Business Analysis

By:
Dr. Saurabh Chadha
Strategy Analysis
• Key Drivers of Value: Growth, ROI and Risk.
• How company will perform on these drivers?
• Calls for evaluation of company’s strategic position (industry
characteristics and company capabilities)
• Therefore, Strategy analysis seeks to explore the economics of a
firm and identify its profit drivers so that the subsequent financial
analysis reflects business realities.
Strategy Analysis
• The profit potential of a company is affected by the industry in which it
operates (Industry choice).
• The strategy it follows to compete in its chosen industry (Competitive
strategy).
• The way in which it exploits synergies across its business portfolio
(Corporate Strategy).
Therefore, strategy analysis involves Industry Analysis, Competitive
Strategy Analysis and Corporate Strategy Analysis.
Industry Analysis – Michael Porter’s Five Forces
Analysis
• He argued that the profit of an industry depends on the combined
strength of the following five basic competitive forces:
Potential
Entrants
Threat of New Entrants

Bargaining Power of Suppliers

Threat of
Substitute
Products

Substitutes
Threat of New Entrants
• New Entrants add capacity, inflate costs, push prices down and reduce
profitability.
• Hence, if an industry faces the threat of new entrants, its profit potential
would be limited.
Entry barriers are high when:
• There is a high investment cost for new entrants.
• Economies of scale are enjoyed by the industry.
• Existing firms control the distribution channels.
• High switching cost (cost of switching from the products of one supplier to
another).
• The government policy limits or even prevents new entrants.
Rivalry between Existing Firms
• Firms in an industry compete on the basis of price, quality, promotion,
service, warranties and so on.
The intensity of rivalry are high when:
• The number of competitors in the industry is large.
• The industry growth is sluggish, pushing firms to strive for a higher market
share.
• The level of fixed costs is high, pressurizing firms to achieve a higher capacity
utilization level.
• The industry’s product is regarded as a commodity or near-commodity,
stimulating strong price and service competition.
• The industry confronts high exit barriers.
Threat of Substitute Products
• Substitute products limits the profit potential of the industry by
imposing a ceiling on the prices that can be charged by the firms in the
industry.
The threat of substitute products is high when:
• The price-performance trade-off offered by the substitute products is
attractive.
• The switching costs for prospective buyers are minimal.
• The substitute products are being produced by industries earning
superior profits.
Bargaining Power of Buyers
• Buyers are a competitive force. They can bargain for price cut, ask for
superior quality and induce rivalry among competitors. If they are
powerful, they can depress the profitability of the supplier industry.
The bargaining power of buyer group is high when:
• Its purchases are large relative to the sales of the seller.
• Its switching costs are low.
• It poses a strong threat of backward integration.
BI is a type of vertical integration in which a consumer of raw materials
acquires its suppliers, or sets up its own facilities to ensure a more reliable
or cost-effective supply of inputs.
Bargaining Power of Suppliers
• Suppliers like buyers can exert a competitive force in an industry as they can
raise prices, lower quality, and curtail the range of free services they provide.
Powerful suppliers can hurt the profitability of the buyer industry.
The bargaining power of supplier group is high when:
• A few suppliers dominate and its more concentrated than the buyer group.
• There are hardly any viable substitutes for the products supplied.
• The switching costs for the buyers are high.
• Suppliers do present a real threat of forward integration.
FI is a type of vertical integration where a manufacturer acquires the channels
of distribution of its outputs to achieve greater economies of scale or higher
market share.
Industry Analysis: The Personal Computer
Industry Case
• The personal computer industry began in 1981 when IBM introduced its
PC with Intel’s microprocessor and Microsoft’s DOS operating system.
• Since then the PC industry has grown outstandingly.
• However, it has been characterized by low profitability, in general.
The following factors have contributed to low profitability:
• There is intense rivalry among existing players.
• There are few barriers to entry as virtually all components required to
make a computer can be outsourced.
• The bargaining power of suppliers is high. Example Intel dominates the
microprocessor production and Microsoft controls the operating system
market.
Industry Analysis: The Personal Computer
Industry Case
The following factors have contributed to low profitability:
• Corporate buyers, who account for a substantial portion of the market,
are highly price sensitive and enjoy high bargaining power.
• It is fairly easy to switch from one brand of personal computers to
another as most of the computers use Intel microprocessors and
Microsoft window operating systems.
• As the products offered by different firms are virtually identical, the
room for product differentiation is very limited.
Industry Analysis: The Personal Computer
Industry Case
To sum up,
• The intense rivalry among existing players, ease of entry, high bargaining
power of buyers and suppliers, low switching costs and limited room for
product differentiation……..
• Depressed the average profitability of the personal computer industry.
• No wonder, IBM sold its personal computer business to Lenovo of
China.

__________________
Industry Analysis: Indian Real Estate Sector
Competitive Strategy
• Among the various frameworks of strategy formulation, the one
developed by Michael Porter Competitive Strategy has been perhaps
the most influential in shaping management practice.
• He argues that the firm can explore three generic ways of gaining
sustainable competitive advantage i.e. cost leadership, product
differentiation and focus strategy.
Competitive Position of the Firm
Cost Leadership
• Cost leadership can be attained by exploiting economies of scale, exercising
tight cost control, minimizing cost in areas like R&D and advertising, and
deriving advantage from cumulative learning.
• Firms which follow this strategy includes Bajaj Auto in two wheelers, Mittal in
steel, Walmart in discount retailing, and Reliance industries in petrochemicals
etc.
• Any enterprises applying this model, they focus on producing standardized
products and sell products with a very low per-unit cost to consumers.
• This will attract consumers who are sensitive to price.
• The strategy can be used to target at large markets. Firms can use either a low-
cost strategy or a best-value strategy.
Cost Leadership
• In order to apply a cost leadership strategy successfully, a company must
ensure that its total costs of its whole value chain are lower than
competitors’. There are two ways to accomplish it.
• Value chain activities are more efficiently than rivals. They are the plant
layout, new technologies, different products, product design, year-round
full capacity, and so on.
• Reducing or eliminating cost-producing activities. They are suppliers,
distributors, products online sales, manufacturing facility relocation, and
so on
Cost Leadership
Cost leadership strategy can be effective under the following conditions:
1. Price competition among rivals is especially powerful
2. Products of rivals are identical
3. Few ways to achieve product differentiation
4. Most customers use the product in the same ways
5. Low switching costs
6. A lot of customers with bargaining power
7. Newcomers use low prices to attract buyers
Cost Leadership - Examples
Wal-Mart is a giant in retail in the USA. Wal-Mart is a pioneer in supply chain
management. Its distribution channels are managed efficiently and effectively. It
controls manufacturing, inventory, and distribution effectively. Besides, It always
offer the lowest price compared to rivals. Because Wal-Mart buys with a huge
volumes from suppliers, Wal-Mart often gain the best prices.
Acer is one of largest PC manufacturers in the world. Its markets are around the
world. Its PC products are selling at the lowest price compared to rivals. Acer
uses cost leadership strategy. With the same features, Acer laptops are always
cheaper than its rivals. For example, ACER E1 is selling to HP CQ45 and lower
than Lenovo G400. However, ACER E1 531 offers bigger screen at 15.6 inches
and HDD at 500GB more storage capacity than HP CQ45’s HDD at 320 GB
only. It brings more features and benefits to buyers than rivals do. This strategy
gives Acer a competitive advantage in gaining and maintaining its market shares.
Product Differentiation
• Product differentiation involves creating a product that is perceived by
customers are distinctive or even unique so that they can be expected to
pay a higher price. Firms which have excelled in this strategy include
Mercedes in automobiles, Rolex in wristwatches, Mont Blanc in pens, and
Raymond in textiles etc.
• Firms using the model will produce differentiated products and services.
And products can be many degrees of differentiation.
• They can be different in design, brand image, technology, features,
customer service, dealer network, product performance, useful life, ease
of use and so on.
Product Differentiation
• A firm must be careful to study buyers’ needs and preferences to
determine the feasibility before pursuing the differentiated strategy. And
a firm can charge a higher price for its differentiated product and to gain
customer loyalty.
• A risk of differentiation strategy is that products are not be valued good
enough by customers. When this happens, a cost leadership strategy
easily will defeat a differentiation strategy.
• Moreover, another risk of pursuing a differentiation strategy is that
competitors may quickly copy the differentiating features.
Product Differentiation
The differentiation strategy can be effective in the following conditions:
1. There are many ways to differentiate products or services and many
buyers perceive these differences as having value.
2. Buyer needs and uses are diverse.
3. Few rival firms are following a similar differentiation approach.
4. Technological change is fast
Product Differentiation - Examples
Apple uses differentiation strategy in doing business. Apple uses its own
platform for its products lines. IPhone go with iOS; IPad go with iOS; and
MacBook Laptops go with Mac OS. The platforms are coded by Apple
themselves. And hardware's of the devices are designed and manufactured
to use their own software. So their perfect compatibility makes Apple’s
devices run smoothly. Until now competitors have not imitated completely.
Apple brings more benefits and satisfaction for its customers and gains
customers’ loyalty through the differentiation strategy.
Product Differentiation - Examples
Samsung is directly competing Apple in the smart phone industry. In
order to attract more customers and gain market shares, Samsung use the
differentiation strategy in its innovated products development. For
example, Galaxy Note Series, S-Pen was designed and attached to the
Galaxy. It is a stylus but more convenient and smarter. Moreover, wider
screen of Galaxy Note Series, higher pixel camera, and longer battery
make a big differentiation compared to other rivals’ products.
Focus Strategy
• Firms applying the model will produce products and services to serve a
particular group of consumers. They aim at small markets.
• There are two types of focus strategies.
(1) Firms offer products or services to a niche group of customers at the
lowest price compared to rivals’ on the market. (Cost)
(2) Firms offer products or services to a niche of customers at the best
value compared to rivals’ price on the market. This will help to offer best
value products or services to meet customers’ tastes better than rivals’ do
and the price can be higher than rivals’. (Differentiation)
Focus Strategy
• If firms apply a focus strategy, they just concentrate on a narrow market
like particular group of customers, geographic markets, or on particular
product-line segments.
• They will serve customer in the narrow market better than competitors
or choose a target with least vulnerable to substitute.
• However, there are risks when firms pursue a focus strategy. Competitors
will recognize the successful focus strategy and copy it or consumer
preferences will be changed.
Focus Strategy
A focus strategy can be attractive under the following conditions:
• Target market niche is large, profitable, and growing.
• Industry leaders do not consider the niche to be crucial to their own
success.
• Industry leaders consider it too costly or difficult to meet the specialized
needs.
• Industry has many different niches and segments.
• Few rivals are attempting to specialize in the same target segment.
Focus Strategy - Examples
In the auto industry premium sedan segment, Hyundai Elantra is directly
competing with Corolla Altis and Honda Civic. Selling price of Hyundai
Elantra is cheaper than others such as Honda Civic. However, Hyundai
Elantra offers more feature than other competitors. It follows cost
leadership strategy and it brings more benefits for buyers.
Heineken beer is positioned for high income users. It serves a small
market of rich people. The selling price is higher than other brands such as
Tiger beer, 333 beer, Sapporo beer. Its flavor tastes better than others. It
show stylish image for users. Heineken beer uses strategy of
differentiation. Other example like Honda Activa in automatic scooter
segment.
Gaining Competitive Advantage
• By choosing an appropriate strategy, a firm does not necessarily gain
competitive advantage.
• To do so the firm must develop the required core competencies (the key
economic assets of the firm) and structure its value chain (the set of
activities required to convert inputs into outputs) appropriately.
• As Palepu et al. say: “The uniqueness of a firm’s core competencies
and its value chain and the extent to which it is difficult for
competitors to imitate them determines the sustainability of a
firm’s competitive advantage”.
Gaining Competitive Advantage
To assess whether a firm is likely to gain competitive advantage, the
analyst should examine the following:
• The key success factors and risks associated with the firm’s chosen
competitive strategy.
• The resources and capabilities, current and potential, of the firm to deal
with the key success factors and risks.
• The compatibility between the competitive strategy chosen by the firm
and the manner in which it has structured its activities (R&D, design,
manufacturing, marketing and distribution, and support).
• The sustainability of the firm’s competitive advantage.
• The potential changes in the industry structure and the adaptability of
the firm to address these changes.
Boston Consulting Group - BCG Matrix
Samsung Mobiles - BCG Matrix
Corporate Strategy Analysis
• When you analyze a multi-business firm, you have to evaluate not only the
profit potential of individual businesses but also the economic implications
(positive as well as negative) of managing different businesses under one
corporate canopy.
• Example: General Electric (GE) has succeeded immensely in creating
significant value by managing a highly diversified set of businesses ranging
from light bulbs to aircraft engine. (Positive)
• On the other hand, Sears has not succeeded in managing retailing with
financial services. (Negative)
• Therefore, it is important to consider all those factors which influences firm’s
ability to create value.
Corporate Strategy Analysis
Corporate Sources of Value Creation
Transaction Cost Analysis: The optimal score depends on how the costs of
performing activities inside the firm compare with the costs of using the
market mechanism.
• Transaction costs inside a firm is less as compared to market based
transactions for the following reasons:
• Communication costs inside a firm are lower because it is easier to protect
confidentiality and assume credibility.
• The corporate office can reduce the costs of enforcing agreements between the
various units of the firm.
• Valuable nondivisible assets (brand names, distribution channels etc) and nontradable
assets (systems, processes etc) can be shared by the various units of the firms.
Corporate Strategy Analysis
The analyst should examine the following factors to assess whether a
firm’s corporate strategy has the potential to create value:
• Imperfections in the product, labour or financial markets in the business in
which the firm operates.
• Existence of special resources such as brand name, proprietary knowledge etc
can create economies of scope.
• The degree of fit between the company’s specialized resources and its
portfolio of businesses.
• The allocation of decision rights between the corporate office and business
units and its effect on the potential economies of scope.
• The system of performance measurement etc.
Customer Segmentation Analysis: It helps in evaluating a company’s ability to
satisfy customers relative to competitors and identifying current or potential
competitive advantage.
Porter’s Value Chain Analysis
Adrian Slywotzky and David Morrison Concept of Modern Value Chain
Analysis
Fitness Landscape and Competitive Strategy
Fitness Landscape
• Stable Landscape: Businesses in this landscape tend to be fairly predictable
with limited growth opportunities. Good returns during cyclical upswings
and inferior returns during cyclical downswings Examples: Utilities,
Commodity producers and consumer non-durables like food, fuel, tobacco,
office supplies, rubber, plastics, textiles, clothing etc.
• Coarse Landscape: Its rougher than stable landscape. Businesses in this
landscape are in a flux and subject to rapid change. In this landscape some
firms perform better than others but there is a definite risk of being
unseated by disruptive technology. Examples retail, financial services,
healthcare etc.
Fitness Landscape and Competitive Strategy
Fitness Landscape
• Rolling Landscape: This is the most unpredictable landscape with
constantly changing peaks and valleys. Firms in this environment face
substantial uncertainty, experiment with different models and come
up with ever changing product offerings. Returns in this sector can be
significantly high but may be short-lived. Example: genomics industry,
software companies, fashion related sectors and most start ups.
Fitness Landscape and Competitive Strategy
Strategies to improve fitness
• Small Jumps: It involves small incremental steps mostly in the form of
process improvement initiative aimed towards reaching a peak.
• Long Jumps: These are discontinuous moves such as investments in
nascent products and meaningful acquisitions in unrelated fields.
Such moves catapult a company to a higher peak or push it into a lower
valley.
Small Jumps: Stable Landscape
Between Small and Long Jumps (Moderate Jumps): Coarse Landscape
Long Jumps: Rolling Landscape
Fitness Landscape and Competitive Strategy
Fitness Landscape and Competitive Strategy
Fitness Landscape and Competitive Strategy