From Financial Statement to Business Analysis

1
From Financial Statementto Business Analysis
Financial Statement
Distortion and noise
True information
Intermediaries rely on their knowledge of the
firms industry and its competitive strategy
Step 1 Business strategy analysis
Step 2 Accounting analysis
Step 3 Financial analysis
Step 4 Prospective analysis
2
Business strategy analysis(step 1)
Key profit drivers
Sustainability
Key risks
Key Drivers
KEY ECONOMIC FACTORS
INDUSTRY
Cellular phones
Population coverage and churn rates
Internet commerce
Hits per hour
Pharmaceuticals
Research and development
Retail
Retail space and sales per square foot
Fashion clothing
Brand management and design
Non-fashion clothing
Production efficiency
Beverages
Brand management and production innovation
3
Business strategy analysis
Profit in excess of the cost of capital
Industry analysis
Corporate strategy analysis
own strategic choices
Competitive strategy analysis
4
Business strategy analysisIndustry analysis
Rivarly among existing firms (1)
Threat of new entrants (2)
Threat of substitute products (3)
Degree of actual and potential competition
Industry profitability FIVE FORCES
Bargaining power in input and output markets
Bargaining power of buyers (4)
Bargaining power of suppliers (5)
5
Business strategy analysisIndustry analysis
Rivarly among existing firms (1)

• Industry growth rate
• Concentration and balance of competitors
• Degree of differentiation and switching costs
• Scale/learning economies and the ratio of fixed
  to variables costs
• Excess capacity and exit barriers

6
Business strategy analysisIndustry analysis
Threat of new entrants (2)

• Economies of scale
• First mover advantage
• Access to channels of distribution and
  relationship
• Legal barriers

7
Business strategy analysisIndustry analysis
Threat of substitute products (3)

• Perform the same function
• Technologies that allow to use less of existing
  product
• Customers willingness to substitute (brand,
  design)

8
Business strategy analysisIndustry analysis

• Price sensitivity
• Switching costs
• Differentiation
• Importance of product to the cost structure
• Relative bargaining power
• Number of buyers relative to the number of
  suppliers
• Volume per buyer
• Threat of backward integration by the buyers

Bargaining power of buyers (4)
9
Business strategy analysisIndustry analysis

• Price sensitivity
• Switching costs
• Differentiation
• Importance of product to the cost structure
• Relative bargaining power
• Number of buyers relative to the number of
  suppliers
• Volume per suppliers
• Threat of forward integration by the suppliers

Bargaining power of suppliers (5)
10
Business strategy analysisIndustry analysis

• The European Airline Industry
• In the early 1980s highly regulated (routes and
  fares)
• From 1987 to 1997 EU liberalized the industry,
  reduced government intervention
• In 1980 the four largest European airlines
  carried 54 million passengers
• In 2000 the same airlines carried 147 million
  passengers
• the industry exhibited steady growth
• In the early 2000s many of the largest
  European airlines reported poor performance
• other national carriers went bankrupt

WHY?
11
Business strategy analysisIndustry analysis
Rivarly among existing firms (1)

• The European Airline Industry
• Growth annual average 5 between 1995 and 2004.
  Negative growth after 11/09/01
• Concentration fragmented industry
  liberalization of the market State subsidies
• Differentation and switching cost virtually
  identical flights
• Structural excess capacity problem the annual
  passenger load factor was 72 (1995-2004).

12
Business strategy analysisIndustry analysis
Threat of new entrants (2)
Threat of substitute products (3)

• The European Airline Industry
• 1993 Change in system used to allocate time
  slots among the airlines
• Use of smaller airports in order to enter the
  market
• Easy access to capital. Second-hand aircraft
• After 1997 no legal barriers. Possibility to
  freely operate on any route within the EU
• Substitute products High-speed rail network.

13
Business strategy analysisIndustry analysis

• The European Airline Industry
• 90 of aircraft came from two commercial
  aircraft manufacturers (Airbus, Boeing)
• Fluctuations in fuel market price
• Significant power of airline employees (threat
  of strike)
• Web booking systems made market prices
  transparent

Bargaining power of buyers (4)
Bargaining power of suppliers (5)
14
Business strategy analysisIndustry analysis
The memory chip industry One of the fastest
growing industies in the last twenty years is the
memory chip industry. Yet the average
profitability has been very low. What are the
potential factor that might explain this apparent
contradiction?
15
Business strategy analysisIndustry analysis
Threat of new entrants (2)
Threat of substitute products (3)
Rivarly among existing firms (1)

• The memory chip industry
• Low concentration
• Few barrier to entry
• Low differentation
• Low switching costs
• High fixed costs and low variable costs
• Presence of scale and learning economies
• Excess capacity
• No access needed for distribution
• High importance of product for cost

Bargaining power of buyers (4)
Bargaining power of suppliers (5)
16
Business strategy analysisCompetitive strategy
analysis
Two generic competitive strategies
Sustainable competitive advantage
COST LEADERSHIP
DIFFERENTIATION
17
Business strategy analysisCompetitive strategy
analysis

• Economies of scale and scope
• Efficient production
• Simpler product design
• Lower input costs
• Low-cost distribution
• Little research and development or brand
  advertising
• Tight cost control system

COST LEADERSHIP
Supply same product or service at a lower cost
18
Business strategy analysisCompetitive strategy
analysis

• Superior product quality
• Superior product variety
• Superior customer service
• More flexible delivery
• Investment in brand image
• Investment in research and development
• Control system focus on creativity and innovation

DIFFERENTIATION
Supply a unique product or service at a cost
lower than the price premium customers will pay
19
Business strategy analysisCompetitive strategy
analysis
Core competencies
Value chain
The sustainability of a firms competitive
advantage
the extent to which it is difficult for
competitors to imitate them

• What are the key success factors and risk
  associated with the firms chosen competitive
  strategy?
• Does the firm currently have the resources and
  capabilities to deal with the key success factors
  and risks?
• Are there any barriers that make imitation of
  the firms strategy difficult?
• Are there any potential changes in the firms
  industry structure that might dissipate the
  firms competitive advantage?
• Is the company flexible enough to adress these
  changes?

20
Business strategy analysisCompetitive strategy
analysis
The sustainability of a firms competitive
advantage In the early 1980s, United, Delta and
American Airlines each started frequent flier
programs as a way to differentiate themselves in
response to excess capacity in the industry.

• What happened?
• Airlines anticipated that the programs would
  fill seats that would otherwise have been empty
  and hence would have had a low marginal cost
• However, because the costs of implementing a
  program were low, there were few barriers to
  other airlines starting their own frequent flier
  programs
• Before long, every airline had a frequent flier
  program with the same requirements for earning
  free air travel
• Simply having a frequent flier program no longer
  differentiated airlines!

21
Business strategy analysisCompetitive strategy
analysis

• IKEA
• 1953 founded by Ingvar Kamprad as a mail-order
  company
• 1960s started to develop its operating concept
  selling flat-packed furniture through large
  warehouse store
• 1960s started to expand internationally
• IKEAs average growth rate between 1999 and 2005
  was approximately 11
• For the 2005 fiscal year IKEA achieved 15.2
  billion in revenues
• Its profit margin was well above those of some
  of IKEAs larger competitors
• One of the worlds largest forniture retailers.

How did IKEA achieve such performance?
22
Business strategy analysisCompetitive strategy
analysis
ECONOMIC DESIGNS Its designers find the most
economic design solution
LOGISTICS Large warehouse stores outside the city
centers. Forniture in flat-pack format.
GLOBAL STRATEGY In 33 countries it targets the
same customer group (young families and couples)
Low-cost competitive strategy
SOURCING OF PRODUCTION A network of 1,300
suppliers in 53 country. Often it is a
manufacturers sole customer
SALES Customers need little assistance. Limited
after-sales service. Minimum personnel expenses.
23
Business strategy analysisCompetitive strategy
analysis
Over the years, IKEA had made large investments
in knowledge of low-cost
forniture design
logistics
store design
the business model was very difficult to replicate
competitive advantage
sustainable
No competitors has been able to replicate the
business model on a similar scale
24
Business strategy analysisCompetitive strategy
analysis
In 2005, IKEAs brand was estimated at 7.8
billion. Its a cult brand.
Strength of retailers brand name
Diversity in its assortment
Distinctiveness of its design
IKEAs strategy exhibits some characteristics of
a differentiation strategy
25
Business strategy analysisCorporate strategy
analysis
Multibusiness organizations
evaluate the industries and strategies of the
individual business units
evaluate the economic consequences of managing
all the businesses under one corporate umbrella
Organizations ability to create value through a
broad corporate scope
the transaction cost of performing a set of
activities inside the firm versus using the
market mechanism
26
Business strategy analysisCorporate strategy
analysis
Transaction inside an organization may be less
costly than market-based transaction
Nontradable or nondivisible asset
Critical role of the Headquarters office
Communication costs
Empirical evidence suggests
its difficult to create value through a
multibusiness corporate strategy
27
Business strategy analysisCorporate strategy
analysis

• EASYGROUP
• 1995 easyJet started operations as a low-fare
  short-haul airline company
• 2000 28 of its share was placed on the LSE at
  an amount of 224 million
• From 1997 to 2005 EasyJets revenues increased
  from 46 to 1,341 million
• Stelios Haji-Ioannou , the founder of EasyJet,
  streched the easy brand name to other
  industries
• Competitive strategy web-booking in advance,
  no-frills services, bypass intermediaries, tight
  control over costs.
• Following this strategy, EasyGropu expanded into
  car rental, pizza delivery bus transport,
  cinemas, hotels.

How could EasyGroup create value through its
broad corporate?
28
Business strategy analysis Corporate strategy
analysis
Expertise in flexible pricing and online selling
Brand-stretching can help to economize on
advertising
Diversification
Established reputation in offering no-frills
services at low prices
Revenues from licensing the easy brand
There were also signs that EasyGroup was
expanding too rapidly and that its
diversification beyond air travel was likely to
fail.