Financial Analysis in Hong Kong: Qualitative Examination of Financial Statements (2nd edition) for CEOs and Board Members

10. Macro Corporate Analysis

Chapter 10 Macro Corporate Analysis This chapter introduces a series of factors in the macro environment affecting corporations and includes the following sections: • Economy Analysis • Industry Analysis • Information-Seeking Survey No corporation operates on its own. Analysts look at the macro environment and identify the relevant external factors affecting a corporation as well as how well the corporation’s internal strengths and weaknesses match with these external factors. To survive and prosper in the global market, corporations which align their own objectives and capabilities with the macro environment best should ultimately become the winner. Annual reports usually include extracts of opportunities and risks from the relevant aspects of the macro environment in which the corporation operates and specify the means that are used to achieve the desired ends. Analysing the macro environment may be divided into five dimensions, so-called PESTE Analysis,1 as follows: • politics; • economics; • society; • technology; and • environment (referring to the natural environment). 186 Financial Analysis in Hong Kong (Second Edition) Some may rearrange the five letters of PESTE into STEEP. Over the last ten to fifteen years, various academics, executives and business consultants have further developed their own versions of macro environment scanning models. One common terminology is PESTLE (or PESTEL) Analysis which refers to an extension of PESTE by adding the legal dimension which is understandable given the increasing regulations, deregulations and litigious culture around the world. Other variations of macro environment scanning models include STEEPLED (which evaluates social, technological, economic, environmental, political, legal, ethical and demographical factors) and STEER (which evaluates socio-cultural, technological, economic, ecological, and regulatory factors). Whatever terminology is used, PESTE Analysis seeks to give an overview of the overall macro environment and can be completed at different levels, ranging from a page of some key points to a comprehensive survey with detailed findings. Useful data exists everywhere, but the trick is to identify the relevant bits and to convert them to knowledge relevant to the underlying business. In the context of financial analysis in the corporation’s macro environment, analysts tend to focus on the economy and industry. To compete in the macro environment, a corporation may generally adopt three generic strategies2 allowing it to obtain a competitive advantage. There are two basic types of competitive advantage that a corporation may possess—low cost and differentiation—depending on the industry and market structure and other external factors. Along with these two generic strategies, there is a third generic strategy—focus—which aims at cost advantage or differentiation in a narrow market segment than the pure low cost or differentiation strategies. Therefore, analysts may find out the type of strategies adopted by the corporation under review and how well the chosen strategies match with the macro environment, particularly relating to the economy and industry. Economy Analysis An economy is generally characterized by growth, inflation, interest rate, exchange rate as well as size of population, workforce and unemployment. Analysing the local economy in which the corporation under review situates may no longer be adequate because of the impact of globalization. 10. Macro Corporate Analysis 187 Changes in the local economy does not necessarily give an equivalent impact on corporations situated locally because most of today’s corporations operates on a global basis in the sense that the materials are sourced worldwide, and their products are being sold to local as well as overseas markets. An economy is basically made up of three core elements: labour, capital and natural resources. Combining all three elements is the function of entrepreneurial management so that individual corporations and the economy as a whole can prosper. In economics, these three elements are known as factors of production, referring to the resources used as factor input in producing goods or services. Labour Financial analysis often reveals objective data concerning the nature, quantity and ability of labour. Tracking the volume of production or sales generated by each worker can indicate the changes in the labour’s productivity. Monitoring the sick leave and punctuality of the workforce can indicate the degree of absenteeism and staff motivation. Unfortunately, such data relating to individual corporations is generally not available to anyone other than the management, but relevant data relating to the entire economy published by the government can provide a general indication of the quality of labour in the territories in which the corporation under review situates. China, for example, has been commonly known as having a large pool of...