Introduction to Finance

SWOT analysis 
review of a fi rm’s 
internal strengths and weaknesses, 
and its external opportunities and 
threats
2
For a seminal piece on the role of value maximization in a fi rm versus stakeholder theory or the “balanced score-
card,” see Michael C. Jensen, “Value Maximization, Stakeholder Theory, and the Corporate Objective Function,” 
Journal of Applied Corporate Finance
,
 
Fall 2001, vol. 14, no. 5, pp. 8–21.

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524
C H A PT E R 1 7 Capital Budgeting Analysis
a real diff erence exists. Diff erentiation leads to an imperfect market where one fi rm can set 
higher prices. Potential sources of diff erentiation include “branding” created through advert-
ising and promotion expenditures, R&D, and quality diff erences.
3) 
Absolute cost advantages
can place competitors at a cost disadvantage. A fi rm that 
enters a market early can learn about the production and distribution process fi rst, making its 
use of assets, technology, raw inputs, and personnel more effi
cient than that of competitors. 
The fi rm can cut costs and prices, and can maintain market leadership. Similar advantages can 
result from possessing proprietary technology protected by patents. Early entry into foreign 
markets can allow the fi rm to gain experience over its competitors as it can more eff ectively 
make inroads into new markets and start to build customer loyalty. 
4) 
Diff erences in access to distribution channels
may result in unique advantages by redu-
cing competitors’ access to consumers. Shelf space is limited at retail outlets, and store owners 
hesitate to take space from a current supplier and give it to a new entrant. A motivated and 
well-trained sales force may keep competitors from chipping away at a fi rm’s market share. 
The next time you are at the grocery store, take a look at the varieties of breakfast cereal pro-
duced by the large fi rms in the industry!
5) 
Government policy
can hinder new and potential entrants, and give existing competitors 
unique advantages. An increasing regulatory burden on an industry may discourage entry by 
increasing the complexity and costs of entry. Domestic industries can seek import quotas to limit 
the extent of foreign entry and competition. Of course, similar quotas by other countries, perhaps 
raised in retaliation to the domestic quotas, will hurt the fi rm that initially sought protection. The 
policy of a foreign government toward nondomestic producers, as well as the stability of the 
government, can contribute to the political risk of investing or doing business overseas.
17.2
Capital Budgeting Process
The capital budgeting process involves the preparation and analysis of a business case request 
for funding and usually consists of the following fi ve stages: