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STRATEGIC VALUE ANALYSIS Competitive interactions to be considered in investment decisionsSVA™ MethodologySelection of slides: 

STRATEGIC VALUE ANALYSIS Competitive interactions to be considered in investment decisions SVA™ Methodology Selection of slides

Agenda: 

Agenda Foundations of Strategic Value Analysis methodology and SVA™ tool The industry cost curve Introduction to imperfect competition (investments // price & volumes) SVA foundations Illustrations How to deal with the threat of entry? Contexts that favour / limit entry Case of a new entrant more competitive than the local firm Judo economics : Case of a new entrant less competitive than the local firm Demand growth and market structuring Pre-emption and acquisitions Retaliation threat Free-riding New business models for commodities International development issues Corporate finance issues

Starting point : Industry Cost Curve, cf Watters, Mc Kinsey, 1981Market share predictions do not fit with empirical evidence in multi-markets industries: 

Starting point : Industry Cost Curve, cf Watters, Mc Kinsey, 1981 Market share predictions do not fit with empirical evidence in multi-markets industries Market Price Quantity produced (K tons) Unit cost ($/t) Market Demand Total available capacity Alpha 1 Bravo 1 Alpha 2 Romeo (Idle) Bravo 2 (unbuilt) Profits that accrue to Bravo 1 Why do Alpha2 not seek to undercut the price for improving its utilization ratio ? What if cost curves differ from one market to another while capacity constraints are limiting the total available volume ? How to quit the world of perfect competition (allocation that maximizes the efficiency of the whole industry) ? Next available entrant

Example of a competition issue (game theoretical approach) Scenarios building and selection: 

Example of a competition issue (game theoretical approach) Scenarios building and selection SVA methodology helps building meaningful scenarios and SVA tool figures out the pay-offs for players and competitors

How to figure out Payoffs of players ? (3/6) SVA deals with multi-market / capacity constraints problem: 

How to figure out Payoffs of players ? (3/6) SVA deals with multi-market / capacity constraints problem Capacity Costs Plants Distribution / Logistic costs Market shares Price Distribution schemes Contributive margins Financial results Size Growth Segmentation Markets

How to figure out Payoffs of players ? (4/6) Competitors delivered costs on one market and SVA allocation of market shares under capacity constraints : 

How to figure out Payoffs of players ? (4/6) Competitors delivered costs on one market and SVA allocation of market shares under capacity constraints Market 1

How to figure out Payoffs of players ? (5/6) Plants’ capacity and location par company and competitors market shares: 

How to figure out Payoffs of players ? (5/6) Plants’ capacity and location par company and competitors market shares Market 1

How to figure out Payoffs of players ? (6/6) Market shares allocation and plant-to-market flows: 

How to figure out Payoffs of players ? (6/6) Market shares allocation and plant-to-market flows Marrakech Fes Tanger Casablanca

Agenda: 

Agenda Foundations of Strategic Value Analysis methodology and SVA™ tool The industry cost curve Introduction to imperfect competition (investments // price&volumes) SVA foundations Illustrations How to deal with the threat of entry? Contexts that favour / limit entry Case of a new entrant more competitive than the local firm Judo economics : Case of a new entrant less competitive than the local firm Demand growth and market structuring Pre-emption and acquisitions Retaliation threat Free-riding New business models for commodities International development issues Corporate finance issues

Some contexts support new competitors entry : 

Some contexts support new competitors entry Some markets characteristics may create entrance opportunity for new competitors (importers or new domestic investment projects) A high growth The existence of power buyers (distributors) which could turn away from their usual suppliers An easy access to raw materials or technologic alternatives (new raw materials or new process) Custom duties reduction Incumbent firms behavior can contribute to increase entry risks : High prices, resulting from abuse of dominant position or production costs too high Difficulties to supply clients (who may look for alternative sourcing schemes) Lack of capacity Frequent under coverage, low service rate Weakness of services associate to the product (credit) Weak control of downstream supply chain and distribution structure Weak control of upstream sourcing in case of non-vertical integration. Finally, a bad coordination between domestic players may facilitate the entry : if the firm facing directly the new entrant mistakenly responds, firms which were not “a priori” concerned can be severely hurt by the propagation of the price war, that nobody can stop…But in some contexts, “weak entrants are welcomed”

Judo economics : Case of a new entrant less competitive than the local firm (1/3): 

Capacity investment No investment or delayed investment Entry No Entry Entry No Entry Accommodation Price policy of the Incumbent firm Price war then Buyout Accommodation Price war then Buyout Judo economics : Case of a new entrant less competitive than the local firm (1/3) No entry Capacity investment High prices Ex ante deterrent price (NPV or new entrant project cancelled) Incumbent firm action New entrant action

Judo economics : Case of a new entrant less competitive than the local firm (3/3)Once the investment is sunk, the incentives to sustain a price war while pushing volumes can hardly be stopped by cash shortages that could not be re-negotiated with the banks: 

Judo economics : Case of a new entrant less competitive than the local firm (3/3) Once the investment is sunk, the incentives to sustain a price war while pushing volumes can hardly be stopped by cash shortages that could not be re-negotiated with the banks Example : Impact of a 3 years price war on new entrant cash flows MEuros Price war Additional cash needs Demand growth & stable market share Back to normal prices Debt’s reimbursement Capital allocation & Investment

Agenda: 

Agenda Foundations of Strategic Value Analysis methodology and SVA™ tool The industry cost curve Introduction to imperfect competition (investments // price&volumes) SVA foundations Illustrations How to deal with the threat of entry? Contexts that favour / limit entry Case of a new entrant more competitive than the local firm Judo economics : Case of a new entrant less competitive than the local firm Demand growth and market structuring Pre-emption and acquisitions Retaliation threat Free-riding New business models for commodities International development issues Corporate finance issues

Demand growth, price policy and stability of the industry’s structure: 

Demand growth, price policy and stability of the industry’s structure Company A Company B Competitors having to invest in new capacities to follow their market share Expected demand’s growth = 3% Market Price (euros/t) Market share (%) NPV (M euros) With market prices around 65€/T, Company D is the only one who cannot justify a new capacity investment, unless begging on an aggressive strategy (catch volumes to other competitors) or seeking to pre-empt demand’s growth and dissuade another company to invest. Company C Company D

Offer/Demand cycles evolution offer various types of entry strategy Early entry requires pro-active capacity/consolidation management, while late entry requires opportunistic timing and parallel competitive efforts: 

Fragmented Consolidation (with acquisition and preemption) Structured Years (Mt) €/T Successful early entry Consolidation (large players acquire marginal players during this window of opportunity ) Fragmented Supply shortage in an increasing demand context incites many players to invest in a short time period (simultaneously) Structured Years (Mt) Successful late entry Offer/Demand cycles evolution offer various types of entry strategy Early entry requires pro-active capacity/consolidation management, while late entry requires opportunistic timing and parallel competitive efforts Considerable market risk created by supply / demand gap Demand Early entry (low entry cost) must be followed by acquisitions and demand pre-emption Acquire to consolidate position, pre-empt market demand by introducing timely capacities Manage market downturns . €/T Demand Capitalize on market shocks to enter at lower cost and lead re-structuring

Agenda: 

Agenda Foundations of Strategic Value Analysis methodology and SVA™ tool The industry cost curve Introduction to imperfect competition (investments // price&volumes) SVA foundations Illustrations How to deal with the threat of entry? Contexts that favour / limit entry Case of a new entrant more competitive than the local firm Judo economics : Case of a new entrant less competitive than the local firm Demand growth and market structuring Pre-emption and acquisitions Retaliation threat Free-riding New business models for commodities International development issues Corporate finance issues