Externe analyse Flashcards
What does EBIT stand for?
Earnings Before Interest and Tax
Explain ROIC
= Return On Invested Capital;
Takes into account the capital required to compete in the industry
= EBIT / (average invested capital)
= EBIT / (equity + longterm debt)
ROIC is meestal een betere manier om na te kijken hoe ‘goed’ het management ‘werkt’, omdat het zowel het vermogen van het bedrijf meeneemt in de berekening als wat het bedrijf leent
What does ROE stand for and how do you calculate it?
Return On Equity
= net income/equity
(inkomen/vermogen)
When comparing the (median) ROE of pharmaceuticals vs. computers & office equipment, we see that the pharmaceutical industry has a much higher median ROE. Why?
Pharmaceutical industry
-> highly differentiated products, if patented
-> consumers are rather price-insensitive
-> Monopoly, if patented
Personal computers
-> higher number of firms with products that are much more commoditized
(remark: (mass-)customization tries to break the commoditization trend)
Explain: what are critical success factors? (CSF)
‘Qualifiers’
–> necessary to ‘survive’
–> avoid failure
Differentiators
–> lead to ‘success’
–> necessary and sufficient conditions
“CSFs are determined at the market level through complex interaction among the firm’s competitors, customers, regulators, innovators external to the industry, and other stakeholders”
! INDUSTRY ANALYSIS !
What is the 3C analysis?
CONTEXT: general/macro context
–> tool: PEST(EL)
CHAIN
–> tool: industry/company chain
COMPETITION
–> tool: Five Forces
How can you define CSFs for a company?
By performing an external analysis.
This can either be a 3C analysis or a SWOT
What do the letters in the PEST(EL) tool stand for?
- Political
- Economical
- Socio-cultural
- Technological
- Ecological (often discussed in ‘S’)
- Legal (often discussed in ‘P’)
What would you investigate when looking at the Political context?
Divide into sections: regional, national, European, Worldwide
Check:
- impact government
- stability political regime
- taxations, subsidies
- etc
What would you investigate when looking at the economical context?
- unemployment rate
- interest rate
- economic climate
- etc
What would you investigate when looking at the socio-cultural context?
- demographic evolution
- health
- attitude towards work-life balance
- environmental awareness
- etc
What would you investigate when looking at the technological context?
- impact e-business
- impact internet security
- new production processes
- R&D expenditures government
- etc
What would you investigate when looking at the ecological context?
- Kyoto protocol
- ‘Waste’ policy
- etc
What would you investigate when looking at the legal context?
- Competition regulations
- International contracts
- etc
Describe the 3 industries in the chain (external analysis)
Primary industries
-> upstream industries (extraction / processing)
Secondary industries
-> midstream industries (fabrication / assembly)
Tertiary industries
-> downstream industries (wholesale distribution / retail / services)
Give some attention points when looking at the company chain
- Where are the company’s activities located in the industry chain?
- Who does what? Which party does what?
–> is there a dominant player? why?
–> vertical integration? - Who are the final customers?
–> B2B vs B2C - How to create customer value? Necessary activities?
What are the five forces in the Five Forces Model?
- POTENTIAL ENTRANTS: threat of new entrants
- BUYERS: bargaining power of buyers
- SUPPLIERS: bargaining power of suppliers
- SUBSTITUTES: threat of substitute products of service
- INDUSTRY COMPETITORS: rivalry among existing firms
When looking at the force of Internal Rivalry in the Five Forces Model. What does it depend on?
- Concentration Ratio
- Product/Service differentiation
- Excess Capacity
- Exit Barriers
- Cost Structure
- Scale Economies
- Industry Growth
Explain why the concentration ratio is important for the force of Internal Rivalry
The concentration ratio
= the combined market share of the leading firms
Widespread belief: higher concentration (less firms) = higher prices
There are two specific types of diversity (of competitors). Which ones and explain?
- strategic diversification: a company expands its business into (e.g.,) a new market, products or services. The company thus expands its offer
- product/service differentiation: a company makes its products/services more appealing to the market
Explain excess capacity in the Internal Rivalry force
Unused capacity encourages firms to offer price cuts
–> to increase demand
Explain exit barriers in the Internal Rivalry force
Difficult to leave the industry?
Price wars!
Explain scale economies in the Internal Rivalry force
Cost benefits of greater volumes
–> aggressive price competition
Explain cost structure in the Internal Rivalry force
How low can prices go? Depends upon cost structure!
Fixed costs relatively high, compared to variable costs
–> firm “wants to do business”, even if prices are low!
To block potential entrants in a new business, there are two types of ENTRY BARRIERS that could be put into place. Which ones?
Structural barriers: natural advantages that incumbents have (knowledge, infrastructure)
Strategic barriers: strategic moves of incumbent firms to discourage new entrants (excess capacity, client binding,…)
Why are new entrants bad for an industry?
More competitors = decrease in industry concentration
Give some examples of possible entry barriers.
- Economies of scale
- need of capital (capital requirements)
- expected reactions of incumbents, such as retaliation (wraakacties)
- switch costs
- product differentiation & being loyal
- government & legal barriers
- access to distribution channels
What are sunk costs?
Investments that cannot be recovered on exit
Why are sunk costs important in the five forces model? To which force does this belong?
Potential Entrants
-> absence of sunk costs makes an industry vulnerable to hit-and-run entry whenever established firms raise their prices above the competitive level
What effects does having substitutes have?
When there are no close substitutes, consumers are insensitive to price
=> demand is price inelastic
What is the influence of complements?
Complements increase the value of a good
How does the market position of a firm influence it profits?
The supplier with the strongest market position will receive highest profits
How?
-> try to achieve monopolization, differentiation and shortage of supply in own products
-> try to encourage competition, commoditization and excess capacity in the production of the complementary product
How do you define the price sensitivity of buyers?
- The greater the importance of an item as a proportion of total costs, the more price sensitive buyers are
- the more critical a product is to the quality of the buyer’s product, the less price sensitive the buyer is
How does the availability of substitutes influence the buyer’s price sensitivty?
If products are not differentiated / substitutes are available, buyers are able to switch supplier on the basis of price. They are more price sensitive
How does competitiveness among buyers influence the buyers’ price sensitivity?
More competitiveness
=> buyers want price reductions from suppliers
Relative bargaining power depends upon 4 things, which ones?
- relative concentration of the market in question
- purchase volume of downstream firms
- buyers’ information
- threat of forward/backward integration
How does the relative concentration of the market in question influence the relative bargaining power?
The smaller the number of buyers (thus, buyer market is more concentrated), the lower prices & profits in the supplying industry are
Thus:
n° of suppliers > n° of buyers => buyers have most power
! HIGHEST CONCENTRATION LEVEL HAS MOST NEGOTIATION POWER !
How does the purchase volume of downstream firms influence the relative bargaining power?
- the greater the purchase, the greater the cost of losing a buyer
- lumpy orders!
If lumpy orders, buyer has relatively more power (infrequently and in large indivisble batches)
What does the O and T stand for in SWOT?
Opportunities and Threats
Can you give examples of threats (SWOT)?
- emergence of cheaper / better technologies
- Introduction of better products by rivals
- Entry of lower-cost foreign competitors
- Rise in interest rates
- Potential of a hostile takeover
- Unfavorable demographic shifts
- Adverse shifts in foreign exchange rates
Describe ‘Opportunities’ for a SWOT analysis?
Opportunities most relevant to a company are those offering:
- good match with its financial and organizational resource capabilities
- best prospects for profitable long-term growth
- potential for competitive advantage
What are the disadvantages of SWOT?
- Often not enough depth
- too general
- relative strengths of factors within ‘S’, ‘W’, ‘O’, ‘T’
- relative strength of actors? (customers, suppliers, government, …)
- requires ACTION!
–> combination internal & external analysis
