08. Case Frameworks Flashcards
How do you evaluate a company or investment?
(1) External Forces
- Industry: Porter’s Five Forces
- Competitor
- Customer
- Market Growth
- Supply/Demand
- Uncontrollable Factors
(2) Strategy
- Core Competency
- Competitive Advantage
- Strategic Options
(3) Operations
- Profitability Analysis
- Value Chain Analysis
(4) Organizational Structure
- Management team and culture
- Processes
- Tools
- Measurements
(5) Financing
- Initial costs vs exit
- Deal structure
- Debt capacity
(6) Investment Criteria
What should you consider regarding the company’s strategy?
> Core Competency: what does the firm do well? (SWOT Analysis)
1) Provides customer benefits
2) Hard for competitors to imitate
3) Can be leveraged widely to many products and markets
> Competitive Advantage: how does company earn above-average profits?
1) Pricing
2) Differentiation (quality, performance, reliability, durability, features, perceived quality of the brand)
3) Focus: niche/specialty
> product life cycle 1) emerging, growing, mature, declining > Strategic Options 1) Expand scope - Merge: vertical or horizontal - Acquire - JV - Enter new market - Develop and sell new products/services 2) Narrow scope - Divest - Exit market 3) Change direction - Reposition company’s brand, focus or image 4) Do nothing
> Strategic Fit
1) Does it fit with our core competency?
- Define broadly in order to allow itself to be flexible enough to adapt to market changes
- Spin off businesses that are not part of core business
2) Cost Benefit Analysis: what makes the strategic option desirable?
- Benefits/synergies:
a. Additional revenue: branding/pricing power; new markets/consumers; improved management
b. Reduced costs: SG&A, economies of scale
- Costs/risks:
a. Extra costs: initial investment/acquisition cost, cultural fit, integration risk, transaction costs, revenue cannibalization
What should you consider regarding the company’s operations?
> Profitability Analysis
1) Revenue Drivers: how much growth is projected (CAGR) and how much is attributed to growth of the industry?
- Price
a. Supply (capacity) / demand (usage)
b. Demand elasticity
c. Differentiated (value-add) vs commodity (cost-plus)
d. Customer service
e. Brand strength
f. Industry fundamentals
- Volume
a. Increase market share (organic vs acquisitions)
b. More products
c. Improve technology
d. Reputation / perceived quality
e. Key personnel with customer relationships
f. Industry fundamentals
2) Cost Drivers: outsource or in-house? how can they be controlled?
- Variable Costs
a. Labor
b. Materials: concentrate purchasing? economies of scale?
c. Marketing
d. Distribution: efficient supply chain?
e. Management:
- Fixed Costs
a. Initial investment
b. Equipment
c. Utilities / facilities
d. Rent / insurance
e. Overhead
3) Mix
- Product
a. Advantages / disadvantages
b. Differentiation
c. Substitution
- Customer
a. Who?
b. Needs? Service levels?
c. How to reach and retain?
- Distribution channel
4) FCF Generation
- EBITDA: P x V - VC - FC
- capex: growth vs maintenance
- net working capital: efficiency
> Value Chain Analysis
1) Determine company’s value-add and competitive advantage
- Primary Activities: Raw materials – inbound logistics – operations – distribution – marketing and sales – customer service
- Support Activities: IT, HR, Finance
What should you consider regarding the company’s organizational structure?
> Management Team and Culture
1) Skills: experience and competence; replaceable?
2) Incentives: equity stake in the business?
3) Relationships: industry connections (buyers/suppliers)
4) Simplify or change roles and responsibilities
> Processes
1) Quality
2) Efficiency
- Working capital management
3) Capabilities
4) Distribution
> Tools
1) Upgrade tools
2) Simplify and integrate systems
3) Automate non-value add activities
> Measure
1) Create and compare metrics
What should you consider regarding the financing of the investment?
> Entry / Exit Dynamics (public comps and precedents)
1) Valuation
2) Breakeven analysis
> Deal Structure: Sources and Uses
1) Cash
2) Debt
3) Stock
> Debt Capacity: reference point is needed
1) Leverage ratios
2) Liquidity ratios
What are the main criteria to consider when deciding to make an investment?
1) External: low reliance on uncontrollable factors (e.g. Non-cyclical product offering)
2) Strategy: limited business risk due to competitive edge and strong, defensible market position
3) Operations: strong predictable cash flows with growth potential and cost cutting opportunities
4) Organizational Structure: strong, experienced management team
5) Financing: clean B/S with high debt capacity; viable exit strategies exist
What makes an industry attractive?
1) moderate fragmentation
2) high barriers to entry
3) low reliance on customer / supplier
4) large market with growth potential
5) low reliance on uncontrollable factors
What are Porters’ five forces?
(1) Competitive rivalry
- Perfect competition, oligopoly, or monopoly
- What is the primary strategy for product competition (brand, quality, price, service)?
- What is market share / fragmentation (# of comps)?
- High fixed costs & low variable costs
- High barriers to entry
- Reactions to your actions?
(2) Threat of new entry
- Barriers to entry high or low (e.g. capital equipment, technology protection, labor unions, time, cost advantage, specialist knowledge)
- Economies of scale?
- Market fragmentation?
(3) Threat of substitutes
- Is substitution easy and viable?
- Low switching costs
(4) Supplier power
- How many suppliers are there for each key input? Size of each?
- How easy is it for suppliers to drive up prices?
- What is the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on?
(5) Buyer power
- How many customers are there? Size of each order?
- Differences between services?
What factors result in high barriers to entry (low threat of new entrants)
- Economies of scale
- High capital requirements
- Differentiated products
- Hard to access distribution channels
- Existing companies have proprietary technology
- Limited access to raw materials
- Steep learning curve
What makes a buyer group powerful?
- If it is concentrated or accounts for a large % of sales
- If it buys undifferentiated products
- If many substitute products exist
- If it faces low switching costs
- Credible threat of backward integration
- Product is unimportant to quality of the buyer’s product
What makes a supplier group powerful?
-Supplier provides differentiated products
If there are high switching costs
-Few substitute products exist
-Credible threat of forward integration
Which factors make substitute products more threatening?
- If they compete in price with industry’s products
- Are produced by industries earning high profits
Which factors make competition more intense?
- Numerous competitors exist or equally balanced competitors
- Slow industry growth
- High fixed costs
- Lack of differentiation
What are the four stages of the product life cycle?
(1) Emerging
(2) Growth
(3) Maturity
(4) Declining
Common characteristics of emerging industry?
- Technological uncertainty
- No clear “right” strategy
- High initial costs
- Many new companies and spin-offs
- First-time buyers
