CFA Level 2- Reading 32-Your Strategy needs a strategy

This is a part of my CFA Level 2 notes series. I will try and jot down the important points and ideas in each of the CFA readings, both for my reference as well as for my fellow aspirants who may benefit from it.

This is one of the shortest and most interesting chapters in the CFA curriculum so I decided to start with it.

Just like the BCG matrix classifies companies based on growth and market share the CFA curriculum enlists 2 factors to classify industry
1. Predictability: How far into the future can you determine the demand, market dynamics and overall industry performance
2. Malleability: How much can you and your competitors shape that change.

Based on these factors a matrix is created that gives 4 major strategies:
1. Classical: Predictable +Non malleable.
Eg: FMCG, Commercial Banks
(Interestingly enough the curriculum gives the example of the oil and gas space. While the non-malleable condition still holds predictability has gone for a toss with the advent of shale!)
2.Adaptive: Non predictable+non malleable

This covers industries where global competition, technological innovation, social feedback loops, and economic uncertainty combine to make the environment radically and persistently unpredictable.
Eg: Biotechnology, Electronics, Specialty fashion
3.Shaping: Nonpredictable+Malleable

This sector includes new or young high-growth industries where barriers to entry are low, innovation rates are high, demand is very hard to predict, and the relative positions of competitors are in flux, a company can often radically shift the course of industry development through some innovative move

Eg: Internet and Catalog retail

4. Visionary: Predictable+Malleable

This group includes sectors where the future can be reliably estimated as well as be proactively moulded.

Eg: Media, Insurance, Food retail

As expected due to an increased belief of a predictable future(either due to conventional education or over confidence) Visionary and Classical were much more common.

In conclusion, companies should analyse their industry, geography and overall economic condition to judge the predictability and malleability before zeroing down on an ideal strategy.

More CFA notes here: https://ganeshnagarsekar.wordpress.com/cfa-notes/

 

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