Profitability & 5 Forces Assignment

The output for this exercise should be created individually, but you should feel free to seek technical help (e.g., Excel) and feedback on your thinking. Assignment is due on Sunday, September 29th, 11:59PM. Use this as an opportunity to explore an industry of professional interest.

Please turn in your summary memo (Step 8), attached to your summary tables (Steps 1-5) and your Porter’s Five Force Analysis (Step 6). You may alter tables and charts in a way to ease formatting, but this should look professional. Please submit everything in one file.

In this exercise, you will be acting as an analyst in a publicly owned company, focused on analyzing various measures of profitability across firms and industries over time to advise the firm’s leaders. The goals of the exercise are:

to develop an understanding of what constitutes average, below-average and above-average performance at both the firm and industry level;

to build your familiarity with the North American Industrial Classification System (NAICS) of classifying industries;

to give you a better sense of the overall distribution of various measures of economic performance;

to understand and apply the Five Forces analysis framework; and

to learn about an industry of interest to help with career choices and interviews.

For this assignment, I am providing an Excel data set in the Assignments folder in BlackBoard, consisting of 60,498 firm-year observations for all US public companies in the Compustat database between 2019 and 2023. There are 13 variables in the data set described below.

NOTE 1: Mirroring real life situations, this data set is not completely clean. For certain industries, you may spot records that you should remove from your analyses. Part of this assignment is to pay attention to the data you obtain and properly dealing with it prior to your analyses.

Assignment

Step 1: Calculate the economic average profitabilities

For each year of data, calculate the economy-wide ROA, ROS, and ROE, using all firms in the dataset (at this level, don’t worry about removing any records – at the economy level, small errors will not matter much). Remember your statistics!

Step 2: Identify a Target Industry:

Your analysis will be on a single industry, generally based on either a 4-digit or 6-digit NAICS code. It is likely easiest to start by finding a firm of interest and discover its NAICS code. The choice of 4-digit or 6-digit code depends on how specific you may need to be to have reasonably similar companies: 4-digits gives you more firms, but they may be in noticeably different businesses (different offer, customers, suppliers), whereas 6-digits yields fewer firms, but they are more likely to be relevant competitors. Example: 4451 is sufficient to identify grocery stores and 4811 for airlines. 325620 may be needed for Cosmetics (3256 includes P&G). Use of SIC may yield good results.

When you get to Steps 5 & 6 (Five Forces), you may want to further narrow the industry by customizing the companies within based on your knowledge. If so, please explain your definition of the industry you are analyzing.

Field Descriptions:

NOTE: the Filter feature in Excel is a good way to select the set of firms you will use in your analysis. While you can do your further analysis in the original spreadsheet, we recommend you copy and paste the subset of data for your analysis into a new (and smaller) spreadsheet. Include all the years for all the firms in your selected industry.

Step 3: Calculate Performance Measures for the Industry

For your industry set of firms, calculate the Industry average Return on Sales (ROS), Return on Assets (ROA), and Return on Equity (ROE). Next, calculate ROS, ROA and ROE measures for each row in your industry spreadsheet (row=data for single firm/year). Summarize industry findings in a table and comment on any noticeable variations over time.

Step 4: Examine the Distribution of Profits for 2023 using ROS, ROE and ROA

Now look only at the data for 2023. Evaluate the range of profitability for firms within the industry, find the mean, maximum and minimum ROS, ROA, and ROE in your industry; note the names of the firms with these max and min parameters. Indicate which is the best measure for your industry and explain why you believe it is the best measure.

Put this information into a table (e.g. below).

Step 5: Examine the Industry Leaders (by Sales in 2023)

Using only 2023 data, create a table of the top 5-10 firms by Sales, showing Assets, Net Income, Sales, Equity, ROS and ROA. Example showing top 6 firms by Sales for 4451:

You may include other columns you think are relevant to your industry.

Step 6: Porter’s Five Forces Analysis for your industry

Create a table with the structure in Exhibit 1 below to show your assessment of the factors with the most significant impact on industry profitability. Focus on 3 to 5 factors for each force, some of which you think help the industry raise profitability and some that are assumed to limit profitability but that you think are actually weak. Use your own thoughts about the industry, and augment by searching on the web for information on particular industries. You’d be surprised by the amount of information you can find if you search for “industry analysis” and the industry name or NAICS! Use of ChatGPT or other AI-enabled software may be useful for this part of the assignment…if you use such software, cite its use and show the prompt in an appendix.

Step 7: Examine how the industry forces differentially affect two of the top five players in that industry.

As we’ve noted in classes, Industry Analysis focuses on the Average Industry Incumbent. Individual companies look at their own positions relative to the five forces and determine their strategies based on their activities and resources. Find detailed info on two of the top companies in your industry and examine how industry forces differentially affect the two. From this, you can develop strategies for your focal firm that help it to gain a competitive advantage against a key incumbent.

While AI might provide some insights, you should plan on using your own analysis based on our class to make your case.

Step 8: Summarize your understanding of the industry in a memo

You are acting as an analyst for the C-suite of one of the industry leading companies. In the next week, your manager will be presenting to the board of directors. As part of this presentation, she would like to touch on the company’s profitability potential within the industry and how it compares to a top competitor. Provide your manager with an 800–1000-word memo that summarizes this potential as it contrasts to that competitor (which you should identify from step 5). Provide your opinion as to whether the firm is in an industry whose conditions are, on average, very favorable, somewhat favorable, ambiguous, somewhat unfavorable, or very unfavorable. Be certain to support your opinion with high impact evidence from credible sources.

Your memo will be reviewed by me/TAs for quality of strategic analysis and content, and by your career/communications faculty for how effectively you communicate and defend your opinion.

Administrative Details:

Your memo should be in the form of a five-part inductive argument using the audience assessment and information synthesis skills that you have been learning in Executive Communications. This means five independent reasons for your profitability potential [note how this aligns nicely with the five forces], each supported by three to five pieces of robust evidence from your analysis. Use the SM275 MSMS ExecCom Style and Format Guide in laying out your memo. Above all else, be sure to write a concise and content rich overall headline and section headlines, such that just reading your six headlines will tell us your whole story. Also be sure to document your sources with CMS style footnotes. An added plus will be to use imbedded graphics [graphs, tables, etc.] to visualize your data in support of your argument. Format for clarity and don’t make your boss work to figure out what you are saying. Feel free to use ChatGPT or equivalent to assist you in preparing and/or proofreading your memo. As always, append a transcript of your bot sessions to your work and include a brief footnote in your memo asserting that you did use GenAI tools to support your work.