FIN302 ANALYSIS OF

EQUITY & FIXED

INCOME INVESTMENT
Topic 1 Business Strategy Analysis 1
CONTENT
 A) Types of Business Models
 B) Industry Analysis Using Porter’s 5 Forces Model
 C) Types of Business Strategy

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A.1) WHAT IS A BUSINESS
MODEL?
 The term business model refers to a company's plan for making a profit.
 It identifies the products or services the business plans to sell, its identified target market, and
any anticipated expenses.
 Business models are important for both new and established businesses. They help new,
developing companies attract investment, recruit talent, and motivate management and staff.
 Established businesses should regularly update their business model or they'll fail to anticipate
trends and challenges ahead.
 Business models also help investors evaluate companies that interest them, and employees
understand the future of a company they may aspire to join.

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A.2) TYPES OF BUSINESS
MODELS
 There are as many types of business models as there are types of business.
 For instance, direct sales, franchising, advertising-based, and brick-and-mortar stores are all
examples of traditional business models.
 There are hybrid models as well, such as businesses that combine internet retail with brick-
and-mortar stores.
 Below are some common types of business models;
 Retailer:
 One of the more common business models most people interact with regularly is the retailer
model. A retailer is the last entity along a supply chain. They often buy finished goods from
manufacturers or distributors and interface directly with customers.
 Example : Walmart

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A.2) TYPES OF BUSINESS
MODELS
 Manufacturer:
 A manufacturer is responsible for sourcing raw materials and producing finished products by
leveraging internal labor, machinery, and equipment. A manufacturer may make custom goods
or highly replicated, mass-produced products. A manufacturer can also sell goods to
distributors, retailers, or directly to customers.
 Example: Ford Motor Company
 Subscription:
 Subscription-based business models strive to attract clients in the hopes of luring them into
long-time, loyal patrons. This is done by offering a product that requires ongoing payment,
usually in return for a fixed duration of benefit.
 Example: Spotify

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A.2) TYPES OF BUSINESS
MODELS
 Franchise
 The franchise business model leverages existing business plans to expand and reproduce a
company at a different location. Often food, hardware, or fitness companies, franchisers work
with incoming franchisees to finance the business, promote the new location, and oversee
operations. In return, the franchisor receives a percentage of earnings from the franchisee.
 Example: Domino's Pizza
 Pay-as-You-Go
 Instead of charging a fixed fee, some companies may implement a pay-as-you-go business model
where the amount charged depends on how much of the product or service was used. The
company may charge a fixed fee for offering the service in addition to an amount that changes
each month based on what was consumed.
 Example: Utility companies

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A.3) EXAMPLE OF BUSINESS
MODELS
 Consider the vast portfolio of Microsoft. Over the past several decades, the company has
expanded its product line across digital services, software, gaming, and more. Various business
models, all within Microsoft, include but are not limited to:
 Productivity and Business Processes: Microsoft offers subscriptions to Office products and
LinkedIn. These subscriptions may be based off product usage (i.e. the amount of data being
uploaded to SharePoint).
 Intelligent Cloud: Microsoft offers server products and cloud services for a subscription. This
also provide services and consulting.
 More Personal Computing: Microsoft sells physically manufactured products such as
Surface, PC components, and Xbox hardware. Residual Xbox sales include content, services,
subscriptions, royalties, and advertising revenue.

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B.1) STRATEGY ANALYSIS
-It is an important starting point for the analysis of financial statements.
-Strategy analysis allows the analyst to probe the economics of a firm at a qualitative level so that the
subsequent accounting and financial analysis is grounded in business reality.
-Strategy analysis also allows the identification of the firm’s profit drivers (product, service..) and key
risks (associated with that, scenario during crisis, what happened? How do they overcome it?). --
Enables the analyst to assess the sustainability of the firm’s current performance and make realistic
forecasts of future performance.
-Strategy analysis, therefore, involves industry analysis, competitive strategy analysis, and corporate
strategy analysis.

Industry Analysis

Competitive Strategy

Corporate Strategy Analysis

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B.2) INDUSTRY
ANALYSIS
 An analyst has to first assess the profit
potential of each of the industries in
which the firm is competing.
 Porter’s 5 Forces
 Example: Starbucks,

Boeing,
Netflix

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 THREAT OF ENTRY SUPPLIERS & BUYERS

6 Major Barriers to Powerful Suppliers & Suppliers & Buyers

Threat of Entry
Market Entry Buyers Bargain Power
• Relatively easy to • Economics of scale • Employ pressure over • Suppliers powerful –
enter, highly • Product prices, quality or few dominant firms,
competitive differentiation (brand quantity component supplied
• Potential new equity) demanded/sold is differentiated, few
entrants, intensify • Capital requirements substitutes
fight for market share • Cost disadvantages • Buyers powerful –
• Access to distribution few of them, buy in
channels huge volume, product
relatively
• Government
undifferentiated
regulations (switching is easy),

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 SUBSTITTUES COMPETITIVE RIVALRY

Substitute Products Deserve the Closest Rivalry Among Intense Rivalry

& Services Analysis Participants Expectation

• Threaten on prices • Show improvement • Depends on the • Competitors are

& profitability in price number, relative relatively equal size
performance size & competitive & power
• Produced by firms prowess of • Industry growth is
with deep pockets participants slow
• Fixed cost are high
• Exit barriers are
high

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B.3) COMPETITIVE STRATEGY
 Championed by Porters (1980s & 1990s).
 Argument – company could only outperform its rivals if it could establish a difference that
could preserve.
 Sustainable competitive advantage (SCA) – achieved when the advantage resists erosion from
competitors.

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PORTER GENERIC
COMPETITIVE STRATEGIES
 ‘Generic’ – can apply to any
business & any industry.
 However, the relative attractiveness
of different generic strategies is
related to choices about competitive
scope.

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 PORTER GENERIC
COMPETITIVE STRATEGIES:
STRATEGIES
Cost Leadership Cost Focus Differentiation Focus Differentiation
• Aggressive exploit cost • Focus strategy – well- • Seeks to create uniqueness • Focus strategy – well
reduction thorough defined market niche on the mass market defined market niche
economics of scale & • Eg. Southwest Airlines, • Eg. Nike, Walt Disney • Eg. Soft drink ventilation in
operation (purchasing, IKEA campus, Ferrari
overhead, etc)
• Charges low to substantial
market share
• Eg. Dell Computer, Wal-
Mart, McDonald

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 COMPETITIVE DYNAMICS OF
AN INDUSTRY
Underlying structural Market & industry Conduct Performance
conditions structure

• Supply – raw • Number of sellers • Competitive • Production

materials, tech, & buyers; barriers culture; product efficiency;
public policy to entry, exist; strategies; pricing margins profit
• Demand – price patterns of behavior; level; employment
elasticity, ownership; cost advertising levels
existence of structures strategies;
substitutes, rates distribution
of market growth, relationships
eco performance,
purchase methods,
market seasonality

Types of markets
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TYPES OF MARKETS
Type of Markets Description
Pure competition Numerous firms offer broadly the same product/service
Monopolistic Firms offering a differentiated product/service
competition
Pure oligopoly Few firms produce broadly the same commodity
Differentiated Few firms produce products that are partially
oligopoly differentiated
Monopoly Only one firm provides the product/service due to patents,
licenses, scale economics

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INFLUENCE OF MARKET
POSITION ON STRATEGY
 Market position often direct influence upon strategy.
 Classification of competitive position:-

1) Market leader – largest market share (by virtue of its pricing, advertising intensity,
distribution coverage, tech advance, rate of new product introductions); provide benchmark
for others.
2) Market challengers & followers – slightly smaller marker share; may choose to adopt
aggressive stance or less aggressive stance.
3) Market nichers – series of small firms that survive & indeed often prosper by choosing to
specialize in parts of the market

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 MARKET LEADERS,
CHALLENGERS, FOLLOWERS
& NICHERS - STRATEGY
Market Market Markets Market
Leaders Challengers Followers Nichers
Discount/cut prices
Expand the /market Segment carefully
Cheap goods

Innovate products & distribution

Protect the current share Improve services Use R&D cleverly Get smart

Advertise heavily

Proliferate the range

Expand share Challenge conventional wisdoms
Reduce cost 18
C.1 APPLYING CORPORATE
STRATEGY ANALYSIS
 Corporate strategy analysis involves examining whether a company is able to create value by
being in multiple businesses at the same time.
 A well-crafted corporate strategy reduces costs or increases revenues from running several
businesses in one firm relative to the same businesses operating independently and transacting
with each other in the marketplace.
 Strategy analysis is also useful in guiding financial analysis. For example, in a crosssectional
analysis, the analyst should expect firms with cost leadership strategy to have lower gross
margins and higher asset turnover than firms that follow differentiated strategies.
 In a time series analysis, the analyst should closely monitor any increases in expense ratios
and asset turnover ratios for low-cost firms, and any decreases in investments critical to
differentiation for firms that follow differentiation strategy.

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 Business strategy analysis also helps in prospective analysis and valuation.
 First, it allows the analyst to assess whether, and for how long, differences between the firm’s
performance and its industry’s (or industries’) performance are likely to persist.
 Second, strategy analysis facilitates forecasting investment outlays the firm has to make to
maintain its competitive advantage.

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C.2 CASE STUDY
 Let’s apply the concepts of corporate strategy analysis to the Tata Group, a diversified global
company headquartered in India.
 Tata traces its beginnings to the founding of a private trading firm in 1868.
 In 2009-2010 the company reported revenues of $67.4 billion, employed almost 400,000
people, and had operations in over 80 countries.
 Its structure as a diversified conglomerate reflects its Indian roots as a legacy of the British
colonial managing agency system, and also in the need to provide its own intermediary
infrastructure in the absence of that infrastructure in the emerging Indian market.
 Chairman Ratan Tata has worked since his appointment in 1991 to turn what was then a
collection of highly independent companies spread across disparate industries into a modern
global enterprise able to harness the value of multicompany synergy to successfully compete
in India and beyond

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 At the end of 2010, the Tata Group was organized into seven business sectors:
 • Information Technology and Communications: In 2009-2010 this sector represented about
16 percent of Tata’s revenues. Tata Consultancy Services is India’s most valuable IT company
and its over 140,000 consultants provide IT services, business solutions, and outsourcing
across 42 countries. This sector also includes companies engaged in product design and
technology development services, interactive learning development, business support services,
and telecommunications.
 • Engineering products and services: This sector represented about 33 percent of Tata’s
revenues. Tata Motors, producer of the Nano, the world’s least expensive car, is India’s largest
automobile company, and is also a significant player globally, being the world’s fourth-largest
truck manufacturer, the second-largest bus manufacturer, and the owner (since 2008) of Jaguar
Land Rover. Other companies in this sector provide automotive, construction, and engineering
products and services.

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 • Materials: Materials represented about 32 percent of Tata’s revenues. Tata Steel, a Fortune Global 500
company in its own right,employs over 80,000 people in nearly 50 countries. Other companies in the sector
provide a wide range of materials production and services.
 • Services: Services represented about 4 percent of Tata’s revenues. The Taj Hotels Resorts and Palaces group
offers 66 hotels across India as well as 16 international locations, while related companies provide additional
rea-estate-focused services. Tata AIG Life Insurance Company and Tata AIG General Insurance Company
provide insurance solutions to individuals and businesses. Additional companies provide asset management,
management consulting, and other services.
 • Energy: Energy represented about 6 percent of Tata’s revenues. Tata Power is India’s largest private-sector-
integrated power utility. Tata BP Solar is the largest Indian maker of solar photovoltaic and solar water
heating products.
 • Consumer Products: Consumer products represented about 4 percent of Tata’s revenues. Tata Beverage
Group markets brands such as Tata Tea, Tata Coffee, Tetley (the leading UK market brand), Eight O’Clock
Coffee, and Mount Everest Mineral Water. Other companies in the sector own retail stores, and also produce
and market watches, jewelry, and eyewear.
 • Chemicals: Chemicals represented about 3 percent of Tata’s revenues. Tata Chemicals is the world’s second
largest producer of soda ash, and produces a variety of chemicals for the consumer, industrial, and farm
sectors. Other companies in the sector pursue drug discovery and development and produce agrochemicals.

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GIVEN THE CONVENTIONAL WISDOM THAT MULTI-
INDUSTRY CONGLOMERATES WILL STRUGGLE TO COMPETE
AGAINST THEIR MORE-FOCUSED COMPETITORS, HOW HAS
TATA MANAGED TO ACHIEVE ITS SUCCESS THUS FAR?
 The answer lies in the well-executed development of centralized functions applied across the
group that support, connect, and elevate the individual companies on many different levels,
while at the same time allowing them the independence to succeed on their own.
 Key elements of this model include:

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1ST POINT
 • The primary connection between the Tata Group companies, and perhaps their biggest collective source
of strength is the Tata Brand, which in 2011 was named one of the top 50 global brands by Brand Finance.
 This recognition comes as the result of a well-planned and careful nurturing of the brand by Chairman
Tata that began in 1995 when he introduced the Tata Brand Equity Scheme.
 This subscription plan establishes the criteria by which a subscriber company may use the Tata brand and
also gain access to the resources of the broader group.
 Subscribing companies sign the Brand Equity and Business Promotion (BEBP) agreement, which
specifies a required code of conduct that helps to ensure high standards of quality and integrity across the
company.
 A centralized organization, Tata Quality Management Services (TQMS), works to help Tata companies
achieve their business objectives and meet the standards specified by the agreement. Companies who
excel in quality management can be nominated for the JRD Quality Value Award, which is modeled after
the Malcolm Baldrige Award.
 Conversely, companies who fail to meet the standards set out in the BEBP agreement risk losing their right
to use the Tata name. The value of the Tata brand is immense for a group company that is not well
recognized in its market, and especially in emerging markets the brand can be a very powerful and
important sign of quality and integrity.

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2 ND
POINT
 The Tata Group exploits its scale and the diversity of its collective companies in order to foster
learning, leadership development, and the sharing of best practices across the group.
 Tata Administrative Services (TAS) coordinates a group-wide management recruitment and
development program, recruiting at top Indian business schools and rotating new managers
across group companies during a five-year development plan.
 The Tata Management Training Centre (TMTC) brings together senior executives, who share
insights with their fellow executives from a huge diversity of industries.
 The scale of the company is such that these programs can easily bring together 50 or more
company CEOs, who share best practices, view problems from a multitude of perspectives,
and build relationships that help facilitate cross-company communication and synergy.

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3 RD
POINT
 While Tata Group companies operate with a significant degree of independence, they have the financial,
intellectual, and other resources of the broader group behind them.
 In many ways the central office acts as a venture capitalist—serving as a resource for investment funds,
management expertise, and connections within the broader group, in industry, and in government.
 Much like venture capitalists, the Group Executive Office (GEO) members sit on the boards of Tata
Group companies in order to facilitate communication between the central office and individual
companies, and to bring the knowledge and experience of the broader group to each individual company.
 This support allows group companies to act like a much larger company in making acquisitions,
investing in new technologies, and making other strategic moves. The power of this backing can be seen
in the acquisitions of Tetley Tea by Tata Tea in 2000, Corus by Tata Steel in 2007, and Jaguar Land
Rover by Tata Motors in 2008, all of which represented an acquisition of a company much larger than
the Tata company which acquired it. This would not have been possible without the backing of the
broader group.

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 As of 2010, almost 60 percent of Tata Group revenue came from outside the Indian market.
 The increasingly global footprint of the company as well as the evolving global economy
present several challenges to the effectiveness of its conglomerate model.
 First, the continued expansion into developed countries may reduce the importance of the
internal intermediary infrastructure that Tata has worked to develop.
 Second, as the Indian economy continues to evolve, this same issue may eventually hold true
in the home market.

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 Finally, the continued successful integration and coordination of the operating companies in a
company with a strong tradition of independence will be made ever harder when spread across
an increasingly broad geography.

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THANK YOU

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