Business Analysis - PowerPoint

							Business Analysis
March 4, 2000

Introduction to Business Analysis
March 4, 2000

Purpose:

Discuss basic approach to understanding businesses, identifying critical drivers of success and ultimately discern viability of business idea • Objectives of analysis

Agenda:

• Using Frameworks • Group Application and Elevator Pitches
Limit: 1 hour

Business Analysis
Three Central Questions of Strategy to Understand Viability of Business
Why 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 Analysis
Are Some Industries Fundamentally More Profitable Than Others?
10%

Average Return on Sales 1971-1990

5%

7.0% 5.6% 4.2% 3.5% 2.6% 0% Soft Drinks Photographic Equipment Book Printing Farm Machinery Bread, Cake, Etc.

Source: Dun & Bradstreet/HBS case 9-792-066

Business Analysis
Developing the Ability to Quickly Focus in on Key Issues

Know the “Rules” for the Business
• Where does growth come from?
• Where does profitability come from?

• Who are the Winners? • Who are the Dogs?

Why? Why?

• What are the major implications, opportunities and threats?

1. Define Business and Industry

2. Analyze / Apply Frameworks

3. Develop Understanding

Business Analysis
Analyzing Different Aspects of The Business/Industry

Frameworks can be useful tools for evaluating different aspects of a business to focus in on critical performance drivers and key opportunities There are a number of potentially useful frameworks for better understanding businesses. Among the more frequently used are:
• Four C’s • Porter’s Five Forces

One size does not fit all -Goal is to logically think through the Business model

Business Analysis Frameworks
The Four C’s
Customers
• Who are the major customers?

Competitors
• Who are the key competitors?

Costs
• Key drivers of costs? • Margins and trends over time?

Competencies
• Strength, Weaknesses, Opportunities, Strengths (SWOT) analysis • What are the firm capabilities that can add value in the industry?

• Who are the highest value customers? How do I identify them? • What are the key customer trends in this industry?
• What valueadded services can we provide to them?

• What are some of the key competitor trends? • What strategies are winners and losers pursuing?

• What are the economics of the industry?

Business Analysis Frameworks
Porter’s Five Forces
New Entrants

Threat of New Entrants

Industry Competitors
Bargaining Power Bargaining Power

Suppliers

Buyers

of Suppliers

Intensity of Rivalry

of Buyers

Threat of Substitutes

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.”

Business Analysis
Entry Barriers Examples
Experience Curve
Marginal Cost Marginal Cost

Economies of Scale

Time

Volume

To enter industries that have start off with lower marginal costs means that barriers to entry are lower

Business Analysis
Entry Barriers (continued)
Capital Requirements: Fixed vs. Variable Costs

Pharmaceutical Industry
Fixed Costs

Total Cost
Management Consulting Fixed Costs

Volume

Business Analysis
Key is to Move From Framework Application to “So What” Five Steps to Insight • 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 insights

Business Analysis

BACKUP

Business Analysis Frameworks
Porter’s Five Forces
Entry Barriers Economies of scale Proprietary product differences Brand identity Switching costs Capital requirements Access to distribution Rivalry Determinants Industry growth Fixed (or storage) costs/value added Intermittent overcapacity Product differences

New Entrants

Brand identity Switching costs

Absolute cost advantages Proprietary learning curve
Access to necessary inputs Proprietary low-cost product design Government policy Expected retaliation

Concentration and balance Informational complexity

Threat of New Entrants

Diversity of competitors Corporate stakes Exit barriers

Industry Competitors Bargaining Power Suppliers of Suppliers Intensity of Rivalry
Determinants of Supplier Power
Differentiation of inputs Switching costs of suppliers and firms in the industry Presence of substitute inputs Supplier concentration

Bargaining Power of Buyers Buyers

Determinants of Buyer Power
Bargaining Leverage Buyer concentration versus firm concentration Buyer volume

Price Sensitivity Price/total purchases Product differences Brand identity Impact on quality/ performance

Threat of Substitutes

Buyer switching costs relative to firm switching costs Buyer information

Importance of volume to supplier Cost relative to total purchases in the industry
Impact of inputs on cost or differentiation Threat of forward integration relative to threat of backward integration by firms in the industry

Substitutes
Determinants of Substitution Power Relative price performance of substitutes Switching costs Buyer propensity to substitute

Ability to backward integrate Substitute products
Pull-through

Buyer profits Decision makers incentives