
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LOS 26.e: Describe questions that should be addressed READING 26: EQUITY VALUATION: APPLICATIONS AND PROCESSES
in conducting an industry and competitive analysis.
MODULE 26.1: EQUITY VALUATION: APPLICATIONS AND PROCESSES
Porter three generic strategies to
compete and generate profits:
1. Cost leadership: Being the lowest-
cost producer of the good.
2. Product differentiation: Add
product features or services that
increase the attractiveness product
to command a premium.
3. Focus: Employing one of the
previous strategies within a
particular segment to gain a
competitive advantage.
The attractiveness (long-term profitability) of any industry is determined by the
interaction of these five competitive forces (Porter’s five forces).
Key is quality of earnings in financial statement information: income statement, balance sheet, and the notes to the financial statements.
Watch out for:
• Accelerating or premature recognition of income?
• Reclassifying gains and nonoperating income?
• Expense recognition and losses?
• Amortization, depreciation, and discount rates?
• Off-balance-sheet issues?
