Stategy Key Point

Topics: Financial statements, Strategic management, Financial statement analysis Pages: 13 (2314 words) Published: March 21, 2011
AYN 505 – Sem. 1/2011

A. Discussion Question

1. In financial analysis, explain why each of the four financial analysis steps (strategy, accounting, financial, and prospective analysis) is critical, and explain how they relate to one another. (PHBWBL p10, Q4 adapted)

2. Your brother, who works in a bank, has recommended to you that you purchase shares in an organisation, on the basis of the following information, which he has heard discussed around the office:

• Total assets have increased by 33%
• Revenue has increased by 12%
• Net profit has decreased by 4%.
• The dividend per share is 23c.
• The current share price is $8.50; 12 months ago it was $7.50.

Would you invest in this organisation? What information encourages you to do so, and what reasons might you have for hesitating? What additional information would you like before making this decision, and where might you find that information? (PHBWBL p10, Q5 adapted)

3. Rate and compare the leisure & hospitality industry and the mining industry as high, medium, or low on the Porter’s Five-Forces framework for industry structure. Which is likely to earn the highest returns? (PHBWBL p44, Q4 adapted)

4. What are the ways that an organisation can create barriers to entry to deter competition in its business? What factors determine whether these barriers are likely to be enduring? (PHBWBL p44, Q8)

B. Case Study

Inventec Case PHBWBL p48-53

Attempt the following questions (p53)

1. Despite its growth and size why is Inventec not very profitable?

2. What are the drivers of the average profitability of the Original Design and Manufacturing industry?

3. What are the key factors that a company like Inventec needs to manage to earn above-average profits in this industry?

4. Why is the Indian software industry, on average, so much more profitable than the Chinese ODM industry?

5. What strategic advice will you give Inventec to improve its profitability?

C. Project Task
None prescribed, but you should think about forming a group and selecting an industry/ company.

A. Discussion Questions

A1 In financial analysis, explain why each of the four financial analysis steps (strategy, accounting, financial, and prospective analysis) is critical, and explain how they relate to one another. (PHBWBL p10, Q4 adapted)

Managers have better information on a firm’s strategies relative to the information that outside financial analysts have. Superior financial analysts attempt to discover ‘inside information’ from analysing financial statements.

The 4 main steps are:

The four steps for business analysis help outside analysts to gain valuable insights about the firm’s current performance and future prospects.

1. Business strategy analysis

Strategy analysis enables the analyst to understand the underlying economics of the firm and the industry in which the firm competes. Involves 3 key steps:

1. Industry analysis
➢ What economic factors drive the industry choice? Impact on profitability? 2. Competitive strategy
➢ How has the company positioned itself in the industry? 3. Corporate strategy
➢ Can the company create value across the range of its business? (Ability to exploit synergies, minimisation of transaction costs,

There are a number of benefits to developing this knowledge before performing any financial statement analysis.

1. Strategy understanding provides a context for evaluating a firm’s choice of accounting policies and hence the information reflected in its financial statements (e.g. revenue recognition and cost capitalization policies)

2. Strategy analysis highlights the firm’s profit drivers and major areas of risk and provides an indication about whether these are likely to change (important for forecasting).

3. Strategy analysis makes it possible to...
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