4-1 evaluating a company’s resources and competitive position

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Evaluating a Company’s

Resources and Competitive

Position

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“Before executives can

chart a new strategy, they

must reach common

understanding of the

company’s current

position.”W. Chan Kim and Renee

Mauborgne

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Chapter Roadmap

• Question 1: How Well Is the Company’s Present Strategy Working?

• Question 2: What Are the Company’s Resource Strengths and Weaknesses and Its External Opportunities and Threats?

• Question 3: Are the Company’s Prices and Costs Competitive?

• Question 4: Is the Company Competitively Stronger or Weaker than Key Rivals?

• Question 5: What Strategic Issues and Problems Merit Front-Burner Managerial Attention?

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1. How well is the company’spresent strategy working?

2. What are the company’s resourcestrengths and weaknesses and itsexternal opportunities and threats?

3. Are the company’s prices andcosts competitive?

4. Is the company competitively strongeror weaker than key rivals?

5. What strategic issues meritfront-burner managerial attention?

Company Situation Analysis:The Key Questions

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Fig. 4.1: Identifying the Components ofa Single-Business Company’s Strategy

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Question 1: How Well Is the Company’sPresent Strategy Working?

• Must begin by understanding what the strategy is

– Identify competitive approach

• Low-cost leadership

• Differentiation

• Focus on a particular market niche

– Determine competitive scope

• Broad or narrow geographic market coverage?

• In how many stages of industry’s production/distribution chain does the company operate?

– Examine recent strategic moves

– Identify functional strategies

Key Considerations Key Considerations

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• Qualitative assessment –Is the strategy well-conceived?

– Covers all the bases?

– Internally consistent?

– Makes sense?

– Timely and in step with marketplace?

• Quantitative assessment – What are the results?

– Is company achieving its financial and strategic objectives?

– Is company an above-average industry performer?

Approaches to Assess How Wellthe Present Strategy Is Working

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• Trend in sales and market share

• Acquiring and/or retaining customers

• Trend in profit margins

• Trend in net profits, ROI, and EVA

• Overall financial strength and credit ranking

• Efforts at continuous improvement activities

• Trend in stock price and stockholder value

• Image and reputation with customers

• Leadership role(s) – Technology, quality, innovation, e-commerce, etc.

Key Indicators of How Wellthe Strategy Is Working

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• S W O TS W O T represents the first letter in

– SS trengths

– WW eaknesses

– OO pportunities

– TT hreats

• For a company’s strategy to be well-conceived, it must be

– Matched to its resource strengths and weaknesses

– Aimed at capturing its best market opportunities and erecting defenses against external threats to its well-being

S W

O T

Question 2: What Are the Company’s Strengths, Weaknesses, Opportunities

and Threats ?

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• A strength is something a firm does well or an attribute that enhances its competitiveness– Valuable skills, competencies, or capabilities– Valuable physical assets– Valuable human assets– Valuable organizational assets– Valuable intangible assets– Important competitive capabilities– An attribute placing a company in a position of market advantage– Alliances or cooperative ventures with partners

Resource strengths and competitivecapabilities are competitive assets!

Identifying Resource Strengthsand Competitive Capabilities

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Competencies vs. Core Competencies vs. Distinctive Competencies

• A competence is the product of organizational learning and experience and represents real proficiency in performing an internal activity

• A core competence is a well-performedinternal activity central (not peripheral or incidental) to a company’s competitivenessand profitability

• A distinctive competence is a competitively valuable activity a company performs better than its rivals

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• Stem from skills, expertise, and experience usually representing an– Accumulation of learning over time and– Gradual buildup of real proficiency in

performing an activity• Involve deliberate efforts to develop the ability to do

something, often entailing– Selecting people with requisite knowledge and skills– Upgrading or expanding individual abilities – Molding work products of individuals into a cooperative

effort to create organizational ability– A conscious effort to create intellectual capital

Company Competencies and Capabilities

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Core Competencies –A Valuable Company Resource

• A competence becomes a core competence when the well-performed activity is central to a company’s competitiveness and profitability

• Often, a core competence isknowledge-based, residing in people,not in assets on a balance sheet

• A core competence is typically the result of cross-department collaboration

• A core competence gives a company apotentially valuable competitive capabilityand represents a definite competitive asset

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Examples: Core Competencies

• Expertise in integrating multiple technologiesto create families of new products

• Know-how in creating operating systemsfor cost efficient supply chain management

• Speeding new/next-generation products to market

• Better after-sale service capability

• Skills in manufacturing a high quality product

• Capability to fill customer orders accurately and swiftly

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• A distinctive competence is a competitively valuable activity that a company performs better than its competitors

• A distinctive competence is a competitively potent resource source because it

– Gives a company a competitively valuablecapability unmatched by rivals

– Can underpin and add real punchto a company’s strategy

– Is a basis for sustainable competitive advantage

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Distinctive Competence –A Competitively Superior Resource

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Examples: Distinctive Competencies

ToyotaLow-cost, high-quality

manufacturing of motor vehicles

StarbucksInnovative coffee drinks and

store ambience

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Determining the CompetitivePower of a Company Resource

• To qualify as competitively valuable or to be the basis for sustainable competitive advantage, a “resource” must pass 4 tests:

1. Is the resource hard to copy?

2. Is the resource durable – does it have staying power?

3. Is the resource really competitively superior?

4. Can the resource be trumped bythe different capabilities of rivals?

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Identifying Resource Weaknessesand Competitive Deficiencies

• A weakness is something a firm lacks, does poorly, or a condition placing it at a disadvantage

• Resource weaknesses relate to

– Inferior or unproven skills,expertise, or intellectual capital

– Lack of important physical,organizational, or intangible assets

– Missing capabilities in key areas

Resource weaknesses and deficienciesare competitive liabilities!

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Identifying a Company’sMarket Opportunities

• Opportunities most relevant to acompany are those offering

– Good match with its financial andorganizational resource capabilities

– Best prospects for profitable long-term growth

– Potential for competitive advantage

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Identifying External Threats

• Emergence of cheaper/better technologies

• Introduction of better products by rivals

• Entry of lower-cost foreign competitors

• Onerous regulations

• Rise in interest rates

• Potential of a hostile takeover

• Unfavorable demographic shifts

• Adverse shifts in foreign exchange rates

• Political upheaval in a country

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• S W O TS W O T analysis involves more than just developing the 4 lists of strengths, weaknesses, opportunities, and threats

• The most important part of S W O TS W O T analysis is

– Using the 4 lists to draw conclusionsabout a company’s overall situation

– Acting on the conclusions to

• Better match a company’s strategy to itsresource strengths and market opportunities

• Correct the important weaknesses

• Defend against external threats

Role of SWOT Analysis inCrafting a Better Strategy

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Fig. 4.2: The Three Steps of SWOT Analysis

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For Discussion: Your Opinion

In doing SWOT analysis, why is it not

sufficient just to compile 4 lists (one each for

resource strengths, resource weaknesses,

market opportunities, and external threats)

and then move on?

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• Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company situation analysis

• Key analytical tools

– Value chain analysis

– Benchmarking

Question 3: Are the Company’sPrices and Costs Competitive?

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• A company’s business consists of all activities undertaken in designing, producing, marketing, delivering, and supporting its product or service

• All these activities that a company performs internally combine to form a value chain—so-called because the underlying intent of a company’s activities is to do things that ultimately create value for buyers

• The value chain contains two types of activities

– Primary activities (where most ofthe value for customers is created)

– Support activities that facilitateperformance of the primary activities

Concept: Company Value Chain

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Fig. 4.3: A Representative Company Value Chain

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Example: Value Chain Activities

for a Bakery Goods Maker Primary Activities

• Supply chain management

• Recipe development and testing

• Mixing and baking

• Packaging

• Sales and marketing

• Distribution

Support Activities

• Quality control

• Human resource management

• Administration

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Example: Value Chain Activitiesfor a Department Store Retailer

Primary Activities• Merchandise selection

and purchasing

• Store layout and product display

• Advertising

• Customer service

Support Activities• Site selection

• Hiring and training

• Store maintenance

• Administrative activities

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Example: Value ChainActivities for a Hotel Chain

Primary Activities• Site selection and

construction

• Reservations

• Operation of hotel properties

• Managing lineupof hotel locations

Support Activities

• Accounting

• Hiring and training

• Advertising

• Building a brand and reputation

• Generaladministration

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• Combined costs of all activities in a company’s value chain define the company’s internal cost structure

• Compares a firm’s costs activityby activity against costs of key rivals

– From raw materials purchase to

– Price paid by ultimate customer

• Pinpoints which internal activities are asource of cost advantage or disadvantage

Characteristics of Value Chain Analysis

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• Several factors give rise to differencesin value chains of rival companies

– Different strategies

– Different operating practices

– Different technologies

– Different degrees of vertical integration

– Some companies may perform particular activities internally while others outsource them

• Differences among the value chains of competing companies complicate task of assessingrivals’ relative cost positions

Why Do Value Chains of Rivals Differ?

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• Assessing a company’s cost competitiveness involves comparing costs all along the industry’s value chain

• Suppliers’ value chains are relevant because– Costs, performance features, and quality of inputs

provided by suppliers influence a firm’s own costsand product performance

• Value chains of distributors and retailers arerelevant because – Their costs and profit margins represent “value added”

and are part of the price paid by ultimate end-user– The activities they perform affect end-user satisfaction

The Value Chain Systemfor an Entire Industry

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Fig. 4.4: Representative Value Chain for an Entire Industry

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Pulp & Paper Industry

Timber farming

Logging

Pulp mills

Papermaking

Distribution

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Parts and components manufacture

Assembly

Wholesale distribution

Retail sales

Home Appliance Industry

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Processing of basic ingredients

Syrup manufacture

Bottling and can filling

Wholesale distribution

Advertising

Retailing


Albertson’s

Soft Drink Industry

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Computer Software Industry

Programming

Disk loading

Marketing

Distribution

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Developing Data to Measure a Company’s Cost Competitiveness

• After identifying key value chain activities, the next step involves determining costs of performing specific value chain activities using activity-based costing

• Appropriate degree of disaggregation depends on

– Economics of activities

– Value of comparing narrowly definedversus broadly defined activities

• Guideline – Develop separate costestimates for activities

– Having different economics

– Representing a significant or growing proportion of costs

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• Determining whether a company’s costs are in line with those of rivals requires

– Measuring how a company’s costs compare with those of rivals activity-by-activity

• Requires having accounting data to measure costof each value chain activity

• Activity-based costing entails

– Defining expense categories accordingto specific activities performed and

– Assigning costs to the activityresponsible for creating the cost

Activity-Based Costing: A KeyTool in Analyzing Costs

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• Focuses on cross-company comparisons of how certain activities are performed and costs associated with these activities

– Purchase of materials

– Payment of suppliers

– Management of inventories

– Getting new products to market

– Performance of quality control

– Filling and shipping of customer orders

– Training of employees

– Processing of payrolls

Benchmarking Costs ofKey Value Chain Activities

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• Identify best and most efficient means of performing various value chain activities

• Learn what is the “best” way to perform a particular activity from those companies who have demonstrated that they are “best-in-industry” or “best-in-world” at performing the activity

• Learn what other firms do to perform an activity at lower cost

• Figure out what actions to take to improve a company’s own cost competitiveness

Objectives of Benchmarking

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Ethical Principles in Benchmarking

• Avoid actions implying an interest in– Restraint of trade– Market and/or customer

allocation schemes– Price fixing– Bribery

• Refrain from acquiring trade secrets by any means viewed as improper

• Be willing to provide same type of information to a benchmarking partner

• Communicate early to clarify expectations and avoid misunderstandings

• Be honest and complete

• Treat benchmarking interchange as confidential

• Use information obtained only for stated purposes

• Respect corporate culture of partner companies

• Use benchmarking contacts designated by partner company

• Be fully prepared for each exchange

• Provide partners with agenda and questionnaire prior to exchange

• Follow through with commitments to partner in a timely manner

• Understand how partner wants information provided used

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• Cost competitiveness depends on how well a company manages its value chain relative to how well competitors manage their value chains

• When a company’s costs are out-of-line, the activities responsible for the higher costs may be due to any of three parts of industry value chain 1. Activities performed by suppliers 2. A company’s own internal activities 3. Activities performed by forward channel allies

Activities, Costs, &

Margins ofForward

Channel Allies

InternallyPerformedActivities, Costs, &Margins

Activities, Costs, &

Margins ofSuppliers

Buyer/UserValue

Chains

What Determines If aCompany Is Cost Competitive?

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• Implement use of best practices throughout company

• Eliminate some cost-producing activities altogether by revamping value chain system

• Relocate high-cost activities to lower-cost geographic areas

• See if high-cost activities can be performedcheaper by outside vendors/suppliers

• Invest in cost-saving technology

• Innovate around troublesome cost components

• Simplify product design

• Make up difference by achieving savings in backward or forward portions of value chain system

Options to CorrectInternal Cost Disadvantages

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• Pressure suppliers for lower prices

• Switch to lower-priced substitutes

• Collaborate closely with suppliers to identify mutual cost-saving opportunities

• Arrange for just-in-time deliveries from suppliers to lower inventory and internal logistics costs

• Integrate backward into businessof high-cost suppliers

Options to Correct aSupplier-Related Cost Disadvantage

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• Pressure dealer-distributors and other forward channel allies to reduce their costs to makethe final price to buyers more competitivewith prices of rivals

• Work closely with forward channel allies toidentify win-win opportunities to reduce costs

• Change to a more economical distribution strategy

– Switch to cheaper distribution channels

– Integrate forward into company-owned retail outlets

Options to Correct a Cost Disadvantage Associated With Activities of Forward

Channel Allies

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• A company can create competitive advantage by out-managing rivals in performing value chain activities in either/both of two ways

Option 1: Develop competencies and capabilitiesthat rivals don’t have or can’t match

Option 2: Do an overall better job than rivals oflowering combined costs of performingall the value chain activities

Translating Performance of Value Chain Activities into Competitive Advantage

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Fig. 4.5: Translating Company Performance of Value Chain Activities into Competitive Advantage

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• Overall competitive position involvesanswering two questions

– How does a company rank relativeto competitors on each importantfactor that determines market success?

– Does a company have a netcompetitive advantage or disadvantagevis-à-vis major competitors?

Question 4: Is the Company Stronger

or Weaker than Key Rivals?

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1. List industry key success factors and other relevant measures of competitive strength

2. Rate firm and key rivals on each factor using rating scale of 1 to 10 (1 = very weak; 5 = average; 10 = very strong)

3. Decide whether to use a weighted or unweighted rating system (a weighted system is superior because chosen strength measures are unlikely to be equally important)

4. Sum individual ratings to get an overall measure of competitive strength for each rival

5. Based on overall strength ratings, determine overall competitive position of firm

Assessing a Company’sCompetitive Strength vs. Key Rivals

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• Reveals strength of firm’s competitive position vis-à-vis key rivals

• Shows how firm stacks up against rivals, measure-by-measure – pinpoints firm’s competitive strengths and competitive weaknesses

• Indicates whether firm is at a competitive advantage / disadvantage against each rival

• Identifies possible offensive attacks (pit company strengths against rivals’ weaknesses)

• Identifies possible defensive actions (a need to correct competitive weaknesses)

Why Do a CompetitiveStrength Assessment ?

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• Based on results of both industry and competitive analysis and an evaluation of a company’s competitiveness, what items should beon a company’s “worry list”?

• Requires thinking strategically about

– Pluses and minuses in the industryand competitive situation

– Company’s resource strengths and weaknesses and attractiveness of its competitive position

A “good” strategy must address “what to do”about each and every strategic issue!

Question 5: What Strategic IssuesMerit Managerial Attention?

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Stating the Issues Clearly and Precisely

• A well-stated issue involves such phrases as

– “How to . . . ?”

– “Whether to . . . ?”

– “What should be done about . . . ?”

• Issues need to be precise, specific, and “cut straight to the chase”

• Issues on the “the worry list”raise questions about

– What actions need to be considered

– What to think about doing

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• How to stave off market challenges from new foreign competitors?

• How to combat price discounting of rivals?

• How to reduce a company’s high costs?

• How to sustain a company’s present growthin light of slowing buyer demand?

• Whether to expand a company’s product line?

• Whether to acquire a rival firm?

• Whether to expand into foreign markets rapidly or cautiously?

• What to do about aging demographics of a company’s customer base?

Identifying the Strategic Issues: Some Possibilities

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For Discussion: Your Opinion

Why is it important for company managers

to develop a “worry list” of strategic issues

and problems that they need to address and

to resolve? Why can’t managers just skip

this step and go directly to the task of

choosing what strategy to employ?

4-1 evaluating a company’s resources and competitive position

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