Week 2: Writing a Good Case Analysis

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Week 2 Writing a Good Case Analysis

• MBA 299 Strategy
• Ian Larkin Evan Rawley
• 4-7-2006

2
Announcements

• Round 2 of CSG has run and results are posted
• Round 3 strategies due on Tuesday 4/11 at noon
• Barnes Noble vs. Amazon.com write-up due
  Wednesday 4/12 (ILs sections) or Thursday 4/13
  (ERs sections)

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Agenda for today

• Quick status check
• Case write-up focus on qualitative factors
• Key success factors
• 10 things to avoid
• Strategic frameworks Porters 5-forces
• Financial statement analysis and benchmarking

4
Game results for Ians sections

• Total capacity (Number of teams) in each market
  for each of the 4 games

5
Typical reactions to CSG

• Whoa, this totally isnt what I expected!
• Welcome to the wonderful world of the CSG!
• This always happens early in the game doing
  well is actually about the middle and end-game
• Theres way more capacity in the market I entered
  than I thought there would be!
• Can you play in this market given the likely
  economics?
• Will everyone else come to the same conclusion
  and sell capacity?
• Wow, Im a monopolist in my market! Or I can be
  a monopolist in this market that no one entered!
• Dynamics are important. But so is your cost
  position

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Thinking about cost

• Total avg. cost total number of units
  sold/total costs
• You can only guesstimate the total number of
  units you will sell, but given current capacity
  you should be able to set bounds
• Total cost EC Ktotal capacity MCtotal
  units sold scrap value of capacity
• Total variable cost Total cost sunk cost
• EC is sunk some part of K is sunk (be careful
  with the latter!)
• When deciding when to exit, whats the relevant
  cost you should look at?
• If youve sunk a cost, look at total average
  variable cost
• If you havent sunk a cost, should use total cost
  (entry decision)
• Remember from Ryanair relevant cost/necessary
  prices VERY different pre- and post-entry!

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Agenda for today

• Quick status check
• Case write-up focus on qualitative factors
• Key success factors
• 10 things to avoid
• Strategic frameworks Porters 5-forces
• Financial statement analysis and benchmarking

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A quick review of the cases weve covered

• Coors
• Strategies must be coherent and consistent luck
  matters!
• Cola Wars
• Industry analysis tells us a lot Porters 5
  forces is the bedrock analysis
• Crown Cork Seal
• Firm strategy can be more important than being in
  the right industry
• Matching Dell
• Cost leadership strategy possible, especially
  when it takes advantage of constraints of
  existing competitors
• Husky
• Differentiation strategy requires real,
  sustainable methods to drive up willingness to
  pay for certain semgent(s)
• Ryanair
• Need to consider competitive reactions when
  formulating strategy

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Goals for the case write-up exercise

• Give you the chance to apply the tools youre
  learning in class
• Let you get creative in shaping the analysis how
  you see fit (strategy is an art)
• Give you practice and feedback for the final exam

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The official rules from the syllabus

• Each CSG group will submit one case write-up
• Case write-ups are due before class
• The purpose of the case write-up is to encourage
  in-depth examination of the case and to prepare
  you for the final exam
• Write-ups should be 3-5 single-spaced pages
  (excluding any tables and exhibits)
• Tables and exhibits must be parsimonious and
  self-contained
• The write-ups may be primarily qualitative and
  focused on answering the discussion questions
• Quantitative analysis is encouraged
• Extend the analysis beyond the discussion
  questions

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3 basic issues in building a good case

• Developing a thesis
• Style
• Implementation

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10 pitfalls to avoid

• 1. Do have a thesis
• 2. Do use a customized analytical framework (or
  at least a coherent organization)
• 3. Dont turn in a laundry list of bullet points
  (like this)
• 4. Dont summarize excessively
• 5. Dont give extraneous recommendations
• 6. Do present a balanced argument
• 7. Dont be indecisive
• 8. Dont advance arguments without support
• 9. Dont pull in lots of outside material
• 10. Dont get the facts wrong

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Have a thesis

• A thesis is not a statement of facts, but rather
  a statement about ideas
• Statements of facts Who, what, and where
• Statements of ideas How and why, with supporting
  facts
• Which of the following is more interesting?
• For the past twenty years Coke and Pepsi have
  dominated the carbonated drinks market
• Cokes aggressive branding strategy has been a
  fundamental strategy leading to competitive
  advantage
• Every part of your paper should consistently
  focus on your thesis

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Use an analytical framework

• Examples of standard frameworks
• Porters 5 forces
• Internal/external
• Marketing 3 Cs and 4 Ps
• Cost leadership vs. differentiation
• Game theoretic
• Dont apply frameworks mechanically
• Pick and choose the most appropriate parts of
  each to create a customized framework
• Can be more of an organization than a
  framework, but your thought process should be
  clear

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So, what are the key success factors for case
write-ups?

• Developing a thesis
• Be insightful on core issues
• Prioritize
• Organize your write-up and tell coherent story
• Style
• Be balanced and show both sides, but stick to
  your guns
• Blend facts with analysis let the story tell
  itself
• Plan on taking time to write
• Implementation
• Bring in limited case data which solidify key
  points
• Follow instructions

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Next steps

• Read the case
• Look at discussion questions
• For motivation only, dont necessarily try to
  answer them
• Figure out whats critical
• Develop a thesis and supporting
  arguments/analysis
• Follow the rules

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Agenda for today

• Quick status check
• Case write-up focus on qualitative factors
• Key success factors
• 10 things to avoid
• Strategic frameworks Porters 5-forces
• Financial statement analysis and benchmarking

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Thinking about quantitative analysis

• Using quantitative support to back up your
  argument is often critical
• BUT detailed analysis of the right numbers
  rarely drives good case understanding
• Rather, good case understanding drives one to
  look at the right numbers
• SO Develop a solid understanding of the basic
  issues, then worry about quantitative analysis
• Sometimes will need to do some quick calculations
  to build a basic understanding just dont be
  too detailed

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A sample gameplan

• Identify your thesis (or some potential theses)
• Getting to a good thesis may require some number
  crunching, but shouldnt require that much
• Identify parts of the value chain that are
  critical to your thesis
• Porter Rivalry, Entry barriers, Suppliers,
  Buyers, Substitutes
• Look for data (or other evidence in the case)
  that can be used to support these critical areas
• Think SIMPLE and look for IMPACT

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Porters Five Forces
Threat of New Entry

• Economies of scale
• Proprietary product differences
• Brand identity
• Switching costs

• Capital requirements
• Access to distribution
• Absolute cost advantages
• Government policy
• Expected retaliation

Bargaining Power of Suppliers

• Differentiation of inputs
• Switching costs
• Presence of substitute inputs
• Supplier concentration
• Importance of volume to supplier
• Cost relative to total purchases
• Impact of inputs on cost or differentiation
• Threat of forward integration

• Buyer concentration
• Buyer volume
• Buyer switching costs
• Buyer information
• Ability to integrate backward
• Substitute products
• Price / total purchases
• Product differences
• Brand identity
• Impact of quality / performance
• Buyer profits

• Switching costs
• Concentration and balance
• Informational complexity
• Diversity of competitors
• Corporate stakes
• Exit barriers

Threat of Substitutes

• Relative price performance of substitutes
• Switching costs
• Buyer propensity to substitute

Source Michael E. Porter, Competitive
Advantage (New York Free Press, 1985)
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Analyses suggesting rivalry is high

• Market share leads you to believe theres no
  dominant player
• Total share of top 3 or 4 competitors
• Share of top competitors is relatively similar
  (no dominant player)
• Industry growth is low
• Fixed/sunk costs are big, particularly with
  several players currently in the market
• Fixed costs / total costs, or just gross fixed
  costs
• Overcapacity, particularly with several
  players..
• Total units sold / total capacity
• Switching costs are low
• Product homogeneity (often qualitative rather
  than quantitative, unless market surveys etc are
  posted)

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Analyses suggesting high BTE

• Economies of scale are high
• Average cost total cost / produced declines
  sharply
• Minimum efficient scale point at which this
  stops declining sharply
• Need to compare MES to total size of the
  market!!!
• Absolute cost advantages exist
• Learning curve exists after producing X years
  average costs decline by Y (often hard to
  calculate)
• Proprietary inputs or distribution channels
  (again, often qualitative, although of
  inputs/distribution locked up can be good)
• Cost of entry is high
• Total cost to set up MES factory (again, compare
  to total size of industry)
• Time to recoup initial investment is long

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Analyses suggesting high buyer power

• Buyer concentration
• Demand by top 5 buyers / total demand
• Few sales sales long-lived
• Length of contracts time between sales
• Presence of backwards integration
• Number of buyers who act as own supplier
• High investments required to serve buyers
• Costs of specific investments (e.g., locating
  plant close to buyers factory)
• Ease of buyer switching
• Lack of specific investments by buyers

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Analyses suggesting high supplier power

• Supplier concentration
• Supply of top 5 suppliers / total supply
• High supplier margin (especially compared to
  yours)
• High COGS (as a of sales)
• Useful to look at a single unit
• Presence of forwards integration
• Number of competitors who act as own supplier
• High investments required to use product from
  supplier
• Costs of specific investments (e.g., tooling a
  production machine to fit molds from supplier)
• Ease of supplier switching
• Lack of specific investments by buyers
• Importance of your firms volume to your
  suppliers

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Analyses suggesting substitution threat

• High price elasticity of demand
• If prices rise X, demand falls by more than X
• Or, if price of substitute product falls by X,
  demand for my product falls (can be less than X
• Correlation of sales declines with sales growth
  in substitute market
• Our markets sales fell by 200mn substitutes
  sales grew by 180mn
• Overall, this is the most qualitative of the
  forces needs to focus on product differences
  and consumer tastes

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Agenda for today

• Quick status check
• Case write-up focus on qualitative factors
• Key success factors
• 10 things to avoid
• Strategic frameworks Porters 5-forces
• Financial statement analysis and benchmarking

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Financial statement analysis

• Can be critical when assessing the two generic
  strategies (cost leadership vs. differentiation)
• Use all three statements and market value to your
  advantage
• Remember your accounting and finance identities
  and use this to back in to missing values of
  interest
• Look at within-firm trends over time
• Remember to deflate them
• CPI data at the Bureau of Labor Statistics
  http//data.bls.gov/cgi-bin/surveymost?cu
• Talk to the I-bankers and accountants in your
  group they will have good thoughts on this

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Income statement

• Think hard about the top line
• Usually it is possible to estimate average
  price/unit
• Use product mix information to push deeper
• COGS (GM) and SGA per unit and as a of sales
  are fundamental data points
• Find the appropriate level of granularity
• Look at P/E ratios and use the imputed growth
  rate to consider plausible scenarios consistent
  with market expectations
• Where will the growth in earnings come from - top
  line growth or from efficiencies?
• What does the company have to do to satisfy Wall
  Street?

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Balance Sheet

• How is the company financing its operations?
• Debt is good if it doesnt disrupt operations
• Does anything you see make you wonder about
  revenue recognition?
• Large deferred revenue liabilities are a bad
  signal
• Working capital matters in many industries
• WCAP - AR - Inventory /- other deferred
  assets/liabilities as appropriate
• Compare net asset value to market cap
• Has this firm created value historically?
• Be wary that NAV is often very imprecise

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Statement of cash flows

• Dying businesses might hemorrhage cash at the
  operating level while keeping earnings up
• Get a sense of how the firm is investing its
  capital
• Get a sense for earnings management
• Big bath accounting in year X make earnings
  look better at year X1 . . . observe this in
  the cash flows

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Some identities

• Sales Price/unit x units sold
• COGS Product cost/unit x units sold
• Production cost Raw materials cost direct and
  indirect labor costs depreciation
• Gross margin Sales COGS
• Net income Gross margin SGA
• P/E PV(earnings)-market value of debt/shares
  outstanding
• Use earnings today and an approximation of the
  cost of capital to estimate expected growth
  staring with this equation
• Market value Share price x shares outstanding
  market value of debt (usually approximated by
  book value of debt)

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High-level internal benchmarking

• Compare the financial metrics you just calculated
  within a firm (over time)
• Look for more detailed market or operational data
  to help explain variation in key metrics
• Does brand strength explain high price/unit?
• Does RD strength explain a high P/E?
• Do scale economies explain low costs/unit?
• Ask yourself what these comparisons tell us about
  firm strategy

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Detailed benchmarking

• Detailed benchmarking requires lots of data so
  internal benchmarking may be the only plausible
  option
• Compare plants, divisions, regions, products etc.
• Create PLs for the relevant unit of analysis
  (can be difficult)
• Often a great way to find opportunities
• Tip regression analysis might impress your
  client/boss and is pretty easy to do

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External Benchmarking

• Compare financial statement measures across firms
• Unit prices and sales (and hopefully something
  about mix)
• Unit COGS, GM and SGA and these measures as a
  fraction of total revenue (again mix adjust
  whenever possible)
• Market cap and P/E
• Look for granular market or operating data to
  understand firms better
• Ex. industry scale curves can tell us about the
  role of scale in production, the relative
  efficiency of plants and the effect of capacity
  on prices
• Can be GREAT evidence for existence of cost or
  differentiation strategy
• Cost compare various cost drivers across firms,
  a la Dell
• Differentiation compare various willingness to
  pay/customer value drivers across firms, a la
  Husky

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Useful tips Units are key!

• Think carefully about your units often
  normalizing by an appropriate unit can really
  help clarify your argument (and your thinking)
• XX/sales (overall performance)
• XX per unit produced or sold (suggests economies
  of scale, over/under-investment in marketing,
  etc)
• XX per customer (important in repeat-purchase or
  consumer goods environments)
• XX as a of industry profits (useful for BTE,
  rivalry, etc)

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Useful tips Compare!

• Making comparisons can also be illuminating
• To competitors relative efficiency, sources of
  competitive advantage/disadvantage
• To past values improvements or deterioration
  over time
• To other geographies or BUs ability to migrate
  business model from core business

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Useful tips Dont make it too hard!

• Keep it simple
• Let your thesis/ideas drive your analysis, not
  the other way around hopefully it will come
  relatively naturally
• Dont force quantitative analysis if nothing
  jumps out at you, support your point another way
  (qualitative logic, statement of fact, quotes
  from key players)
• Present your s simply, but in a way that clearly
  supports the point youre trying to make

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Plans for next section

• Anything we didnt get a chance to cover today
• Round 5 of the CSG
• More frameworks
• Core competencies
• Technological frameworks (e.g., network
  externalities)