2/26/2024

LECTURE 2: STRATEGIC ANALYSIS

Module 1: Market Structure and Competitive Analysis
Dr. Tien Ng

WHY STRATEGIC ANALYSIS

• An important starting point for the analysis of financial statements

• Allows the identification of the firm’s profit drivers and key risks
• Enables the analysts to assess the sustainability of the firm’s
current performance and make realistic forecasts of future
performance

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WHY STRATEGIC ANALYSIS

• Factors drive a firm’s value:

Cost of capital: the capital markets
Return on capital: strategic choices - industry choice, competitive
positioning (e.g. cost leadership or differentiation), corporate strategy
A firm’s value is determined by its ability to earn a return on its capital in excess
of the cost of capital.

STRATEGIC ANALYSIS

Step 1 Step 2 Step 3

INDUSTRY ANALYSIS & COMPETITIVE ANALYSIS COMPETITIVE

MKT OPPORTUNITIES
demand for this industry
How attractive the
industry in term of
offering prospects for
sustained profitability?
What is the industry’s
technical structure?
(competitive intensity &
position)
intensity: supply ability
players, competitors,
POSITIONING
What are the company’s
strategic options?
How well has it executed its
strategies for better
performance prospects?

opportunities: growth long enough => sustainable

based on GDP: living standards
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INDUSTRY ANALYSIS
AND MARKET
OPPORTUNITIES

INDUSTRY ANALYSIS &

MARKET OPPORTUNITIES

 Economic analysis for market size & market opportunities

• Economic and technical structure
• Demographic changes/Size of the region/Size of the market (and shares
served by the firms), and the growth rate over time
• Changes in citizen concepts (or perceptions), consumer confidence
• Recent development (technical, financial, management, regulatory, …) &
other changes affecting business

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COMPETITIVE
ANALYSIS
and
PORTER’S FIVE
FORCE MODELS

INDUSTRY STRUCTURE ANALYSIS

AND PROFITABIITY

- Porter’s Five Force Model

 A framework that attempts to analyze the level of competition within an
industry and business strategy development
 It derives five forces that determine the competitive intensity and therefore
attractiveness of an industry
 Attractiveness in this context refers to the overall profitability of an industry

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MODEL
PORTER’S FIVE FORCE

Industry Profitability

supply affects P & Q

(Porter, 1980)

MODEL
PORTER’S FIVE FORCE potential to earn abnormal profit
Degree of actual
and potential
Industry Profitabilitycompetitors

Bargaining powers
in input and output
Excess supply affect
industry’s P, Q markets
actual profit
Cost Pricing strategy

Substituted products affect

industry’s P, Q

(Porter, 1980)

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MODEL
PORTER’S FIVE FORCE

Industry Profitability
• Why threat?
• new players add capacity to
industry and potential fight for
market share (decrease P,
increase cost, increase CAPEX)
• pressure to lower prices or
higher costs or higher necessary
investment to compete
• Depend on the height of barrier
to entry
advantages that incumbents (existing
players/competitors/rivalry)have relative
to the new entrants
(Porter, 1980)

MODEL
PORTER’S FIVE FORCE

Industry Profitability • Barrier to entry:

• Economies of scale (FC/unit,
supply-side, demand-side)
• Product differentiation
Other entry barriers:
• Capital requirements (vs. industry
growth)
• Switching costs (b/c change of
suppliers)
• Access to distribution channel
• Cost advantages (independent
of scale/size)
(Porter, 1980) • Government policy
First-mover advantage
switching costs chi phi chuyen doi : mean the cost occurs when customers switch from one product to another.

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MODEL
PORTER’S FIVE FORCE

Industry Profitability offer same function in

• Why threat?
different manner

• Substitute product may place a

ceiling on prices, offer a more
attractive price-performance
trade-off which places a lid on
the industry’s profit potential
• Depend on :
• level of price – performance
trade-off, switching cost,
change in technology in other
industry

(Porter, 1980)

MODEL
PORTER’S FIVE FORCE

Industry Profitability
• Why threat?
• Powerful suppliers force cost
increase, limit quality or
service, or even shift cost to
industry participants
• Depend on supplier’s industry
structure:
• degree of concentration,
product uniqueness ,
switching costs, tendency of
forward integration
(Porter, 1980)

concentration: number of suppliers and

switching cost is high: bargaining power of suppliers is high. substitutes available in the market
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MODEL
PORTER’S FIVE FORCE

Industry Profitability
• Why threat?
• Powerful buyers force down
price, demand better quality or
service, and generally play
industry participants off
against another
• Depend on :
• level of price sensitivity,
degree of concentration,
product uniqueness, switching
cost, tendency of backward
integration , …
(Porter, 1980)

Switching cost is low --> Bargan power of

backward integration: do by themselves instead of purchase from others buyer is high.

MODEL
PORTER’S FIVE FORCE

Industry Profitability • Why threat?

number
• Powerful and size
rivalry of profitability
limits
distribution
• Depend on :
• Intensity of Rivalry muc do ganh dua
• fragmented vs. consolidated higher price
• industry growth competition
• exit barriers
• Basis of competition
• It is the dimension that
competitors take place
• Rivalry is especially
destructive to profitability if it
gravitates solely to price
(Porter, 1980)

industry growth: rapidly, not need grap other market shares to grow: low threat
- stagnant industry growth: taking share from the other to grow: high threat

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STRENGTH OF FORCES DRIVES PROFIT

• Short-term profits are affected by many things (weather, industry cycles, …)

but long-term performance is dominated by these five forces
• The strongest competitive force(s) determine(s) how profitable an industry can
be
• When all competitive forces are strong there is little profit (e.g. airline,
ROIC 5%)
• Conversely, weak competition leads to high profitability (e.g. beverage,
ROIC 35%)

WARNINGS

• Industries boundaries often not clear (firm frequently operates in more than
one industry)
• Incomplete industry definition may result in incomplete analysis and inaccurate
forecast
• Why? Your assumption may be wrong …

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LECTURE 2: STRATEGIC ANALYSIS

Module 2: Strategies Analysis
Dr. Tien Ng

COMPETITIVE
POSITIONING

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COMPETITIVE STRATEGIES

 Industry structure guides strategic actions by the firms,

for example:
• Positioning the company to better cope with current forces do to fight with the force
• Build defense against the competitive forces costly
• Shape the balance of competitive forces in favorable manner most costly

• Objectives, Goals, Plan …

1. POSITIONING TRICK TO WIN:

Positioning where the forces are
weakest to boost profit
E.g. TRA in the Pharmaceutical ( Healthcare) industry  Weakest point of strong forces

DEGREE OF ACTUAL & POTENTIAL COMPETITORS

Rivalry - Moderate Threat of New Entrant - Strong Threat of Substitute - Low
Cap intensive; Abbott (Domesco
Incumbent 51% ; Glome Taisho
advantages
Solid industry growth (>10%); – DHGnetwork
34%); Vin, No substitution in term of medicine
Masan, FPT,
(tech, RD); Distribution (hospital,
Consolidated mkt - Yet high exit OTC); Govn. restrictionsTGDD, Digiworld
– Yet industry Relative substitution across types of
M&A firms with strong distribution network,
barriers drugs
but low profit (e.f. DBG growth
Pharmacreates
Daklak)mkt potential

PHARMA PROFITABILITY

BARGAINING POWER IN INPUT & OUTPUT MARKETS

Bargaining Power of Buyers - rampant Bargaining Power of Suppliers - Strong

significant
Foreign suppliers of investment
raw materials into traditional
(>90%),
Hospital bid; other medical representative
medicine to reduce reliance on imported
OTC over-the-counter: quite low power mainly from China, India, Australia
materials (e.g. use of herbs)

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1. POSITIONING

E.g. HPG in the Steel industry

DEGREE OF ACTUAL & POTENTIAL COMPETITORS
Rivalry – High/Moderate Threat of New Entrant - Strong Threat of Substitute - Low
Weak Govn. Restrictions (esp. ease
High industry growth (>10%); Yet environment-related policy), plus industry No substitution
high exit barriers growth creates mkt potential
strong threat

STEEL PROFITABILITY

BARGAINING POWER IN INPUT & OUTPUT MARKETS

strong threat
Bargaining Power of Buyers - high Bargaining Power of Suppliers – Strong/Moderate
Foreign suppliers of raw materials (>50%), mainly from China,
Buyers sensitive to price
Australia, Brazil (BOF: iron ore, coal integration
Backward … or EAF: electric,
(HRCrecycled steel)
production)
Investment in high-tech to support Competitive suppliers’ market
competition on price

produce HRC by themselve => control the

COGS => cost strategy

STEEL MARKET STRUCTURE

STEEL

Galvanized coated
Construction steel Retailer
steel

BOF technology EAF technology

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2. BUILD DEFENSE AGAINST FORCES

• Porter’s three generic strategies to build defense against the

competitive forces:
COST STRATEGY
Low cost High cost able to charge high price b/c your
shift cost to customers products differentiates ur competiors

Broad
COST DIFFERENTIA-
Mkt LEADERSHIP TION
COMPETITIVE sell @ discount P sell specialized
STRATEGY  efficiency, weak expensive product
supplier power  gross margin
FOCUSED STRATEGY
Narrow
Mkt Cost Focused
Differentiation Focused

PORTER’S THREE GENERIC STRATEGIES

Ferrrari Audi

COST LEADERSHIP DIFFERENTIATION

What would happen to Hummer if it
wanted to follow a cost leadership
and a differentiation strategy?

Hummer would find itself facing the dilemma of

attempting to market and sell a highly specialized and
COST - FOCUS expensive product- FOCUS
DIFFERNTIATION at a discounted price.
Focused: family cars It simply wouldn’t work!

No company can do 2 strategy together: not differentiation and cost leadership together
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BUILD DEFENSE AGAINST FORCES

• Porter’s three generic strategies to build defense against the competitive forces

Industry Force Cost Leadership Differentiation

Price cut in retaliation deters Customer loyalty discourages potential
Entry Barrier ngan can
potential entrant entrants
Few close alternatives lessen buyer
Buyer Power Offer lower price to powerful buyer
power
Better insulated from powerful Able to pass on supplier price increase
Supplier Power
supplier tach rieng to customers
Can use low price to defend Customer attaching to differentiated
Substitute
substitute attributes
Rivalry Better able to compete on price Brand loyalty keep customer from rivals

BUILD DEFENSE AGAINST FORCES

• Porter’s three generic strategies to build defense against the competitive forces

Industry Force Focused

Entry Barriers Focusing develop core competencies that increase entry barrier

Buyer Power Large buyers have less power to negotiate b/c of few close
alternatives
Supplier Power Suppliers have power b/c of low volume, but a differentiation is
better able to pass on supplier price increases
Substitute Specialized products and core competencies protect against subs

Rivalry Rivalry cannot meet differentiation-focused customer needs

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3. SHAPE INDUSTRY STRUCTURE

• Firm can also reshape the forces in its favor

e.g.
• Limit supplier power, via standardized specification for parts
• Expand services so it’s hard for customers to leave
• Invest in products different from your rivals, to avoid price wars
• Invest in R&D to scare off new rivals
• Make products very available, to offset subs

END OF LECTURE 2

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