PESTEL Analysis PDF

MACRO ENVIRONMENT ANALYSIS: PESTEL ANALYSIS by Yunus Emre Yazıcı WHAT IS PESTEL ANALYSIS AND ITS HISTORY? W Strategic tool to assess the external environment H Helps identify opportunities and threats A Understanding of market trends and shifts, aiding in informed decision-making Helps aligning strategies with changing external conditions for competitiveness T 1960s 1980s 1990s 2000s Emerged businesses Initial version was Expanded to PESTEL, started realizing the originated as PEST, growing awareness of Became a standard tool importance of the gained popularity in the environmental issues in strategic planning external factors on their 1980s and regulations performances PESTEL ANALYSIS USE CASES Strategic Market Entry Marketing Product Business Planning Strategies Planning Development PESTEL helps By assessing political, PESTEL provides Understanding businesses evaluate economic, and social insight into cultural and environmental and external factors to align conditions, PESTEL legal influences, technological trends long-term strategies guides companies in allowing tailored through PESTEL with emerging trends identifying suitable marketing strategies enables product and potential markets and reducing that resonate with innovations that meet challenges. entry risks. target audiences. evolving customer needs. PESTEL ANALYSIS USE CASES Risk People Mergers and Market Assessment Strategies Acquisitions Research PESTEL highlights By analyzing social and PESTEL helps evaluate PESTEL offers a broad external risks, from legal factors, PESTEL market dynamics and perspective on external regulatory changes to supports HR in crafting external risks, ensuring factors, helping economic shifts, aiding policies and practices informed decisions in companies understand in proactive risk aligned with labor M&A processes. the market landscape management. market trends and before making strategic regulations. decisions. ADVANTAGES AND DISADVANTEAGES OF PESTEL ANALYSIS ADVANTAGES DISADVANTAGES It is a simple framework It is easy to use insufficient data It facilitates an understanding of the wider The risk to capture too much data may business environment lead to ‘paralysis by analysis’ It encourages the development of external The data used may be based on and strategic thinking assumption that later prove to be It can enable an organization to anticipate unfounded future business threats and take action to The pace of change makes it increasingly avoid or minimize their impact difficult to anticipate developments that my It can enable and organization to spot affect an organization in the future opportunities and exploit them fully To be effective, the process needs to be repeated on a regular basis. COMPONENTS OF PESTEL ANALYSIS P E S T E L Political Economic Social Technological Environmental Legal Societal Ecological and Legal Economic Government changes, Advancements environmental regulations and trends, including policies, demographics, in technology, factors, frameworks that inflation, stability, and and cultural innovation, and including govern the exchange rates, regulations that trends that the influence of sustainability industry, and economic can affect impact digital and climate including labor growth, that business consumer transformation change, that laws and influence market operations. behavior and on industries. affect business compliance dynamics. preferences. practices. requirements. POLITICAL - It covers all the political factors that can affect your business GOVERNMENT STABILITY AND REGIME GOVERNMENT POLICIES REGULATION AND DE-REGULATION TRADE CONTROL AND AGREEMENTS TAX POLICY LABOR LAWS SECURITY AND POLITICAL RISKS CORRUPTION LEVEL LOBBYING POWER ECONOMIC - It takes the economy into account and how it could impact your business ECONOMIC GROWTH INTEREST RATES / CURRENCY EXCHANGE RATES / INFLATION RATES DISPOSABLE INCOME LEVELS TRADE CONTROL AND AGREEMENTS UNEMPLOYMENT LEVELS RAW MATERIAL COSTS / ENERGY COSTS CREDIT AVAILABILITY RECESSIONS / CRISES COST OF LIVING SOCIAL - Things that impact on society and social norms DEMOGRAPHICS LIFESTYLES AND CONSUMER PREFERENCES MEDIA AND SOCIAL MEDIA EDUCATION LEVELS CULTURAL NORMS ANDA TABOOS WORK-LIFE BALANCE PRIORITIES DIVERSITY AND INCLUSION ETHICS AND SOCIAL RESPONSIBILITY HEALTH AND WELLNESS CONCERNS TECHNOLOGICAL - Technological advancements that affect industries and lifestyles New technologies are continually emerging, and the rate of change itself is increasing. How will this affect the organization’s products or services? FOR EXAMPLE: AI Robotics Blockchain Virtual and Augmented Reality Autonomous Vehicles Climate Technologies ENVIRONMENTAL - Environmental and sustainability concerns CLIMATE AND WEATHER NATURAL RESOURCES AVAILABILITY WASTE AND POLLUTION ENVIRONMENTAL CONSCIOUSNESS RECYCLING INFRASTRUCTURE AND REGULATIONS SUSTAINABLE PRACTICES GEOGRAPHICAL TERRAIN AND LOCATIONS BIODIVERSITY AND ECOLOGY RENEWABLE INCENTIVES LEGAL - Legislative changes that could cause you to alter your procedures COMPETITION LAW CONSUMER LAW LABOR LAW HEALTH AND SAFETY REGULATIONS PRODUCT LIABILITY LAWS PRIVACY LAWS INTELLECTUAL PROPERTY LAW IMPORT/EXPORT LAWS EMPLOYMENT LAWS HOW TO DO A PESTEL ANALYSIS? Decide how Identify the and by whom 1 scope of the research 2 will the information be 3 Gather the information 4 Analyze the findings collected Identify Discuss the Mark items as Decide what 5 a threat or opportunity 6 options to address the 7 findings with decision 8 actions need to be taken issues makers TIPS COLLABORATE EXPERTISE TECHNIQUES Use other techniques such Multiple perspectives can Use expertise and resources as SWOT analysis, identify more within the organization competitor analysis, or threat/opportunity scenario planning FREQUENCY FALLACY CONCLUSION Incorporate a PESTLE Avoid collecting vast analysis into an ongoing amounts of detailed Don’t jump to conclusions process for monitoring information without analyzing about the future based on changes in the business and understanding your the past or present environment findings appropriately CASE STUDY – Energy company based in Turkey Political Economic Social Technological Environmental Legal Government's With climate The permit HIT 30 program New wind and change, the period for green Society’s to encourage Lower interest solar energy regions where energy demand for technological rates are production and the facilities are production clean energy investment, expected soon battery located may facility use including green technologies lose their investments will energy suitability be shortened Opportunity Opportunity Opportunity Threat Threat Opportunity Investments Necessary should be Raising public Diversify the conditions need Creating a team Take advantage increased, and awareness renewable to be met, and to follow of the shorter refinancing about what we energy portfolio incentives must innovations permit period options should do geographically be applied for be considered THANKS FOR LISTENING BONUS AFTER CLASS QUESTIONS TO ASK POLITICAL What are the current political stability and government policies in the country/region? Are there any regulations or legal requirements that could affect the industry? How do government trade policies, tariffs, or tax structures impact the business? Are there any upcoming elections or political events that may influence the market? How does the level of corruption or bureaucracy impact business operations? ECONOMIC What are the prevailing interest rates, and how do they affect consumer spending and borrowing? How strong is the local economy, and what are the GDP growth trends? Are exchange rates stable, and do they influence the company’s international operations? What are the inflation rates, and how do they impact business costs and pricing strategies? How does unemployment affect the company’s workforce or consumer purchasing power? SOCIAL What are the demographic trends (e.g., age distribution, population growth)? How do cultural attitudes and values influence consumer behavior in this market? What lifestyle changes are occurring that might affect demand for products or services? Are there shifts in consumer preferences that could influence the industry? How does education level impact the workforce availability and customer base? TECHNOLOGICAL What technological innovations are emerging, and how can they be leveraged in the industry? How quickly is technology evolving, and does the company need to adapt? Are there any new technologies that could disrupt the market or create opportunities? What is the state of infrastructure, such as internet connectivity and digital capabilities? How does the pace of technological change impact product development and marketing? ENVIRONMENTAL How does climate change and environmental regulation affect the company or industry? Are there any sustainability initiatives that the company needs to comply with? What environmental challenges (e.g., pollution, resource scarcity) are prevalent? How do consumers perceive environmental impact, and how does this influence purchasing behavior? Are there opportunities for sustainable or green products that could drive growth? LEGAL What are the current laws and regulations that the company must comply with? Are there specific labor, health, or safety laws that could impact operations? How do intellectual property laws affect the business’s ability to innovate? Are there anticipated legal changes that could affect the market or operations? How are data protection and privacy laws evolving, and do they impact business practices? MICRO-ENVIRONMENT ANALYSIS Nurten Zulal Ilhan EC48U Contents What is Micro-Environment analysis? (Definition, examples of internal elements, how can we conclude a microenvironmental analysis.) Competitor Analysis (Definition, critical factors, tools and models) Customer Analysis (Definition, critical factors, five steps to running successful customer analysis) Supplier Analysis (Definition, critical factors, types of supplier analysis, benefits) Reference What is Micro-Environment analysis? Micro-environment analysis evaluates the elements of the micro-environment. They are made up of all the actors and elements of the immediate environment of an organization, and they directly affect how the company is run. There are a number of elements and factors that should be taken into consideration when performing microenvironmental analysis. Examples of a Micro-environment Factor A Company Employees Market Intermediaries Customers Competitors Public How can we conclude a microenvironmental analysis? In order to conduct a microenvironmental analysis, we must first determine the internal factors affecting a company. Competitors, customers and suppliers are critical factors that affect the success and sustainability of a business and that we need to analyze. We use a number of models and tools to examine these elements. Competitor analysis is the process of identifying organizations that offer similar products or services in the marketplace. These competitors are then evaluated against a set of predefined criteria. An effective competitive analysis helps an organization Competitor look at itself from a competitor and customer perspective and identify where and what can be Analysis improved. Main Elements: Market Share: What is the market share of competitors? Who are the leading competitors? Product and Service Quality: How good is the quality of the products or services offered by your competitors? How can your business compete with this quality? Pricing Strategies: What are your competitors' pricing strategies? Is your pricing strategy appropriate in this competitive environment? Marketing and Sales Techniques: What marketing channels and strategies do competitors use? How do they reach customers? Innovation and Use of Technology: You should analyze how your competitors use technology and their new product development processes. Can you gain competitive advantage with new technologies? Example If you run a clothing store, your competitors will be other stores that cater to the same customer segment. Which brands are in the same price range and focus on the same fashion trends? What kind of a presence do they have on social media? How effective are their advertising campaigns? Tools and Models An example of a component in competitive analysis is understanding the competitor's marketing mix. Although it is a method geared more towards macro analysis, like SWOT analysis and VRIO Analysis, PEST analysis is also used for this. The Porter Five Forces model is used for a comprehensive analysis of the competitive environment. SWOT SWOT analysis is a very effective tool when doing competitive analysis because it allows you to identify a company's strengths, weaknesses, opportunities and threats. We will briefly touch on opportunities and threats. Opportunuties External factors such as market trends, new technologies, and changing customer demands determine the opportunities for your company or your competitors. When analyzing opportunities, observe how your competitors are evaluating these opportunities. How can your company evaluate these opportunities before your competitors? For example, if a competitor has not yet invested in digital transformation, how can your company use the opportunities in this area? Threats When analyzing market threats, identify the risks that both your company and your competitors face. Threats can include economic uncertainty, new competitors entering the market, regulations, or technological changes. If your competitors also face threats, you should consider how they have developed a defensive strategy against these threats and how your company can provide better protection. For example, plan how your company will position itself in case a new competitor enters the market. The Porter’s Five Forces Porter's Five Forces analysis model was first published by Harvard Business School professor Michael E. Porter in 1979, when he distributed it in the Harvard Business Review. It took its name from one of the ten most powerful papers in the Harvard Business Review since its inception. The distribution of this paper has changed the understanding of strategy across enterprises, associations, and even countries. Five Forces analysis can help organizations investigate the attractiveness of the industry, how patterns will affect competition in the industry, what businesses an organization should tackle, and how organizations can position themselves for progress. Five Forces Analysis is a strategic tool that aims to give a characteristic diagram rather than a detailed business analysis strategy. It helps to investigate the qualities of a market position in light of the five basic forces. Accordingly, the five forces work best when looking at the entire market segment rather than your business and competitors. Customer Analysis The goal of customer analysis is to understand how customers behave and what their preferences are. It involves collecting and reviewing demographics, purchasing patterns, product usage history, spending habits, loyalty metrics, and more. This aims to understand wants, needs, pain points, and goals. Typically, organizations that conduct customer analytics use a variety of methods to do this. These methods include analyzing first-party data (like CRM or Marketing data), focus groups, interviews, market data, existing customer feedback, and more. Main Elements Demographic Features: Examine the characteristics of customers such as age, gender, income level, education level. Behavioral Characteristics: What are the customers' purchasing habits, motivations, brand loyalty, product and service preferences? How do they use the products? Expectations and Needs: What do customers expect from products? What do they care about most in terms of price, quality, service, etc.? Feedback and Complaints: What are the feedbacks from customers about your products and/or services? How do you manage their complaints? Example If you run a restaurant, you should look for answers to questions such as what age range your customers are in, what types of food they are more interested in, what meal times are busy, etc. You can also improve your service quality with online reviews and customer feedback. Five steps to running successful target customer analysis 1. Leverage existing customer data (Segmentation) This data source is likely to be your CRM (Client Relationship Management) system and segmenting it or grouping it by customer characteristics can provide invaluable insights into consumer behavior. Geographic (such as city, country, regions, or territories) Demographic (such as age, gender, education history, or socioeconomic status) Behavioral (how they interact with you and your products/services) Consumption (related to where or how they consume media) It is an effective way to create personalized experiences that drive loyalty, engagement, and long-term customer relationships 2. Utilize customer feedback A simple yet often overlooked method for garnering feedback is to ask customers for reviews. Companies must understand that reviews provide valuable insights to help them better understand their customers and take appropriate action. Product or Service reviews are helpful in industries such as hospitality or e-commerce, but direct customer feedback can be incredibly beneficial for organizations in any sector. The qualitative nature of feedback in review format is an effective way to spot any issues before they become serious problems and enables businesses to take corrective measures quickly. Moreover, engaging customers through reviews helps build relationships, leading to greater loyalty, higher purchase rates, and longer-term revenue growth. 3. Leverage your other first-party data In addition to your CRM data, several other marketing and engagement platforms can be used to collect valuable customer data. These may include Google Analytics, Social Media Platforms, chat tools, and contact requests. How people found your website in the first place What products or services are they most interested in What marketing messages have they already been exposed to What links or call-to-actions have they clicked 4. Use your existing internal knowledge Many businesses are split into various departments, and these departments often have different perspectives concerning their customers’ needs. Gathering insights about your customers from internal teams can be incredibly beneficial as it allows you to develop a comprehensive view of the customers and their requirements. By leveraging all the available insights from across multiple departments, companies can capture a more rounded picture of their target audience and create better strategies to meet their customers’ needs and deliver quality experiences that generate loyalty and growth in the long run. 5. Develop your customer personas or buyer profiles Once you have developed a comprehensive view of your target audience and identified the customer profile types you are interested in targeting, it’s time to start thinking about customer personas. A persona is a fictionalized version of your average customer, created by gathering and analyzing all available data points. It helps bring the customer to life, capturing their motivations, desires, and needs, and provides teams with a clear understanding of who they are targeting. Supplier Analysis Supplier analysis is the process of evaluating potential suppliers and assessing their ability to provide goods or services in a way that meets the needs of your business. The goal of supplier analysis is to identify any risks associated with working with a particular supplier, and to determine whether they are a good fit for your company. There are a number of factors to consider when conducting supplier analysis. These include the quality of the goods or services offered, the supplier’s financial stability, their delivery record, and their customer service. It is important to thoroughly research each potential supplier before making a decision. Main Elements Supplier Quality: What is the quality of products and services offered by suppliers? How do quality materials affect the quality of the company's products? Cost: What are the pricing policies of suppliers? Can more suitable alternative suppliers be found to reduce costs? On-Time Delivery: What is the performance of suppliers in delivering materials on time? How do delivery delays affect the company's production processes? Supplier Relations: How are the relationships with suppliers? Are long-term and trust-based partnerships established or are suppliers constantly changing? Diversity and Alternative Suppliers: Is supplier diversity ensured? Are alternative suppliers available? Dependence on a single supplier can be risky, so working with more than one supplier may be important. Example Consider a supplier that supplies electronic components for a technology company. If the supplier does not deliver the materials on time, it can slow down the company’s production line and disrupt customer deliveries. Therefore, supplier reliability is very important. Types Of Supplier Analysis SWOT Cost-Benefit Risk Assessment SWOT This involves looking at the supplier’s strengths, weaknesses, opportunities, and threats. This can be a helpful way to identify potential areas for improvement. However, it can also be time-consuming and may not always provide clear direction on how to improve supplier performance. Cost-Benefit This looks at the costs and benefits associated with using a particular supplier. This can be helpful in deciding whether or not to continue doing business with a particular supplier. However, it can be difficult to accurately assess all of the costs and benefits involved. Risk Assessment This involves assessing the risks associated with using a particular supplier. This can be helpful in identifying potential problems that could arise from using a certain supplier. However, it can be time-consuming and may not always provide clear direction on how to avoid or mitigate risks. Businesses should identify potential risks associated with their suppliers, such as financial instability, political instability in the country of origin, or environmental concerns. Additionally, businesses should consider the impact of disruptions to the supply chain. Benefits Reduced costs: By carefully evaluating supplier proposals and comparing them against each other, businesses can ensure they are getting the best possible price for the goods and services they need. Improved quality: A supplier analysis can help identify potential issues with quality control at suppliers, allowing businesses to make changes before problems arise. Greater efficiency: An efficient supply chain is crucial for any business. By analyzing suppliers and their operations, businesses can identify areas where improvements can be made to reduce waste and increase efficiency. Better planning: Having accurate information about suppliers’ capabilities and capacities helps businesses plan their production schedules more effectively, avoiding disruptions caused by late or missing deliveries. Reference https://www.investopedia.com/terms/p/porter.asp https://activecollab.com/blog/project-management/micro-marketing-environment#:~:text=Micro%2Denvironment%20analysis%20evaluates%20the,how%20the%20company%20is %20run. https://open.oregonstate.education/strategicmanagement/chapter/3-analyzing-the-organizations-microenvironment/ https://www.imd.org/blog/marketing/customer-analysis-marketing-plan/#:~:text=The%20customer%20analysis's%20goal,%2C%20pain%20points%2C%20and%20objectives. https://www.lexer.io/p/customer-analysis-model https://www.researchgate.net/figure/Buyer-Supplier-relationship-analysis_tbl1_237618063 https://oboloo.com/what-is-supplier-analysis-definition/#:~:text=conduct%20supplier%20analysis-,Supplier%20analysis%20is%20the%20process%20of%20assessing%20supplier %20performance%20in,trends%20and%20areas%20for%20improvement. https://en.wikipedia.org/wiki/Supplier_evaluation https://www.gep.com/knowledge-bank/glossary/what-is-supplier-evaluation PEER ANALYSIS Selma Saraç Why do we Competitor analysis is a method used to compare a company's financial performance, valuation, and key metrics with similar companies. This helps us assess need peer strengths, weaknesses, and the company’s competitive position. By using this analysis, we can analysis? evaluate investment opportunities and identify potential risks or growth potential within an industry. Cluster analysis is a statistical technique in which algorithms are used to group a set of objects or data points into groups based on their similarity. What is The result of cluster analysis is a set of clusters, where each cluster is distinct from one another, Cluster and the objects or data points within each cluster are largely similar to each other. Analysis? The purpose of cluster analysis is to help reveal patterns and structures within a dataset that may provide insights into underlying relationships and associations. What is Cluster Analysis Used For? Marketing: Cluster analysis segments customers into groups based on buying patterns or interests (personas). Different marketing strategies are applied to each group. Risk Analysis in Finance: Financial institutions group customers by risk categories based on their bank balance and debt, aiding decisions for loans, insurance, and credit approvals. Real Estate: Clustering is used to group properties by size, location, and market value to evaluate real estate potential. Competitor Analysis: Companies use cluster analysis to group competitors by size, profitability, innovation, and risk. This helps in identifying closest competitors, benchmarking, and adjusting strategies to improve market position. Cluster Select Metrics: Use relevant metrics for example: Analysis to size, profitability, innovation, risk metrics. Group Companies: Cluster analysis groups similar Determine companies. Identify Competitors: Closest competitors are in Competitor the same cluster. Use Results: Benchmark, find threats, and spot s opportunities. Example: As a company, I aim to assess my position in terms of innovation relative to other competitors in the industry FIRST STEP: YOU NEED TO NORMALIZE YOUR DATA AFTER UPLOADING IT TO SPSS! The First Step in Enter your data into SPSS: Input the innovation data, Go to the Analyze menu and Add the variables you want to Performing a such as R&D expenditure, patent count, and new select Descriptive Statistics, then click on Descriptives. normalize into the Variables section. Cluster product development rate. Analysis in SPSS: Check the box labeled Save standardized values as Click OK, and SPSS will calculate the Z-scores for each Normalizing variables. This will instruct SPSS to calculate Z-scores and variable and add them to your dataset. Your data is now create new columns for the Data normalized data. ready for cluster analysis. Before conducting a cluster analysis in SPSS, normalizing the data is essential. This step ensures that variables with different scales are comparable, which leads to more accurate results. One of the most common methods for normalizing data is by using Z-scores. A Z-score transforms the data by setting the mean to 0 and the standard deviation to 1. This allows variables with different units to become comparable. Z-Score = (Value - Mean) / Standard Deviation This method is particularly important in analyses like cluster analysis, as it ensures that variables with different scales are brought to the same level Running the Cluster Analysis: Results: Drawing Graphs: How Does the k-Means Cluster Analysis Work? Step 1: Decide on clusters Decide the number of clusters, “K” for the algorithm, for example, K=3. The algorithm will partition the above twelve data points into 3 clusters. Step 2: As K=3, take any three data points as Step 2: Choose data points the initial means. In this example, points C, D, and E are chosen as the initial means. Note that the K-means algorithm can take any point as the initial mean. NOTE: One of the most important limitations of the K-means algorithm is that the initial cluster centers are chosen randomly. If the algorithm initially assigns very similar banks to different clusters, this could be a poor starting point and lead to misleading results. This issue is known as the random initialization problem for cluster centers. Therefore, run the algorithm multiple times to ensure the results are accurate! Step 3: Calculate the distances Calculate the distance from every point in the data set to each initial cluster mean. Three cluster-means C, D, and E have randomly been chosen. For each data point in the sample, calculate it’s the distance from these three means. A data point is added to a cluster based on its minimum distance. For example, point A has a minimum distance from an initial mean E. This means that A is in the cluster with mean as E. After the ﬁrst step, the clusters are obtained. Step 4: Reiteration – Calculation of New Means Now it is easy to see the initial clusters. The next step is to calculate three new cluster means. For this, every data point in a particular cluster is taken, and a mean is calculated. Step 5: Reiteration—Calculate the distance of each data point from the new means Repeat step 3 to ﬁnd out the distance of all data points from the newly calculated cluster means, X, Y, and Z. Each data point will be assigned to the cluster whose newly calculated cluster mean it is closest to. Example: Let’s assume we are a bank and we want to compare ourselves to our competitors across various categories We can use size-related metrics to conduct a cluster analysis in order to identify our biggest competitors in terms of size: Size-Related Metrics: Total Revenue Total Assets Market Share Number of Branches Market Capitalization Total Deposits Loan Portfolio Size After identifying our major competitors, we can compare ourselves with them using the key financial metrics such as: Some Return on Equity (ROE) Important Return on Assets (ROA) Metrics for Price-to-Earnings (P/E) Ratio Competitor Dividend Yield Comparison Asset Turnover Ratio Operating Margin Interest Coverage Ratio 1. Publicly Available Financial Reports For large, publicly traded companies (including many banks), some key metrics are available in annual reports, 10-K filings, How to find and quarterly earnings reports (10-Qs) detailed 2. Industry Reports and Market Research competitor Many companies purchase industry reports and market research from firms like Gartner, metrics? McKinsey, Forrester, and CB Insights. These firms conduct in-depth analysis and surveys across industries 3. Competitive Intelligence Teams Larger firms often have dedicated competitive intelligence teams that gather and analyze data about competitors. These teams: Use data scraping tools to collect online information about competitors’ activities, product launches, and R&D efforts. Monitor competitor announcements, partnerships, or acquisitions. Purchase data from third-party providers that track industry spending patterns. 4. Estimation and Proxy Metrics If specific data is not available, companies often use proxy metrics or estimates. For example: Partnership announcements: If a bank frequently announces partnerships with fintech companies, it can be a proxy for higher R&D investment in fintech. Patent filings: Some firms analyze patent data to see where competitors are focusing their innovation efforts. Hiring trends: By looking at the job postings of a competitor (e.g., hiring for blockchain engineers or AI specialists), firms can infer where they are investing. Press releases and news: Companies announce major initiatives, especially in fintech, operational changes, or digital transformation, which can serve as a proxy for understanding where their investments are going. References: https://www.financestrategists.com/wealth-management/fundamen tal-vs-technical-analysis/peer-group-analysis/ https://www.displayr.com/understanding-cluster-analysis-a-compreh ensive-guide/ https://www.spotfire.com/glossary/what-is-cluster-analysis Strength and Weakness Analysis: Strategic Positioning Framework There are various frameworks that a company can use to determine its strategic position. One of the most common of these is SWOT analysis. We can divide this analysis technique into two main headings. The ﬁrst is the strength and weakness part which is focused on here, which focuses on the internal dimension of the company, and the second is the external effects that the company may face in the market. By Y. Kerem Göçmen Understanding Strength and Weakness Analysis Internal Evaluation Competitive Edge Strategic Decision-Making Strength and Weakness Analysis It helps identify areas where a The analysis guides crucial focuses on a company's internal company excels or lags behind business decisions by providing a capabilities and limitations. competitors. clear internal picture. Tools for Strength and Weakness Analysis Peer Group Analysis Ratio Analysis Comparative Decision-Making Selecting similar and competitive Evaluate ﬁnancial health through Use benchmarking data to make companies in the sector to perform liquidity, activity, proﬁtability, and informed strategic choices and performance measurements leverage ratios. allocate resources effectively. Strategic Planning and Strength-Weakness Analysis Determining Competitive Advantage Maintain strengths, strengthen weaknesses Evaluating Strategic Opportunities Internal competencies aligned with opportunities Developing Competitive Strategy Differentiation Strategy Cost Leadership Strategy cont. Strategic Planning and Strength-Weakness Analysis Adjusting Strategic Alignment Harmonize internal factors with external market conditions for optimal positioning Allocating Resources Strategically Strategically distribute resources to leverage strengths and mitigate weaknesses effectively Some Approaches Resource Based View Internal Capacity Analysis Activity-Based Costing Evaluate internal resources as: Evaluate the eﬃciency and Implement ABC to accurately Value effectiveness of internal processes allocate costs and identify Rarity and capabilities. ineﬃciencies in operations. Inimitability Non-substitutability Financial Data Analysis for Strengths and Weaknesses Income Statements and Balance Sheets and Liquidity Proﬁt Ratio and Financial Proﬁt Margins Ratios Leverage Gross Proﬁt Margins Current Ratio Return on Assets (ROA) pricing strategy liquidity degree effective asset utilization Operational Proﬁt Margin Quick Ratio Debt to Equity Ratio operational eﬃciency solvency of short-term debts debt repayment diﬃculty and Net Proﬁt Margin Return on Equity (ROE) risk general ﬁnancial ability to yield earning for performance investors Operational Data Analysis for Strengths and Weaknesses Production Efﬁciency and Supply Chain Management Innovation and Technology Capacity Utilization and Logistics Performance: Capacity Eﬃciency Rate Supplier Performance R&D Expenditures whether ﬁrm is using full of on time, high quality technology investments capacity Logistic Costs Inventory Turnover eﬃcient transportation effective inventory management Market and Competitor Data Analysis for Strengths and Weaknesses Market Share Analysis Competitor Analysis Market Share Benchmarking sales volume analyzing and comparing Growth Rate Market Dynamics and Trends ability to expand market share Final Review and References Strategic Positioning Continuous Improvement Adaptive Strategy References Hill, T. and Westbrook, R., “SWOT analysis: it's time for a product recall”, Long Range Planning, February 1997 Kenton, W. (2024, June 29). How to Perform a SWOT Analysis. Investopedia. Bloomenthal, Andrew. "Financial Ratio Analysis: Deﬁnition, Types, Examples, and How to Use." Investopedia, Financial Performance Analysis Arda Dereli 30 October, 2024 Table of Contents Horizontal and Vertical Analysis Ratio Analysis Liquidity Ratios Proﬁtability Ratios Solvency Ratios Valuation Ratios Efficiency Ratios What is Horizontal Analysis? Also known as trend analysis A technique used to evaluate ﬁnancial statements over multiple periods such as ratios or line items. Why is it used ? Comparison over time Company Decisions Financial data from consecutive Supporting decision-making for the periods (e.g., years, quarters) are management of the company compared to see how speciﬁc items have changed. Planning and Forecasting Financial Health By examining historical trends; Evaluating ﬁnancial health of the companies, investors and creditors company over time. can better forecast future performance. Horizontal Analysis What is Vertical Analysis? Also known as common-size ﬁnancial statement analysis. Vertical analysis is a method of ﬁnancial statement analysis in which each line item is listed as a percentage of a base ﬁgure within the statement. Why is it used ? Data Simpliﬁcation Scale Neutrality Simpliﬁes complex ﬁnancial data and Simpliﬁes comparison across highlights proportions and companies of different sizes by relationships. eliminating the effect of scale. Trend Analysis Benchmarking Tracking internal trends over Benchmarking against industry time. averages or competitors. Vertical Analysis Vertical Analysis What is Ratio Analysis? Ratio analysis is a method of examining a company’s ﬁnancial statements to learn about its ; Why does Ratio Analysis is crucial? Performance Evaluation Financial Forecasting To evaluate either how a company's To make predictions about a performance has changed over time company's ﬁnancial stability and or how it compares to other potential future growth businesses in its industry. Comparative Analysis Risk Detection To assess the ﬁrm's performance To determine both short and long over time term risks of the business Financial Ratios Liquidity Proﬁtability Solvency Valuation Efﬁciency Current Ratio Gross Proﬁt Margin Debt Ratio Earnings Per Share Inventory Turnover Quick Ratio Operating Margin Equity Ratio Dividend per Share Receivables Turnover Cash Ratio Pretax Margin Debt to Equity Ratio Asset Turnover Book Value per Share Net Proﬁt Margin Interest Coverage A/P Turnover Ratio P/E ratio Cash Flow Margin Working Capital Cash Flow to Debt Peg Ratio Turnover Return on Assets Ratio Return on Equity Dividend Payout Ratio Return on Invested Dividend Yield Capital Earnings Yield EV/ EBITDA ratio Liquidity Ratios Liquidity, is the ability to convert assets into cash quickly and cheaply. Liquidity ratios measure a company’s ability to pay off short- term obligations. Why Liquidity Ratios are used? Liquidity Assessment Determine if a company can use its current, or liquid, assets to cover its current liabilities. Creditworthiness Evaluation Determine creditworthiness of the company Investment Viability Determine investment worthiness. What is CurrentAsset & Liability ? Current Assets Current Liabilities Assets that a company expects to convert into Obligations that a company is expected to settle cash, sell, or consume within one year or within within one year or its operating cycle (whichever is its operating cycle longer). These liabilities typically require the use of current assets or the creation of new current liabilities for Liquidity Ratios There are three main types of liquidity ratios. Current Ratio Quick Ratio Ratio Analysis Cash Ratio Current Ratio The current ratio measures a company's ability to pay off its current liabilities (payable within one year) with its total current assets. Current Current Assets = Ratio Current Liabilities Quick Ratio (Acid - Test) The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets (can be turned into cash within 90 days ). It excludes inventory and prepaid expenses from the calculation. Current Prepaid C + MS + AR Quick - Inventory - Quick = = Assets Expenses Prepaid Ratio CL Ratio Current Liabilities Expenses where; C = Cash & cash equivalents MS = Marketable Securities AR = Accounts Receivable Cash Ratio The cash ratio takes the test of liquidity even further. This ratio only considers a company’s most liquid assets – cash and marketable securities Assets that are most readily available to pay short-term obligations. Cash & Cash Equivalents Cash Ratio = Current Liabilities Liquidity Ratios a,b,c a,b a) Current Ratio a,b a,b a a b) Quick Ratio c) Cash Ratio a,b,c Limitations of Liquidity Ratios Ignores the timing of cash ﬂows Doesn’t consider the quality of assets Too high liquidity may indicate inefficiency Ignores market conditions Ratio Analysis Industry-Speciﬁc differences Proﬁtability Ratios Proﬁtability ratios measure a company’s ability to generate proﬁt relative to revenue, balance sheet assets, operating costs, equity, or other ﬁnancial elements. Why Proﬁtability Ratios are used? Operational Efficiency Proﬁtability Analysis Indicating how well a company's Measuring how efficiently a company management is operating a generates proﬁt and value for business. shareholders. Financial Health Insight Industry Benchmarking Benchmarking performance Providing insight into a company’s against industry standards or ﬁnancial health and proﬁtability competitors. trends over time. Proﬁtability Ratios Gross Proﬁt Margin Also known as gross margin Gross Proﬁt Gross Proﬁt = Margin Revenue Gross Proﬁt = Net Sales – COGS Net Sales = Total Revenue Operating Margin (EBIT Margin) Reﬂecting a company's operational efficiency and proﬁtability from core activities Excluding ﬁnancing expense and taxation effects. Operating Proﬁt Operating Margin = Revenue Operating Income (EBIT) = Revenue - Operating Expenses Pre-tax Margin Measures a company's proﬁtability before tax expenses are deducted Pretax Earnings Before Tax = Margin Revenue Earnings Before Taxes = Pre-tax Income Net Proﬁt Margin Indicates how much proﬁt a company makes for every dollar of revenue after all expenses, taxes, and costs have been deducted Net Proﬁt Net Income = Margin Revenue Cash Flow Margin Measures how well a company converts sales revenue to cash Provides insight into the quality of a company's earnings and its ability to generate cash relative to its sales. Cash Flow Operating Cash Flow Margin = Revenue Proﬁtability Ratios a) Gross Proﬁt Margin b) Operating Margin a,b,c,d c) Pretax Margin a d) Net Proﬁt Margin b c d Return On Assets (ROA) Measures how effectively a company uses its assets to generate proﬁt. Indicating how efficiently management is utilizing its resources. Return on Net Income = Assets (ROA) Average Total Assets Return On Equity (ROE) Key ratio for shareholders. It measures a company's ability to earn a return on its equity investments. Return on Net Income = Equity (ROE) Average Total Equity Return On Invested Capital (ROIC) Measures how effectively a company is using its invested capital to generate proﬁt. Provides insight into how well a company is allocating both equity and debt to create value for its shareholders and debt holders. Return on Invested NOPAT = Capital (ROE) Average Invested Capital NOPAT : Net Operating Proﬁt After Taxes (EBIT – Taxes on EBIT) Invested Capital = Equity + Debt Solvency Ratios Solvency ratios measure a company’s ability to meet long-term obligations. Also known as leverage ratios Why Solvency Ratios are used? Long-Term Viability Assess the company’s long-term health Financial Risk Assessment Evaluate the ﬁnancial risk associated with the company Creditworthiness Evaluation Determine credit worthiness Leverage Ratios Focus on the degree to which a company is using borrowed funds (debt) to ﬁnance its operations. Total Liabilities Debt Ratio = Total Assets (Debt to Assets) Shareholder’s Equity Equity Ratio = Total Assets Debt to Equity Total Liabilities = Ratio Shareholder’s Equity Interest Coverage Ratio Measures how many times a company can cover its current interest payments with its available earnings. Interest Coverage EBIT = Ratio Interest Expenses Cash Flow to Debt Assesses a company’s ability to cover its total debt with its cash ﬂow from operations. Cash Flow to Debt = Operating Cash Flow Ratio Liabilities Limitations of Solvency Ratios Focus on Long-Term Debt Impact of Asset Valuation Debt Structure Variability Valuation Ratios Sometimes called market value ratios or price ratios. Measurements of how appropriately shares in a company are valued and what type of return an investor may get. Why Valuation Ratios are used? Assessing Stock Price vs. Intrinsic Value Evaluating Growth Potential Understanding Market Sentiment Earnings per Share (EPS) One of the most commonly used per-share stock valuation ratios is earnings per share (EPS). Earnings per Net Income - Preferred Dividends = Share (EPS) Outstanding Number of Common Share EPS is an important metric because; over the long-term, net proﬁt is the primary determinant of investment value. Dividend Per Share Represents the amount of cash a company pays to its common shareholders for each share they own. DPS = Total Dividends Paid - Special Dividends Number of Outstanding Shares Book Value Per Share The net asset value of a company as recorded in its ﬁnancial statements (the "bookvalue") divided by the number of outstanding common shares. Book Value Total Shareholder’s Equity - Preferred Equity = per Share Number of Outstanding Shares P/E Ratio How much the market is prepared to pay for each dollar of earnings? Indicating whether a stock is relatively cheap or expensive. P/E Price per share Market Value of Equity = = Ratio Earnings per Share Net Income High-growth companies often have high P/E’s because investors are willing to pay a premium for anticipated future growth. Peg Ratio It helps to understand whether the P/E ratio is justiﬁed given expected growth. P/E PEG Ratio = Expected Growth Rate (EPS) P/E for Company Y : 15 Company Y PEG = 15/12% = 1.25 P/E for Company Z: 18 Company Z PEG = 18/19% = 0.95 Dividend Payout Ratio The percentage of a company's earnings that is distributed to shareholders as dividends. Dividend = Dividends per Share (DPS) X 100 Payout Ratio Earnings per Share (EPS) Dividend Yield Indicating the return on investment from dividends for shareholders. Dividend Dividends per Share = X 100 Yield Price per Share Earnings Yield Measures how much proﬁt an investor earns for each dollar invested in the stock Earnings Earnings per Share (EPS) = X 100 Yield Price per Share Enterprise Market Value Reﬂecting the cost of acquiring the entire business Market Cash and Cash Enterprise Market = + Total Debt - Value (EV) Capitalization Equivalents EV to EBITDA Ratio Illustrates how long the company will take to generate the cash ﬂow needed to cover its debt and equity market value Enterprise Value EV to EBITDA Ratio = EBITDA Limitations of Valuation Ratios Earnings Manipulation Ignoring Non-Financial Factors Temporary Fluctuations Assumptions and Estimates Eﬃciency Ratios Also known as activity ratios Efficiency ratios measure how efficiently a company uses its assets to generate revenue or manage its operations. Why Eﬃciency Ratios are used? Assess Operational Efficiency Identify Potential Problem Areas Enhance Financial Planning and Decision-Making Inventory Turnover Measures how quickly a company sells and replaces its inventory during a speciﬁc period. Inventory Turnover = COGS Average Value of Inventory A higher ratio indicates efficient inventory management (quick sales), while a lower ratio may signal overstocking or slow sales. Receivables Turnover Measures the number of times a company collects its average accounts receivable balance Accounts Receivable Net Credit Sales = Turnover Ratio Average Accounts Receivable Net creditsales: the amount of revenue earned by a company paid via credit Average AR: averagebetween a company's starting accounts receivable balance and ending accounts receivable balance Asset Turnover Indicates how efficiently a company uses its total assets to generate revenue. Beginning + Ending Total Assets Turnover = Net Sales Average Total Assets Assets Average Total Assets = Ratio Total Assets 2 Fixed Asset Turnover Measures how efficiently a company uses its ﬁxed assets (such as property, plant, and equipment) to generate sales Net Sales Fixed Asset Turnover = Average Net Fixed Assets Accounts Payable Turnover Reﬂects how quickly a company pays off its suppliers, measuring the number of times accounts payable are paid during a period. Accounts Payable Supplier Purchases = Turnover Average AP Working Capital Turnover Shows how efficiently a company uses its working capital to generate sales Working Capital Sales = Turnover Ratio Working Capital Working Capital = Current Assets – Current Liabilities Limitations of Eﬃciency Ratios Quality of Financial Data Seasonality Effects Ignoring Market Conditions Bibliography https://corporateﬁnanceinstitute.com/resources/accounting/ﬁnancial-ratios/ https://www.coursehero.com/sg/introduction-to-ﬁnance/horizontal-and-vertical-analysis-methods/ https://www.cfainstitute.org/-/media/documents/support/programs/cfa/cfa_program_level_ii_ﬁnancial_ratio_list.pdf https://analystprep.com/Ratio_Sheet.pdf https://www.investopedia.com/terms/l/liquidityratios.asp https://corporateﬁnanceinstitute.com/resources/accounting/liquidity-ratio/ https://www.stock-analysis-on.net/NASDAQ/Company/Apple-Inc/Ratios/Liquidity/Quarterly-Data?srsltid=AfmBOoro hwa-7oD79cin9U4l83yhV06oxJncsAm2IMkHRj_eoQPyJqUt https://www.investopedia.com/terms/p/proﬁtabilityratios.asp https://www.accountingtools.com/articles/what-is-a-turnover-ratio.html https://www.carboncollective.co/sustainable-investing/valuation-ratios https://medium.com/@strike.marketingteam/understanding-market-value-ratios-key-metrics-for-investment-analysis-6b e5abba50ba#:~:text=Market%20value%20ratios%2C%20also%20known,book%20value%2C%20or%20cash%20ﬂow. https://analystprep.com/Ratio_Sheet.pdf Thank you Environmental Threat and Opportunity Profile (ETOP) Credibility Measurement, Credit Scoring/Rating Models Altman, Fitch, Moody’s, S&P corporate models Yunus Emre Yazıcı, Arda Dereli, Kerem Göçmen, Nurten Zülal İlhan, Selma Saraç, Alperen Önal Contents 01 Credibility Measurement 02 Credit Scoring 03 Altman Z-Score Model 04 Fitch, Moody’s, S&P Credit is the lifeblood of modern economies. Institutions and organizations in the country need credit to meet their needs, make investments and grow. However, giving and receiving credit carries risks. The possibility of the debtor not fulfilling her/his obligations is a major concern for creditors. This is where credit availability comes into play. Credibility is the ability of a person or financial financial units to fulfill their obligations on time and completely. Those with high creditworthiness are considered reliable in financial markets and can get credit more easily. Those with low 1.Credibility Measurement creditworthiness may have difficulties in accessing credit and may have to pay higher interest rates. Credibility performance is done to determine the credit risk of the debtor, estimate the probability of repayment and determine suitable loans. This process includes analyzing the financial history, evaluating the current financial situation and estimating performance. General tools used in creditability optimization are credit scoring and credit rating models. While credit scoring is used to evaluate potential credit risk numerically, credit rating is expressed in credit risk characters. 2.1 Use of Credit Scoring Areas of Use of Credit Rating & Score Credit scoring is a system used to numerically assess the credit risk of individuals. The credit score is calculated by taking into account factors such as the borrower's credit history, level of indebtedness, income status, and employment history. Evaluating credit applications: Credit scores are used to evaluate the likelihood of loan applications being approved. Setting credit limits: Credit scores are used to determine credit limits for borrowers. Setting interest rates: Credit scores are used to determine interest rates for borrowers. Risk management: Credit scores help financial institutions manage credit risk. Investment decisions: Investors use credit ratings to learn about companies in which to invest. Financing costs: Credit ratings affect the financing costs of companies. Companies with higher credit ratings can borrow at lower interest rates. Risk management: Credit ratings help financial institutions and investors manage their risks. Regulation: Credit ratings are sometimes used by regulators. Both firm and individiuals 2. Credit Scoring Credit scoring is a system used to numerically assess the credit risk of individuals. The credit score is calculated by taking into account factors such as the borrower's credit history, level of indebtedness, income status, and employment history. 2.2 Credit Scoring Models and Types Regression models: Analyze the relationship between variables related to the borrower's credit risk. Classic method: age,income,credit history etc. Both firm and individual Advantages of the Regression Model: It is an easy-to-use and understandable method for estimating credit risk. It allows analyzing the impact of different factors on credit risk. It provides an objective method for evaluating credit applications. 2.2 Credit Scoring Models and Types Regression Limitations of the Regression Model: The accuracy of the model depends on the quality of the data set used. The model can predict future risks using only past data. The model may not take into account all risk factors.Macro,politic and others. 2.1 Credit Scoring Models and Types Decision Tree-Machine Learning Approaches Applicant 1: If the income level is $40,000 and the credit history is poor, the application is rejected. Applicant 2: If the income level is $60,000 and the debt-to-income ratio is 25%, the application is approved. Applicant 3: If the income level is $70,000 and the debt-to-income ratio is 40%, the application is rejected 2.2 Credit Scoring Models and Types Decision Tree-Machine Learning Approaches Pros and Cons Overfitting: Decision trees tend to overfit the Easy Understandability: Decision trees visualize the results training data. This can result in less accurate and decision-making process due to their tree structure. This predictions being made against the newly makes it easier for users to understand how the model works. presented data. Feature Selection: Decision trees increase efficiency by Sensitivity: Decision trees are very sensitive to identifying the most influential features (variables). This small changes in the data set. Small differences in helps filter out unnecessary data. the data can be significantly different in brightness. Flexibility: Decision trees can work with both continuous and More Complex Relationships: Decision trees can categorical data, making them suitable for a wide variety of struggle with complex data components. In data sets. particular, they may not be able to adequately represent transitions between multiple variables. Fast Prediction: Decision trees can quickly make predictions on new data, which is advantageous when working with large Limited Generalizability: Tree structures can have data sets. limited generalizability, making the model applicable to a wider data set. Explainability of Processes: Decision trees are good at explaining what decisions were made and why, which helps Singular Results: Decision trees often occur at a financial institutions comply with regulations. specific decision point, meaning that some types of softer (probabilistic) results are not given. 2.2 Credit Scoring Models and Types (e.g. probability of repayment, default risk) Neural network-Machine Learning Approaches Pros and Cons Data Requirement: Neural networks require a large amount of High Accuracy: Neural networks can analyze data to train effectively. If there is not enough data, the model’s complex data and make more accurate accuracy may decrease. predictions. They can provide higher accuracy rates in credit risk prediction compared to Overfitting: If the model overfits the training data, it may perform traditional methods. poorly when faced with new data. This reduces the model’s ability to generalize. Data Variety: Neural networks have the ability to process both structured and unstructured data Transparency Issues: Neural networks are often referred to as (text, images, etc.). This allows the model to be “black box” models. That is, their decision-making processes are enriched by utilizing more data sources. often difficult to understand, which can create trust issues for users and regulators. Learning Ability: Neural networks can constantly update and learn based on past data. This allows Computational Cost: Training and implementing neural networks credit scoring models to get better over time. often requires high computational power and resources. This can increase costs. Predictive Power: Thanks to the ability to recognize complex relationships and patterns, Data Quality: The effectiveness of neural networks depends on neural networks can be effective in predicting the quality of the data used. Inaccurate or missing data can future credit risks. negatively impact the success of the model 2.2 Credit Scoring Models and Types Compariso n Which Method Should Be Used When? Regression analysis: Suitable when the relationship between variables is linear and the data does not contain outliers. Example : Houses,car Decision trees: Suitable when the data is both categorical and numerical and the interpretability of the model is important. Example : Customer Segmentation ANN: Suitable when the relationship in the data is complex and non-linear, high accuracy is required and large data sets are available. Example: Insurance,Mortage Credit. There are also other machine learning and statistical methods such as Discriminant Analysis Clustering Algorithms Support Vector Machines (SVM) 2.2 Credit Scoring Models and Types Appendi x The most common credit scoring model used in Turkey is the FICO score developed by the Credit Registry Bureau (KKB). The FICO* score takes a value between 0 and 1900 and represents the credit risk of the borrower. Payment History: 35% Debt Status: 30% Length of Credit History: 15% New Credits: 10% Diversity of Credit Types: 10% In Turkey, the FICO score is evaluated as follows: 0-699: Low Credit Score (High risk) 700-1099: Medium Credit Score (Medium risk) 1100-1499: Good Credit Score (Low risk) 1500-1900: Very Good Credit Score (Very low risk) Fair Isaac Corporation 3.Altman Z-Score Model The Altman Z-Score is a financial analysis model used to assess the bankruptcy risk of companies. Z=1.2×X1+1.4×X2+3.3×X3+0.6×X4+X5 X1 = Working Capital / Total Assets X2 = Retained Earnings / Total Assets X3 = Operating Earnings / Total Assets X4 = Market Value / Total Debt X5 = Sales / Total Assets Score Ranges Z > 2.99: The company is unlikely to go bankrupt. 1.81 < Z < 2.99: The company is unlikely to go bankrupt. Z < 1.81: The company is likely to go bankrupt. ***cofficients and score ranges may vary depending on the sector and company 3.Altman Z-Score Model Assume a company has the following financial data: Working Capital = 200,000 TL Retained Earnings = 150,000 TL Earnings Before Interest and Tax (EBIT) = 300,000 TL Equity = 400,000 TL Sales = 1,000,000 TL Total Assets = 1,500,000 TL Total Liabilities = 600,000 TL 3.Altman Z-Score Model Drawback The model is generally developed for companies in the manufacturing sector. The model is based on historical data and may not fully reflect future performance. The model does not take into account all financial risk factors*. *Risk factors: Macroeconomic Risks: External economic factors such as interest rate fluctuations, inflation, exchange rate risks, and economic recession can affect a company's performance, but the model does not take such risks into account. Sector Risk: The Altman Z-Score model was developed for the manufacturing sector and does not take into account differences between sectors. For example, the risk factors specific to the service or technology sectors are not taken into account. Liquidity Risk: The model does not provide information about short-term cash flow problems or liquidity risk. Whether the company can meet its financial obligations in the short term is a factor that remains outside the model. Operational Risk: Risks that affect the daily operation of the company, such as supply chain problems, management changes, internal audit deficiencies, or operational disruptions, are ignored. Legal and Regulatory Risks: Factors such as legal changes, rules imposed by regulatory bodies, or environmental regulations can directly affect financial performance, but the model does not take such risks into account. Technological Change Risk: The company's failure to adapt to technological developments can lead to loss of productivity or a decrease in competitiveness. The model does not reflect such risks. Competition Risk: Increased competition that could affect market share is outside the scope of the model and could negatively impact the company's financial performance. 4.Fitch, Moody’s, S&P Government bonds, corporate bonds and financial institutions Similar metrics are used: -Financial Strength -Management and Governance -Economic and Industry Risks -Liquidity and Debt Service Ability -Economic Stability and Operational Efficiency - Macroeconomic conditions etc. 4.Fitch, Moody’s, S&P How Do They Work? Modifier Liquidity Country Risk Industry Risk Business Competitionk Risk Profile Governance First SCORE score-A nchor Cash Flow Financial Group or Government Profile Influence Diversification/ Portfolio effect Feature Altman Z-Score Fitch Moodys S&P Purpose To predict bankruptcy risk of To assess credit To assess credit risk of To assess credit risk of companies risk of companies companies and companies and and governments governments governments Scope Mostly manufacturing Wide range of Wide range of companies Wide range of companies companies companies and and countries and countries countries Methodology Statistical model based on Comprehensive Comprehensive analysis Comprehensive analysis quantitative data analysis combining combining quantitative combining quantitative quantitative and and qualitative factors and qualitative factors qualitative factors Scale Numerical score (Z-score) Letter grades (AAA Letter grades (Aaa to C) Letter grades (AAA to D) to D) Strengths Effective in predicting Global coverage, Extensive database, Wide coverage, bankruptcy, easy to use experienced detailed analysis, global experienced analysts, analysts, detailed reach transparent methodology methodology Weaknesses Only applicable to the Subjectivity, Subjectivity, delays, Subjectivity, delays, manufacturing industry, based delays, model risk model risk model risk on historical data, does not cover all risk factors 4.Fitch, Moody’s, S&P Fundamental Differences Altman Z-Score Main Area of Use SME-KOBI It is not useful in the service and technology sectors (because their growth rates are volatile) or in start-ups (because of its methodology). 4.Fitch, Moody’s, S&P Fundamental Differences Corporate debt Has a strong Government and structured reputation in US bonds and finance products debt markets corporate debt -credit debt etc. Mortgage-backe It stands out in d securities niche areas such as ESG analysis.(en-soc -gov) IBCA Reference -Gillmor, D. (2015, December 2). Standard & Poor’s rating process. European Head of Leveraged Analytics, Standard & Poor’s. -Fitch Ratings. (2022, February 24). The rating process. -Altman, E. I. (2000). Financial ratios, discriminant analysis, and the prediction of corporate bankruptcy. Journal of Finance, 23(1), 589-609 -Rashid, F., Khan, R. A., & Quresh, I. H. (2023, November). A comprehensive review of the Altman Z-Score model across industries. -Moody's Investors Service. (n.d.). Credit ratings and research. Retrieved from https://www.moodys.com - Fitch Ratings. (2022, February 24). The rating process. Retrieved from https://businesslawreview.uchicago.edu/print-archive/misuses-sp-500

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