Oliver Tonge Los Mejores Strategic management exam

1A Select an industry. Choose a framework that is particularly useful when

analyzing* the industry; PESTEL, five forces,**market segment or strategic groups,
and explain why profitability has been either high or low in that particular
industry.
N.B *Correction?
** I have replaced a full stop with a comma and assumed that the question is asking for one
framework because the question did not grammatical make sense.

Reasons for high profitability of European Private equity funds (Industry: Private
Equity)

Strategic groups are organizations within an industry with similar strategic

characteristics. The strategic groups that I will compare with this market are
acquisitions by public companies and acquisitions by private companies. I will
explain why this industry exists, is so profitable and why it so much harder for
public companies to use this same approach. In the private equity industry,
which as of June 2016 is globally valued at $2.49 trillion USD (Preqin, 2017),
well-managed private equity companies buy badly run disorganized sections of
large public companies or entire public companies and improve efficiency with
the aim (and legal obligation) to sell all investments. This is called a buy-to-sell
approach and is very popular because a lot of cash is created as well as
increasing company value.

The reasons for inefficiency of these public companies may be due to neglect, not
reaching performance targets or other weaknesses. Often disorganized units of
the companies are not easy to value because they are integrated into the public
company. This can make it hard for public companies to sell these unsuccessful
parts of the business and therefore is an opportunity for private equity houses.
However, recently the approach of private equity companies has shifted towards
acquiring entire public companies in search of greater growth and profit. This is
a riskier approach as costs can be higher for example when Toys R us went
private in 2005, the entire top management staff had to be replaced ("The
Strategic Secret of Private Equity", 2017).

A big reason for the high profitability of private equity houses in the UK is due to
personal financial incentives. Senior management of public companies often do
not give enough attention to units of the companies that are performing below
par because there is no personal incentive to do so. However, if these units are
taken private, fund managers are able to charge a fee on the cash linked to the
amount of cash returned to fund investors. Therefore managers are incentivized
to create a higher return on investment for investors in order to receive a higher
value in the performance fee (which is typically 20%). Managers also receive a
2% management fee.

Furthermore, the buy-to-sell approach eliminates any temptation that would be

incurred through trying to synergize loosely related businesses within the
portfolio such as sharing costs. This is because the private equity house must
Oliver Tonge Los Mejores Strategic management exam

make the acquired company as lean as possible and must minimize its
liabilities.

However, private equity companies are faced with the economic threat of an
Increase in interest rates that create a threat making it harder to finance large
public buyouts. This may be a key driver for change should interest rates rise.

Another reason why this industry is so profitable is because once a private

equity firm gains experience and know-how in the acquisition and disposal
process, it is able to gain experience and speed up the process in the future.
Furthermore, the industrys high profitability is due to the legal structure of
public companies versus private companies. The regulation on public companies
is much greater than in private equity firms. This is largely due to private equity
houses using hedge money- in other words money from high net worth
individuals whereas public companies are usually invested in using real money
such as pension funds.

The future of competitiveness in the private equity market is dependent upon

whether public companies take up the buy-to-sell strategy that private firms use.
This has been made much easier in Europe because the capital gains tax that
public companies would have to pay for the sale of a business has been removed.
However, the likelihood of public companies adopting this buy, improve, sell
approach is low because most corporate managers are less willing to trade than
private equity managers, many of whom are previous investment bankers.

In conclusion, I have shown how private equity firms are strategically placed to
take advantage of weak public companies and make a profit. This is incentivized
financially at a personal level and at a corporate level because private companies
are subject to less regulation. Private companies also do not face the social
pressure from shareholders who are likely risking real money. Private equity
companies can also maneuver easier through tax restraints that public
companies are subject to.
Oliver Tonge Los Mejores Strategic management exam

4 What do you think are Key Success Factors for a company in:

a) the delivered pizza industry

Critical success factors are product features that are highly valued by a set of
customers and where the organization must excel in order to outperform
competitors (Johnson, & Scholes, 1997). In order to identify what are the
critical success factors, I have presumed that the mission in the delivered
pizza industry would be to be a profitable business with steady growth. In
order to do this in the delivered pizza industry, critical factors would include,
pizza being fresh, hot, delivered on time and hygienically. The reliability of
the company is also important because customers will demand consistency
when ordering food.

Key success factors are less important than critical factors but still contribute
to the success of the industry. These include the ability of the marketing team
to research the market and to respond to changes in market demand as
quickly as possible. This would allow the company to increase sales, and
increase market share. The ability of the company to retain customers is also
important because this will dictate whether the company is sustainable or
not.

b) the investment banking industry

A company in the investment banking industry must be successful in its

sales and trading department, in order to be a successful market maker
and increase profits. The bank must also be able to facilitate mergers and
acquisitions successfully by having a successful sales pitch. The bank
must also be able to solicit interest from potential buyers and finally to
execute the agreement. A big part of successful investment banking are
accurate valuations, which are used for public equity offerings, fairness
opinions, research , mergers and acquisitions and investments. The other
two front office parts of the investment bank which are key to its success
are debt and equity capital markets. The equity capital markets
department are about helping companies raise money through the stock
market, through Initial public offerings. The banks must attract and
convince clients to use their bank and get the right sell price in order to
keep both investors and bank clients happy. In the debt capital markets
department, the investment bank must set a reasonable rate of interest on
the debt it lends to companies and also make sure the debtors will be able
to repay the loans and their interest.
Finally, a key success factor is the back office jobs such as the
administrators, secretaries, security and maintenance teams that ensure
the day to day investment bank is run successfully.

Bibliography:
 Oliver Tonge Los Mejores Strategic management exam

JOHNSON, G. AND SCHOLES, K.

Exploring corporate strategy
In-text: (Johnson, & Scholes, 1997)
Your Bibliography: Johnson, G., & Scholes, K. (1997). Exploring corporate strategy (1st ed.). London:
Prentice Hall.

Website

PREQIN
In-text: (Preqin, 2017)
Your Bibliography: Preqin. (2017). Prequin. Retrieved 2 June 2017, from
https://www.preqin.com/docs/samples/2017-Preqin-Global-Private_Equity-and-Venture-Capital-Report-
Sample-Pages.pdf

Website

THE STRATEGIC SECRET OF PRIVATE EQUITY

In-text: ("The Strategic Secret of Private Equity", 2017)
Your Bibliography: The Strategic Secret of Private Equity. (2017). Harvard Business Review. Retrieved
2 June 2017, from https://hbr.org/2007/09/the-strategic-secret-of-private-equity