Peer Group Analysis

Peer Group Analysis

It is the practice of comparing a firm's result to those of similar firms. Commercial industry classification systems often provide a starting point for constructing a peer group. Start with companies in the same industry, review the subject company and its competitors' annual reports, and confirm each comparable company's primary business activity is similar to that of the subject company.

Useful questions to ask are:

·    What proportion of revenue and operating profit is derived from business activities similar to those of the subject company?

·    Does a potential peer company face a demand environment similar to that of the subject company?

·    Does a potential company have a finance subsidiary?

Principles of strategic analysis A business has to understand the dynamics of its industries and markets in order to compete effectively in the marketplace. Porter identifies five forces that dictate the rules of competition in each industry. These forces determine industry profitability because they influence the prices, costs and required investment of firms in an industry.

·    The threat of substitutes. Substitutes not only limit profits in normal times, they also reduce the bonanza an industry can reap in good times. The threat of a substitute is high if it offers an attractive price-performance trade-off to the industry's product, and/or the buyer's cost of switching to the substitute is low.


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