Company analysis pulls three threads together: where the firm sits competitively, how it earns money today, and how it funds growth tomorrow. Each thread answers a different question, and each carries its own exam traps.
Porter's three generic strategies define how a company tries to win:
- Cost leadership. Lowest unit cost in the industry. Scale, process discipline, supply chain control. Wins on commodity-like goods.
- Differentiation. Unique product attributes that command a price premium. Brand, technology, service, design.
- Focus. Narrow segment served on either a cost or differentiation basis. Niche depth in exchange for limited reach.
TRAP: "Stuck in the middle" firms attempt cost and differentiation simultaneously and earn below-average returns on both. Exam stem: a firm trumpets premium quality while cutting R&D to chase low-cost rivals. That is stuck in the middle, not hybrid strategy.
Five forces map the structural pressure on returns:
Industry life cycle also signals position. Embryonic stage carries high risk and negative cash flow. Growth stage delivers rising margins and scale economies. Shakeout brings consolidation.
Common mistakes
- Calling a firm "hybrid" when it is stuck in the middle. Trap: claiming dual cost and differentiation strategy is sophisticated. The exam answer flags eroding margins and inconsistent positioning.
- Confusing revenue growth with pricing power. Volume-driven growth at flat or compressed margins is NOT pricing power. Trap value: 12% revenue growth with gross margin falling from 40% to 36% reads as price-taking, not pricing power.
- Treating capex equal to depreciation as "no investment." Capex / D&A near 1.0 is steady-state replacement, not zero. The maintenance assumption holds only in stable industries with stable asset bases.
Bottom line
- Three generic strategies: cost leadership, differentiation, focus. Mixing them ("stuck in the middle") destroys returns.
- Five forces frame position: rivalry, new entrants, substitutes, supplier power, buyer power.
- Revenue decomposes into price × volume × mix. Pricing power is raising price without losing volume, visible as gross-margin stability through input-cost shocks.
- Margin ladder runs gross, EBITDA, EBIT, net; operating leverage rises with fixed costs: the heavier the fixed-cost base, the harder EBIT swings when revenue moves.
Exam shortcut
Map strategy first, financials second: identify cost vs. differentiation vs. focus before reading margins, then test whether the numbers fit the claim. For pricing power, look at gross margin behavior through input shocks, not headline revenue growth. For funding gaps, compute CCC and multiply by incremental revenue to size the working-capital build before judging whether capex and leverage are sustainable.
The full lesson (about 2,126 words, 14 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- company analysis
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