Assessing Drivers: of Business Growth

Assessing Drivers of
Business Growth
corporatefinanceinstitute.com
Course objectives
Understand the framework Analyze the external economy Analyze a company’s industry
for assessing corporate that a company operates in using by looking at Porter’s five forces
business growth PESTEL analysis and the industry lifecycle
Assess a company’s Perform SWOT analysis to

lifecycle, risks and competitive evaluate a company’s internal and
advantage external environment
Framework for assessing business growth
EXTERNAL ECONOMY
Top Down INDUSTRY Bottom Up
COMPANY
Practical tools for analyzing business growth
External Economy Industry Company

• PESTEL analysis • Porter’s five forces • Competitive advantage
• Industry lifecycle • Ansoff Matrix
• Firm lifecycle
• Assessing management
• SWOT analysis
Analyzing The External Economy
Session Objectives
Understand how to use Identify the six factors –

01. PESTEL analysis to analyze the
external environment of a
02. political, economic, social,
technological, environmental, and
business legal
03. Apply the knowledge in

analyzing an example company
EXTERNAL ECONOMY
PESTEL analysis
PEST & PESTEL analysis
PEST analysis is a strategic framework used to evaluate the external environment for a business by
breaking down the opportunities and threats into political, economic, social and technological factors.
It can be an effective framework to use in corporate strategy planning, useful in identifying the pros
and cons of business strategy.
Political factors Economic factors
Identify
Anticipate opportunities React
and threats
Social Technological
factors factors
PESTEL analysis
PESTEL analysis is a tool used to assess the macro environment of a business. It includes
environmental and legal factors that directly impact the company.
Political factors Economic factors
Identify
Social Technological
opportunities
factors factors
and threats
Environmental Legal
factors factors
PESTEL checklist – political factors
Political
Government policies Taxation forecasting
Fiscal policies Corporate tax rules
Government / business relations New competition

Funding grants and initiatives Industry competition regulation
PESTEL checklist – economic factors
Economic
Economic cycle Interest rates forecasting
Inflation, growth rate, unemployment Overnight rates, bond yields
rates
Consumer spending Government spending

Consumer disposable income Monetary policies
Business investment Exchange rates

Domestic and foreign investments International exchange rates
PESTEL checklist – social factors
Social
Demographics Lifestyles forecasting
Family size, population growth, Trends toward healthy lifestyle
religion
Attitudes Needs and desires

Consumers’ beliefs and values Need for better product
features, customer service
PESTEL checklist – technological factors
Technological
Leading edge developments Own R&D forecasting
Infrastructure, emerging Innovation to increase consumer
technologies, automation access to technology
Competitors’ R&D
First mover advantage
PESTEL checklist – environmental factors
Environmental
Weather conditions Climate change forecasting
Seasonal conditions, natural Warmer temperatures
disasters
Pollution Ecological impacts

Air, noise, water, light pollution Recycling, carbon footprint
Sustainability
Corporate Social Responsibility
(CSR)
PESTEL checklist – legal factors
Legal
Industry regulation Licenses & permits forecasting
Industry-specific trade Procedures to acquire business
regulation and restrictions licenses and permissions
Labor and consumer laws Intellectual property

Employment legislations, consumer Protection over intangible assets
protection
PESTEL example – grocery store
What are the PESTEL factors for a grocery store?
Political trends Economic trends

• Trade policies that impact the import and • Changes in household incomes
export of produce and other products • Increasing transportation costs
• Price inflation
Social trends Technological trends

• Healthy lifestyle trend leads to increasing • Increasing online grocery shopping
demand for organic and natural products • More efficient organic and natural farming
• Population shift from rural to urban areas • Automated inventory management
Environmental trends Legal trends

• Environmental impact • Consumer safety policies
• Sustainability of food sources • Staff training
• Hiring and termination policies
Analyzing The Industry
Session Objectives
Identify the changes in cash

01. Use Porter’s five forces model
to analyze an industry 02. flows at different stages of the
industry lifecycle
Understand how the industry

03. and business lifecycles are tied
to making lending decisions
INDUSTRY Porter’s five forces

Business lifecycle
Porter’s five forces
Porter’s five forces is an important tool used in a Potential entrants/

strategic analysis to assess industry attractiveness. barriers to entry
There are five forces driving industry competition.
This model helps a company

understand the risks in the industry
it is operating in and decide how it Suppliers and Buyers and
wants to execute its strategies in their bargaining their bargaining
response to competition. power power
Rivalry/competition
in the industry
Threat of
substitutes
Porter’s five forces activity – grocery store
Identify the five forces driving competition in the grocery store industry.
Potential entrants/ • Barriers to entry are moderate

barriers to entry • Dominated by big supermarket chains
• Large players can create barriers for
• Market concentration is high smaller players with their bargaining power
• Competition is high and distribution channels
Suppliers and their Buyers and their

bargaining power bargaining power
Rivalry/competition
• Small grocery stores in the industry • Buyers have high bargaining power
have low bargaining because they can easily switch stores
power with suppliers
• Threat of substitutes is low to moderate

Threat of • Switching costs are very low
substitutes • E.g. Meal kit delivery service
Assessing the industry sector
What do these three industries have in

common?
• Manufacturer of fax machines
• Manufacturer of DVDs
• Print-based newspapers
They are all industries in decline.
Industry lifecycle
$ Launch Growth Shake-Out Maturity Decline

Life cycle
extension
Sales
Cash
Profit
Time
Lenders are more likely to lend to companies

in these stages of the industry lifecycle.
Analyzing The Company
Session Objectives
01. 02.
Analyze the degree of business Compare strategies for gaining
and financial risks for a company competitive advantage in an industry
03. Identify various business

growth strategies 04. Summarize all external and internal
business growth factors using a SWOT analysis
Firm life cycle

Business lifecycle
Competitive advantage
Ansoff matrix
SWOT analysis
COMPANY
The firm life cycle
Market share
High Low
• Growth/share matrix provides a visual

display of the strengths of a business.
high
• Many businesses aim for a balanced
Market growth
portfolio of products/services/business Growth Launch
units at each stage of the cycle.
Low
Maturity Decline
The components of risk
Total risk
Business risk Financial risk

• Product-market fit • Financial leverage
• Customer base • Reliance upon debt
• Bargaining power • Interest rates
• Proven business model • Cost of capital
The firm life cycle and business risk
Market share
High Low
high
Market growth Growth Launch
Low High business risk Very high business risk
Maturity Decline
Medium business risk Low business risk
The firm life cycle and financial risk
Market share
High Low
high
Growth Launch
Market growth High business risks Very High business risks
Low Low financial risk Very low financial risk
Maturity Decline
Medium business risks Low business risks
Medium financial risk High financial risk
Net cash flow at different stages
Market share
High Low
high
Cash inflow HIGH Cash inflow LOW
Market growth Cash outflow HIGH Cash outflow HIGH
NEUTRAL NEGATIVE
Low
Cash inflow HIGH Cash inflow LOW

Cash outflow LOW Cash outflow LOW
POSITIVE NEUTRAL
Business and financial risk combined
Lenders are more likely to lend to companies
in theses stages of the firm lifecycle.
Level of risk
Financial risk
Business risk
Introduction Growth Maturity Decline
Stage of the firm life cycle
The firm life cycle
It is crucial that the analyst has a comprehensive

understanding of the industry’s phase in the life cycle
model.
In addition, the analyst must also understand the firm’s

life cycle state within the industry context.
Understanding a firm’s life cycle allows

analyst to assess the appropriate:
• Corporate / business strategies
• Financial strategies
Michael Porter identified two strategies for gaining competitive advantage in an industry:
Lowest cost Differentiation
Tools for assessing competitive advantage
Broad target
1. Cost
2. Differentiation
Competitive scope
Leadership
Narrow target
4. Differentiation
3. Cost Focus Focus
Lower cost Differentiation

Competitive position
What value proposition does the organization have to create a solid relationship with the customer?
Best product Total customer solutions System lock-in

• Focus on being the lowest cost • Focus on full experience of the • Exclusive channel with significant
provider customer barriers to entry
• Focus on unique, desired • Creates a complete set of • Draws customers with extensive
products with premium price product and service offerings network of third party
• Seeks to substitute for or complementors
leverage activities provided by
the customer
Ansoff’s Matrix
PRODUCTS
EXISTING NEW
INCREASING RISK
EXISTING
MARKET PRODUCT
PENETRATION DEVELOPMENT
1 3
MARKETS
MARKET
NEW
DIVERSIFICATION * = Relative risk

DEVELOPMENT
2 4 1 = Low
4 = High
INCREASING RISK
Putting it all together – SWOT analysis
SWOT is a summary version of external and internal analysis as described in previous sections. Because it introduces
opportunities to the company, it is a bridge to generating strategic alternatives.
Strengths Weaknesses Opportunities Threats
Characteristics of a Characteristics of a Elements in a company’s Elements in the external

business which give it business which put it at a external environment that environment that could
advantages over its disadvantage relative to allow it to formulate and endanger the integrity and
competitors its competitors implement strategies to profitability of the business
increase profitability
Case Study
Case study overview – Oil Transportation Ltd.
Oil Transportation Ltd. (OTL) quick facts:

• Operating for over ten years
• Owned and operated by the Hill family
• Solid customer base of 20 to 25 oil industry customers
• Owns 20 trucks and 45 flat bed trailers
• Has been consistently profitable
Scott Hill, director at the company, wants to sell the

business sometime over the next 5 years but is unwilling to
pay for a business valuation.
Case study overview – Oil Transportation Ltd.
You have been provided with the following documents:

• Oil Transportation Ltd. – Company Brief
• Industry Report – US General Freight Trucking
Using the information given in the

documents and the tools
introduced in this course, analyze
the opportunities for business
growth for Oil Transportation Ltd.
Frameworks
Oil Transportation Ltd. – PESTEL analysis
Political trends Economic trends
Social trends Technological trends
Environmental trends Legal trends
Oil Transportation Ltd. – Porter’s five forces
Potential entrants/
barriers to entry
Suppliers and their Buyers and their

bargaining power bargaining power
Rivalry/competition
in the industry
Threat of
substitutes
Oil Transportation Ltd. – competitive advantage
Sources of competitive advantage
Oil Transport Ltd. Competitors
Oil Transportation Ltd. – risks and mitigation
Risk Mitigation strategy
Oil Transportation Ltd. – SWOT summary
Strengths Weaknesses Opportunities Threats

Assessing Drivers: of Business Growth

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Assessing Drivers of

Assess a company’s Perform SWOT analysis to

Top Down INDUSTRY Bottom Up

External Economy Industry Company

Understand how to use Identify the six factors –

03. Apply the knowledge in

Political factors Economic factors

Political factors Economic factors

Government / business relations New competition

Consumer spending Government spending

Business investment Exchange rates

Attitudes Needs and desires

Pollution Ecological impacts

Labor and consumer laws Intellectual property

What are the PESTEL factors for a grocery store?

Political trends Economic trends

Social trends Technological trends

Environmental trends Legal trends

Identify the changes in cash

Understand how the industry

INDUSTRY Porter’s five forces

Porter’s five forces is an important tool used in a Potential entrants/

This model helps a company

Potential entrants/ • Barriers to entry are moderate

Suppliers and their Buyers and their

• Threat of substitutes is low to moderate

What do these three industries have in

They are all industries in decline.

$ Launch Growth Shake-Out Maturity Decline

Lenders are more likely to lend to companies

03. Identify various business

Firm life cycle

• Growth/share matrix provides a visual

Business risk Financial risk

Cash inflow HIGH Cash inflow LOW

It is crucial that the analyst has a comprehensive

In addition, the analyst must also understand the firm’s

Understanding a firm’s life cycle allows

Lowest cost Differentiation

Lower cost Differentiation

Best product Total customer solutions System lock-in

DIVERSIFICATION * = Relative risk

Strengths Weaknesses Opportunities Threats

Characteristics of a Characteristics of a Elements in a company’s Elements in the external

Oil Transportation Ltd. (OTL) quick facts:

Scott Hill, director at the company, wants to sell the

You have been provided with the following documents:

Using the information given in the

Political trends Economic trends

Social trends Technological trends

Environmental trends Legal trends

Suppliers and their Buyers and their

Sources of competitive advantage

Oil Transport Ltd. Competitors

Risk Mitigation strategy

Strengths Weaknesses Opportunities Threats

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