Framework for Business Analysis

1
Framework for Business Analysis

• Business Strategy Analysis
• Degree of ActualPotential Competition
• Rivalry among Existing Firms
• Threat of New Entrants
• Threats of Substitutes products
• Bargaining Power in InputOutput Markets
• Competitive Strategy
• Financial Analysis
• Profitability Analysis
• Risk Analysis

2
Industry AnalysisRivalry Among Existing Firms

• Rivalry is high as a result of
• Competitors are numerous and are roughly equal in
  size and resources.
  
• Almost no switching costs.
• Competitors are diverse is strategies
• Competitors with high strategic stakes
• Exit barriers are high
• Rivalry is changing as a result of acquisitions,
  new category killers and value oriented sellers.

3
Industry AnalysisThreat of New Entrants

• Threat of new entrants is low because
• Scale Economies in procurement, distribution and
  advertisement.
  
• Capital requirements for keeping and managing
  inventory and for opening of new stores.
  
• Product Differentiation based in brand equity and
  positioning .
  
• Distribution Access/Relationships to malls,
  suppliers.
  
• Costs advantage resulting from favorable
  locations.

4
Industry AnalysisThreat of Substitute Products

• Threat of Substitutes Products is low because all
  the potential competitors are already in
  
• Individual Specialty Stores
• Discount Retailers
• Mass Retailers
• Department Stores
• Chains of Specialty Stores

5
Industry AnalysisBargaining Power of Buyers

• Bargaining power of buyers is high as a result
  of
  
• Facing low Switching Costs
• Product is an important purchase for buyers
• Bargaining power of suppliers is low because
• It is Easy to switch from one supplier to
  another
  
• Number of Suppliers Relative to Number of Buyers
• The Limited over 3500 suppliers!
• No differentiation or threat of upward
  integration.
  

6
Industry AnalysisConclusion

• This industry is characterized
• by a high degree of rivalry
• and high bargaining power of
• its customers which could
• foster a change in the potential for
  profitability from medium to low in the future.

7
Competitive StrategyThe GAP

• The GAP
• GAP is pursuing a differentiation strategy.
• Its focus is in the youth segment of the
  population
  
• Focus on selling value rather than fashion.
• Less stores but larger size and higher sales per
  square foot.
  
• Focus on the design and accessibility of the
  stores.
  
• More mass marketing oriented

8
Competitive Strategy The Limited

• The Limited
• Focus on fashion and quality
• High degree of diversification
• Higher Brand Equity
• Focus on more in-store advertising
• Larger Number of Stores
• Lower stores size and lower sales per store
• Higher price point customers
• Catalog Sales and Credit Card.

9
Competitive AdvantageGAP

• The Gap is a more focused company. It is pursuing
  a higher-margin niche strategy targeting only the
  youths population. GAP has a better management of
  inventories and fixed assets. Its improved
  logistic in its stores represents higher sales
  per squared foot and more efficient use of
  advertising. Gap line is more standard and value
  oriented than The Limiteds and directed toward
  lower prices points customers. Gap carries less
  SKU but more depth in its stores reducing
  obsolescence.

10
Competitive AdvantageThe Limited

• The Limited is a more diversified company, trying
  to compete in a variety of different product
  categories.
  
• This prevent them from an efficient use of
  resources. Consequences are lower inventory
  turnover and higher expenses in advertising.
  
• The broad assortment of products and the
  different nature of its products pose
  difficulties in The Limited management of
  suppliers and sales per store.
• The limited has less penetration outside the USA

11
Financial Analysis

• Time Series Analysis
• Profitability Analysis
• Profit Margin
• Assets Turnover
• Risk Analysis
• Short-Term Liquidity Risk
• Long-Term Solvency Risk
• Cross Section Analysis
• Profitability
• Risk

12
Time Series AnalysisThe GAP

• Profitability Analysis
• ROA affected in year 6 increased in year 7.
• Profit Margin
• Higher COGS due to growth of Old Navy stores. SG
  grew due to opening of new stores.
  
• Lower COGS in year 7 as a result of a more
  favorable retailing environment
  
• Assets Turnover
• Increased slightly despite of increase in
  Inventories T/O due to new stores rollout.
  
• ROCE same path as ROA.

13
Time Series AnalysisThe GAP

• Risk Analysis
• Short-term Liquidity Risk
• Decline in cash and buildup in inventory due to
  new Old Navy Stores.
  
• Cash Flow to Current liabilities Ratio over 40
• Long-term Solvency Risk
• Increased slightly over the three years but still
  at healthy levels.
  

14
Time Series AnalysisThe Limited

• Profitability Analysis
• ROA decreased in year 6 but recover in year 7.
• Profit Margin
• Difficulties in pricing and reduced profitability
  in womens group sales caused higher COGS in year
  6.
  
• Improvement in Retail environment and swift in
  sales toward more profitable segments (Intimate
  brands) decreased COGS.
  
• Assets Turnover
• Increased slightly as a result of higher
  Receivables T/O. Sale of credit card subsidiary
  offset higher Inventory T/O.
  
• Improved as a result of growth in sales per
  squared foot plus sale of credit card business.

15
Time Series AnalysisThe Limited

• ROCE
• Increased from 6 to 7 due to an increase in the
  leverage ratio to finance buyback of common
  stocks.
  
• Risk Analysis
• Short-term Liquidity Risk
• Affected by decline in cash and buildup of
  inventories (maybe obsolete?).
  
• Cash Flow to Current Liabilities over 40
• Long-Term Solvency Risk
• Red flag debt ratios are high and cash flow and
  coverage ratios are low.

16
Cross Section Analysis

• Profitability Analysis
• ROA GAP exceeds the Limited in each year.
• Profit Margin
• GAP has lower COGS as a result of more standard
  product line, less competition in non-mall
  locations and less obsolescence compared to
  Limiteds more fashion oriented product line.
• Limited COGS affected by in-store promotions
  whereas GAP uses advertising.
  
• Asset Turnover
• GAP higher Receivables T/O results from not
  having its own credit card.
  
• Higher plant assets T/O comes from higher sales
  per square foot.

17
Cross Section Analysis

• Risk Analysis
• Short-term Liquidity Risk
• GAPs liquidity ratios exceed those of The
  Limited but neither of the two companies present
  short-term liquidity risk.
  
• The Limited seems to pay its suppliers so
  quickly.
  
• Long-term Liquidity Risk
• GAP exhibits less long-term solvency risk, Its
  debt, cash flow and coverage ratios are superior
  to those of The Limited.