Date post: | 18-Jan-2016 |
Category: |
Documents |
Upload: | allyson-mcdaniel |
View: | 265 times |
Download: | 18 times |
Concepts of OverviewDeck #1
Professor Sonia Marciano
Qualitative Analysis is Critical to Valuing Projects and Firms
• Historical cashflows provide some information about future cashflows – qualitative analysis tells us some of what we can learn from the past.
• Qualitative analysis also informs us about critical factors that affect cashflows going forward.
• Qualitative and quantitative analyses are highly complementary and often “siloed” in practical and academic contexts.
Firm Advantages Leave Financial Footprints
Size)Market ( ShareMarket Sales
Capital
Sales
A&SG
Sales
COGS)- (Salesrate)tax 1(
WACC
EconomicProfit
EconomicProfit
SuperiorEconomic Profit
SuperiorEconomic Profit
Higher Gross Margin
Higher Gross Margin
Lower SG&A toSales Ratio
Lower SG&A toSales Ratio
Higher Market Share
Higher Market Share
Lower Capital to Sales Ratio
Lower Capital to Sales Ratio
COGS advantage
Price premium due to benefitadvantage
Superior efficiencies in marketing or administration
Greater ability to spread fixed portion of SG&A due to larger volumes
CapitalNOPAT WACC
Superior management of working capital
Efficiencies in use of fixed assets
Benefit advantage
Lower prices due to cost advantage
Financial Footprints
StrategicDrivers
Ability to dominate niches competitors cannot serve
Concepts• Industry Analysis (Strategy Essentials)• Positioning (Strategy Essentials)• Resource Based View (Strategy Essentials)• Value Creation vs. Added Value (Strategy Essentials)• Key Success Factors (This slide deck)• Firm Boundaries (Strategy Essentials)• Game Theory (Slide Deck #3)• Real Options (Slide Deck #4)• Corporate Social Responsibility (Strategy Essentials)• Preemption /Sustaining Advantage (Strategy Essentials)
Strategy Concepts
The “Value Creation” describes how a wedge is driven between the customer’s WTP and the firm’s cost generally in a particular industry or industry segment.
The “Value Chain” depicts where and how a particular firm creates value
“Added Value” indicates the source of a particular firm’s leverage over its trading partners
These three concepts are useful for articulating the uniqueness of the firm’s product or production process (or both).
Although not shown here, firms can enjoy added value on the cost side – firm’s B’s cost could be lower b/c of production efficiencies or superior trading terms with suppliers or tied to some locational advantage.
Return on Invested Capital, Average of 1985 – 2002
Note: ROIC calculated as EBIT divided by Average Invested Capital (Total Assets less Excess Cash less Current Operating Liabilities)Source: Compustat and author’s calculations
Variance Across Industries
Average ROIC of the U.S. Economy: 11.6%
Copyright Michael E. Porter 2006
Variance Across Firms
Pharmacia-Upjohn 1.60%
Nucor 1.35%
Market Economics
Company’s Position in its Market
Attractive
Unattractive
Disadvantage Advantage
Pharma.2.16%
Steel-5.55%
Merck10.36%
BethlehemSteel
-12.25%
Source: Stern Stewart Performance 1000 database
Strategy FrameworksWTP Drivers:
Cost Drivers:
Positioning Analysis: Describes the nature of the firms cost or product market position. Positions are often more valuable over a subset of the market – hence there is often a “trade off” – firm creates value but also faces a more limited market potential.
Industry Analysis: Any firm’s ability to sustain profits is impacted by the attractiveness of the industry in which that firm competes. This framework identifies constituents best (and least) able to constrain industry profits.
The best positions exploit industry opportunities and avoid industry constraints.
In the case of some firms, particular resources generate a high fraction of value – the key to retaining those resources is cospecialization.
Resource Based View
Consider Nonmarket Factors Such As Demographics…
Baby Boomers
Baby Boomers
…And Politics
Industry or more generally context attractiveness reflects the accumulated “thoughtfulness” of the
“players” (firms, customers, suppliers). By thoughtful, we mean game theoretic…
•Utilities• Cloud services (?)
• These industries have much higher MES• Examples: Commodity metals, chemicals, oil tankers after the 1990 Oil Pollution Act
• Cola• Automobiles
• Think of microeconomics:•Price is the only thing that differentiates•Industry is not capacity constrained, but each firm is small relative to total demand•Oil tankers before 1990
• Customers demand for features is heterogeneous, production has low MES •Restaurants in a local market, Local car insurers, small music labels
• PC operating systems• Search (?)
Min
imu
m E
ffic
ien
t Scale
Low relative to market demand
High relative to market demand
Low
High
Industry Features Combine with Firm Reactions to Give Rise to Market Structures
•Interactions are non-strategic•Firms cannot shape their environment
Product Differentiation
•Interactionsstrategic•Firms canshape their environment
Natu
re o
f Firm
Inte
ractio
ns
Perfect competition Monopolistic competition
Free-Entry Free-Entry MarketsMarkets
Oligopoly Oligopoly MarketsMarketsHomogeneous product oligopolyDifferentiated product oligopoly
““Winner-Take-All” Winner-Take-All” MarketsMarkets
Traditional natural monopoly
Network industries
VERY high scale economies relative to market sizeNot Necessarily scale economies…unique market features
Where should we put large music labels?
Critical that a Firm Identify Its Key Success Factors – Taxonomize Success and Tie to Value Chain
• Product Portfolio: broad and deep in terms of product and price range
• Product Excellence and Innovation: High ratings in established rankings. Distinctness in desired attributes/image. Demonstrated technology leader.
• Brand Management: Clear brand positioning – nurtured and cultivated to create sufficiently broad appeal.
• Pricing and Incentives: Able to premium price to monetize the above. Rarely use incentives to boost volume.
• Channel Mgmt/Retail Environment: Appealing retail facility, right geography and coverage – professionally managed and consistent practices across locations. Highly profitable dealers – low intra-brand competition.
• Customer Relationship: Satisfying sales process and ownership experience. High customer loyalty.
• Lifecycle/Residual Value Management: Cradle to gave mindset. Higher residual value (price for used car) relative to competitors
Example: Luxury Car Segment
This slide adapted from analysis by Scott Corwin, Partner of Booz and Company
Sustainability/Preemption Analysis: Warren Buffet is Said to Ask “How Wide are the “Moats”?
Legal Barriers
One-of-a-Kind Strategic Assets
Information Gapsand Complexity
Economies of Scale, Market Size, and
Sunk Cost
Increasing Returns Advantages
• Patents• Copyrights• Trademarks• Operating Licenses
• Superior Locations• Human Talent• Trade secrets• Intellectual property• Brand names
• “Black magic”• Social complexity• Path dependence • Need to imitate on
numerous dimensions
• Cumulative experience along a learning curve
• Product performance track records and reputation
• Installed base in a network market
• Market big enough to support just one efficient-scale firm
Mos
t pow
erfu
lL
east
pow
erfu
l
What do you do when they expire?Worth more to other firms?
Will they retain economic power?Gateways to profitable growth?
Often most enduring ... but will they prevent us from replicating our success
formula as we grow?
Will advantage be undermined as market grows?
Will advantage be undermined by shifts in technology or
customer priorities?
Back to the Cash FlowsGenerally a high fraction of the firms flow of value is derived from:– How attractive is the industry?
How “thoughtful” are the players in this business?– The firm’s “position” in the industry
Real optionsCSR
– Demographics and politics– The wisdom reflected in the firm’s value chain:
SupportActivities
Marketing& Sales
(e.g. Sales Force, Promotion, Advertising, Proposal Writing, Web site)
InboundLogistics
(e.g. Incoming Material Storage, Data Collection, Service, Customer Access)
Operations
(e.g. Assembly, Component Fabrication, Branch Operations)
OutboundLogistics
(e.g. Order Processing, Warehousing, Report Preparation)
After-Sales Service
(e.g. Installation, Customer Support, Complaint Resolution, Repair)
M
a
r
g
i
n
Primary Activities
Firm Infrastructure(e.g. Financing, Planning, Investor Relations)
Procurement(e.g. Components, Machinery, Advertising, Services)
Technology Development(e.g. Product Design, Testing, Process Design, Material Research, Market Research)
Human Resource Management(e.g. Recruiting, Training, Compensation System)
ValueWhat buyers are willing to pay
The value described above is fairly “ownable”
The Not All Sources of Cash Flows are Ownable
• In the case of some firms, particular people generate a notable share of the firm’s profits and if these people leave, value goes with them.
• We call individuals who contribute a notable share of the firm’s value “stars” or “jockeys”. A partial list of what makes jockeys special is:– Cannot “cast a wide net” to replace them– Their value they generate is “mobile”– They often matter when big information frictions are
present.
We will discuss implications using BMG case
Central Point of Strategy
If the firm offers something unique and that uniqueness is defensible, the firm may be able to sustain economic profits for at least some period.