CH 2 STRATEGY ANALYSIS

Strategy Analysis
Strategy analysis is an important starting point for the analysis of financial statements
Allows the analyst to probe the economics of a firm at a qualitative level
Subsequent accounting and financial analysis is grounded in business reality

Allows the identification of the firms profit drivers and key risks
Enables the analyst to assess the sustainability of the firms current performance and make realistic forecasts of future performance

Strategy Analysis (Contd)

Firms profit potential is determined by its own strategic choices
Industry choice
Industry analysis

Competitive positioning
Competitive strategy analysis

Corporate strategy
Corporate strategy analysis

INDUSTRY ANALYSIS
Assess the profit potential of each industries in which the firm is competing because the profitability of various industries differ systematically and predictably over time Average profitability of an industry is influenced by the five forces

5 Competitive Forces
Competitive force 1: Rivalry among existing firms
Industry growth rate Concentration and balance of competitors Degree of differentiation and switching costs Scale/learning economics and the ratio of fixed to variable costs Excess capacity and exit barriers

5 Competitive Forces (Contd)

Competitive force 2: Threat of new entrants
Economies of scale First mover advantage Access to channels of distribution and relationship Legal barriers

5 Competitive Forces (Contd)

Competitive force 3: Threat of substitute product
Relative price and performance of the competing product or service Customers willingness to substitute

Competitive force 4: Bargaining power of buyers

Price sensitivity Relative bargaining power

Competitive force 5: Bargaining power of suppliers

Competitive Strategy Analysis

Competitive strategy 1: Cost leadership Competitive strategy 2: Differentiation Achieving and sustaining competitive advantage
Match between firms core competencies and key success factors to execute strategy Match between firms value chain and activities required to execute strategy Sustainability of competitive advantage

Corporate Strategy Analysis

Many firms operate in multiple businesses. The optimal activity scope of firms depends on the relative transaction cost of performing a set of activities inside the firm versus using the market mechanism.