Strategy Analysis

Topic 3

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Introduction to strategy analysis:
Strategy analysis is used to review the economics of an organisation at a
qualitative level to perform accounting and financial analysis.

This involves
 Identify key profit drivers
 Risks

to assess the sustainability of the performance and make realistic

forecasts of future performance.

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While a firm’s cost of capital is determined by the capital markets, its
profit potential is determined by its own strategic choices:
(1) Industry Choice - the choice of an industry or a set of industries in
which the firm operates
(2) competitive positioning - the manner in which the firm intends to
compete with other firms in its chosen industry or industries
(3) corporate strategy - the way in which the firm expects to create and
exploit synergies across the range of businesses in which it operates.

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INDUSTRY ANALYSIS

Why industries have

different levels of
profitability???

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Industry structure influences profitability

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Competitive Force 1: Rivalry Among Existing Firms
In some industries, firms compete aggressively, pushing prices close to the marginal cost.
In other industries, firms do not compete aggressively on price. Instead, they find ways to
coordinate their pricing, or compete on nonprice dimensions, such as innovation or brand
image.

Several factors determine the intensity of competition between existing players in an industry:
 industry growth rate.
 Concentration and balance of competitors
The number of firms in an industry and their relative sizes determine the degree
of concentration in an industry
 degree of differentiation and switching costs.
If the products in an industry are very similar, customers are ready to switch
from one competitor to another purely on the basis of price.
 scale/learning economies and the ratio of fixed to variable costs.
Competition is high if size is important factor
if the fixed cost is high, companies tend to reduce prices. Eg. Airlines
 Excess capacity & exist barriers. Eg. Specialized assets
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Competitive Force 2: Threat of New Entrants
The potential for earning abnormal profits will attract new entrants to an industry. New entrants
create a constraint in pricing.

Economies of scale might arise from

 large investments in research and development (the pharmaceutical or jet engine industries)
 in brand advertising (soft-drink industry)
 In physical plant and equipment (telecommunications industry)

First mover advantage

 first movers might be able to set industry standards
 enter into exclusive arrangements with suppliers of cheap raw materials
 they may also acquire scarce government licenses to operate in regulated industries.

Access to channels of distribution and relationships

 Limited capacity in the existing distribution channels and high costs of developing new
channels

Legal barriers.

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Competitive Force 3: Threat of Substitute
Products
Energy-conserving technologies allow customers to reduce their consumption of electricity
though its not a switching cost.

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Competitive Force 4: Bargaining Power of
Buyers
Two factors determine the power of buyers:
 price sensitivity
Buyers are more price sensitive when the product is undifferentiated and there are few sw
itching costs.
Example: - the packaging material for soft-drink producers
- windshield wipers for automobile manufacturers

 relative bargaining power.

Competitive Force 5: Bargaining Power of Suppliers

Suppliers are powerful when there are only a few companies and there are few substitutes
available to their customers.

In the soft drink industry, Coke and Pepsi are very powerful relative to the bottlers.

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COMPETITIVE STRATEGY ANALYSIS
The 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.

there are two generic competitive strategies:

1. cost leadership

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COMPETITIVE STRATEGY ANALYSIS
Cost leadership
1.Considerable bargaining power over suppliers, which helps the company keep its
operating costs low
2.Little aircraft variety (mainly Boeing 737-200), allowing them to purchase spare parts in
large quantities
3.Negotiation power with airport operators, demanding low landing and handling fees, in
addition to flying to less popular airports
4.Lack of differentiation services such as loyalty schemes, free food, in-flight
entertainment, airport lounges, premium cabin, etc.

The Irish based budget airline (with a fleet size of 469

airplanes including subsidiaries) carries more international
passengers than any other airline in the world.

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COMPETITIVE STRATEGY ANALYSIS
Differentiation
The first and most important point is product innovation. Tesla entered the automotive
industry offering market-disruptive electric vehicles that people absolutely loved.

Their cars are not only environmentally friendly and extremely high tech, but also have a
very distinctive and beautiful aesthetic. Over the years, many companies have tried
building electric or hybrid cars, but none of them with the detail and elegant design that
Tesla achieved.
But these are not the only aspects of Tesla’s product differentiation. Some others include:

The possibility to customize your car;

Regular software updates;
Solar panels and supercharging compatibility;
And self-driving features.

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To evaluate whether or not a firm is likely to achieve its intended competitive
advantage, the analyst should ask the following questions:

• What are the key success factors and risks associated with the firm’s chosen competitive strategy?

• Does the firm currently have the resources and capabilities to deal with the key success factors and risks?

• Has the firm made irreversible commitments to bridge the gap between its current
capabilities and the requirements to achieve its competitive advantage?

• Has the firm structured its activities (such as research and development, design,
manufacturing, marketing and distribution, and support activities) in a way that is
consistent with its competitive strategy?

• Is the company’s competitive advantage sustainable? Are there any barriers that
make imitation of the firm’s strategy difficult?

• Are there any potential changes in the firm’s industry structure (such as new technologies, foreign
competition, changes in regulation, changes in customer requirements) that might dissipate the firm’s
competitive advantage? Is the company
flexible enough to address these changes

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Thank you

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