Answer 1. Porter's Five Forces model. Threat of new competition. Threat of substitute products or services. Bargaining power of customers (buyers)

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1 Answer 1 Porter's five force s analysis is a structure for industry analysis and business strategy development given by Michael E. Porter of Harvard Business School in It revolves around the five key forces of industrial organization economics that determine the competitive intensity and therefore Charm of a market that means the overall industry profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to normal profit. Three factors of Porters five forces refer to competition from external sources and the remaining two from internal threats. The environment consists of those forces close to a company that affect its ability to serve its customers and make a profit. Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average. A related example of this is the airline industry. (Porter, 2008, pp ) As an industry, profitability is low and yet individual companies, by applying unique business models, have been able to make a return in excess of the industry average. Porter s five forces include - three forces from 'horizontal' competition i.e.: threat of substitute products, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition i.e. the bargaining power of suppliers and the bargaining power of customers. In porter s view SWOT analysis was unrigorous and ad hoc, so he thought of a better idea which was five forces analysis of Porter. Porter's Five Forces model Threat of new competition Threat of substitute products or services Bargaining power of customers (buyers) Bargaining power of suppliers

2 Intensity of competitive rivalry Foster group Ltd. Foster's Group is a beer group with interests in brewing and soft drinks. Foster's group Limited is based in Melbourne, Victoria and is a subsidiary of British multinational SABMiller. The two big players of Beer and Malt Manufacturing industry, who are dominating the industry in Australia are fosters group and Kirin Brewery-owned Lion Nathan National Foods. Though the volume growth remained flat but there is double digit growth in premium and low-carbohydrate beer sales which drove the revenue growth early in five years to Consumers are also shifting from beer to cider, ready-to-drink spirits (RTDs). Threat of new competition It s noticed that consumer love to experience new beers but by their own brand, as they trust their brand very much. So there are not many problems in the beer market with the respect to the new entrants. But still the worries are of acquisitions by foreign companies. Bargaining power of customers (buyers) Bargaining power of buyers is very low as they are very brand loyal and would pay any price for their product. Threat of substitute products or services Change in taste of consumers shifting from Beers to cider, ready-to-drink spirits and availability of substitutes and is very high in this industry. Bargaining power of suppliers

3 The supplier bargaining power is very high as the company fluctuate their prices frequently with regard to the prevailing market condition. Intensity of competitive rivalry The two big players of Beer and Malt Manufacturing industry, who are dominating the industry in Australia are fosters group and Kirin Brewery-owned Lion Nathan National Foods. Westpac Banking Corporation Westpac Banking Corporation is a multinational financial services, one of the Australian "big four" banks and the second-largest bank in New Zealand. Threat of new competition Starting of new banks requires a huge capital and no one with just an idea and bit of capital can start a bank. But there are some services of banks which they can capitalize such as internet bill payment which is fee based revenue for banks and another threat is companies offering financial services. The possibilities of new Giant world banks entering into the market can also be a challenge for Westpac. Power of suppliers It might not be a big threat for Westpac but a supplier luring away human capital does cause a threat to bank. Power of buyers Buyers do not worry banks a much but the power of buyers to switch to other banks may cause a bit of worry for the bank. Availability of substitutes It is easily understood that there are plenty of banks against Westpac and substitute availability is very high.

4 Competitive Rivalry The industry is highly competitive. There is a race between banking industry to better and quick services to their clients in future we may see take over s and mergers by big banks. Answer 2 Liquidity ratio It helps to know the ability of firm to pay its short term debts. 2:1 is considered to be good ratio but if the ratio is more than it, it means that the firm has surplus cash or the current assets are not fully utilized and if the ratio is less than it means that firm may fall short of cash to meet its yearly expenses or the expenditure is more in that year as compared to the current assets. Different analysts consider different assets to be relevant in calculating liquidity. Some people do calculate only the sum of cash and equivalents divided by current liabilities because they feel that they are the most liquid assets, and would be the most likely to be used to cover short-term debts in an emergency. Short term assets can easily be converted into cash which helps the companies to pay their debts when creditors seek for payment. If we see the liquidity ratio of Foster s group than we can clearly see that it is falling every year which is not a good sign and it may be concern for the organization. It reflects that company may face issues in paying their monthly debts.( (Please refer to the attached excel) Solvency ratio This ratio helps to know the company s ability to meet its future obligation in long run. It provides a measurement of how likely a company will be to continue meeting its debt obligations. 'Solvency Ratio' Acceptable solvency ratios will vary from industry to industry, but as a general rule of thumb, a solvency ratio of greater than 20% is

5 considered financially healthy. Generally speaking, the lower a company's solvency ratio, the greater the probability that the company will default on its debt obligations. If we analyze the ratio of fosters group we may see that its long term solvency is fair and company is trying to maintain a good balance between borrowings and equity to meet its future capital requirement. Though the company still needs to work on it s fund raising through borrowings, still it has made pretty good efforts in the past to raise funds through debt. (Please refer to the attached excel) If we see the ratios of Westpac bank we can simply analyze that the solvency ratios of Westpac bank is very good. It has maintained a good balance between the borrowing and equity of funds to meet its future obligations. (Please refer to the attached excel) Asset-Utilization Ratio Analysis which helps in measuring the utilization of assets in business, it helps to know whether the assets are underutilized or over utilized or there is a proper utilization of assets which also reflects a better management of resources by the organization and the capability of management to handle there resources well. If we analyze the ratios of foster group we may find that in past the group was utilizing its asset pretty well but in recent years the ratio has falls steadily and these are not a great sign for the organization these may be the reasons for worry for the organization in future. It is not at all a good sign may be assets need to be checked by the organization. Now if we see that Westpac banks asset utilization ratio we may find that the organization is utilizing its asset very well and there is proper management of assets by the organization and it shows some positive signs for future of bank and it also represent the effective management of the organization. The ratio has show a steady rise in recent years if we see we come to know that company s asset utilization has increased year on year and it is expected to rise in near future though there is to competition in the market still company stands still. These ratios show some good signs for the organization. (Please refer to the attached excel)

6 'Profitability Ratios' The name itself explains the meaning of the ratio, profitability ratio means nothing else than profit earning capability of the organization. In which various different factors on which ratios can be calculated like operating profits ratio, net interest margin etc. It helps to know and compare the working of company in past and present or we can compare the between two firms on basis of their profit earnings. It is important to note that a little bit of background knowledge is necessary in order to make relevant comparisons when analyzing these ratios. For instances, some industries experience seasonality in their operations. The retail industry, for example, typically experiences higher revenues and earnings for the Christmas season. Therefore, it would not be too useful to compare a retailer's fourth-quarter profit margin with its first-quarter profit margin. On the other hand, comparing a retailer's fourth-quarter profit margin with the profit margin from the same period a year before would be far more informative. If we analyze the ratios of foster group we may come to know that the ratios of FGL are pretty uneven. There can be some big movements on the profit chart of the organization with some good amount of ups and downs in the profit of company in last 2010 company registered some losses but again it raised itself and earned some decent profits in but company needs to work on its profits so that each year by year it can grow slowly and steadily making normal profits to survive in long run. And now if we analyze the profits of Westpac we may find that the bank has grown steadily and slowly making some good profits in the past if we see the profit chat of company we may come to know that it is showing some good signs for future and it seems like industry will also be growing in future as the banks profit shows. (Please refer to the attached excel) Answer 3 The Dividend discount model implies that the dividends are discounted at the required rate of return to arrive the intrinsic value of the security.

7 Mathematically, Price = Dividends*(1+g) / (req. rate growth rate) Growth rate has been assumed to be 2% in the long run, considering the overall slowdown in the global economy and historical average growth rate of the Australian economy. (Please refer to the attached excel) The required rate is calculated using the Capital Asset Pricing Model, where, Required Return on Equity = Risk Free Rate + Beta*(Market Return Risk Free Rate) Risk Free Rate has been assumed to 5.5% which is the return on Australian govt. bonds with 1 year maturity. Beta for Foster Group (0.9) and West Pac (1.1) has been taken as average beta for the last 10 Years. (Please refer to the attached excel) Market Return has been taken as average return on the Australian Stock Exchange, AORD All Ordinaries Index for the last ten years.-3% Based on the dividend discount model, the intrinsic value for Foster Group is calculated as The intrinsic value for Westpac Bank has been calculated as (Please refer to the attached excel)

8 References 1. Porter M, Argyres N, McGahan A, "An Interview with Michael Porter", The Academy of Management Executive 2. Simkovic M, 2008, Competition and Crisis in Mortgage Securitization, pp Coyne, K and Subramaniam, S 1996, The McKinsey Quarterly, pp Porter, M 2008, "The Five Competitive Forces that Shape Strategy", Harvard Business Review, pp "Westpac Fast Facts". Retrieved 13 April 2009, West Pac Media Release 6. Louisson, S 2009, "Westpac loses NZ Court Tax Case". Wall Street Journal.