STRATEGY ANALYSIS

Introduction
Strategy analysis
important starting point for the analysis of financial st
allows analyst to probe the economics of a firm at a qualitative level so
that the subsequent accounting and financial analysis is grounded in
business reality
allows the identification of the firms profit drivers and key risk
enables the analyst to assess the sustainability of the firms current
performance and make realistic forecasts of future performance
involves: industry analysis, competitive strategy analysis, and corporate
strategy analysis

Industry Analysis
To assess profit potential of each of the industries in which the firm
is competing because the profitability of various industries differs
systematically and predictably over time, before analyzing firms
profit potential
Based on researches, there are five forces that influence average
profitability of an industry Porters Five Forces
Porters Five Forces
 Structural reasons
all represented barriers to
entry in certain industries,
thus allowing those
industries to be more
profitable than others.
 Porters Five Forces
* Threat of Entry
* Bargaining Power of Suppliers
* Bargaining Power of Buyers
* Development of Substitute
Products or Services
* Rivalry among Competitors
 Barriers to Entry
large capital requirements or
the need to gain economies of
scale quickly.
strong customer loyalty or
strong brand preferences.
lack of adequate distribution
channels or access to raw
materials.
materials
 Power of Suppliers
high when
* A small number of dominant,
highly concentrated suppliers
exists.
* Few good substitute raw materials
or suppliers are available.
* The cost of switching raw
materials or suppliers is high.
 Power of Buyers
high when
* Customers are concentrated,
concentrated large or
buy in volume .
* The products being purchased are
standard or undifferentiated making
it easy to switch to other suppliers.
* Customers purchases represent a
major portion of the sellers total
revenue.
 Substitute products
competitive strength high when
* The relative price of substitute
products declines .
* Consumers switching costs decline.
decline
* Competitors plan to increase
market penetration or production
capacity.
capacity
 Rivalry among competitors
intensity increases as
* The number of competitors
increases or they become equal
in size.
size
* Demand for the industrys products
declines or industry growth slows.
slows
* Fixed costs or barriers to leaving
the industry are high.
high
 Degree of actual and potential competition

Rivalry among Threat of new Threat of

existing firms entrants substitute
Industry growth products
Scale economies
concentration Relative price &
differentiation First mover advantage
performance
switching cost Distribution access
scale economies Buyers willingness
cost structure Relationship
to swich
excess capacity Legal barriers
exit barriers

INDUSTRY PROFITABILITY

Bargaining power in input and output markets

Bargaining power Bargaining Power
of buyers of supplier
Switching cost Switching cost
differentiation differentiation
importance of product importance of product
for costs&quality for costs&quality
number of buyers number of buyers
volume per buyer volume per buyer
Competitive strategy analysis

Profitability of a firm is influenced not only

by its industry structure but also by the
strategic choices it makes in positioning
itself in the industry
Two generic competitive strategies
Cost leadership
differentiation
Corporate Strategy Analysis
Analyzing multi business organization is not
only evaluating the industries & strategies of the
individual business but also the economic
consequences of managing all the different
business under one corporate umbrella
In practice, it pays to be skeptical when
evaluating companies corporate strategies
Important question to be asked: does
organization have special resources such as
brand names to create value