From Financial Statement to Business Analysis Financial Statement Distortion and noise True information Intermediaries rel...
Business strategy analysis (step 1) Key profit drivers Sustainability Key risks Key Drivers Cellular phones Internet comme...
Business strategy analysis Profit in excess of the cost of capital own strategic choices Industry analysis Competitive str...
Business strategy analysis: Industry analysis Degree of actual and potential competition Bargaining power in input and out...
Business strategy analysis: Industry analysis Rivarly among existing firms (1) <ul><li>Industry growth rate </li></ul><ul>...
Business strategy analysis: Industry analysis <ul><li>Economies of scale </li></ul><ul><li>First mover advantage </li></ul...
Business strategy analysis: Industry analysis <ul><li>Perform the same function </li></ul><ul><li>Technologies that allow ...
Business strategy analysis: Industry analysis <ul><li>Price sensitivity : </li></ul><ul><ul><ul><ul><li>Switching costs </...
Business strategy analysis: Industry analysis <ul><li>Price sensitivity : </li></ul><ul><ul><ul><ul><li>Switching costs </...
Business strategy analysis: Industry analysis <ul><li>The European Airline Industry </li></ul><ul><li>In the early 1980s: ...
Business strategy analysis: Industry analysis Rivarly among existing firms (1) <ul><li>The European Airline Industry </li>...
Business strategy analysis: Industry analysis Threat of new entrants (2) <ul><li>The European Airline Industry </li></ul><...
Business strategy analysis: Industry analysis <ul><li>The European Airline Industry </li></ul><ul><li>90% of aircraft came...
Business strategy analysis: Industry analysis The memory chip industry One of the fastest growing industies in the last tw...
Business strategy analysis: Industry analysis <ul><li>The memory chip industry </li></ul><ul><li>Low concentration; </li><...
Business strategy analysis: Competitive strategy analysis Two generic competitive strategies Sustainable competitive advan...
Business strategy analysis: Competitive strategy analysis COST LEADERSHIP <ul><li>Economies of scale and scope </li></ul><...
Business strategy analysis: Competitive strategy analysis <ul><li>Superior product quality </li></ul><ul><li>Superior prod...
Business strategy analysis: Competitive strategy analysis Core competencies Value chain …  the extent to which it is diffi...
Business strategy analysis: Competitive strategy analysis The sustainability of a firm’s competitive advantage In the earl...
Business strategy analysis: Competitive strategy analysis <ul><li>IKEA </li></ul><ul><li>1953: founded by Ingvar Kamprad a...
Business strategy analysis: Competitive strategy analysis Low-cost competitive strategy GLOBAL STRATEGY In 33 countries it...
Business strategy analysis: Competitive strategy analysis competitive advantage forniture design store design logistics Ov...
Business strategy analysis: Competitive strategy analysis IKEA’s strategy exhibits some characteristics of a differentiati...
Business strategy analysis: Corporate strategy analysis Multibusiness organizations evaluate the industries and strategies...
Business strategy analysis: Corporate strategy analysis Transaction inside an organization may be less costly than market-...
Business strategy analysis: Corporate strategy analysis <ul><li>EASYGROUP </li></ul><ul><li>1995: easyJet started operatio...
Business strategy analysis:  Corporate strategy analysis Diversification Established reputation in offering no-frills serv...
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From Financial Statement to Business Analysis

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From Financial Statement to Business Analysis

  1. 1. From Financial Statement to Business Analysis Financial Statement Distortion and noise True information Intermediaries rely on their knowledge of the firm’s industry and its competitive strategy Step 1: Business strategy analysis Step 2: Accounting analysis Step 3: Financial analysis Step 4: Prospective analysis
  2. 2. Business strategy analysis (step 1) Key profit drivers Sustainability Key risks Key Drivers Cellular phones Internet commerce Pharmaceuticals Retail Fashion clothing Non-fashion clothing Beverages Population coverage and churn rates Hits per hour Research and development Retail space and sales per square foot Brand management and design Production efficiency Brand management and production innovation KEY ECONOMIC FACTORS INDUSTRY
  3. 3. Business strategy analysis Profit in excess of the cost of capital own strategic choices Industry analysis Competitive strategy analysis Corporate strategy analysis
  4. 4. Business strategy analysis: Industry analysis Degree of actual and potential competition Bargaining power in input and output markets Bargaining power of buyers (4) Bargaining power of suppliers (5) Rivarly among existing firms (1) Threat of new entrants (2) Threat of substitute products (3) Industry profitability “ FIVE FORCES”
  5. 5. Business strategy analysis: Industry analysis Rivarly among existing firms (1) <ul><li>Industry growth rate </li></ul><ul><li>Concentration and balance of competitors </li></ul><ul><li>Degree of differentiation and switching costs </li></ul><ul><li>Scale/learning economies and the ratio of fixed to variables costs </li></ul><ul><li>Excess capacity and exit barriers </li></ul>
  6. 6. Business strategy analysis: Industry analysis <ul><li>Economies of scale </li></ul><ul><li>First mover advantage </li></ul><ul><li>Access to channels of distribution and relationship </li></ul><ul><li>Legal barriers </li></ul>Threat of new entrants (2)
  7. 7. Business strategy analysis: Industry analysis <ul><li>Perform the same function </li></ul><ul><li>Technologies that allow to use less of existing product </li></ul><ul><li>Customer’s willingness to substitute (brand, design…) </li></ul>Threat of substitute products (3)
  8. 8. Business strategy analysis: Industry analysis <ul><li>Price sensitivity : </li></ul><ul><ul><ul><ul><li>Switching costs </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Differentiation </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Importance of product to the cost structure </li></ul></ul></ul></ul><ul><li>Relative bargaining power: </li></ul><ul><ul><ul><ul><li>Number of buyers relative to the number of suppliers </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Volume per buyer </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Threat of backward integration by the buyers </li></ul></ul></ul></ul>Bargaining power of buyers (4)
  9. 9. Business strategy analysis: Industry analysis <ul><li>Price sensitivity : </li></ul><ul><ul><ul><ul><li>Switching costs </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Differentiation </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Importance of product to the cost structure </li></ul></ul></ul></ul><ul><li>Relative bargaining power: </li></ul><ul><ul><ul><ul><li>Number of buyers relative to the number of suppliers </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Volume per suppliers </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Threat of forward integration by the suppliers </li></ul></ul></ul></ul>Bargaining power of suppliers (5)
  10. 10. Business strategy analysis: Industry analysis <ul><li>The European Airline Industry </li></ul><ul><li>In the early 1980s: highly regulated (routes and fares); </li></ul><ul><li>From 1987 to 1997: EU liberalized the industry, reduced government intervention; </li></ul><ul><li>In 1980: the four largest European airlines carried 54 million passengers; </li></ul><ul><li>In 2000: the same airlines carried 147 million passengers; </li></ul><ul><li>… the industry exhibited steady growth; </li></ul><ul><li>In the early 2000’s: many of the largest European airlines reported poor performance; </li></ul><ul><li>… other national carriers went bankrupt… </li></ul>WHY?
  11. 11. Business strategy analysis: Industry analysis Rivarly among existing firms (1) <ul><li>The European Airline Industry </li></ul><ul><li>Growth: annual average 5% between 1995 and 2004. Negative growth after 11/09/01; </li></ul><ul><li>Concentration: fragmented industry; liberalization of the market; State subsidies; </li></ul><ul><li>Differentation and switching cost: virtually identical flights; </li></ul><ul><li>Structural excess capacity problem: the annual passenger load factor was 72% (1995-2004). </li></ul>
  12. 12. Business strategy analysis: Industry analysis Threat of new entrants (2) <ul><li>The European Airline Industry </li></ul><ul><li>1993: Change in system used to allocate time slots among the airlines; </li></ul><ul><li>Use of smaller airports in order to enter the market; </li></ul><ul><li>Easy access to capital. Second-hand aircraft; </li></ul><ul><li>After 1997: no legal barriers. Possibility to freely operate on any route within the EU; </li></ul><ul><li>Substitute products: High-speed rail network. </li></ul>Threat of substitute products (3)
  13. 13. Business strategy analysis: Industry analysis <ul><li>The European Airline Industry </li></ul><ul><li>90% of aircraft came from two commercial aircraft manufacturers (Airbus, Boeing); </li></ul><ul><li>Fluctuations in fuel market price; </li></ul><ul><li>Significant power of airline employees (threat of strike…); </li></ul><ul><li>Web booking systems made market prices transparent </li></ul>Bargaining power of buyers (4) Bargaining power of suppliers (5)
  14. 14. Business strategy analysis: Industry analysis The memory chip industry One of the fastest growing industies in the last twenty years is the memory chip industry. Yet the average profitability has been very low. What are the potential factor that might explain this apparent contradiction?
  15. 15. Business strategy analysis: Industry analysis <ul><li>The memory chip industry </li></ul><ul><li>Low concentration; </li></ul><ul><li>Few barrier to entry; </li></ul><ul><li>Low differentation; </li></ul><ul><li>Low switching costs; </li></ul><ul><li>High fixed costs and low variable costs; </li></ul><ul><li>Presence of scale and learning economies; </li></ul><ul><li>Excess capacity; </li></ul><ul><li>No access needed for distribution; </li></ul><ul><li>High importance of product for cost </li></ul>Bargaining power of buyers (4) Bargaining power of suppliers (5) Threat of new entrants (2) Threat of substitute products (3) Rivarly among existing firms (1)
  16. 16. Business strategy analysis: Competitive strategy analysis Two generic competitive strategies Sustainable competitive advantage COST LEADERSHIP DIFFERENTIATION
  17. 17. Business strategy analysis: Competitive strategy analysis COST LEADERSHIP <ul><li>Economies of scale and scope </li></ul><ul><li>Efficient production </li></ul><ul><li>Simpler product design </li></ul><ul><li>Lower input costs </li></ul><ul><li>Low-cost distribution </li></ul><ul><li>Little research and development or brand advertising </li></ul><ul><li>Tight cost control system </li></ul>Supply same product or service at a lower cost
  18. 18. Business strategy analysis: Competitive strategy analysis <ul><li>Superior product quality </li></ul><ul><li>Superior product variety </li></ul><ul><li>Superior customer service </li></ul><ul><li>More flexible delivery </li></ul><ul><li>Investment in brand image </li></ul><ul><li>Investment in research and development </li></ul><ul><li>Control system focus on creativity and innovation </li></ul>DIFFERENTIATION Supply a unique product or service at a cost lower than the price premium customers will pay
  19. 19. Business strategy analysis: Competitive strategy analysis Core competencies Value chain … the extent to which it is difficult for competitors to imitate them… The sustainability of a firm’s competitive advantage <ul><li>What are the key success factors and risk associated with the firm’s chosen competitive strategy? </li></ul><ul><li>Does the firm currently have the resources and capabilities to deal with the key success factors and risks? </li></ul><ul><li>Are there any barriers that make imitation of the firm’s strategy difficult? </li></ul><ul><li>Are there any potential changes in the firm’s industry structure that might dissipate the firm’s competitive advantage? </li></ul><ul><li>Is the company flexible enough to adress these changes? </li></ul>
  20. 20. Business strategy analysis: Competitive strategy analysis The sustainability of a firm’s competitive advantage In the early 1980s, United, Delta and American Airlines each started frequent flier programs as a way to differentiate themselves in response to excess capacity in the industry. <ul><li>What happened? </li></ul><ul><li>Airlines anticipated that the programs would fill seats that would otherwise have been empty and hence would have had a low marginal cost ; </li></ul><ul><li>However, because the costs of implementing a program were low, there were few barriers to other airlines starting their own frequent flier programs; </li></ul><ul><li>Before long, every airline had a frequent flier program with the same requirements for earning free air travel; </li></ul><ul><li>Simply having a frequent flier program no longer differentiated airlines ! </li></ul>
  21. 21. Business strategy analysis: Competitive strategy analysis <ul><li>IKEA </li></ul><ul><li>1953: founded by Ingvar Kamprad as a mail-order company; </li></ul><ul><li>1960s: started to develop its operating concept: selling flat-packed furniture through large warehouse store; </li></ul><ul><li>1960s: started to expand internationally; </li></ul><ul><li>IKEA’s average growth rate between 1999 and 2005 was approximately 11%; </li></ul><ul><li>For the 2005 fiscal year IKEA achieved € 15.2 billion in revenues; </li></ul><ul><li>Its profit margin was well above those of some of IKEA’s larger competitors; </li></ul><ul><li>One of the world’s largest forniture retailers. </li></ul>How did IKEA achieve such performance?
  22. 22. Business strategy analysis: Competitive strategy analysis Low-cost competitive strategy GLOBAL STRATEGY In 33 countries it targets the same customer group (young families and couples) SOURCING OF PRODUCTION A network of 1,300 suppliers in 53 country. Often it is a manufacturer’s sole customer ECONOMIC DESIGNS Its designers find the most economic design solution LOGISTICS Large warehouse stores outside the city centers. Forniture in flat-pack format. SALES Customers need little assistance. Limited after-sales service. Minimum personnel expenses.
  23. 23. Business strategy analysis: Competitive strategy analysis competitive advantage forniture design store design logistics Over the years, IKEA had made large investments in knowledge of low-cost the business model was very difficult to replicate No competitors has been able to replicate the business model on a similar scale sustainable
  24. 24. Business strategy analysis: Competitive strategy analysis IKEA’s strategy exhibits some characteristics of a differentiation strategy In 2005, IKEA’s brand was estimated at € 7.8 billion. It’s a cult brand. Strength of retailer’s brand name Diversity in its assortment Distinctiveness of its design
  25. 25. Business strategy analysis: Corporate strategy analysis Multibusiness organizations evaluate the industries and strategies of the individual business units evaluate the economic consequences of managing all the businesses under one corporate umbrella Organization’s ability to create value through a broad corporate scope … the transaction cost of performing a set of activities inside the firm versus using the market mechanism
  26. 26. Business strategy analysis: Corporate strategy analysis Transaction inside an organization may be less costly than market-based transaction Nontradable or nondivisible asset Critical role of the Headquarters office Empirical evidence suggests… Communication costs … it’s difficult to create value through a multibusiness corporate strategy
  27. 27. Business strategy analysis: Corporate strategy analysis <ul><li>EASYGROUP </li></ul><ul><li>1995: easyJet started operations as a low-fare short-haul airline company; </li></ul><ul><li>2000: 28% of its share was placed on the LSE at an amount of £ 224 million; </li></ul><ul><li>From 1997 to 2005: EasyJet’s revenues increased from £ 46 to £ 1,341 million; </li></ul><ul><li>Stelios Haji-Ioannou , the founder of EasyJet, streched the “easy” brand name to other industries; </li></ul><ul><li>Competitive strategy: web-booking in advance, no-frills services, bypass intermediaries, tight control over costs.; </li></ul><ul><li>Following this strategy, EasyGropu expanded into car rental, pizza delivery bus transport, cinemas, hotels. </li></ul>How could EasyGroup create value through its broad corporate?
  28. 28. Business strategy analysis: Corporate strategy analysis Diversification Established reputation in offering no-frills services at low prices Expertise in flexible pricing and online selling Revenues from licensing the “easy” brand Brand-stretching can help to economize on advertising There were also signs that EasyGroup was expanding too rapidly and that its diversification beyond air travel was likely to fail.
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