To analyze a firm’s existing investments, and to identify differential advantages that explain excess returns on existing investments.

Key Questions:

1. What are the firm’s competitive strengths and differential advantages, if any?

2. Does this firm earn excess returns on its existing projects? If yes, can it maintain the competitive strengths that allowed it to earn these excess returns? If not, what can it do to start earning excess returns on its projects?

3. Does the firm have poor investments? If so, what might be the reasons for the poor returns?

Framework for Analysis:

1. Analyzing Existing Investments 1.1. What is the accounting return that the firm earns on its existing investments?

How does this compare with the cost of equity and capital?

1.2. What was the firm’s economic value added in the most recent financial year?

How does it compare with the previous year?

1.3. What, if anything, do the accounting returns and economic value added tell you about the quality of the firm’s existing investments?

2. Assessing Competitive Strengths 2.1. Who are the primary competitors to this firm and how does the firm compare to them in terms of both quantitative (size, profitability, risk) and qualitative measures

(quality of management, service)?

2.2. Does the firm have any special strength that no other firm in the sector possesses?

2.3. Does the firm lag other firms in the sector on any of the measures?
3. Evaluating Sustainability of Competitive Strengths 3.1. Are the firm’s competitors catching up with the firm on its strengths?

3.2. Are there new competitors either in the market or on the horizon who could compete with the firm on its strengths?