Case Toolkit

I. Industry Analysis Cases: 1. Porters 5 forces: Entry - Economies of scale & scope | - Cost of entry | - Access to channels & markets | - Incumbent brand equity or excess capacity | Supplier power-------------Internal Rivalry ---------------Buyer Power - Scarce resources | - Many sellers - Elastic demand - Few suppliers | - Commodity - Few customers - No substitute inputs | - Industry excess capacity - No product differentiation | Substitutes ` - Technology/ substitute learning curve
- Switching costs - Market trends/ tastes

2. Competitive models: Pure Competition: Many firms, commodity, no product differentiation, 0-economic profits P D d Q Monopolistic Competition: Still many firms, little product differentiation, low profits P D d Q Oligopoly: Few firms, product differenn, high profits, incumbent advntgs, game theory, implicit collusion P D d Q Monopoly: One firm, control over market & supply, monopoly-level profits, legal issues 3. Capacity constraints: Benefits of excess capacity: - Economies of scale => lower marginal cost => lower price - Alternate uses of capacity? Costs of excess capacity: - Opportunity cost - Demand may not keep up - Retaliation from competition - Industry overcapacity leads to price war - Outsource/ sub-contract - Lease

Alternatives: 4. Economy Industry Market Firm 5. 4 Cs: - Customers - Competition - Channels - Cost

Case Toolkit <contd.>

II. Market Expansion Cases: (include Industry Analysis tools) 1. Profitability: Profit = Q (P C) Expenses C = (Sunk + Fixed + Variable) Costs Entry: SC + FC + VC Halt: VC Exit: FC NPV: NPV = (-C0) +
i=1 N

(Ci / (1 + ri))

C0: Entry costs N: time frame for project Q & N together have implications for capacity constraints, esp. when resources scarce or FC/SC are high Ci: Cash flow each year r: Cost-of-capital, includes risk-evaluation 2. Value chain: Input (suppliers) Prodn (mfgrs) Mktng (advertisers, media) Distn Sales Service/ repair Cust

Also apply internal/ external model. Eg: existing mkt share for firm being acquired; govt. issues for intl investments. III. Investment / Mergers & Acquisitions Cases: 1. NPV analysis: NPV = (-C0) + i=1 N (Ci / (1 + ri)) C0: Capital requirement N: Life of project/ time-horizon for payback; when resource are scarce, N affects capacity constraints Ci: Cash flow each year r: Cost-of-capital, includes risk-evaluation - CAPM : r = rf + (rm - rf), where rm based on S&P500 (12%), rf based on T-bills (4%) - from historic returns or industry benchmarks - Systematic vs idiosyncratic risk 2. Internal/ External issues: how are the following affected? Internal: Stockholders, Employees, Capacity/ Resources, Processing, Mktng, Distn, Misc. expenses, Value chain External: Competitors response, Change in industrial structure, Market/ customer response, Govt issues

3. Misc. issues/ questions: - Is a positive NPV sufficient? - Redundancies after merger/ acquisition? - Value added? Profit (firm1 + firm2) > Profit (firm1) + Profit (firm2) ? - Effect on stock-holders (Miller-Modigliani) - Organizational synergy/ strategic fit? - Core competency vs Diversification 3. Break-even analysis: - Total Revenue = SC + FC + VC - Discounted Cash Flows

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IV. Profit Improvement Cases: 1. Profitability: Profit = Q (P C) Expenses (Note: for revenue improvement,
i=1 N

(Q*P), where N is #product/ services)

Change in any of the following: Q - Product (Change in: Portfolio, Raw materials, Supply, Mfg, Packaging, Distn) - Price - Customers (Change in: Loyalty, Tastes/ trends, Economic factors) - Competitors (Differentiation on: Product/ portfolio, Price, Promotion) - Mktng (Problem with: Targeting, Advertising, Sales, Service, Price promotion) P - Is P at (MR = MC) [also check wrt level permitted by industry structure] - If (MR<MC), then firm is losing money for every new unit increase P or decrease Q - If (MR>MC), then there may be room for a price cut, thereby increasing Q P - Effect of competition/ industry type on price - Cost of Good Sold - Problems along value chain - Raw materials/ supply / Mfg / Dist / Sales - Hold-up problem - Supply/distribution chain management - Go through income statement expense items - Eg, Payroll/ Depreciation/ Tax/ Interest/ Inventory holding - Lease vs buy, outsource, etc.
Value-added Product/ service portfolio: Good! OK

D MC Q MR

Exp

2. Income statement (Go through each item and figure out cause of loss)
Revenue (for each major operation: check out cost/ value graph) - COGS (direct labor, materials, overhead, delivery) Gross Operating Margin - Expenses (Selling, General and Administrative or SGA) Depreciation Operating Profit - Interest Expense Profit before Taxes - Taxes Net profit

unnecessary

bad! Cost

3. Internal vs External: Changes in the following? Internal - Supply/ raw mats/ capacity External - Govt - Prodn - Economy - Mktng - Industry - Distn - Competition - Expenses - Customers/ market - Value chain - Price (if change in quantity, relate price to qty change using historical demand function) - Cost V. Stock Valuation Cases: Stock price = Mkt value of equity / # shares outstanding - Equity value = NPV of cash flows to perpetuity NPV = (-C0) + i=1 N (Ci / (1 + ri)) - Cost of capital (based on risk, ); WACC - Income statement vs Cash flow statement vs Free Cash Flow - Debt vs Equity - Tax write-off for debt interest - Bond-holders vs stock-holders - Dividend vs stock repurchase (Div taxed @ income rate, stock repurch taxed @ cap gains rate) - Analysts forecasts - Economic factors vs industry factors vs firm-specific factors - Market efficiency - Effect of interest rates (Fed) on inflation and stimulation

Wed, Apr 28 1. Coke vs. Bottlers (Source: Bulletpoint News): Coke announces sales vol drop in N America Independent bottlers increased price Coke charges them royalty per case Increase in price increases bottlers profit Pepsi independent bottlers form coalition for bargaining power to match competitors price increases Pepsi & Coke bottlers implicitly collude Coke bottlers expect Pepsi bottlers to meet price hike 2. Upstream (Cokes) profits down, while downstream (independent bottlers) profits up. Pepsi Bottling Group announces IPO (side issue?)

Disney profits down (Source: WSJ, 4/28/99) Consumer products sales down (worldwide and domestic) Tarzan products expecting competition from Star Wars products Home-video (animation) rentals/sales down Thinking about cost-cutting measures Movie studio Corporate opns ABC broadcast network Film Theme parks doing well

3. How could AOL increase revenue? (Source: WSJ 4/28/1999) New segments identified (in addition to member on-line services) Advertisements On-line commerce 4. Telecom Italias stock down (Source: WSJ 4/28/1999) Deutsche Telekom merger with Telecom Italia in trouble DT 40% owned by German govt, which will have vote in merged corporation TI doesnt mind German govts presence Italian govt objects to German govts say in multi-national In the meantime, TI rival Olivetti making move towards DT Also, TIs stock-holders becoming increasingly wary of deal Stock speculators hedging between DT and Olivetti, causing DTs stock to fall Australia weathers Asian economic crisis (Source: WSJ 4/28/1999) Aus went through downturn in 80s Cleaned up banking system Corrupt/ poor lending practices Let currency float Increased investor confidence Controlled monetary policy well to stimulate economy while controlling inflation Raised (tightened) interest rates when economy looked strong, to control inflation Lowered (loosened) rates when economy needed stimulation Businesses expanded export base from mostly Asia to Europe, etc. RESULT: 5.1% GDP growth (compared to 3.9% for US and negative growth in Asia) Stock market booming Exports growing in new regions Currency stable

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WSJ, Fri, Apr 30 1. Repsol, Spains largest Oil & Natl Gas Chem group wants to buy Argentinas largest private oil company, YPF. Oil prices bouyant at $15-$16/ barrel; may go up to $17 Investors optimistic about YPFs worth Good synergy between Repsol and YPF YPF has lots of reserves YPF currently has 50% of Argentinas mkt share Some anti-trust concerns, but generally good govt. support (Eg. President Menem favourable) Covance, the #2 clinical-trial company in the US wants to acquire Parexel, the #3 firm Function: contract research, clinical trials from drug companies like Pfizer, Eli Lily, etc. New firm would be largest in industry Deal worth $671 Million Firms traditionally independent; now more profit-driven; extremely competitive Very profitable: eg. Single test can be worth $50M High growth: 500% industry growth in last 5 yrs; expected to grow at 20-25% anually in future Conflict of interest (efficiency vs scientific accuracy) concerns from Govt (affects whole industry) To allay such fears, firms employ University medical schools to oversee & be liason Covance Paraxel HQ Princeton, NJ Waltham, MA 1998 Revenue $732M $325M 1998 Net Income $49M $21M Employees 7300 4300 EDS reports $20.6M first quarter loss Profits in last 4 Qtrs: $180M, $210M, $190M, $130M (ie., BIG drop this qtr) Operating margin fell to 6.3% from 7.7% same qtr last yr Sharp decline in margins from ATKearney (Mgmt Consulting unit) Lower profits from GM IT contract (which is 25% of overall revenue) Sold of leasing protfolio Revenue increased 10% from same qtr last yr, with sales growth of only 3% CFO feels IT market untapped Response: EDS cuts 4% of work force (5,200 jobs) Boeing interested in buying controlling stake in Ellipso satellite mobile-phone project (owned by Mobile Comm Holdings, Inc) Cost: $700 M MCH is a closely-held corp that holds an FCC license to launch a novel satellite system (one of 3 such licenses) MCH worth $2.4B Ellipso operations to start in late 2001 and focus service on underdeveloped countries (emerging mkts). Market for satellite-based systems volatile Capital for such projects getting increasingly difficult to get (reasons include recent failures by similar large systems) Ellipso marks Boeings first effort to control a satellite-services system Boeing struggling to profit from a boom of commercial jet deliveries Therefore spending billions expanding into commercial-space mkts

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