Business

Analysis
September 28th
 ”Give a hungry man a fish, and you feed him for a day,
But if you teach him how to fish, you feed him for a lifetime.”

- Maimonides
Business Case

1983 1994

● After 11 years
● From $100 million ● Acquired $1.7 billion
regional ● Distribution strategy
● to $1.3 billion problem
global brand ● Overestimated sales
growth
● Underestimated
complexity of its
distribution channel
● Sell Snapple for $300
million
Security Analysis Process

BUSINESS
ANALYSIS

GAAP
FINANCIAL FINANCIAL
FORECAST
STATEMENT STATEMENT
ASSUMPTION
ANALYSIS

VALUATION
Security Analysis Process Highlight issue
in financial statement
Identifies concern that
require more detailed
business analysis BUSINESS
ANALYSIS

GAAP
FINANCIAL FINANCIAL
FORECAST
STATEMENT STATEMENT
ASSUMPTION
ANALYSIS

VALUATION
FS & BA : Work hand in hand to identify
target firm’s potential
Introduction
Ø Understanding financial statement is not enough!
Ø Business Analysis’ Goal :
● Learn the business ● Manufacturing process
● Its industry and market outlook ● Purchaning
● Competitors ● Technology
● Various product ● R&D
● Marketing and selling approach ● Investment opportunity
● Human resources ● Etc
That might affect future cash flow

Ø Business Analysis help

● consider whether firm can maintain
profitability/more profitable/less profitable
● Determine assumption for valuation method
Outline

External Internal
Analysis Analysis
Outside firm’s control Inside firm’s control
Business Analysis Framework
External Analysis
Internal Analysis
q Economic q Customer
Structure q Mission Analysis
q Product and service
q Product life cycle
q Pricing and differentiation
q Market and selling strategies
q Supply chain
q Human resources
q Investment priorities
q Individual q Finance/accounting q Government
Competitor and Regulatory
Assessment Analysis
External Analysis

Economic Customer
Structure Analysis

Individual
Government and
Competitor
Regulator Analysis
Assessment
 External
Analysis Industry has
1. Economic Structure High returns
More intense
of the Industry
competition
Attrack more
● Determine returns,
investment
profitability, and cash
flow Lower
● Systematic approach expected return
to study economic More
structure: Five basic
competitive forces competition
(Porter’s Five Forces
Frameworks) Lower
Firm’s value Lower
Industry return
Porter’s approach
Potential Entrants

Existing
Buyers Competitive Suppliers
Rivalry

Substitutes
Existing Major Factors that increase
competitive rivalry among firms
Competitive
Rivalry
● Goal : understanding the
existing rivalry on a More competitors
macroeconomic level Increase Low industry growth
Competitive Limited product differentiation
● The greater the rivalry à
Rivalry High fixed cost
the lower profitability Excess industry capacity
The stronger the barriers
to entry, the lower
Potential
Entrance
competitive rivalry

Ø How many?
Ø How they will affect competitive rivalry?
Ø Barriers to entry:
● Economic scale
● Product differentiation (Highly
differentiate products or well-known
brand)
● High capital needs
● The difficulty of obtaining certain
resources
● Access to distribution channels
● Cost disadvantages
● Specialized technology or patents
Substitute
Products
● Only few products that do
not have substitutes
● Can remove profit from
industry
● Example : Coffee and Tea
 Buyers
● Customer have a strong
bargaining power
● Demanding quality
improvement and price
reduction
● Represent large portion of
sales
● Price reduction à
profitability and cash flow
will be reduced
 Supplier
● Have more bargaining power if
only a few of them and if there
are not many substitutes
● Raise price and reduce quality
● Industry does not generate
significant portion of supplier’s
sale, it will have more price
flexibility, thus can reduce
profitability and cash flow
External
Analysis
ü How does this competitor approach the marketplace?
2. Individual Competitor ü What are the unique characteristic of its product or
Assessment service?
ü What are its competitive advantages?
● Goal : address the specific ü How does its pricing compare with the target company?
strategies of key competitors on ü What is its apparent marketing strategy?
a microeconomic level. ü How does customer view the product and service?
ü Is the competitor well positioned for the future trends in
● Task not covered by porter’s the industry?
five forces ü Is this competitor profitable? Is it likely to invest more in
the business if the competitive situation heats up?
● Ask questions to understand ü How does the competitor make or buy its product? Is
competitor’s strategy, products, the way it makes or buys its product a competitive
marketing, supply chain, and advantage?
profitability and how each will ü How is the product distributed? Does the distribution
affect targeted company method provide a competitive advantage?
ü Is the business management a strength or weakness?
External Analysis
3. Customer Analysis
o Goal : understand customer needs and interest by
looking at demographic trends, purchasing habits,
attitudes and usage information, and other types of
data.
o Why study customer? à project future sales to
customer and marketing expenses; channel used;
profitability
o Two level of customers: immediate customer and
ultimate user
o What aspects of target firm’s product are really
important to the customer? Is price the key or is
quality most important?
o Are buyers looking for customized product?
o How are the customers’ needs likely to change in
the future?
External Analysis
4. Governmental and Regulation Analysis

• Can limit or foreclose entry into

a market
• Proscribe certain form of
competition
• Affect profitability
• Incur significant expenses from
adhering to licensing
requirements
Internal Analysis
Internal Analysis
Focus
q Mission
q Product and service Everything under firm’s
q Product life cycle control that may influence its
q Pricing and differentiation future cash flow
q Market and selling strategies
q Supply chain
q Human resources Success Key
q Investment priorities
q Finance/accounting Competitive
advantage of
firm
Internal Analysis
1. Mission
What firm want to accomplish

“To accelerate the world’s transition to sustainable energy.” - Tesla

Spread ideas - TED

“To connect the world’s professionals to make them more productive and
successful.” - LinkedIn

“Sejahtera bersama bangsa dengan memberikan nilai terbaik kepada

para pemangku kepentingan” – Astra International
Internal Analysis
2. Product and Service
• What do the product and service do?
• How does the customer use them?

• Understand market scope (geographic area,

technology, customer type)
• Product line
• Understand product offering from annual report,
firm’s Website, analyst report
Internal Analysis
3. Product Life Cycle Optimized
production cost,
R&D low

Cut R&D and

promotional cost
Sales grow
rapidly
Significant R&D,
production and
promotional cost
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Internal Analysis
3. Product Life Cycle
Internal Analysis
4. Pricing and Differentiation
• Product can be differentiated
by : quality, service, function
• Some firms selecting small
niche and serving its very
specialized needs
• The more differentiated the
product, the less competition
focuses on price
• Understanding firm’s
positioning
Internal Analysis
5. Supply Chain
Research and
o Supply chain includes
Development
combined effort of purchasing,
manufacturing, research and
development, and distribution

o How each part of the supply

chain works to be able to project
future cash
Purchasing Manufacturing Distribution
o Large percentage in cost occur in to Customer
supply chain
o Recognizing which part most
important
Internal Analysis

6 Marketing 8 Investment Priorities

Understand firm’s strategy Can be used to defend
for bringing the product to its position in market
customer

7 Human Resources 9 Finance/Accounting

Leadership ability and Firm’s financial health
style Will be covered in Ch 4 and 5
End of presentation

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