2. Strategy Analysis
• Strategy analysis is an important starting
point for the analysis of financial statements
– Allows the analyst to probe the economics of a
firm at a qualitative level
• Subsequent accounting and financial analysis is
grounded in business reality
– Allows the identification of the firm’s profit drivers
and key risks
• Enables the analyst to assess the sustainability of
the firm’s current performance and make realistic
forecasts of future performance
3. Strategy Analysis (Cont’d)
• Firm’s profit potential is determined by
its own strategic choices
– Industry choice
• Industry analysis
– Competitive positioning
• Competitive strategy analysis
– Corporate strategy
• Corporate strategy analysis
4. INDUSTRY ANALYSIS
• Assess the profit potential of each
industries in which the firm is competing
because the profitability of various
industries differ systematically and
predictably over time
• Average profitability of an industry is
influenced by the five forces
5. 5 Competitive Forces
• Competitive force 1: Rivalry among
existing firms
– Industry growth rate
– Concentration and balance of competitors
– Degree of differentiation and switching
costs
– Scale/learning economics and the ratio of
fixed to variable costs
– Excess capacity and exit barriers
6. 5 Competitive Forces (Cont’d)
• Competitive force 2: Threat of new
entrants
– Economies of scale
– First mover advantage
– Access to channels of distribution and
relationship
– Legal barriers
7. 5 Competitive Forces (Cont’d)
• Competitive force 3: Threat of substitute
product
– Relative price and performance of the
competing product or service
– Customers’ willingness to substitute
• Competitive force 4: Bargaining power
of buyers
– Price sensitivity
– Relative bargaining power
• Competitive force 5: Bargaining power
of suppliers
8. Competitive Strategy Analysis
• Competitive strategy 1: Cost leadership
• Competitive strategy 2: Differentiation
• Achieving and sustaining competitive
advantage
– Match between firm’s core competencies
and key success factors to execute
strategy
– Match between firm’s value chain and
activities required to execute strategy
– Sustainability of competitive advantage
9. Corporate Strategy Analysis
• Many firms operate in multiple
businesses.
• The optimal activity scope of firms
depends on the relative transaction cost
of performing a set of activities inside
the firm versus using the market
mechanism.
