Choosing the right competitors to analyze is a crucial skill for investment bankers (IBs). It helps you understand the market dynamics, the strengths and weaknesses of your client, and the potential valuation and deal opportunities. But how do you select the most relevant and comparable firms to benchmark? Here are some tips to guide you.
The first step is to identify the industry and sector that your client operates in. You can use standard classifications, such as SIC codes, NAICS codes, or GICS codes, to narrow down the pool of potential competitors. However, you should also consider the specific products, services, customers, and markets that your client offers or targets. For example, if your client is a niche software company, you may not want to compare it with a large diversified IT firm.
When you're looking at competitors in International Business, focus on the ones that are most like your company and operate in similar areas. Check out companies with similar products or services, target customers, and where they're located. Think about both direct competitors (those doing the same thing as you) and indirect ones (those affecting your market in different ways). It's also a good idea to look at companies trying new things that could impact the industry. Pay attention to how well they're doing in the market, financially, and what plans they have. By understanding these companies, you can make smart decisions and come up with good strategies for dealing with the challenges of the international market.
The next step is to filter the competitors by size and growth. You want to find firms that have similar revenue, earnings, assets, and market capitalization as your client. This will help you compare their financial performance, profitability, and efficiency. You also want to look at their growth rates, both historical and projected, to see how they are expanding or contracting in the market. For example, if your client is a fast-growing startup, you may not want to compare it with a mature or declining company.
To understand how a business fits into the market, think about the type of work it does (industry) and the specific area within that (sector), like technology or healthcare. Size just means how big or small the company is, whether it's a small one starting out or a big one. Growth is about how much the company is getting bigger. Looking at these things helps businesses see the bigger picture, like having a map to figure out where they are, how big their vehicle is, and where they're headed. It's like planning a trip for your business.
The third step is to consider the geographic and regulatory factors that affect your client and its competitors. You want to find firms that operate in the same or similar regions, countries, or markets as your client. This will help you account for the differences in demand, supply, competition, and costs across different locations. You also want to look at the regulatory environment, such as taxes, tariffs, subsidies, or legal restrictions, that apply to your client and its competitors. For example, if your client is a regulated utility company, you may not want to compare it with an unregulated energy producer.
When businesses look at geography, they're checking where they do their work whether it's in one place or many. Knowing this helps them plan things that suit each area. Regulations are like the rules businesses need to follow. These rules can be different in each country or region and cover things like how they trade, pay taxes, and make products. Following these rules is important to avoid problems and keep the business running well. So, it's kind of like knowing where you're working (geography) and following the rules (regulations) to do things right in the business world.
The fourth step is to analyze the strategy and positioning of your client and its competitors. You want to find firms that have similar business models, value propositions, competitive advantages, and risks as your client. This will help you assess their strategic fit, differentiation, and sustainability in the market. You also want to look at their recent and future moves, such as mergers and acquisitions, divestitures, partnerships, or innovations, that may affect their market position. For example, if your client is a low-cost provider, you may not want to compare it with a premium brand.
The final step is to evaluate the data availability and quality of your client and its competitors. You want to find firms that have reliable, consistent, and comparable financial and operational data that you can access and use for your analysis. You also want to avoid firms that have missing, outdated, or distorted data that may skew your results or conclusions. For example, if your client is a private company, you may not want to compare it with a public company that has more disclosure and transparency.
When choosing the right competitors to analyze in IB, it is essential to consider a combination of quantitative and qualitative criteria. You need to find a balance between similarity and diversity, relevance and representativeness, and accuracy and completeness. To do this, start with a broad list of competitors and narrow it down based on your criteria. Utilize multiple sources of information, such as industry reports, databases, websites, or news articles, to identify and research the competitors. Additionally, use common sense and judgment when selecting the competitors instead of relying solely on formulas or rules. It is important to explain and justify your choices and assumptions as well as be ready to defend them if challenged. Lastly, update and revise your list of competitors as the market conditions or client objectives change.