Ask us your questions about the course or the Strathena game. We publish here Xavier Fontanet’s answers to a selection of questions.
Questions about the course:
Question: Are the prices/costs used in the experience curves of the market share value course adjusted for inflation?
X.F.: The prices used in the experience curves are deflated prices. We use a GDP deflator for this, a sort of average price index.
Question: Are there industries, with little competition, where the experience effect does not apply, or only minimally?
X.F.: What drives prices down is growth, which allows productivity gains. When competition is active (which is the vast majority of cases today due to globalization), competitors are forced to pass productivity gains back to the market, otherwise, they lose market share and disappear.
The cases where prices rise are generally those where there is a monopoly and low growth, or even a decline in the market. The competition authority is there to ensure that monopolies end.
Another element to consider is technological progress: an industry that does not grow and exhibits monopolistic behavior does not last long because it is quickly replaced by another industry. This is the whole approach of creative destruction.
Question: In chapter 9 “What is a Leverage Buy Out (LBO)”, why is the cash flow allocated to repaying the debt when it has already been repaid by the company (financial expenses)?
X.F.: In fact, the debt to be repaid is the one that was used for the acquisition.
Watch the BFM strategy show below. I had invited Dominique GAILLARD, the president of the France Invest association, which is the association of private equity firms. I’m sure with these two shows you will understand.
You can enable English subtitles with the CC button in the YouTube toolbar
Question: I have a question about the experience effect. Indeed, your example about the service industry makes a lot of sense, and your example of a Paris-Dubai ticket seems coherent to me. However, according to a recent government report, prices tend to increase this year, even though the number of travelers continues to rise. I thought low-cost airlines had lowered costs. How can this be explained?
X.F.: The experience curve is a method that allows measuring the evolution of prices in the long term. You need at least two to three doublings of the experience base to measure things correctly.
- If the industry grows fairly quickly, say 15% per year, it doubles in five years, so you need a historical record of a good ten years.
- If the market grows more slowly, you need a price history of at least 30 years.
The changes you mention are over one year, so they are absolutely not significant.
Another piece of advice: check out the first case study of chapter 12. It talks about what is happening in air transport with the arrival of low-cost airlines that drive prices down.
Questions about the game:
Question: How is the value of the company calculated in the game?
X.F.: The value we use for the company is a multiple of the net profit, after taxes. Depending on the growth rate of the industries, the Price Earnings (P/E) ratio between capitalization and net profit varies greatly.
- In industries that grow very slowly, it is 7
- In industries with average growth, the ratio goes up to 15. This average value is used as the basis for calculation in the game
- For industries with growth above 10%, the P/E can reach 30.
