CHAPTER 1
OVERVIEW OF FINANCIAL REPORTING, FINANCIAL
STATEMENT ANALYSIS, AND VALUATION
Solutions to Questions, Exercises, and Problems, and Teaching Notes to Cases
1.1 Value Chain Analysis Applied to the Timber and Timber Products Industry.
Exhibit 1.A below contains a depiction of the value chain. The links in the value chain
are as follows:
1. Timber Tracts: Plant and maintain timber tracts (Weyerhaeuser)
2. Logging: Harvests timber (Weyerhaeuser)
3a. Sawmills: Cut timber into various grades of wood (Weyerhaeuser)
3b. Pulp and Paper Manufacturing: Grinds timber into pulp and converts the pulp
into various grades of paper and cardboard (International Paper)
4a. Intermediate Users of Wood: Engage in construction and furniture
manufacturing (Masco)
4b. Intermediate Users of Paper: Manufacture containers and packaging (Owens-
Illinois) and various commodity and specialty papers (Georgia-Pacific)
5a. Retailers of Lumber and Wood Products: Sell such products to the final
consumer (Home Depot)
5b. Retailers of Paper Products: Sell such products to the final consumer (Office
Depot).
Exhibit 1.A
Value Chain for the Timber and Timber Products Industry
Retailers of
Sawmills Intermediate
Lumber and
Users of Wood
Wood
Products
,Timber Logging
Tracts
Pulp and Intermediate Users of Retailers of
Paper
Paper
Manufacturin Paper Products
g
,1.2 Porter’s Five Forces Applied to the Air Courier Industry.
Buyer Power. Air courier services are a commodity. Firms in the industry offer
similar overnight or two-day deliveries. Firms also provide opportunities to track
shipments. Business customers can negotiate favorable shipping terms based on the
volume of shipments. Thus, buyer power among large corporate customers is high.
Supplier Power. The principal inputs are labor services, equipment, and information
systems. Except for pilots and some information processing specialists, the skill
required to offer air courier services is relatively low. Therefore, competition for jobs
reduces supplier power. The principal items of equipment are airplanes, trucks, and
sorting equipment. The number of suppliers of this equipment is relatively small, but
the equipment offered is largely a commodity. Thus, equipment supplier power is
relatively low. Information systems are critical to scheduling, tracking, and delivering
parcels. Hiring individuals with the education and skills needed to design and
maintain this information system is not difficult because these skills and education are
not unique. Thus, supplier power is low.
Rivalry among Existing Firms. Seven air couriers now carry a 90 percent market
share. Fed Ex and UPS have the largest market shares and compete heavily. Smaller
firms compete more in particular geographical or customer markets. Thus, rivalry is
relatively high.
Threat of New Entrants. The cost of acquiring equipment, developing national and
international delivery networks, and overcoming entrenched firms in an already
crowded market makes the threat of new entrants low.
Threat of Substitutes. The main threat to transportation of letter parcels is digital
transmission, and that threat is high. The threat of substitutes for transportation of
packages is low.
1.3 Economic Attributes Framework Applied to the Specialty Retailing Apparel
Industry.
, Demand. Firms attempt to compete on design, colors, and other product attributes,
but apparel is largely a commodity. Demand is somewhat cyclical with economic
conditions; customers tend to delay purchases or trade down during economic
downturns. Demand is seasonal within the year. Demand grows at the growth rate in
population, which suggests that apparel retailing is a relatively mature market. To the
extent that retailers can generate customer loyalty, demand is not highly price-
sensitive. However, given the similarity of product offerings across firms, firms
cannot price their goods too much out of line with those of their competitors.
Supply. In most markets, there are many firms selling similar apparel. The barriers
to entry are not particularly high because an apparel line and retail space are the most
important ingredients.
Manufacturing. The manufacturing process is labor-intensive. The manufacturing
process is relatively simple, and firms source their apparel from Asia, which has low
wages.
Marketing. Because of the large number of suppliers selling similar products,
apparel-retail firms must stimulate demand with attractive store layouts, colorful
product offerings, and various sales promotions.
Investing and Financing. Firms must finance inventory, usually with a combination
of supplier and bank financing. The risk of inventory obsolescence is somewhat high
if the product offerings in a particular season do not sell. Firms tend to rent retail
space in shopping malls, so they need to engage in extensive long-term borrowing.
1.4 Identification of Commodity Businesses.
Dell. Dell’s products—computers, servers and printers—are commodities. Dell tends
not to develop the technologies underlying these products. Instead, it purchases the
components from firms that develop the technologies (semiconductors and computer
software). Dell’s direct-to-customer marketing strategy is not unique, but the extent
OVERVIEW OF FINANCIAL REPORTING, FINANCIAL
STATEMENT ANALYSIS, AND VALUATION
Solutions to Questions, Exercises, and Problems, and Teaching Notes to Cases
1.1 Value Chain Analysis Applied to the Timber and Timber Products Industry.
Exhibit 1.A below contains a depiction of the value chain. The links in the value chain
are as follows:
1. Timber Tracts: Plant and maintain timber tracts (Weyerhaeuser)
2. Logging: Harvests timber (Weyerhaeuser)
3a. Sawmills: Cut timber into various grades of wood (Weyerhaeuser)
3b. Pulp and Paper Manufacturing: Grinds timber into pulp and converts the pulp
into various grades of paper and cardboard (International Paper)
4a. Intermediate Users of Wood: Engage in construction and furniture
manufacturing (Masco)
4b. Intermediate Users of Paper: Manufacture containers and packaging (Owens-
Illinois) and various commodity and specialty papers (Georgia-Pacific)
5a. Retailers of Lumber and Wood Products: Sell such products to the final
consumer (Home Depot)
5b. Retailers of Paper Products: Sell such products to the final consumer (Office
Depot).
Exhibit 1.A
Value Chain for the Timber and Timber Products Industry
Retailers of
Sawmills Intermediate
Lumber and
Users of Wood
Wood
Products
,Timber Logging
Tracts
Pulp and Intermediate Users of Retailers of
Paper
Paper
Manufacturin Paper Products
g
,1.2 Porter’s Five Forces Applied to the Air Courier Industry.
Buyer Power. Air courier services are a commodity. Firms in the industry offer
similar overnight or two-day deliveries. Firms also provide opportunities to track
shipments. Business customers can negotiate favorable shipping terms based on the
volume of shipments. Thus, buyer power among large corporate customers is high.
Supplier Power. The principal inputs are labor services, equipment, and information
systems. Except for pilots and some information processing specialists, the skill
required to offer air courier services is relatively low. Therefore, competition for jobs
reduces supplier power. The principal items of equipment are airplanes, trucks, and
sorting equipment. The number of suppliers of this equipment is relatively small, but
the equipment offered is largely a commodity. Thus, equipment supplier power is
relatively low. Information systems are critical to scheduling, tracking, and delivering
parcels. Hiring individuals with the education and skills needed to design and
maintain this information system is not difficult because these skills and education are
not unique. Thus, supplier power is low.
Rivalry among Existing Firms. Seven air couriers now carry a 90 percent market
share. Fed Ex and UPS have the largest market shares and compete heavily. Smaller
firms compete more in particular geographical or customer markets. Thus, rivalry is
relatively high.
Threat of New Entrants. The cost of acquiring equipment, developing national and
international delivery networks, and overcoming entrenched firms in an already
crowded market makes the threat of new entrants low.
Threat of Substitutes. The main threat to transportation of letter parcels is digital
transmission, and that threat is high. The threat of substitutes for transportation of
packages is low.
1.3 Economic Attributes Framework Applied to the Specialty Retailing Apparel
Industry.
, Demand. Firms attempt to compete on design, colors, and other product attributes,
but apparel is largely a commodity. Demand is somewhat cyclical with economic
conditions; customers tend to delay purchases or trade down during economic
downturns. Demand is seasonal within the year. Demand grows at the growth rate in
population, which suggests that apparel retailing is a relatively mature market. To the
extent that retailers can generate customer loyalty, demand is not highly price-
sensitive. However, given the similarity of product offerings across firms, firms
cannot price their goods too much out of line with those of their competitors.
Supply. In most markets, there are many firms selling similar apparel. The barriers
to entry are not particularly high because an apparel line and retail space are the most
important ingredients.
Manufacturing. The manufacturing process is labor-intensive. The manufacturing
process is relatively simple, and firms source their apparel from Asia, which has low
wages.
Marketing. Because of the large number of suppliers selling similar products,
apparel-retail firms must stimulate demand with attractive store layouts, colorful
product offerings, and various sales promotions.
Investing and Financing. Firms must finance inventory, usually with a combination
of supplier and bank financing. The risk of inventory obsolescence is somewhat high
if the product offerings in a particular season do not sell. Firms tend to rent retail
space in shopping malls, so they need to engage in extensive long-term borrowing.
1.4 Identification of Commodity Businesses.
Dell. Dell’s products—computers, servers and printers—are commodities. Dell tends
not to develop the technologies underlying these products. Instead, it purchases the
components from firms that develop the technologies (semiconductors and computer
software). Dell’s direct-to-customer marketing strategy is not unique, but the extent
