The Intended Application of Value Chains Porter S 5 Forces and Economic Attritubes to Financial Analysis

FINANCE -- VALUE CHAINS, PORTER'S 5 FORCES AND ECONOMIC ATTRIBUTES The analyses of The Home Depot and Lowe's will involve value chain analysis, Porters 5 forces framework and economic analysis framework. These three perspectives complement rather than conflict with each other. Furthermore, they view a business internally and externally within a specific industry. The combination of all three perspectives will give an effective "picture" of The Home Depot and Lowe's individually, head-to-head and within their industry.

Value chain analysis -- Information and Value for Financial Analysts Value chain analysis separates a business into a series of value-generating activities called a "value chain," often including primary and support activities. This assists a financial analyst in discerning which activities a business uses to create a competitive advantage and generate shareholder value. The activities ideally offer more value to customer than cost to the business, causing a profit margin (Internet Center for Management and Business Administrations, Inc., 2010).

Generally speaking, the value chain activities involve: Inbound Logistics; Operations; Outbound Logistics; Marketing and Sales; and Service. Inbound Logistics are the receipt and storage of raw materials, along with their required distribution to the business' manufacturing arm. Operations are the processes that make inputs finished products and services. Outbound Logistics are storage and distribution of the finished goods. Marketing and Sales are discernment of customer requirements and generation of sales. Service is customer support after products/services are sold to them.

Those primary value chains are served by a company's: infrastructure, including the organization's framework, its systems, its company culture, etc.; human resources, which recruits, hires, trains, develops and compensates employees; technology, which supports value-creating activities; and procurement, which buys imports such as materials, equipment and supplies. In order to generate profit, the company must be effective in these areas at least to the point at which revenue from customers exceeds the costs of these activities.

In order to heighten competitive advantage and profits, a company may reconfigure its value chains for lower costs or better distinction (Internet Center for Management and Business Administrations, Inc., 2010). 2. Porter's five forces framework -- Information and Value for Financial Analysts Porter's Five Forces examines specific industry environment, using the factors of Competitive Rivalry, Threat of New Entrants, Threat of Substitute Products, Bargaining Power of Suppliers, and Bargaining Power of Buyers.

In his interview on YouTube, Porter speaks of the five factors and discusses the underlying forces of each (Harvard Business Publishing, 2008). Porter emphasizes the significance and elasticity of his five forces, keeping a company focused on "underlying fundamentals" when determining its business strategy and avoiding being tricked by the latest fad or fashion (Harvard Business Publishing, 2008). Explaining the dynamic nature of his five forces, Porter encourages constant reexamination of how the organization and ideally everyone in its employ pursue a "common proposition of gaining competitive advantage" (Harvard Business Publishing, 2008).

Porter also states that competition does not have to be a "zero sum" game; rather, all businesses within an industry can thrive by uniquely serving consumer needs and sharing many "pieces of the pie" (Harvard Business Publishing, 2008). 3. Economic attributes framework -- Information and Value for Financial Analysts This framework of studying a business' economic characteristics is valuable to financial analysts because it ties in with items reported in the business' financial statements (Mangold, n.d.).

This approach focuses on consumer and industry influences on Demand, suppliers' and entry barriers' influences on Supply, capital's, labor's and complexity's influences on manufacturing, the consumer types' influence on marketing, and assets' and risks' influence on financing (Mangold, n.d.). 4. Compare and contrast each of these three perspectives. The three perspectives are not inconsistent with each other. Rather, each of them focuses on a specific area affecting a company. Value chain analysis focuses on internal processes/activities. Porter's 5 forces framework focuses on industry pressures external to the organization.

Economic attributes framework focuses on a business' financial statements with special interest in supply, demand, manufacturing, marketing and financing. The three perspectives combined provide a valuable assessment of the economic characteristics and dynamics driving competition in a specific industry. 5. Explain how you would conduct such analyses in the course project for the financial analysis and valuation of The Home Depot and Lowe's.

I would use value chain analysis to break down The Home Depot's and Lowe's processes into each company's value-generating activities and support activities, which would allow me to determine each company's effectiveness in those value chains and supporting activities and their resulting profit margins. Porter's 5 forces framework would be used to determine each company's competitive rivalry, threat of new entrants, threat of substitute products, bargaining power of suppliers, and bargaining power of buyers to determine each company's competitive advantages/disadvantages.

Finally, the economic attributes framework would be used to examine each company's financial statements and their entries' relationships to their supply, demand, manufacturing, marketing and financing. The combination of all three perspectives to each company should give an effective picture of each company's true valuation. C. Conclusion The combination of value chain analysis, Porter's 5 forces framework and economic attributes framework should provide a thorough analysis of The Home Depot and Lowe's individually, directly competitively.