Case Analysis: Industry and

Company Analysis
4 August 2018

Sources:
https://www.pwc.com/ph/en/advisory/deals-advisory/ma-challenge.html
The Case Method at the Harvard Business School, e.d. M. P. McNair.
“The Five Competitive Forces That Shape Strategy.” by Michael E. Porter. Harvard Business Review.
Discussion Outline

◉ Competition Mechanics
◉ Competition & Training Timetable
◉ Introduction to Case Analysis
○ Written Case Analysis Basic Outline
○ Strategy Analysis Framework
○ Industry Analysis: Porter’s 5 Forces
Competition Mechanics
Competition Timetable
PwC-sponsored trainings (via
webinar)
 Current Training Timetable
Date Training
Aug 4  Overview of Industry Analysis & Company Analysis
Registration of
teams  Accounting, Financial Analysis & Financial Modeling Refresher
Aug 11
(deadline Aug 24)  Valuation Metrics in Different Industries
Aug 18  Presentation of Philippine Conglomerates Analysis

Aug 25  Working/Consultation Sessions: Preliminary Round

Preliminary round
(deadline Sep 5; Sep 1  Working/Consultation Sessions: Preliminary Round
results Sep 14/15)
Sep 8  TBD

Sep 15  TBD

Main round Sep 22  Working/Consultation Sessions: Main Round

(deadline Sep 14; Sep 29  Working/Consultation Sessions: Main Round
results Sep 17)
Oct 6 Submission of Main Round Case Analysis
Introduction to
Case Analysis
Outline:
Harvard Written Analysis of a
Case (WAC) Format

1. Key Strategic Issues/Problem Definition

2. Alternatives
3. Recommendation
4. Implementation/Action Plan
5. Financial Analysis
 Outline:
Written Analysis of a Case
(WAC), Harvard Format
Outline Structural elements

Key Strategic  Brief background of key relevant information & case facts
Issues/  Description of the key issue/problem; must be direct, actionable, and strategically focused
Problem Definition  Impact if key issue/problem not addressed: best case, base case, worst case
Alternatives  Detail the alternatives (note: alternatives must be strategic and mutually exclusive)
 Advantages and disadvantages of each alternative
Recommendation  Lay out key decision criteria
 State recommended course of action and rationale (Why this alternative? Why not the other alternatives?)
 Goals and objectives of the recommendation, i.e. 1) time frame, 2) appropriate specific goals (e.g. profit,
market share, operational efficiency, etc), 3) expected costs and benefits
Implementation/  Key steps and activities, including costs, timeframe, and measures of success/failure for each activity
Action Plan  Possible coordination issues
 Analysis of challenges that need to be considered/dealt with to successfully implement the recommendation
Financial Analysis  Analysis of financial statements (i.e. trend analysis, ratio analysis, benchmarking vs comparables and industry,
and what drives performance)
 ?
What if…
…there is no specific problem identified in the case?
…you are being asked to assess a company with
(seemingly) no major problems?
 “Consider a turkey that is fed every day. Every
single feeding will firm up the bird’s belief that it is
the general rule of life to be fed every day by
friendly members of the human race… On the
afternoon of the Wednesday before Thanksgiving,
something unexpected will happen to the turkey. It
will incur a revision of belief.”
- Nassim Taleb, The Black Swan

“
 Strategic Analysis Outline

Company Industry Company Strategy Strategy

Background Analysis Analysis Formulation & Implementation
Selection
 Strategic Analysis Outline:
Sample application for PWC

Company Industry Company Strategy Strategy

Formulation &
Background Analysis Analysis Selection Implementation

 Company history Integration strategies Cooperation among

 Corp structure
Case Analysis Framework: 
 forward integration competitors
 Financial  backward integration  Joint venture/
performance (last Intensive strategies strategic
3 years) Competition Company  Market penetration, partnerships
 Overview of key  Market development  Mergers &
business  Product development acquisitions
segments & Diversification strategies  Outsourcing
contribution to
financial & Market Product
 Related diversification  Being the first mover
 Unrelated diversification (first mover
performance (Customer) Defensive strategies advantage)
 Retrenchment
 Divestitute
 Liquidation
 Case Analysis Framework

Competition Company
Porter’s 5
Forces Analysis

Market Product
(Customer)
 Case Analysis Framework

Competition Company
Porter’s 5
Forces Analysis

Market Product
(Customer)
Industry Analysis:
Porter’s 5 Forces
Why Porter’s 5 Forces?
Porter’s analysis describes
long-run industry
profitability &
attractiveness with just a
few factors.
If the forces are intense, almost
no company earns attractive
returns.
If the forces are benign, many
companies are profitable.
Industry structure drives
competition and profitability.
The Five Forces That Shape
Industry Competition

The strongest competitive force

(or forces) determine industry
profitabiltiy and become the most
important to strategy formulation.

The analysis can be done from the

perspective of an incumbent, or a
potential entrant
 Example: which forces drive
(limit) industry profitability?
Competitive
rivalry
Airlines Grocery Stores Finance/Securities
Threat of new ROIC: 5.9% ROIC: 16.0% ROIC: 40.9%
entrants
Competitive Competitive Competitive
rivalry rivalry rivalry
Bargaining
power of buyers Bargaining
Bargaining Bargaining
power of
power of buyers power of buyers
suppliers
Bargaining
power of Bargaining
Threat of
suppliers power of
substitutes
suppliers

Threat of Threat of
substitutes substitutes
Stuff to avoid when doing an
industry analysis

X Making lists instead of conducting analysis. It is not about “lists” of

qualitative factors, but also analyzing relative impact and quantifying that
impact where appropriate
X Paying attention to all of the forces equally. Dig deeper into the most
important ones!
X Using static analysis and ignoring trends. Analyze industries over a relevant
and appropriate time horizon that captures key cycles.
X Confusing cyclical or transient changes with true structural changes.
Hence, the time horizon is very important.
X Using the framework to (simplistically) declare an industry “attractive” or
“unattractive.” Instead, use it to guide strategic choices.
Steps in Industry Analysis

◉ Define the relevant industry (products and scope)

◉ Identify participants and segment into groups (if applicable/appropriate):
who are the buyers*, suppliers**, competitors, substitutes, and potential
entrants?
◉ Assess underlying drivers of each competitive force to determine which
forces are strong/weak, and why.
◉ Determine overall industry structure, and test the analysis for consistency.
◉ Analyze recent and likely future changes in each force, and how that might
impact industry structure.
◉ Identify aspects that might be influenced by competitors, new entrants, or
by the Company.

*or buyer groups

**or supplier groups
Steps in Industry Analysis

◉ Define the relevant industry (products and scope)

◉ Identify participants and segment into groups (if applicable/appropriate):
who are the buyers*, suppliers**, competitors, substitutes, and potential
entrants?
◉ Assess underlying drivers of each competitive force to determine which
forces are strong/weak, and why.
◉ Determine overall industry structure, and test the analysis for consistency.
◉ Analyze recent and likely future changes in each force, and how that might
impact industry structure.
◉ Identify aspects that might be influenced by competitors, new entrants, or
by the Company.

*or buyer groups

**or supplier groups
 ?
How to do the
actual assessment?
1. Threat of entry
The threat of entry puts a profit cap on the industry. When
the threat is high, incumbents must hold down their prices
or boost investment to deter new competitors.
The threat of entry in an industry depends on the height of
entry barriers that are present and on the reaction entrants
can expect from incumbents.
1.1 Entry barriers
1. Supply-side economies of scale
2. Demand-side benefits of scale
3. Customer switching costs
4. Capital requirements
5. Non-size related incumbency advantages
6. Unequal access to distribution channels
7. Restrictive government policy
Assess entry barriers relative to entrant capability.
1. Threat of entry (cont’d)
1.2. Expected retaliation
Newcomers are likely to fear expected retaliation if:
◉ Incumbents have previously responded vigorously to
new entrants.
◉ Incumbents possess substantial resources to fight
back, including excess cash and unused borrowing
power, available productive capacity, or clout with
distribution channels and customers.
◉ Incumbents seem likely to cut prices because they are
committed to retaining market share at all costs or
because the industry has high fixed costs, which create
a strong motivation to drop prices to fill excess
capacity.
◉ Industry growth is slow so newcomers can gain volume
only by taking it from incumbents.
2. The power of suppliers
Powerful suppliers capture more of the value for themselves by
charging higher prices, limiting quality or services, or shifting costs
to industry participants.
Powerful suppliers, including suppliers of labor, can squeeze
profitability out of an industry that is unable to pass on cost increases
in its own prices.
A supplier group is powerful if:
◉ Its industry more concentrated than the industry it sells to
(monopoly/oligopoly) situation
◉ The supplier group does not depend heavily on the industry for
its revenues.
◉ Industry participants face switching costs in changing suppliers.
◉ Suppliers offer products that are differentiated.
◉ There is no substitute for what the supplier group provides.
◉ The supplier group can credibly threaten to integrate forward
into the industry
3. The power of buyers
Powerful customers—the flip side of powerful suppliers—can
capture more value by forcing down prices, demanding better
quality ormore service (thereby driving up costs), and generally
playing industry participants off against one another, all at the
expense of industry profitability.
Buyers are powerful if they have negotiating leverage relative to
industry participants, especially if they are price sensitive, using
their clout primarily to pressure price reductions.
1. Negotiating leverage. A buyer group has negotiating leverage if:
◉ There are few buyers, or each one purchases in volumes that
are large relative to the size of a single vendor
◉ The industry’s products are standardized or undifferentiated
◉ Buyers face few switching costs
◉ Buyers can credibly threaten to integrate backward and
produce the industry’s product themselves
3. The power of buyers
(cont’d)
2. Price sensitivity. A buyer group is price sensitive if:
◉ The product it purchases from the industry represents a
significant fraction of its cost structure or procurement
budget.
◉ The buyer group earns low profits, is strapped for cash, or is
otherwise under pressure to trim its purchasing costs.
◉ The quality of buyers’ products or services is little affected by
the industry’s product
◉ The industry’s product has little effect on the buyer’s other
costs. Here, buyers focus on price.

Note: Most sources of buyer power apply equally to consumers and to business-
to-business customers.
Similarities: Consumers tend to be more price sensitive if they are purchasing
products that are undifferentiated, expensive relative to their incomes, and of a
sort where product performance has limited consequences.
Difference: consumers’ needs can be more intangible and harder to quantify
 4. The threat of substitutes

A substitute performs the same or a similar function as an industry’s product by a different means.
Sometimes, the threat of substitution is downstream or indirect, when a substitute replaces a buyer industry’s product.
It is also a substitute to a) do without, b) purchase used rather than new, or c) do it yourself.
When the threat of substitutes is high, industry profitability suffers. Substitute products or services limit an industry’s
profit potential by placing a ceiling on prices.
Substitutes not only limit profits in normal times, they also reduce the bonanza an industry can reap in good times.
The threat is high if:
◉ It offers an attractive price-performance trade-off to the industry’s product. The better the relative value of the
substitute, the tighter is the lid on an industry’s profit potential.
◉ The buyer’s cost of switching to the substitute is low.
5. Competitive rivalry
Rivalry among existing competitors takes many familiar forms,
including price discounting, new product introductions,
advertising campaigns, and service improvements.
High rivalry limits the profitability of an industry, the degree to
which depends on 1) the intensity with which companies
compete and 2) the basis on which they compete.
1. Intensity of competition is high if:
◉ Competitors are numerous or are roughly equal in size and
power
◉ Industry growth is slow (fights for market share)
◉ Exit barriers are high
◉ Rivals are highly committed to the business and have
aspirations for leadership, especially if they have goals that
go beyond economic performance in the particular industry.
◉ Firms cannot read each other’s signals well because of lack
of familiarity with one another, diverse approaches to
competing, or differing goals.
5. Competitive rivalry (cont’d)
2. Dimensions of competition:
(e.g. price, product features, delivery services, etc.)
Price competition is especially destructive to profitability because it transfers
profits directly from an industry to its customers. It is most likely to occur when:
◉ Products or services of rivals are nearly identical and there are few switching
costs for buyers.
◉ Fixed costs are high and marginal costs are low.
◉ Capacity must be expanded in large increments to be efficient.
◉ The product is perishable.
Competition on dimensions other than price is less likely to erode profitability, as
it can improve customer value and support higher prices. It can be good for the
industry as a whole by improving value relative to substitutes or raising entry
barriers.
Also important: whether rivals compete on the same dimensions.
◉ Zero sum: one firm’s gain is another firm’s loss.
◉ Positive sum: increases average profitability of the industry.
Industry Analysis: Best
Practices

◉ Understand the appropriate time horizon. Distinguish temporary or cyclical

changes from structural changes. Rule of thumb: average profitability over
a full business cycle.
◉ Not simply declaring industries attractive or unattractive, but
understanding root causes of profitability. Many elements of the five
forces can be quantified.
◉ Tie back the impact of the forces to competitors’ income statements and
balance sheets. Industry structure defines the gap between revenues and
costs.
◉ Not just a list of pluses and minuses, but looking at the industry in overall,
systemic terms. Understanding what drives profitability today, and how
shifts in one force can trigger reactions in the other forces.
Industry Analysis:
Sources of Info

◉ Annual reports of the company: these will normally

contain industry data as it helps their positioning
◉ Annual reports of competing companies in the same
industry: for the same reason as above
◉ Independent industry reports: these can be found
online, or on prospectuses
◉ Research reports: some stockbrokerages publish
industry reports on a regular basis; even company-
specific reports can provide insights
◉ Third party sources: Euromonitor, etc.
 Sample quantitative data to
help assess Porter’s 5 Forces
• Sales level required to fill capacity or for efficient operations
Threat of new entrants • Tax breaks, exemptions, or restrictions

Bargaining power of • Company’s product as % of buyer’s total costs

buyers • Buyer’s switching costs

Bargaining power of • Input costs as % of total costs (or total revenues)

suppliers • Input cost trends

• Prices of substitute products

Threat of substitutes • Switching costs from product to the substitute product

• Price trends (especially if average price is going down)

Competitive rivalry • Cost trends (e.g. R&D, marketing & promotions)
• Market share
 Industry features that have an
impact on its underlying
structure
Technology and Complementary
Industry growth rate Government
innovation products
Competitive  Can mitigate because of  Depends on  Bankruptcy rules  + raises switching costs
rivalry of an expanding pie competitors’  - less differentiation
commitment & goals

Threat of new  Can intensify is entry  Depends on entry  Patents and other  Depends on impact of
entrants barriers are low barriers regulatory barriers entry barriers

 Depends on buyer price

Bargaining sensitivity
power of buyers

Bargaining  Will not guarantee  Government policies  Will not guarantee

power of profitability if suppliers that favor unions profitability if suppliers
suppliers are powerful are powerful

Threat of  Will not guarantee  Depends on switching  Depending on the nature

profitability if substitutes costs of the substitute, can
substitutes
are attractive actually make
substitution easier
 Case Analysis Framework
Porter’s 5 Forces Analysis
Competitive rivalry
• Competitor concentration
• Competitive behavior
Threat of new entrants
Competition Company
• Barriers to entry
• Government regulations
Bargaining power of suppliers
• Supplier concentration
Bargaining power of buyers
• Customer concentration
• Negotiating leverage (esp. if B2B)
• Price sensitivity
Threat of substitutes
Market Product
• Indirect competitors
• Product lifecycle (Customer)
Assess as needed the impact of government
policies, complementary products, technology
and innovation, and industry growth
Case Analysis Framework

Competition Company

Market Product
(Customer)
Company analysis:
The other three elements
Market (Customer)
 Who is the customer? Who
are the key segments?
(Segment size, growth rate, %
of total market)
 What does each segment
want? (Identify key needs)
 What price is each segment
willing to pay? (price points
and price elasticity)
 What distribution channels do
they prefer or use? (sales by
channel, % to total sales)
 Is there customer
concentration? (sales by
customer, % to total sales)
Company
 Capabilities and expertise?
(core competencies or
competitive advantages)
 Distribution channels used?
(Match against Market)
 Cost structure (fixed cost vs
variable cost, % to revenue;
compare against industry)
 Intangibles (e.g. brand loyalty,
reputation)
 Financial situation (ratio
analysis)
 Org structure (does it address
market?)
Product
 Nature of the product?
(benefits, costs)
 Commodity or ‘differentiable’?
(brand power, features that
increase differentiation)
 Any complimentary goods?
(prices, switching costs,
growth or usage trends)
 Any substitute goods? (see
above)
 Where in the product
lifecycle? (new vs obsolete)
 Packaging and bundling (does
it meet customer need, or add
value?)
 M&A Fit Analysis

Company A Company B Company A + B

Competition

Market

Company

Product
 M&A Fit Analysis

Company A Company B Company A + B

Competition
Do the analysis for Watch out for:
 Synergy in new
both standalone companies (see
Market
companies, then definition of
synergy)
do one for the  Opportunities for
Company one-way or
combined mutual
company exploitation
Product
Thanks!
Any questions ?
You can find me at
◉ james.s.soriano@gmail.com
◉ +639778092936