CH 2STRATEGY ANALYSIS

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

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

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 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

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

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

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

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.