Session 4 Flashcards
What are the primary and support activities in a value chain?
- Primary Activities: Inbound logistics, operations, outbound logistics, marketing & sales, service.
- Support Activities: Firm infrastructure, human resource management, technology development, procurement.
How does a value chain help firms in strategy analysis?
- Identifies sources of value creation and capture.
- Helps understand key concepts like cost drivers, differentiation, and integration.
- Aligns strategy with value chain segments to improve efficiency and success.
The goal is for strategy to align with these segments, ensuring that each part of the value chain contributes efficiently to the firm’s overall success.
What are the key benefits of Value Chain Analysis for a firm?
- Foundation for Strategy – Helps understand what a company does, how activities relate, and where to focus for a competitive edge.
- Comparing Firms – Useful for benchmarking against competitors and assessing value generation.
- Internal Activities – Analyzes how a company creates, delivers, and captures value, identifying strengths and areas for improvement.
- Industry Structure’s Influence – Examines how industry structure and positioning impact value creation.
What is seller concentration, and why is it important?
Definition: Seller concentration refers to the number and size distribution of firms in a market, indicating how many firms compete and how market share is distributed.
Importance:
* Helps assess industry competitiveness.
* Determines the power large firms may hold over the market.
* Influences market dynamics like pricing power, competitive behavior, and barriers to entry.
What is the concentration ratio, and how is it calculated?
The concentration ratio measures the proportion of the market controlled by the largest firms.
Purpose: Indicates what percentage of total market sales is held by the top firms, helping assess market dominance and competition.
What is the Herfindahl-Hirschman Index (HHI), and how is it calculated?
The HHI measures market concentration by summing the squares of the market shares of all firms in a market.
Purpose: Gives more weight to firms with larger market shares, reflecting their dominance.
How do HHI values indicate market concentration?
- HHI < 0.01: Highly competitive market with many small firms, no dominant pricing power.
- HHI 0.01 - 0.15: Unconcentrated market with some dominant firms but still competitive.
- HHI 0.15 - 0.25: Moderately concentrated, a few firms have significant market share.
- HHI > 0.25: Highly concentrated, a small number of firms control most of the market, reducing competition.
Why is market concentration important for competition and attractiveness?
- Less competition: Fewer firms set prices, potentially leading to higher profits but less innovation.
- Higher entry barriers: Large firms block new entrants through brand loyalty or resources.
- Market power: Fewer competitors give firms more leverage over pricing and suppliers, leading to monopolistic tendencies.
What classification systems are used to define markets for measuring concentration?
- SIC (Standard Industry Classification) codes: Classify industries using a four-digit code.
- NACE codes: Used in Europe for classifying economic activities.
What is market power, and how do different market structures influence it?
- Market power: A firm has market power when it can set prices above its marginal cost, allowing higher profits than in perfect competition.
- Perfect competition: Firms have no market power; they are price takers.
- Monopoly power: Comes from barriers to entry, allowing firms to control prices and earn monopoly rents.
- Attractive industries: Industries where firms can exercise market power, often maintained by regulatory or structural entry barriers.
What is the Lerner Index, and how does it measure market power?
What are the key concepts of valuation in financial statements?
Present Value:
- Money today is worth more than the same amount in the future due to earning potential.
- Discounting Future Cash Flows: Adjusts expected future cash flows to present value using a discount rate to account for time and risk.
Types of Valuation:
* Market Value: Based on the current market price (e.g., stock price).
* Book Value: Asset value minus liabilities on the balance sheet.
* Fair Value: The estimated open market price of an asset.
* Liquidation Value: Expected value from selling assets and settling liabilities.
* Intrinsic Value: The true value of an asset, determined through fundamental analysis.
Key Insight: Financial statements can reveal a company’s strategy without direct insight into its operations.
What are common performance indicators used to evaluate a company’s performance?
- Shareholder Return: Measures financial return to shareholders, reflected in stock price appreciation and dividends.
- Growth: Assesses increases in sales, market share, or other key expansion metrics.
- Profitability: Evaluates the ability to generate profit relative to revenue, assets, or equity (e.g., gross margin, operating margin, net margin).
What benchmarks are used to assess a company’s performance?
- Over Time: Compares current performance to past trends.
- Against Other Companies: Compares with competitors to gauge relative industry position.
- Against Absolute Benchmarks: Compares return on capital vs. cost of capital to assess value creation for shareholders.
How can financial ratios help diagnose a company’s performance?
Diagnosing Performance:
- Identifies reasons for good or bad performance.
- Uses ratio decomposition to break down financial metrics.
Interpreting Financial Data:
- Uses qualitative information to understand strategy.
- Considers company context beyond just numbers.
What is the Ratio approach to analyzing Return on Equity (ROE)?
The DuPont approach decomposes ROE into components to analyze profitability, efficiency, and financial leverage.
Use Cases:
- Time-series analysis (same firm over different periods).
- Cross-sectional analysis (comparison with other firms).
How does the DuPont Analysis break down Return on Equity (ROE)?
How can profitability ratios provide strategic insights?
How can profitability ratios provide strategic insights?
How can liquidity ratios provide strategic insights?
Assesses if the company can meet its short-term obligations.
How can efficiency ratios provide strategic insights?
Measures how effectively the company uses assets to generate revenue.
How can solvency ratios provide strategic insights?
Evaluates how the company balances debt and equity in its financing structure.
