BUAD 497 Week 3 Notes
BUAD 497 Week 3 Notes BUAD 497
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This 7 page Class Notes was uploaded by Emily Laurienti on Tuesday September 13, 2016. The Class Notes belongs to BUAD 497 at University of Southern California taught by Prof. Michael Mische in Fall 2016. Since its upload, it has received 29 views. For similar materials see Strategic Managment in Business Administration at University of Southern California.
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Date Created: 09/13/16
9.6.16 Industry Analysis The more attractive an industry is, the more expensive it is to enter o There are rivals coming in o There must be tremendous growth or profits The more attractive an industry is, the more competitive it is The more capital intensive an industry is, the more expensive and difficult it is to exit o If you put a lot of money into the industry, it’s extremely hard to walk away Key questions o What are the strategic ambitions and intentions? Create Extend Capture Defend o What factors must a company consider in crafting a competitive strategy? What are our limitations? What are we able to export? o How do we compete? o When to we compete? Where are we in the industry life cycle? o What external factors influence choices and effectiveness? What opportunities and restrictions are out there? Regulations and tax code To incentivize companies to set up a business in Ireland, the Irish government provided tax incentives. They’re very aggressive in this area—Apple took advantage of this, then the EU charged Apple with taxes because of it. Attractiveness Tests o Provide a set of filters to assess whether to enter an industry or buy a company o Easy to use, intuitive appeal How attractive are the customers? Will the customers stick with us? What are the buyer values? What factors indicate “attractiveness”? What is the relationship between attractiveness and industry structure? o Cost-of-entry Tests How costly is entrance or acquisition? If low cost, how does that reconcile with the attractiveness? We know that attractive industries are more costly to enter If low cost, maybe we’re buying for other reasons What factors are influencing this cost? Is this influence transient (temporary) or is it a permanent cost? Labor unions, tariffs To what extent is the cost of entry influenced by where a company or industry is in its life cycle? If it’s in the growth stage you’ll probably pay a premium o Better-off Test To what extent will shareholder value be improved through the entrance or acquisition? Are you going to be better off by making this deal? Have you increased the value of the company (earnings per share)? Analysis Steps Objectives Develop an understanding of how an industry behaves and performs o Cyclical or seasonal or both? Housing industries are both because you can’t build in winter Shopping patterns—stores get ready for holiday season Develop an understanding of industry drivers including macroeconomic and specific Form conclusions as to industry behavior and future performance and direction Identify shocks and shifts in industry o Natural events—act of God o Labor strike o Political shocks o Uncertainty of policy, economy, etc. o Technology improvements—episodic events Determine attractiveness and appropriateness 1. Interrogate Industry Behavior—critical questions What drives the behavior of the industry? o Calculate % change in revenues or whatever the measurements are—this will be different for each industry. Barrels of oil, cubic feet of gas o Calculate the % change of those by year—this gives you an idea of the severity of movement o Then calculate % change in GDP and compare the two to see if there’s a correlation o How does the industry move to employment, etc. o Once you find what drives the industry, you can make assumptions about how the industry will behave What are the major determinants of industry behavior? What are the sources of these determinants? o What drives interest rates? Money supply, credit availability, consumer debt, mortgage defaults What are the dimensions of the industry? (size, scope, growth rates, restrictions, geographics) What are the economic cycles and historical “booms and busts” of the industry? What are the key measurements of industry performance? o Some industries are very price sensitive, but sell huge volume—volume in sales per square foot o How many tons do you sell (steel industry) o How many hits do you have? (digital companies) What is the level of M&A, consolidation or divestiture? o This is often a sign of attractiveness. If the industry looks attractive to investment bankers it’s either undervalued or poised for growth 2. Identify the leaders of the industry Scope and size of leaders (top 3-5) o Might not have huge market share, but have great influence o Accounting—98% of all publicly traded companies are audited by four firms o In a commoditized industry (great ease of substitution) convenience is important Basis of leadership (size, quality, scale) o How do they lead? o Walmart leads on price and selection (convenience) Basis of competing (cost, price, quality, reach/breadth, innovation, etc.) 3. Identify business and environmental drivers of the industry, including: Economic trends and changes (seasonal, cyclical, episodic, routine) o Understand the relevant measurements and the correlation Customer demands and consumption-pattern changes (sentiment) o Is there loyalty? Competitor initiatives and strengths (aggressive, predatory, passive) o How do companies compete in this industry? Cyber attacks Buying competitors product to find out suppliers Understand how competitors make something—Walmart makes a shopping experience Manufacturing, distribution, production and sales process and technology changes Organizational changes o Why is a company changing their C-suite? o Who are they bringing in? Environmental changes (local, regional, global, political, public sentiment, unions, etc.) Product innovations Governmental and regulatory changes/issues (tariffs, quotas, WTO, sanctions, labor) Societal and demographic shifts/issues Credit, debt and equity markets 4. Determine how the industry interacts with a macroeconomic environment Determine the leading indicators of industry performance Calculate % changes in leading indicators Determine correlation between % changes in leading economic indicators to % changes in industry indicators Form conclusions as to industry behavior and future performance Determine level of competitive rivalry Determine strength of barriers to entry Determine strength of mobility barriers Identify and isolate any migration of profits Determine strength of procing powers Identify extrants to industry Identify exits from industry 5. Apply attractiveness test Assess barriers to entry Assess structural costs Determine attractiveness of entry Determine attractiveness of acquisition, consolidation, or divestiture Must put all of these in context to do an industry analysis 6. Determine life cycle status and position 7. Profile industry HOW TO DO A CASE Objectives Communicate your ideas, impressions, and social skills Business case—facts and circumstances about an organization, individual, industry, etc. SET IN TIME Vary in quality and information Written case Conversational case—in an interview Experiential/Real time case Phase one: Read the Case Scan the case and begin a list of critical thoughts and questions Get to know the case and its facts/figures…relate the case to the assignment Read the case/comprehend the case Correlate the case to assignment; find the data you need to answer the questions…develop sub-questions to help drive your analysis Think critically—what data do you have? What data do you need? Phase two: Analyze the Case Find or confirm the key issues, challenges and problems Determine the major and appropriate facts Identify and isolate the data you will use Apply the appropriate analytical techniques to the case and data Use the cube o Industry o Customers o Financial o Competitors o Regulators o Leadership o Operation/SCM o Organization o Products Top three questions about each component of the cube (see slides) Think critically Phase three: Formulating findings, conclusions, and solutions Phase four: Presenting the Case Introduction and background Problem statement and key issues Analysis and diagnosis Solution formulations and alternatives Conclusions, recommendations, and action plans 9.8.16 Laventhol and Horwath Case How is the industry defined? o Concentration of inhabitance o The Big 8 has become the Big 4 which gives clients less choice o The concentration of the industry was focused on the Big 8 o Today the Big 4 audits 98% of all publicly traded companies o The industry is defined in three dimensions Auditing—dominant practices. Grows 3-7% a year because companies don’t change auditors Tax—doesn’t grow a lot unless the government changes tax law Consulting—could grow in double digits during the time the case takes place. Consulting was a differentiation opportunity o Mobility Barrier—Big 8 firms move around within their own bubble but smaller firms can’t move past the mobility barrier into the big bubble L+H was trying to break across the mobility barrier They did this through taking on mergers to the point where their revenues were invasive of the mobility barrier o Experience curve—time vs. cost. The more experienced you are, the more cost decreases o L+H had to serve a less exclusive market—they were capturing market share. Their strategy was rapid growth through acquisition This lowered the quality of their services What boundaries define this industry? o Taxation—compliance o Auditing o Consulting How does this industry behave? o Highly influenced by the political macroeconomic environment Huge change in corporate tax stimulates major demand in tax services—every time the tax law changes, revenue increases Macroeconomic—effects consulting, most discretionary part of the business You always have to do an audit and file taxes no matter the economy PESTL METHOD—this helps us define how the industry behaves and how the company behaves in the industry o Political—not influenced a lot by politics, but politics are very interested in preserving the integrity of the profession. Understand the political sentiment, where might it lead, not just the current politics o Economic—we know you have to have an audit and pay taxes no matter the economy, but you can cut consulting in a bad year. What drives consulting growth is sentiment and cash flows o Social—perceptions of integrity affect the industry o Technological—technology simplifies this industry. Cyber security needs to be taken into account too o Legislative—L+H was a litigious firm, they would rarely settle. They also didn’t carry insurance SEC Filings—written and delivered by their accounting firms. Accountants have to render an opinion about the how reliable the company is o If the accountant gives a bad opinion, the company will lose investors What factors must a company consider in crafting competitive strategy? o Do they have the necessary infrastructure and revenues to grow and maintain quality? How do we compete? o L+H tried to compete through size but they had to take on many small companies that increased their risk o Competed through litigation—taking on anyone that fought them What external factors influence choices and effectiveness? o Who is worth buying and who isn’t?