CLASS / COURSE: Economics

QUESTION DESCRIPTION:

Economic Analysis Project for the company .

A general conceptual framework for the project is as follows.  Suppose your company plans to raise additional capital.  As is generally required, a set of disclosure documents need to be prepared which will inform investors as to the nature of the business, and the potential risks they will face.  You’ve been asked to create brief slide presentation summarizing this information, to be used in face-to-face meetings with potential investors.  The content section of the presentation should be 5-7 slides.  Additionally, you may want to add introduction/conclusion/reference slides as well. Therefore total slides will be 9 to 12. With speaker’s notes as well.

You, of course, have to come up with the information in the first place.  Here are some of the things that you might want to address:

·       The general economics of the business.  What the firm produces, and nature of production technology (e.g. scale/scope economies).  Cost structure (capital intensive/labor intensive).  Nature of the demand (substitutes/complements), etc.

·       Growth prospects.  What’s the growth story and can you back it up?   Maybe there’s no growth story.

·       The competitive nature of the industry.  Barriers to entry, customer loyalty, product differentiation.  Threats created by competitors, etc. 

·       Special factors relating to regulation or other governmental activity.  Is this a highly regulated business?  Any pending legislation/rulemaking that impacts the business or industry?  How does the government affect demand (price floors, subsidies, etc.)?

·       Risks relating to the availability and costs of inputs.

·       How the company fares in varying macroeconomic environments.  Does the business tend to be pro-cyclical or anti-cyclical?  Can you show that?

·       Any international aspects to the business.  Exchange rate risk?  Threat of international competition, etc.  Are tariffs or quotas in place?

Clearly, the topics you cover should be the most important ones for your particular business.  You don’t have a lot of time—focus on what’s most important.

Your work product should not be a sales pitch.  That’s the CFO’s job.  Your job is to deliver the straight facts, giving the investors the information they need to make the appropriate decision.  Imagine that after the (short) investor meeting is over, one of the investors pulls you aside and says: “We think your CEO is a jerk so we’re not going to invest, but I just wanted to say that I thought your presentation was one of the best I’ve seen in a long time.  I feel like I really understand your company.”

What makes a great presentation?

·       Readability.  Presentation in a Powerpoint, bullet-based format seems to be the way things are presented nowadays.  This would be in a written format, using maybe a slightly larger font size (14 pt), but nothing at all like the ones used in the classroom lectures, which are designed to be projected on a screen, not read in hardcopy.

·       Hard vs soft facts.  To the extent possible, hard, solid quantitative analysis is vastly preferred to soft qualitative statements.

·       Embedded graphics, appropriately used.  Examples, time charts of earnings, market share, etc.

·       Anticipate questions—put yourself in the shoes of the audience.  What would you want to know?  Did you leave out critical information?  You’re not likely to have a second crack with your audience.

·       An acid test: When the slide deck is passed around the table, do the investors lean forward in their chairs to study it?  Or do they set it aside and lean back in their chairs.

 

Information sources:

For public companies there are a lot of mandated disclosures:

Annual/quarterly reports

Proxy Statements

Article in the press

Securities analysts reports (a fabulous source)

I often start at finance.yahoo.com and go from there.

 

Tips on the Economic Analysis Project

 Think of the project as an overall review of the topics we’ve covered in class.  For each topic area, think of how the economic concepts relate to your enterprise.  Here’s a list that comes to my mind.  Not every topic is equally important for your particular business.  Only address those that are most relevant to your case.

1)  Markets.  As you describe your business, how would you characterize the market it operates in?  Is it a national, regional, international market?

2) Demand Side.  Who are the demanders of the product or service you produce?  Do you sell to consumers directly, or to other businesses?  If you sell to other businesses, factors impacting your customers’ businesses indirectly impact yours.  What factors influence the demand for your product?  Is it all about price, or not?  Are your customers especially sensitive to price?

3) Supply Side.  What is the nature of the production process?  Is your production process dominated by fixed costs?  Are there substantial scale or scope economies?  Are there particular production bottlenecks that generate diminishing marginal productivity in the short term?  Do you outsource much of your production or operation?  If so, why?

4) Competitive Environment.  Who are your competitors?  Do you have much in the way of pricing power?  Is your business environment closer to one of perfect competition or oligopoly? Does your business try to segment the customer base, and price differentially (price discrimination)?

5) Labor market situation.  Describe the types of labor inputs used by your business.  How important is labor to your operation?  Is your labor force unionized?

6) Government.  How important is the government to your business?  Maybe the government is a customer?  Are there any current laws, standards, or regulations that are central to your business’s success? If government moves to cut spending, how would that impact your business?

7) Macroeconomy.  How important is the performance of the overall economy to your business?  Does your business vary a lot or a little with the state of the economy?  If interest rates start to increase, will that impact your business?

8) International Trade.  Does your firm sell to foreign customers?  Are foreign firms suppliers?  What do exchange rate fluctuations mean for your business?

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SUBJECTS / CATEGORIES:
1. Business Economics
2. Economics
3. Microeconomics