Strategy Analysis


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Strategy Analysis

  1. 1. Strategy Analysis
  2. 2. Purpose of Strategy Analysis <ul><li>To probe the economics of the firm at a qualitative level. </li></ul><ul><li>To identify key profit drivers and critical success factors. </li></ul><ul><li>To identify key business risks . </li></ul>
  3. 3. Purpose of Strategy Analysis <ul><li>Strategy analysis is the starting point for financial statement analysis. </li></ul><ul><li>Although not quantitative, it heavily influences the quantitative outcome of financial statement analysis. </li></ul><ul><li>This is because it weights and structures later analyses by identifying critical success factors and risks that will later drive profitability assessments, both past, current and prospective. </li></ul>
  4. 4. Components of Strategy Analysis <ul><li>Equity value depends on how profitable a firm is, relative to its cost of financing. Strategic choices that drive profitability include: </li></ul><ul><ul><li>Industry </li></ul></ul><ul><ul><li>Competitive strategy </li></ul></ul><ul><ul><li>Corporate strategy </li></ul></ul>
  5. 5. Industry Analysis <ul><li>Industry Profit Drivers: </li></ul><ul><ul><li>Rivalry among Existing Firms </li></ul></ul><ul><ul><li>Threat of New Entrants </li></ul></ul><ul><ul><li>Threat of Substitution </li></ul></ul><ul><ul><li>Bargaining Power of Suppliers </li></ul></ul><ul><ul><li>Bargaining Power of Buyers </li></ul></ul>
  6. 6. Industry Analysis <ul><li>Rivalry among Competitors </li></ul><ul><ul><li>Industry Growth </li></ul></ul><ul><ul><li>Concentration </li></ul></ul><ul><ul><li>Switching costs </li></ul></ul><ul><ul><li>Scale/learning economies </li></ul></ul><ul><ul><li>Fixed/Variable cost profile </li></ul></ul><ul><ul><li>Excess capacity </li></ul></ul><ul><ul><li>Exit barriers </li></ul></ul>
  7. 7. Industry Analysis <ul><li>Threat of New Entrants </li></ul><ul><ul><li>Scale economies </li></ul></ul><ul><ul><li>First Mover Advantage </li></ul></ul><ul><ul><li>Distribution Access </li></ul></ul><ul><ul><li>Relationships </li></ul></ul><ul><ul><li>Legal Barriers </li></ul></ul>
  8. 8. Industry Analysis <ul><li>Threat of Substitutes </li></ul><ul><ul><li>Relative Prices </li></ul></ul><ul><ul><li>Buyers Willingness to switch </li></ul></ul>
  9. 9. Industry Analysis <ul><li>Bargaining Power- Customers and Suppliers </li></ul><ul><ul><li>Switching costs </li></ul></ul><ul><ul><li>Differentiaton </li></ul></ul><ul><ul><li>Importance of the product or service </li></ul></ul><ul><ul><li>Number of customers/suppliers </li></ul></ul><ul><ul><li>Volume per buyer </li></ul></ul>
  10. 10. Industry Analysis <ul><li>Limitations of the competitive model of industry analysis- </li></ul><ul><ul><li>“Industry” for many firms is not always easy to define. </li></ul></ul><ul><ul><li>The focus on competitive issues may cause an analyst to miss other factors that are more relevant in many cases, e.g., tariffs, global forces, regulation, etc. </li></ul></ul>
  11. 11. Competitive Strategy <ul><li>Two Basic Strategies: </li></ul><ul><ul><li>Cost Leadership </li></ul></ul><ul><ul><li>Differentiation </li></ul></ul>
  12. 12. Cost Leadership <ul><li>Economies of scale </li></ul><ul><li>Efficiency of production </li></ul><ul><li>Simplicity of design </li></ul><ul><li>Imput costs- are they low? </li></ul><ul><li>Distribution cost- is it low? </li></ul><ul><li>Low cost of R&D? </li></ul><ul><li>Cost control systems </li></ul>
  13. 13. Differentiation <ul><li>Is product quality superior? </li></ul><ul><li>Is the product variety superior? </li></ul><ul><li>Customer service and post-sale support capability? </li></ul><ul><li>Delivery flexible? </li></ul><ul><li>Brand image </li></ul><ul><li>R&D investment </li></ul><ul><li>Creativity and innovation </li></ul>
  14. 14. Competitive Strategy <ul><li>Does the company’s strategy produce a competitive advantage? </li></ul><ul><ul><li>Is there a match between the firm’s core competencies and the strategy? </li></ul></ul><ul><ul><li>Is there a match between the firm’s value chain and activities needed to execute the strategy? </li></ul></ul><ul><ul><li>Is any advantage sustainable? </li></ul></ul><ul><ul><li>What are the key success factors and risks? </li></ul></ul>
  15. 15. Corporate Strategy <ul><li>What is the firm’s scope? Is this optimal? </li></ul><ul><li>If its diversified, why? </li></ul><ul><li>If its diversified, how and why are resources deployed as they are? </li></ul><ul><li>If its diversified, what synergies are there and are they greater than the cost of a broad-based scope? </li></ul>
  16. 16. Corporate Strategy <ul><li>Sample questions to probe with- </li></ul><ul><ul><li>Are there cost advantages to doing certain activities in-house, as opposed to out-sourcing? </li></ul></ul><ul><ul><li>Does the firm have unique resources its leveraging? Does its scope match this goal? </li></ul></ul><ul><ul><li>Is decision-making hierarchical or diffuse? </li></ul></ul><ul><ul><li>How is business coordinated across units? </li></ul></ul>
  17. 17. Summary <ul><li>Strategy analysis is an important starting point for Financial Statement Analysis and shapes and structures later analyses . </li></ul><ul><li>Strategy analysis is a qualitative attempt to understand corporate profitability and risk. </li></ul><ul><li>Strategy analysis has three analytical components : industry, competition, and corporate. </li></ul>