BS 7000-093 (Moore)

Chapter 2 Student Outline

Business and Industry Strategy Analysis

http://www.rawlsbusiness.ba.ttu.edu/

http://finance.yahoo.com

Key Learning Outcomes:

Developing a Framework to Assess and Understand Critical Value Drivers, Opportunities, Limitations and Potential of a Firm and Industry

Finding Sources of Information to efficiently and effectively analyze the firm and industry

Understanding the main strategies firms can implement in order to maximize value.

A.Linkage Between “Value-Creation”, Firms’ Activities and Financial Reports

Modigliani and Miller (Foundation of Finance)

Free Cash Flow (Classical Finance Valuation Model)

Residual Income (Accounting)

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BS 7000-093 (Moore)

B. Factors to Consider for Industry Analysis (Five FORCES)

3. Sources of Information for Analysisa. 10-K’s from Main Firms in the Industry

o For Multiple years, read management discussion: Business overview, Significant Business Risks, Results of Operations

o Compare/Analyze across firms and within industry

b. Financial Press (WSJ, Google, Yahoo Finance, ect.) Search for commentary/analysis/articles

on industry and member firms.

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BS 7000-093 (Moore)

c. Keep in mind these are other peoples’ ideas and analysis.

It is your job to critically analyze, evaluate and draw inferences.

C.Competitive Advantages and Strategy Analysis (2 main Dimensions)

First, Classify the Industry Structure

1. Cost Leadership, Product Differentiation, or Mixed

Next, Identify the Value Drivers for the industry classification you developed (KSF’s)

Finally, Identify the extent to which the company you are valuing is delivering value (KSF’s)

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BS 7000-093 (Moore)

D.Achieving and Maintaining Competitive Advantage(s) Next, given classification, Identify “Key Success

Factors” or “Value Drivers” for your classification

Different Strategies work for different types of industry types

E. Assess consistency of the Company with the “optimal” strategies to create Value

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BS 7000-093 (Moore)

F. Value Creation at the Corporate Level1. Conglomerate Portfolio

2. Mergers and Acquisitions

3. Consistency with overall Business Model

Sample Questions

1. Which of the following is an element of the “Five-Forces” model?a. Cost Leadershipb. Maintaining Competitive Advantage(s)c. Bargaining Power of Customersd. Product Differentiatione. Ability to supply the same product or service at a lower cost

2. An industry having a high degree of price competition would be characterized by:

a. High Industry Concentration, Low Legal Barriers to Entry, Low Product Differentiation

b. Few Exit Barriers, Low First mover advantage, Low Product Differentiation

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c. Low Industry Concentration, Easy Distribution Access, High Customer Switching Costs

d. High Concentration, Low Fixed-Variable Cost Ratio, Low Firm Switching Costs

e. Supply < Demand, Low Supplier Switching Costs, Steep Industry Learning Curves

3. Which of the following would lead to the lowest degree of industry price competition?a. Low Industry Concentration, Low Legal Barriers to Entry, Low Product

Differentiationb. Few Exit Barriers, Low First mover advantage, High Product

Differentiationc. Low Industry Concentration, Low Distribution Access, Low Customer

Switching Costsd. High Industry Concentration, Low Fixed-Variable Cost Ratio, Low

Customer Switching Costse. Supply < Demand, High Legal Barriers to Entry, Steep Industry

Learning Curves

4. Which of the following strategies are consistent with either pure cost leadership or pure product differentiation strategies?a. Economies of scale and scope, high R&D investment, tight cost controlb. Superior product variety, lower input costs, High investment in R&Dc. Lower input costs, flexible distribution, low investment in R&Dd. Low investment in brand image, Low investment in R&D, Focus on Cost

Controle. Simpler product designs, Tight cost control, superior product quality

5. Which of the following strategies are consistent with a mixture of cost leadership and product differentiation?a. Economies of scale and scope, simpler product design, tight cost

controlb. Superior product variety, more flexible delivery, High investment in

R&Dc. Lower input costs, low-cost distribution, high investment in R&Dd. High investment in brand image, High investment in R&D, Focus on

Creativitye. Simpler product designs, Tight cost control, Lower Input Cost

7. Determining whether the firm currently has the resources and capabilities to deal with the identified key success factors is an example of which? a. Competitive Strategy Analysisb. Differentiation Analysisc. Analysis of the Degree of Actual and Potential Competitiond. Analysis of the Threat of Substitute Productse. Analysis of the Bargaining Power in Input and Output Markets

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BS 7000-093 (Moore)

8. WalMart’s ability to dictate price & delivery terms to manufacturers is an example of:

a. Buyer bargaining powerb. Supplier bargaining powerc. Product differentiationd. Fixed-Variable Cost ratiose. Exit Barriers

9. Which of the following does not necessarily create corporate value?a. Managing the value chainb. Maintaining a good fit between the company’s specialized resources

and the portfolio of businesses in which the company is operating.c. Good allocation of decision rights between the headquarters office and

the business units to realize all the potential economies of scope.d. Having internal measurement, information, and incentive systems to

reduce agency costs.e. Investing significant resources to product advertising and marketing

activities.

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