Detective Solution
The Financial Detective, 2005 proportion Financial characteristics of companies vary for many reasons. The two most promi_ nent drivers are industry economics and firm sfategy. Each industry has a financial norm around which companies within the industry tend to operate. An airline, for example, wourd naturary be expected to have a high
of fixed
assets (airplanes),
manufacturer would be expected to have a lower gross margin than a pharmaceutical manufacturer because commodities such as steel are subjeci to strong price competition, while highly differentiated producrs like patenred drugs enjoy mrich more pricing freedom ' Because of unique economic features of each industiy, uurrug" financial statements will vary from one industry to the next. Similarly, companies within industries have different flnancial characteristics, in part, because of the diverse strategies that can be employed. Executives choose strategies that will position their company favorably in the competitive jockeying within an industry. Strategies typically entail making important choices in how a product is made (e.g., capital intensive versus rabor intensive), how it is marketed (e.g., direct sales versus the use of distributors), and how the company is financed (e.g., the use of debt or equity)- Strategies among companies in the same industry can differ dramatically ' Different strategies can produce striking differences in financial results for firms in the same industry. The following paragraphs describe pairs of participants in a number of different indlrsffies. Their strategies and market niches provide clues as to the financial condition and performance that one would expect of them. The companies, common-sized financial and operating data, as of early 2005, are presented in a standardized, format :tateTents in Exhibit 1. It is up to you to match the financial data with the company descriptions. Also, try to explain the differences in financial results across industries.
of fixed
assets (airplanes),
manufacturer would be expected to have a lower gross margin than a pharmaceutical manufacturer because commodities such as steel are subjeci to strong price competition, while highly differentiated producrs like patenred drugs enjoy mrich more pricing freedom ' Because of unique economic features of each industiy, uurrug" financial statements will vary from one industry to the next. Similarly, companies within industries have different flnancial characteristics, in part, because of the diverse strategies that can be employed. Executives choose strategies that will position their company favorably in the competitive jockeying within an industry. Strategies typically entail making important choices in how a product is made (e.g., capital intensive versus rabor intensive), how it is marketed (e.g., direct sales versus the use of distributors), and how the company is financed (e.g., the use of debt or equity)- Strategies among companies in the same industry can differ dramatically ' Different strategies can produce striking differences in financial results for firms in the same industry. The following paragraphs describe pairs of participants in a number of different indlrsffies. Their strategies and market niches provide clues as to the financial condition and performance that one would expect of them. The companies, common-sized financial and operating data, as of early 2005, are presented in a standardized, format :tateTents in Exhibit 1. It is up to you to match the financial data with the company descriptions. Also, try to explain the differences in financial results across industries.