International Financial Reporting Standards

3212 WordsMar 25, 201313 Pages
Question 3: Frieda, an accounting student, states: “Strategy analysis seems to be an unnecessary detour in doing financial statement analysis. Why can’t we just get straight to the accounting issues? “Explain to Frieda why she might be wrong. Without strategy analysis, it is impossible to identify what drive profits and what are key risks. Moreover, assessing firm’s current performance and doing realistic forecasts of future performance are also directly linked with firm’s strategy. Three important strategic choices affect firm’s earnings. First, the choice of industry the firm operates in. second, the way firm intends to compete. Third, how successfully firm can exploit synergies. Therefore, for a firm to earn profit, it is necessary…show more content…
However, the competition is high between these firms until the product is developed and patented. Then competition is reduced. The threat of new entrants into the pharmaceutical industry is very low because of the high costs required to enter the industry, which means their profit is high. Even though the economies of scale for production may not be very significant, but other barriers to entry are high. It takes firms 12 to 15 years, and over 800 million in R&D expense to successfully develop new drugs and it takes a lot of follow-up costs and time to be approved for patient use (Cavusgil, Knight, & Riesenberger, 2008). Along with high R&D costs, the heavy regulation of the pharmaceutical industry is another barrier to entry. All drugs and chemicals used need to be approved by the Food and Drug Administration (FDA), and when the drugs are not approved the time and money used to develop them is lost by the firm. The competition between rivals in this industry is very high and aggressive, even though, the number of firms in this industry is not great. All pharmaceutical firms try to be the first release new product to be ahead. Companies in this industry depend on investing in ideas that may pay off in the long- run. This sort of strategy puts a lot of pressure on them to find drugs that will pay off. Recently, the emerging of generic non-branded drugs created the threat of substitutes in this industry. "In the world of
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