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    McGraw-Hill/Irwin Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

    Chapter 4: Evaluating aCompanys Resources and

    Competitive Position

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    4-2

    Chapter Learning Objectives

    1. Understand how to evaluate a companys internalsituation and capabilities and identify the resourcestrengths capable of becoming the cornerstone ofthe companys strategic approach.

    2. Grasp how and why activities performed internally

    by a company and those performed externally byits suppliers and forward channel allies determine acompanys cost structure and ability to competesuccessfully.

    3. Learn how to evaluate a companys competitivestrength relative to key rivals.

    4. Understand the role and importance of industryand competitive analysis and internal situationanalysis in identifying strategic issues company

    managers must address.

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    4-3

    Chapter Roadmap

    Ques t ion 1 : How Well Is the CompanysPresent Strategy Working?Ques t ion 2 : What Are the CompanysResource Strengths and Weaknesses and

    Its External Opportunities and Threats?Ques t ion 3 : Are the Companys Prices andCosts Competitive?Ques t ion 4 : Is the Company CompetitivelyStronger or Weaker than Key Rivals?Ques t ion 5 : What Strategic Issues andProblems Merit Front-Burner Managerial

    Attention?

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    Company Situation Analysis:The Key Questions

    1. How well is the companys present strategy working?

    2. What are the companys resource strengths and weaknesses and itsexternal opportunities and threats?

    3. Are the companys prices and costs competitive?

    4. Is the company competitivelystronger or weaker than key rivals?

    5. What strategic issues merit

    front-burner managerial attention?

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    Figure 4.1: Identifying Components of a Single- Business Companys Strategy

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    Ques t ion 1 : How Well Is the Companys Present Strategy Working?

    Must begin by understanding what the strategy isIdentify com pet it ive app roach

    Low-cost leadership?Differentiation?Best-cost provider?Focus on a particular market niche?

    Determine com pet it ive sco peBroad or narrow geographic market coverage?

    In how many stages of industrysproduction/distribution chain does the companyoperate?

    Examine recent s t ra tegic m ov es

    Identify fun ct io nal s t ra tegies

    Key Considerations

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    Trend in sales and market share Acquiring and/or retaining customers

    Trend in profit margins

    Trend in net profits, EPS, and ROEOverall financial strength and credit rating

    Efforts at continuous improvement activities

    Trend in stock priceImage and reputation with customers

    Leadership role(s) Technology,

    product quality, innovation, etc.

    Key Indicators of How Wellthe Strategy Is Working

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    S W O T represents the first letter inS trengths

    W eaknesses

    O pportunities

    T hreats

    For a companys strategy to be well- conce ived , it must be

    Matched to its resource strengths andweaknesses

    Aimed at capturing its best market opportunitiesand erecting defenses against external threats

    to its well-being

    S W

    O T

    Quest ion 2 : What Are the Companys Strengths,Weaknesses, Opportunities and Threats ?

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    A s t rength is something a firm does well or anattribute that enhances its competitiveness

    Valuable skills, competencies, or capabilitiesValuable physical assetsValuable human assetsValuable organizational assetsValuable intangible assetsImportant competitive capabilities

    An attribute placing a company in a position ofmarket advantage

    Alliances or cooperative ventures with partners

    Identifying Resource Strengthsand Competitive Capabilities

    Resou rce s t reng ths and com pet it ive

    cap abil i t ies are co m pet i t ive asse ts!

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    Competencies vs. Core Competenciesvs. Distinctive Competencies

    A compe tence is the produ c t o forg anization al learning and exp er ience and represents real prof ic iency inperforming an internal activity

    A core com petence is a well-performedinternal activity central (not peripheral orincidental) to a companys compet i t iveness

    and pro f i tabi l i ty

    A dis t inc t ive com petence is aco m pet i t ively v aluable ac t iv i ty a

    company perform s b et ter than i t s r ivals

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    Stem from sk i l ls , expert ise , andexperience usually representing an Accumulation of learning over time andGradual buildup of real prof ic iency in

    perform ing an ac t iv i tyInvolve del iberate effo rts to develop theability to do something, often entailing

    Selecting people with requisite knowledge and

    skillsUpgrading or expanding individual abilitiesMolding work products of individuals into acooperative 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 compe tence becomes a corecompe tence when the well-performedactivity is central to a companyscompetitiveness and profitability

    Often, a core com petence isknowledge-based, residing in people , not in assets on a balance sheet

    A core com petence is typically the result ofcro ss -depar tm ent co l labo rat ion

    A core com petence gives a company apotentially valuable co m pet i t ive capabi l i ty

    and represents a definite co m pet i t ive ass e t

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    A dis t inc t ive com petence is acompetitively valuable activity that acompany perform s bet ter than i tscompe t i to r s

    A dis t inc t ive com petence is acom pet it ively p o ten t resou rcesou rce because it

    Gives a company a com pet it ively va luablecapabi l i ty unm atched by rivalsCan underpin and add real pu nch to a companys strategyIs a bas is for sus tainable com pet it iveadvantage

    # 1

    Distinctive Competence A Competitively Superior Resource

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    Determining the CompetitivePower of a Company Resource

    To qualify as competitively valuable or tobe the basis for su s ta inable com pet i t iveadvantage, a resource must pass 4tests:

    1. Is the resource really com pet it ive ly super ior?

    2. Is the resource rare is it something rivalslack?

    3. Is the resource hard to copy ?

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

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    What Is a Resource-Based Strategy?

    Companies with competitively valuableresource strengths and competenciesoften deploy these capabilities to

    Boost the competitive power

    of their overall strategyBolster their position in the marketplace

    Resource-based strategies

    Attempt to exploit company resources to offervalue to customers in ways rival cannot match

    Can focus on eroding the competitive potencyof a rival by developing different resources that

    effectively substitute for the strengths of the rival

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    Identifying Resource Weaknessesand Competitive Deficiencies

    A weakness is something a firm lacks, doespoorly, or a condition placing it at adisadvantage

    Reso urc e w eakn ess es relate toInferior or unproven skills,expertise, or intellectual capital

    Lack of important physical,

    organizational, or intangible assetsMissing capabilities in key areas

    Reso urc e weakn esses and def ic ienc ies

    are com peti t ive liabi l i t ies!

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    Identifying a Companys Market Opportunities

    Opportunities m os t relevant to acompany are those offering

    Good m atch with its financial andorganizational resource capabilities

    Bes t p rosp ec t s for profi tablelong-term grow th

    Potential for co m pet i tive advantage

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    Identifying External Threats

    Some possibilities:Emergence of cheaper/better technologiesIntroduction of better products by rivalsEntry of lower-cost foreign competitorsOnerous regulationsRise in interest ratesPotential of a hostile takeover

    Unfavorable demographic shifts Adverse shifts in foreign exchange ratesPolitical upheaval and/or burdensome

    government policies

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    S W O T analysis invo lves m ore than ju s t d evelo p in g th e 4 l is ts of strengths,

    weaknesses, opportunities, and threats

    The most important part of S W O T analysis is

    Using the 4 li s t s to d raw co nc lus ions about a companys overall situation

    Ac t ing on the conc lus ions to

    Better match a companys strategy to its resource strengths and market opportunities

    Correct the important weaknesses

    Defend against external threats

    Role of SWOT Analysis inCrafting a Better Strategy

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    Figure 4.2: The Three Steps of SWOT Analysis

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    h

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    Assess ing whether a firms cos t s arecompet i t ive with those of rivals is a crucialpart of company situation analysis

    Key analyt ical to ols

    Value chain analysis

    Benchmarking

    Quest ion 3 : Are the Companys Prices and Costs Competitive?

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    A companys bus iness consists of all activ it iesundertaken in designing, producing, marketing,delivering, and supporting its product or service

    All these activities a company performs internallycombine to form a value ch ain so-calledbecause the underlying intent of a companysactivities is to do things that ultimately cr eate valuefor buy ers

    The value chain contains two typ es of act ivi t ies

    Primary act ivi t ies Where most ofthe value for customers is created

    Supp or t ac t iv i t ies Facilitateperformance of primary activities

    Concept: Company Value Chain

    i 4 3 A i C l Ch i

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    Figure 4.3: A Representative Company Value Chain

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    Combined cos t s of all activities in acompanys value chain def ine a companysin ternal co s t s t ruc ture

    Compares a firms costs activity by activity against costs of key rivals

    From raw materials purchase to

    Price paid by ultimate customer

    Pinpo in ts wh ich internal act ivi t ies are asource of cos t advantage or disadvantage

    Characteristics of Value Chain Analysis

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    Several fac tors give rise to d ifferences in 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 themDifferences am on g th e value ch ains o fcom pet ing com panies com pl icate task ofassess ing rivals re lat ive co s t po si t ion s

    Why Do Value Chains of Rivals Differ?

    Th V l Ch i S

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    Assessing a companys cos t com pet it iveness involves com par ing cos t s all along anindustrys value chainSuppliers value chains are relevant because

    Costs, performance features, and quality ofinputs provided by suppliers influence a firmsown costs and product performance

    Value ch ains of d is t r ibu tors and re tai lers arerelevant because

    Their costs and profit marginsrepresent value added and are part of the price paid by ultimate end-user

    Activities they perform affect

    end-user satisfaction

    The Value Chain Systemfor an Entire Industry

    Fi 4 4 R t ti V l Ch i f E ti I d t

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    Figure 4.4: Representative Value Chain for an Entire Industry

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    A ti it B d C ti g A K

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    Determining whether a companys costs arein line with those of rivals requires

    Measuring how a companys costs comparewith those of rivals activity-by-activity

    Requires having accountingdata to measure cost of eachvalue chain activity

    A ctivi ty-based co st ing entailsDefining expense categories accordingto specific activities performed and

    Assigning costs to the activity

    responsible for creating the cost

    Activity-Based Costing: A KeyTool in Analyzing Costs

    D l i D M

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    Developing Data to Measure aCompanys Cost Competitiveness

    After identifying key value chain activities, the nextstep involves determining costs of performingspecific value chain activities using act ivi ty-basedcos t ing

    Appropriate degree of dis aggregat ion depends onEconomics of activities

    Value of comparing narrowly definedversus broadly defined activities

    Guidel ine Develop separate costestimates for activities

    Having different economics

    Representing a significant or growing proportion of costs

    B h ki C t f

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    Focuses on c ross -com pany com par isons of h ow certain activities are performed andcos t s associated with these activities

    Purchase of materials

    Payment of suppliers

    Management of inventories

    Getting new products to market

    Performance of quality controlFilling 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 ofperforming various value chain activities

    Learn what is the best way to perform aparticular activity from those companies whohave demonstrated that they are best -in-industry or best -in-world at performing theactivity

    Learn what other firms do toperform an activity at lower cost

    Figu re ou t wh at ac t ions to take to improve

    a companys own cost competitiveness

    Objectives of Benchmarking

    Wh t D t i If

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    Cost com pet it iveness depends on how well acompany manages its value ch ain relative tohow well competitors manage their value chainsWhen a companys costs are out -of-line, the

    activities responsible for the higher costs maybe due to any of three parts of industry valuechain

    1. Ac t iv i t ies per form ed by supp l iers

    2. A companys owninternal act ivi t ies

    3. Ac t iv i t ies per formed b y forw ard chann el a ll ies

    Activities,Costs, &

    Margins ofForward

    Channel Allies

    InternallyPerformedActivities,Costs, &Margins

    Activities,Costs, &

    Margins ofSuppliers

    Buyer/UserValue

    Chains

    What Determines If aCompany Is Cost Competitive?

    Options to Correct

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    Implement use of best practices throughoutcompanyEliminate some cost-producing activitiesaltogether by revamping value chain systemRelocate high-cost activities tolower-cost geographic areasSee if high-cost activities can be performedcheaper by outside vendors/suppliersInvest in cost-saving technologyInnovate around troublesome cost componentsSimplify product designMake up difference by achieving savings in

    backward or forward portions of value chain system

    Options to CorrectInternal Cost Disadvantages

    Options to Correct a

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    Pressure suppliers for lower pricesSwitch to lower-priced substitutes

    Collaborate closely with suppliers to identifymutual cost-saving opportunities

    Arrange for just-in-time deliveries fromsuppliers to lower inventory and internallogistics costs

    Integrate backward into businessof high-cost suppliers

    Options to Correct aSupplier-Related Cost Disadvantage

    O i C C Di d A i d

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    Pressure dealer-distributors and otherforward channel allies to reduce their coststo make the final price to buyers morecompetitive with prices of rivals

    Work closely with forwardchannel allies to identify win-winopportunities to reduce costs

    Change to a more economical distributionstrategySwitch to cheaper distribution channels

    Integrate forward into company-owned retail

    outlets

    Options to Correct a Cost Disadvantage AssociatedWith Activities of Forward Channel Allies

    Translating Performance of Value Chain

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    A company can create compet i t iveadvantage by out-managing rivals inperforming value chain activitiesin either/both of two ways

    Opt ion 1 : Develop competencies and capabilitiesthat rivals dont have or cant match andthereby create a resource or capability-based competitive advantage

    Opt ion 2 : Perform value chain activities at a loweroverall cost than rivals and therebycreate a cost-based competitiveadvantage

    Translating Performance of Value ChainActivities into Competitive Advantage

    Figure 4.5: Translating Company Performance of

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    Value Chain Activities into Competitive Advantage

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    Quest ion4 : Is the Company Stronger

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    Whether a company is competitivelystronger or weaker than key rivals hinges onthe answers to two questions

    How does the com pany rank relat ive to c om pet itors on eachimportant factor that determinesmarket success?

    Does the company have a netco m pet it ive advantage or disadvantage vis--vis major competitors?

    Quest ion 4 : Is the Company Strongeror Weaker than Key Rivals?

    Assessing a Companys

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    1. List indus t ry key su ccess fac to rs and otherrelevant measures of competitive strength

    2. Rate f irm and key r iv als o n each factor usingrating scale of 1 to 10 (1 = very weak; 5 =average; 10 = very strong)

    3. Decide whether to u se a w eigh ted orun w eighted rat ing sy s tem (a weighted systemis superior because chosen strength measuresare unlikely to be equally important)

    4. Sum in dividu al rat ings to get an overallmeasure of competitive strength for each rival

    5. Based on overall strength ratings, determineoveral l com pet it ive s t rength of f i rm

    Assessing a Company s Competitive Strength vs. Key Rivals

    Table 4.4: Illustrations of Unweighted

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    and Weighted Strength Assessments

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    Why Do a Competitive

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    Reveals strength of firms competitive positionvis--vis key rivals

    Shows how firm stacks up against rivals,measure-by-measure pinpoints firms

    competitive strengths and competitiveweaknesses

    Indicates whether firm is at a competitiveadvantage / disadvantage against each rival

    Identifies possible offensive attacks (pitcompany strengths against rivals weaknesses)

    Identifies possible defensive actions (a need tocorrect competitive weaknesses)

    Why Do a CompetitiveStrength Assessment ?

    Quest ion5 : What Strategic Issues

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    Based on results of both industry andcompetitive analysis and an evaluationof a companys competitiveness, what items should be on

    a companys worry list? Requires th ink ing s t ra tegical ly about

    Pluses and minuses in the industryand competitive situation

    Companys resource strengths and weaknessesand attractiveness of its competitive position

    Quest ion 5 : What Strategic IssuesMerit Managerial Attention?

    A good strategy m us t address what to do

    abou t each and every s t ra tegic i ssu e!

    A Clear Grasp of the Issues Is a

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    A Clear Grasp of the Issues Is aPrerequisite to Effective Action

    Issues are best couched in such phrases asHow to . . . ? Whether to . . . ? What should be done about . . . ?

    Issues need to be precisely statedand cut straight to the chase The issues on managements worry list represent an agend afor ac t ion

    Sharp, c lear un ders tanding of the i ssu es i s ab ig ass i s t in f igur ing ou t wh at to do to

    add ress and reso lve them !

    Identifying the Strategic Issues:

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    How to stave off market challenges from newforeign competitors?How to combat price discounting of rivals?How to reduce a companys high costs?

    How to sustain a companys present growth in light of slowing buyer demand?Whether to expand a companys product line? Whether to acquire a rival firm?Whether to expand into foreignmarkets rapidly or cautiously?What to do about aging demographicsof a companys customer base?

    Identifying the Strategic Issues:Some Possibilities