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0
86 87 88 89 90 91 92 93 94 95 96 97

Source: Fact Book published by Korea Stock Exchange.




EXHIBIT 7
Stock Trading Value
250,000



200,000
Billion Won




150,000



100,000



50,000



0
71 73 75 77 79 81 83 85 87 89 91 93 95 97

Source: Fact Book published by Korea Stock Exchange.
31
A Framework for Business Analysis and Valuation Using Financial Statements




1-31 Part 1 Framework




EXHIBIT 8
Market Value to GDP Ratios

0 .5 0
Market Capitalization/GDP
Korea Stock Exchange 1998




0 .4 0

0 .3 0

0 .2 0

0 .1 0

0 .0 0
92 93 94 95 96 97

Source: Fact Book published by Korea Stock Exchange.




EXHIBIT 9
Financing of Korean Corporations (in billion won)

Through Financial Institutions Through Capital Markets
.......................................... ................................................
Foreigna Othersb
Bank Non-Bank CP Stock Bonds Total
..............................................................................................................................................................
1989 5,698 7,963 5,131 8,310 4,932 “185 4,292 36,140
1990 7,995 11,477 1,902 5,987 10,931 3,247 6,517 48,056
1991 11,487 12,686 “2,211 5,555 14,065 2,501 8,002 52,085
1992 8,313 11,599 4,183 7,177 6,616 2,527 9,737 50,152
1993 8,440 11,718 9,017 8,619 9,218 “1,298 9,857 55,571
1994 18,367 20,981 4,405 13,198 13,568 4,037 10,423 84,978
1995 14,991 16,884 16,096 14,445 14,958 5,568 11,656 94,597
1996 18,571 18,424 20,691 13,342 20,265 12,063 13,542 116,899
1997 15,116 28,399 4,773 8,974 27,422 7,162 22,127 113,973
..............................................................................................................................................................

a. Foreign implies funds borrowed from overseas capital markets.
b. Others include letters of credit, loans from government, reserve for retirement allowances, etc.
Source: Bank of Korea.
32 A Framework for Business Analysis and Valuation Using Financial Statements




1-32
A Framework for Business Valuation Using Financial Statements




EXHIBIT 10
Financing of Korean Corporations (in percent)


Through Through
Financial Bond/CP Through




Korea Stock Exchange 1998
Institutions Markets Stock Markets Foreign Others Total
...................................................................................................................................................
1989 37.80% 27.84% 22.99% “0.51% 11.87% 100.00%
1990 40.52% 26.70% 12.46% 6.76% 13.56% 100.00%
1991 46.41% 22.76% 10.66% 4.80% 15.36% 100.00%
1992 39.70% 21.53% 14.31% 5.04% 19.42% 100.00%
1993 36.27% 32.81% 15.51% “2.34% 17.74% 100.00%
1994 46.30% 21.15% 15.53% 4.75% 12.27% 100.00%
1995 33.69% 32.83% 15.27% 5.89% 12.32% 100.00%
1996 31.65% 35.04% 11.41% 10.32% 11.58% 100.00%
1997 38.18% 28.25% 7.87% 6.28% 19.41% 100.00%
...................................................................................................................................................

Source: Bank of Korea.




EXHIBIT 11
Foreign Investment in Korean Stock
22

20
U.S.$ Billions




18

16

14

12

10
Jan 96


Apr 96


Jul 96


Oct 96


Jan 97


Apr 97


Jul 97


Oct 97


Jan 98


Apr 98


Jul 98




Source: Korea Stock Exchange.
2
2 S t ra t eg y A n al ys is
chapter




S trategy analysis is an important starting point for the analysis of ¬-
nancial statements. Strategy analysis allows the analyst to probe the economics of the
¬rm at a qualitative level so that the subsequent accounting and ¬nancial analysis is
grounded in business reality. Strategy analysis also allows the identi¬cation of the ¬rm™s
Business Analysis and
2
pro¬t drivers and key risks. This, in turn, enables the analyst to assess the sustainability
Valuation Tools
of the ¬rm™s current performance and make realistic forecasts of future performance.
A ¬rm™s value is determined by its ability to earn a return on its capital in excess of
the cost of capital. What determines whether or not a ¬rm is able to accomplish this
goal? While a ¬rm™s cost of capital is determined by the capital markets, its pro¬t po-
tential is determined by its own strategic choices: (1) the choice of an industry or a set
of industries in which the ¬rm operates (industry choice), (2) the manner in which the
¬rm intends to compete with other ¬rms in its chosen industry or industries (competitive
positioning), and (3) the way in which the ¬rm expects to create and exploit synergies
across the range of businesses in which it operates (corporate strategy). Strategy analy-
sis, therefore, involves industry analysis, competitive strategy analysis, and corporate
strategy analysis.1 In this chapter, we will brie¬‚y discuss these three steps and use the
personal computer industry and Amazon.com, respectively, to illustrate the application
of the steps.


INDUSTRY ANALYSIS
In analyzing a ¬rm™s pro¬t potential, an analyst has to ¬rst assess the pro¬t potential of
each of the industries in which the ¬rm is competing, because the pro¬tability of various
industries differs systematically and predictably over time. For example, the ratio of earn-
ings before interest and taxes to the book value of assets for all U.S. companies between
1981 and 1997 was 8.8 percent. However, the average returns varied widely across speci¬c
industries: for the bakery products industry, the pro¬tability ratio was 43 percentage points
greater than the population average, and 23 percentage points less than the population
average for the silver ore mining industry.2 What causes these pro¬tability differences?
There is a vast body of research in industrial organization on the in¬‚uence of industry
structure on pro¬tability.3 Relying on this research, strategy literature suggests that the
average pro¬tability of an industry is in¬‚uenced by the “¬ve forces” shown in Figure
2-1.4 According to this framework, the intensity of competition determines the potential
for creating abnormal pro¬ts by the ¬rms in an industry. Whether or not the potential
pro¬ts are kept by the industry is determined by the relative bargaining power of the
2-1




33
34 Strategy Analysis




2-2
Strategy Analysis




Figure 2-1 Industry Structure and Profitability

DEGREE OF ACTUAL AND POTENTIAL COMPETITION


Rivalry Among Threat of Threat of
Existing Firms New Entrants Substitute Products
Industry growth Scale economies Relative price and
Concentration First mover advantage performance
Differentiation Distribution access Buyers™ willingness to
Switching costs Relationships switch
Scale/Learning Legal barriers
economies
Fixed-Variable costs
Excess capacity
Exit barriers


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