To get better results search whole phrases rather than keywords For example, if you are looking for risks involved in mutual funds investment then search "Risks in Mutual Funds" rather than "Risks" and "Mutual Funds" separately.

You can search for answers by service provider name. If you want to see answers by a particular service provider, search the name. You will see the questions to which the service provider answered.

Sam Ghosh Founder and SEBI Regd. Investment Adviser at Wisejay Private Limited Bangalore, Karnataka
Basics of Fundamental Analysis, part4 : Qualitative Analysis : Macro Level Analysis
In Investment Advisory
1 answer/comment
10:57:29 AM, 26th November, 2018
  • Sam GhoshFounder and SEBI Regd. Investment Adviser at Wisejay Private LimitedBangalore, Karnataka
    Hire Me

    In part3 of this series, we talked about the company level qualitative analysis – which is more relevant to bottom-up approach. Let us talk about macro level analysis in this post. Macro level analyses are used for top-down approach to understand –
    1. How lucrative the economy and industry is and
    2. Strategic positioning of the company in the industry.


    1. PESTLE(D)

    This tool helps us analysis the macro environment the company operates in using six factors -

    P – Political: Political stability, political interference, trade agreements etc.

    E – Economical : Economic stability, macroeconomic policies, purchasing power, economic liberation etc.

    S – Social: Social influences, attitudes, trends of social change etc.

    T – Technological: Technical know-how, exposure and comfort with technology, policies for technical progress.

    L – Legal: Regulations, rule of law, ease of doing business etc.

    E – Environmental: Environmental legislation and how strongly they are implemented, waste management infrastructure, attitude towards environment etc.

    D - Demographic: Characteristics of the population, i.e. the potential consumer base – median age, distribution of age, the distribution of purchasing power, gender , education level, average age or marriage, birth rate, death rate etc.

    The whole idea is to understand the environment the company operates in and their impact on the decision making of the company management. PESTLE(D) is generally suitable for market level decisions i.e. country level investment decisions.

    For example you are evaluating a company which offers online booking of flight tickets in India. India has a fairly stable and democratic political system. Although the per capita purchasing power is low, the market size is enormous and one of the fastest growing large economies in the world. Socially, air travel used to be a status symbol and luxury. The common mode of interstate transportation is still trains not air travel. Online booking of flight tickets in India was pioneered by maketmytrip.com who struggled in the initial days because the Indians did not have exposure to online payments using credit cards. Also, the credit card companies did not offer payment insurance. Demographically, the median age of Indian population is around 28. This means most of the population is in the working age. This creates a high growth opportunity.

    2. Porter’s Five (six) Forces

    While PESTLE(D) deals with the environment the company operates in, Porter’s Forces deal with the competitive positioning of a company.

    Please refer to the attached image.

    The forces are

    a. Rivalry among the current players

    A large number of players in the market means mean commoditisation of the products offered by the company. This means lower margin due to competition on the basis of price. Apart from some highly regulated sectors, most industries will eventually attract many players and the any supernormal profit will be eroded. It is important to understand whether the company builds a niche or a strong brand to maintain supernormal profits.

    b. Bargaining power of buyers

    In the presence of a large number of similar products of viable substitutes, the buyers enjoy bargaining power. Some of the ways a company deals with the bargaining power of buyers are increasing the switching cost, network effect to increase engagement, loyalty programs etc.

    c. Bargaining power of sellers

    The suppliers of a company can enjoy extraordinary bargaining power due to monopoly created by technological superiority, regulatory protection or cartel etc. For example, the input cost for the refineries are guided by primarily by the OPEC cartel. Another example is the CPU manufacturers who enjoy considerable bargaining power over the PC manufacturers because of the technological superiority.

    d. Threat of new entrants

    Less regulated industries, which does not require a lot of capital investment or technological know-how, are always vulnerable to new entrants who can capture market share by marginal improvement in offerings.

    e. Threat of substitutes

    What is the biggest competition of the payment companies ? Cash. Same way, in the initial days of online flight booking industry, the booking agents were the biggest competition.

    f. Complementaries

    Where substitutes negatively impact the growth for the company, complementaries positively impact them. In the above example of makemaytrip.com and the online flight booking industry, launch of budget airlines along with payment insurance by the credit card companies acted as complementary to the company.

    Be the first to react