The latest investment "hot item" after the telecomm and bio-technology is Nanotechnology. Get the reports from Forbes, a renown name in market research and decide for yourself. You can always have fun browsing the famous Forbes lists or look for other reports. Rating Excellent

Entrepreneurialism Information

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Porter's Five Forces Analysis

By Chris Mallon
If you’ve ever listened to Warren Buffett talk about investing, you’ve heard him mention the idea of a company’s moat. The moat is a simple way of describing a company's competitive advantages. Company's with a strong competitive advantage have large moats, and therefore higher profit margins. And investors should always be concerned with profit margins.

This article looks at a methodology called the Porter’s Five Forces Analysis. In his book Competitive Strategy, Harvard professor Michael Porter describes five forces affecting the profitability of companies. These are the five forces he noted:

1. Intensity of rivalry amongst existing competitors
2. Threat of entry by new competitors
3. Pressure from substitute products
4. Bargaining power of buyers (customers)
5. Bargaining power of suppliers

These five forces, taken together, give us insight into a company's competitive position, and its profitability.

Rivals

Rivals are competitors within an industry. Rivalry in the industry can be weak, with few competitors that don’t compete very aggressively. Or it can be intense, with many competitors fighting in a cut-throat environment.

Factors affecting the intensity of rivalry are:

• Number of firms – more firms will lead to increased competition.
• Fixed costs – with high fixed costs as a percentage of total cost, companies must sell more products to cover those costs, increasing market competition.
• Product differentiation – Products that are relatively the same will compete based on price. Brand identification can reduce rivalry.

New Entrants

One of the defining characteristics of competitive advantage is the industry’s barrier to entry. Industries with high barriers to entry are usually too expensive for new firms to enter. Industries with low barriers to entry, are relatively cheap for new firms to enter.

The threat of new entrants rises as the barrier to entry is reduced in a marketplace. As more firms enter a market, you will see rivalry increase, and profitability will fall (theoretically) to the point where there is no incentive for new firms to enter the industry.

Here are some common barriers to entry:

• Patents – patented technology can be a huge barrier preventing other firms from joining the market.
• High cost of entry – the more it will cost to get started in an industry, the higher the barrier to entry.
• Brand loyalty – when brand loyalty is strong within an industry, it can be difficult and expensive to enter the market with a new product.

Substitute Products

This is probably the most overlooked, and therefore most damaging, element of strategic decision making. It’s imperative that business owners (us) not only look at what the company’s direct competitors are doing, but what other types of products people could buy instead.

When switching costs (the costs a customer incurs to switch to a new product) are low the threat of substitutes is high. As is the case when dealing with new entrants, companies may aggressively price their products to keep people from switching. When the threat of substitutes is high, profit margins will tend to be low.

Buyer Power

There are two types of buyer power. The first is related to the customer’s price sensitivity. If each brand of a product is similar to all the others, then the buyer will base the purchase decision mainly on price. This will increase the competitive rivalry, resulting in lower prices, and lower profitability.

The other type of buyer power relates to negotiating power. Larger buyers tend to have more leverage with the firm, and can negotiate lower prices. When there are many small buyers of a product, all other things remaining equal, the company supplying the product will have higher prices and higher margins. Conversely, if a company sells to a few large buyers, those buyers will have significant leverage to negotiate better pricing.

Some factors affecting buyer power are:

• Size of buyer – larger buyers will have more power over suppliers.
• Number of buyers – when there are a small number of buyers, they will tend to have more power over suppliers. The Department of Defense is an example of a single buyer with a lot of power over suppliers.
• Purchase quantity – When a customer purchases a large quantity of a suppliers output, it will exercise more power over the supplier.

Supplier Power

Buyer power looks at the relative power a company’s customers has over it. When multiple suppliers are producing a commoditized product, the company will make its purchase decision based mainly on price, which tends to lower costs. On the other hand, if a single supplier is producing something the company has to have, the company will have little leverage to negotiate a better price.

Size plays a factor here as well. If the company is much larger than its suppliers, and purchases in large quantities, then the supplier will have very little power to negotiate. Using Wal-Mart as an example, we find that suppliers have no power because Wal-Mart purchases in such large quantities.

A few factors that determine supplier power include:

• Supplier concentration – The fewer the number of suppliers for a given product, the more power they will have over the company.
• Switching costs – suppliers become more powerful as the cost to change to another supplier increases.
• Uniqueness of product – suppliers that produce products specifically for a company will have more power than commodity suppliers.

It’s important to analyze these five forces and their affect on companies we want to invest in. The Porter Five Forces Analysis will give you a good explanation for the profitability of an industry, and the firms within it. If you want to know why a company is able, or unable, to make a decent profit, this is the first analysis you should do.

Stock Investing-The Real Deal On Options Back Dating And What It Means For Stock Investing

By Richard Stoyeck
Just when you thought it was safe to write a check for stock investing, the options backdating scandal hits. Our problem as money managers is that much of the information that has been disseminated about options back dating, and stock investing is just pure WRONG. The purpose of this article is to clear the air, and inform you as some one in need of stock market information just what you need to know about this scandal.

Let’s begin. CEO’s and senior management at any company whether it’s Steve Jobs at Apple, or over 100 other companies in question receive their executive compensation in two forms. The first form is an outright salary grant. Let’s say $5 million per year. No one is challenging that there have been any games with this part of the compensation package.

The second form of payment is stock options of which there are many types. We are going to use the most common form of stock options which is a straight options grant. Let’s create an example. Let’s say John Smith is CEO of ABC Computer and he was given options on 1,000,000 shares of ABC Computer this afternoon which is January 22, 2007 at $10 per share which is the selling price of the stock on the open market.

Now let’s say back on December 15, 2006 the stock was trading at $5 per share. The compensation committee at the corporation in question wants to do the CEO John Smith a favor. They BACKDATE the options agreement to December 15, 2006, when the stock was selling at $5 per share. The date of the options agreement is called the GRANT DATE. You need to remember this term.

Under the IRS Code, an executive must hold the option for 2 years. It is now 2 years and one day later. Let’s make it December 16, 2008, and the stock is selling for $15 per share. John Smith the executive exercises his options and sells 1,000,000 shares at $15 per share on the open market. Because of options backdating, he is showing a grant price of $5 per share, on December 15, 2006. His profit is $10,000,000.

You get the profit by selling one million shares at $15 per share, with a cost price of $5 per share. It’s a $10 per share profit on one million shares, or $10 million profit. If the company had used the correct date of January 22, 2007, the grant price would have been $10 per share, and the selling price would have remained the same at $15 per share. The profit would have been $5 million dollars or half the profit that was made by BACKDATING.

Of course, John Smith CEO would have had to wait until it was two years past the real grant date of January 22, 2007 to sell his stock in order to meet the IRS requirements. We now see that because of options backdating, this CEO executive John Smith made $10 million exercising his options as opposed to $5 million. There are several more things you need to know in order to understand what’s at work here.

• What is the nature of the compensation when the options are being exercised? Is it ordinary income, or capital gain? The answer is that the sale of the options after two years from the grant date is ordinary income. Mr. Smith in this case has $10 million in ordinary income on top of what he is paid in compensation by ABC Corporation.

• Is the IRS being defrauded by options backdating? The answer is no, the $10 million is being declared as income and is includible in income. The IRS is not being defrauded by OPTIONS BACKDATING, although the media would have you believe this is the case. If anything, the IRS is getting more taxes than it is entitled to because the compensation declared is $10 million. If the correct grant date were used the compensation would have been $5 million as we talked about above.

• Is anybody getting defrauded? You bet, the shareholders of the company are being defrauded by whoever is granting the options, and the recipient of the options if he or she DIRECTLY knew about the backdating. In this case, the fraud amounts to $5 million of excess compensation paid because of the backdating. You get that number by figuring out what the compensation would have been if the correct GRANT DATE were used, as opposed to an erroneous earlier date, or backdating.

• Is there any way that an executive can make his gain a CAPITAL GAIN and pay the Capital Gains rate on the transaction? Yes, but it involves the executive in question declaring the value of the option on the grant date, and paying ordinary income taxes on the grant date to the government. This is a section 83b election under the IRS code. The executive then can convert his gain to a capital gain on the date of sale 2 years later. This basically only happens if the stock is very cheap, pennies per share on the grant date. During the Internet go-go years, executives who elected this option got huge tax bills that they could not pay because stocks went from pennies a share to hundreds of dollars per share, and then collapsed before they could sell them, leaving the executive with a huge tax liability.

Another thing an executive can do is exercise his option on the exercise date 2 years later and then NOT SELL, but hold on. He will begin a capital gain holding period on the exercise date 2 years later. Keep in mind that this means the executive is now at risk.

Conclusion

The options backdating scandal has resulted in the shareholders of the companies in question being defrauded by the amount of excess compensation that was earned by the executive granted the option. The IRS was never defrauded by the company. In fact the IRS benefited in the excess compensation paid the executive by receiving additional taxes from the executive.

Options backdating should not be tolerated by any Board of Directors of a company, and certainly not by the shareholder base. To the extent that it is, the Directors are violating the rules of corporate governance that they have a fiduciary responsibility to uphold.

Bill Gates of Microsoft has said publicly the most useful skill he ever learned was a working knowledge of the tax code. Now having said that, where do we sign up to get some of these stock options?

Goodbye and Good Luck

Richard Stoyeck StocksAtBottom.com