Business Analysis ProjectSession 3‐ Analysis of Competitive Market and 

Financial Performance

Andre Samuel

This Session

• ETOP Analysis• Quantitative analysis of Five Forces• Evaluating Strategies‐ Organizational Performance

ETOP Analysis

• ETOP analysis enables strategists to anticipate, consider, and design the most appropriate strategies 

• It provides a reliable guide for scanning macro‐environmental factors, and enhances the strategic ability to understand and act upon macro‐environmental intelligence.

Example ETOP Analysis

Competitive Analysis‐ Porter’s Five Forces

Make your Five Forces analysis Quantitative

First Force‐ Competitive Rivalry• Who are the Key Competitors?• What is the overall Industry/Sector performance?• What are their market share?• Who is winning, who is losing?

UK Supermarket IndustryThe latest grocery share figures from Kantar Worldpanel, published for the 12 weeks ending 22 May 2016, shows average household spend for the big four has dropped by 2.9%. From 2012 to 2015, the German discount chains Aldi boosted their market share. Aldi went to 5%, from 2.6%; while Lidl's share rose to 3.5% from 2.5%. They have taken nearly 9% of the market in just two years. 

UK New Car Industry Marketline (2015)

Market Analysis: • The UK new cars market had total revenues of $93.2bn in 2014, representing a compound annual growth rate (CAGR) of 9.8% between 2010 and 2014.

• The performance of the market is forecast to decelerate, with an anticipated CAGR of 5.5% for the five‐year period 2014 ‐ 2019, which is expected to drive the market to a value of $121.8bn by the end of 2019

Buyer Power‐ UK New Car Industry Marketline(2015)

Overall, buyer power is assessed as moderate‐ 3.3

Supplier Power‐ UK New Car Industry Marketline(2015)

Overall, supplier power is moderate‐ 3

New Entrants‐ UK New Car Industry Marketline(2015)

New entrant power is assessed as moderate‐ 2.5 

Threat of Substitute‐ UK New Car Industry Marketline (2015)

Overall, the threat from substitutes to personal cars is strong‐ 3.7 

Rivalry‐ UK New Car Industry Marketline (2015)

overall rivalry in this market is strong‐ 3.6

Summary of Five Forces‐ UK New Car Industry Marketline (2015)

Each of the Force’s score is plotted on the Radar chart

Predicting the forces 5 years Forward

Key Issues with Using Traditional Five Forces‐ Johnson and Scholes et al (2014, pg. 48‐49)

• Defining the right industry• Converging Industries• Complementary Organizations‐ as a sixth force

Critical Comment on the Five Forces‐Lynch (2015, pg.92)

• The analytical framework is static• It assumes the organization’s own interest comes first

• It assumes buyers have no greater importance than any other aspect of the micro‐environment

• Its starting point is that the environment poses a threat. BUT it may be useful to CO‐OPERATE

• It ignores the HR aspect of strategy• Prescriptive rather than emergent

Modifying the Five Forces using Four Link Model Lynch (2015, pg. 94)

We will need to add Cooperation and Complementors

Five Forces and Collaboration‐ Johnson and Scholes (2014)

Competition and Collaboration‐Johnson and Scholes (2014)

Other Forces of Competition?‐Johnson and Scholes (2014)

P

E

S

T

L

E

Evaluating StrategiesAssessing Performance

Organizational Performance

Economic Performance

• Product Markets‐ sales growth, market share

• Profitability‐ profit margin, ROCE

• Financial Markets‐ share price, dividend yield

Effectiveness

• Balance scorecard• Customer Perspective• Internal business perspective• Innovation and learning perspective

• Financial perspective 

• Triple Bottom Line• Economic measures• Social Measures• Environmental Measures

Performance Comparisons‐ relative to what?

• There are three main comparisons to consider:1. Organizational Targets‐management’s own targets 

expressed in the company’s vision, mission, objectives

2. Trends over time‐ whether performance is improving or declining over time. Improvement suggest good strategy, decline suggest poor strategy

3. Comparator Organizations‐ benchmarking against competitors, or other companies doing equivalent business. Compare using financial measures, share price among others measures. (discussed above)

Ratio How calculated Interpretation Ope

ratin

g ra

tios

Overall Performance

Gross profit Turnover minus direct costs of making product or providing a service

Operating Profit Gross profit minus operating costs

Shows whether operation is financially sustainable

Return on Capital Employed %

Operating profit / Average capital employed x 100

Provides an overall measure of corporate performance

Net Profit Margin % Operating profit / Turnover x 100

Describes the % profit for each £ turnover after direct & indirect expenses have been deducted

Asset Turnover ( X ) Turnover / Average capital employed

Shows how many times sales generated from the capital employed

Working Capital Stock Turnover ( X ) Cost of sales / Stocks Indicates how many times stocks are being

turned over in a year Debtor Turnover ( X ) Turnover / Trade debtors Number of times trade debtors are rotated in

a year Working Capital to Turnover ratio %

(Stocks + trade debtors – trade creditors) / Turnover x 100

Provides a measure of the overall working capital needs of the company. High ratios suggest working capital needs are greater.

Fina

ncial r

atio

s

Debt Ratios Gearing Ratio % Total borrowings / Capital

employed x 100

Measures extent of borrowings in relation to capital employed.

Debt–equity ratio % Total borrowings / Shareholders’ funds x 100

Relates total debt to shareholders’ funds to indicate how company is financed.

Interest Cover (X) Profit on ordinary activities before interest / Interest paid

How many times profits cover interest payments. A measure of the ability to service debt.

Liquidity Ratios Current Ratio (X) Current assets / Current

liabilities How many times current assets cover current liabilities

Acid test (X) Current assets less stocks / Current liabilities

Current ratio less stocks. A more stringent test of liquidity

Ellis, J and Williams D (1993), Competitive Strategy and Financial Analysis, Pitman , page 235

Financial Outcomes

Shareholder Value Analysis‐Johnson and Scholes (2014, pg. 386)

Using Yahoo Finance

• For any listed company you can:• View financial statements• Key Statistics:

• Valuation Measures• Financial Highlights• Trading Information