Business AnalysisMarch 4, 2000Introduction to Business AnalysisMarch 4, 2000Discuss basic approach to understanding businesses, identifying critical drivers of success and ultimately discern viability of business ideaPurpose:•Objectives of analysis•Using Frameworks•Group Application and Elevator PitchesAgenda:1 hourLimit:Business AnalysisThree Central Questions of Strategy to Understand Viability of BusinessWhy are some industries fundamentally more attractive than others?Why are some firms more successful than others?How can we make this firm more successful?Business AnalysisAre Some Industries Fundamentally More Profitable Than Others?Source: Dun & Bradstreet/HBS case 9-792-0667.0%5.6%4.2%3.5%2.6%0%5%10%Soft DrinksPhotographicEquipmentBook PrintingFarm MachineryBread, Cake, Etc.Average Return on Sales 1971-1990Business AnalysisDeveloping the Ability to Quickly Focus in on Key Issues•Where does growth come from?•Where does profitability come from?•Who are the Winners? Why?•Who are the Dogs? Why?•What are the major implications, opportunities and threats?Know the “Rules” for the Business1. Define Businessand Industry2. Analyze /ApplyFrameworks3. DevelopUnderstandingBusiness AnalysisAnalyzing Different Aspects of The Business/IndustryFrameworks can be useful tools for evaluating different aspects of a business to focus in on critical performance drivers and key opportunitiesThere are a number of potentially useful frameworks for better understanding businesses. Among the more frequently used are:•Four C’s•Porter’s Five ForcesOne size does not fit all --Goal is to logically think through the Business modelThe Four C’sBusiness Analysis FrameworksCustomersCompetitorsCostsCompetencies•Who are the major customers?•Who are the highest value customers? How do I identify them?•What are the key customer trends in this industry?•What value-added services can we provide to them?•Who are the key competitors?•What are some of the key competitor trends?•What strategies are winners and losers pursuing?•Key drivers of costs?•Margins and trends over time?•What are the economics of the industry?•Strength, Weaknesses, Opportunities, Strengths (SWOT) analysis•What are the firm capabilities that can add value in the industry?Business Analysis FrameworksPorter’s Five ForcesIndustry CompetitorsIntensity of RivalryNew EntrantsSubstitutesBuyersSuppliersBargaining Powerof SuppliersBargaining Powerof BuyersThreat of New EntrantsThreat of Substitutes“The state of competition in an industry depends on five basic forces. The collective strength of these forces determines the ultimate profit potential of an industry.”“Knowledge of the underlying sources of competitive pressure provides groundwork for strategic agenda of action.”Entry Barriers ExamplesTimeMarginal CostVolumeMarginal CostBusiness AnalysisExperienceCurveEconomies of ScaleTo enter industries that have start off with lower marginal costs means that barriers to entry are lower Entry Barriers (continued)Fixed CostsFixed CostsVariable CostsVariable CostsPharmaceutical IndustryManagement ConsultingVolumeTotal CostCapital Requirements: Fixed vs. Variable CostsBusiness AnalysisBusiness AnalysisKey is to Move From Framework Application to “So What”•Clearly Identify Relevant Business(es)•Evaluate Frameworks to Identify Critical Drivers of Success•Categorize and prioritize to develop hypotheses•Pressure-test hypotheses via Stars and Dogs•Merge understanding of business with Industry trends/events, competitive actions, and company competencies to identify key issues and insightsFive Steps to InsightBACKUPBusiness AnalysisBusiness Analysis FrameworksPorter’s Five ForcesIndustry CompetitorsIntensity of RivalryNew EntrantsSubstitutesBuyersSuppliersBargaining Powerof SuppliersBargaining Powerof BuyersThreat of New EntrantsThreat of SubstitutesDeterminants of Supplier PowerDifferentiation of inputsSwitching costs of suppliers and firms in the industryPresence of substitute inputsSupplier concentrationImportance of volume to supplierCost relative to total purchases in the industryImpact of inputs on cost or differentiationThreat of forward integration relative to threat of backward integration by firms in the industryDeterminants of Substitution PowerRelative price performance of substitutesSwitching costsBuyer propensity to substituteBargaining LeverageBuyer concentration versus firm concentrationBuyer volumeBuyer switching costs relative to firm switching costsBuyer informationAbility to backward integrateSubstitute productsPull-throughPrice SensitivityPrice/total purchasesProduct differencesBrand identityImpact on quality/performanceBuyer profitsDecision makers incentivesRivalry DeterminantsIndustry growthFixed (or storage) costs/value addedIntermittent overcapacityProduct differencesBrand identitySwitching costsConcentration and balanceInformational complexityDiversity of competitorsCorporate stakesExit barriersEntry BarriersEconomies of scaleProprietary product differencesBrand identitySwitching costsCapital requirementsAccess to distributionAbsolute cost advantagesProprietary learning curveAccess to necessary inputsProprietary low-cost product designGovernment policyExpected retaliationDeterminants of Buyer Power