Evaluating a Company’s Chapter Title Resources and Competitive Position
16/e PPT

Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University-Florida Region
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

“Before executives can chart a new strategy, they must reach common understanding of the company’s
W. Chan Kim and Renee Mauborgne

current position.”


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?

Company Situation Analysis: The Key Questions
1. How well is the company’s present strategy working? 2. What are the company’s resource strengths and weaknesses and its external opportunities and threats? 3. Are the company’s prices and costs competitive? 4. Is the company competitively stronger or weaker than key rivals? 5. What strategic issues merit front-burner managerial attention?

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


Question 1: How Well Is the Company’s Present Strategy Working? Key Considerations  Must begin by understanding what the strategy is

Identify competitive approach
  

Low-cost leadership Differentiation Focus on a particular market niche Broad or narrow geographic market coverage? In how many stages of industry’s production/distribution chain does the company operate?

Determine competitive scope
 

 

Examine recent strategic moves Identify functional strategies

Approaches to Assess How Well the Present Strategy Is Working
 Qualitative

assessment – Is the strategy wellconceived?
   

Quantitative assessment – What are the results?

Covers all the bases? Internally consistent? Makes sense? Timely and in step with marketplace?

Is company achieving its financial and strategic objectives? Is company an aboveaverage industry performer?


Key Indicators of How Well the Strategy Is Working
 Trend  Trend  Trend

in sales and market share and/or retaining customers in profit margins in net profits, ROI, and EVA financial strength and credit ranking at continuous improvement activities and reputation with customers

 Acquiring

 Overall  Efforts  Trend  Image

in stock price and stockholder value

 Leadership

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



Question 2: What Are the Company’s Strengths, Weaknesses, Opportunities and Threats ?
 S W O T represents
   

the first letter in

S trengths W eaknesses O pportunities T 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 wellbeing

Identifying Resource Strengths and Competitive Capabilities

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 competitive capabilities are competitive assets!

Competencies vs. Core Competencies vs. Distinctive Competencies

competence is the product of organizational learning and experience and represents real proficiency in performing an internal activity core competence is a well-performed internal activity central (not peripheral or incidental) to a company’s competitiveness and profitability distinctive competence is a competitively valuable activity a company performs better than its rivals



Company Competencies and Capabilities
 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

Core Competencies – A Valuable Company Resource

competence becomes a core competence when the well-performed activity is central to a company’s competitiveness and profitability a core competence is knowledge-based, residing in people, not in assets on a balance sheet core competence is typically the result of crossdepartment collaboration core competence gives a company a potentially valuable competitive capability and represents a definite competitive asset

 Often,

A A

Examples: Core Competencies
 Expertise

in integrating multiple technologies to create families of new products in creating operating systems for cost efficient supply chain management new/next-generation products to market

 Know-how  Speeding  Better  Skills

after-sale service capability

in manufacturing a high quality product to fill customer orders accurately and

 Capability


Distinctive Competence – A Competitively Superior Resource

distinctive competence is a competitively valuable activity that a company performs better than its competitors distinctive competence is a competitively potent resource source because it


Gives a company a competitively valuable capability unmatched by rivals Can underpin and add real punch to a company’s strategy


Is a basis for sustainable competitive advantage

Examples: Distinctive Competencies Toyota
Low-cost, high-quality manufacturing of motor vehicles

Innovative coffee drinks and store ambience


Determining the Competitive Power 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 by the different capabilities of rivals?

Test Your Knowledge
A distinctive competence
A. is a more important competitive asset than a core competence. B. represents uniquely strong capability relative to rival companies—it qualifies as a competitively superior resource strength with competitive advantage potential. C. is a competitively important value chain activity that a company performs better than its rivals. D. can underpin and add real punch to a company's strategy. E. All of the above.

Identifying Resource Weaknesses and Competitive Deficiencies

weakness is something a firm lacks, does poorly, or a condition placing it at a disadvantage weaknesses relate to

 Resource

Inferior or unproven skills, expertise, or intellectual capital Lack of important physical, organizational, or intangible assets Missing capabilities in key areas

Resource weaknesses and deficiencies are competitive liabilities!



Identifying a Company’s Market Opportunities
 Opportunities

most relevant to a company are those offering

Good match with its financial and organizational resource capabilities Best prospects for profitable long-term growth Potential for competitive advantage

Identifying External Threats
 Emergence  Introduction  Entry

of cheaper/better technologies of better products by rivals

of lower-cost foreign competitors regulations of a hostile takeover demographic shifts shifts in foreign exchange rates upheaval in a country

 Onerous  Rise

in interest rates

 Potential

 Unfavorable  Adverse  Political

Role of SWOT Analysis in Crafting a Better Strategy

S 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 T analysis is

Using the 4 lists to draw conclusions about a company’s overall situation Acting on the conclusions to

Better match a company’s strategy to its resource strengths and market opportunities Correct the important weaknesses Defend against external threats

 

Fig. 4.2: The Three Steps of SWOT Analysis


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?


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

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

 Key

Value chain analysis Benchmarking

Concept: Company Value Chain

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 of the value for customers is created) Support activities that facilitate performance of the primary activities

Fig. 4.3: A Representative Company Value Chain


Example: Value Chain Activities for a Bakery Goods Maker
Primary Activities
 

Support Activities
 

Supply chain management Recipe development and testing Mixing and baking Packaging Sales and marketing Distribution

Quality control Human resource management Administration

   


Example: Value Chain Activities for a Department Store Retailer
Primary Activities
   

Support Activities
   

Merchandise selection and purchasing Store layout and product display Advertising Customer service

Site selection Hiring and training Store maintenance Administrative activities


Example: Value Chain Activities for a Hotel Chain
Primary Activities

Support Activities
   

Site selection and construction Reservations Operation of hotel properties Managing lineup of hotel locations

Accounting Hiring and training Advertising Building a brand and reputation General administration

 


Characteristics of Value Chain Analysis
 Combined

costs of all activities in a company’s value chain define the company’s internal cost structure a firm’s costs activity by activity against costs of key rivals
 

 Compares

From raw materials purchase to Price paid by ultimate customer

 Pinpoints

which internal activities are a source of cost advantage or disadvantage

Why Do Value Chains of Rivals Differ?

Several factors give rise to differences 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 them

Differences among the value chains of competing companies complicate task of assessing rivals’ relative cost positions

The Value Chain System for an Entire Industry
 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 costs and product performance

 Value
 

chains of distributors and retailers are relevant 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

Fig. 4.4: Representative Value Chain for an Entire Industry


Example: Value Chain Activities
Pulp & Paper Industry

Timber farming Logging Pulp mills Papermaking Distribution

Example: Value Chain Activities
Home Appliance Industry

Parts and components manufacture Assembly Wholesale distribution Retail sales

Example: Value Chain Activities
Soft Drink Industry

Processing of basic ingredients Syrup manufacture Bottling and can filling Wholesale distribution Advertising Retailing


Example: Value Chain Activities
Computer Software Industry

Programming Disk loading Marketing Distribution

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 degree of disaggregation depends on
 

 Appropriate

Economics of activities Value of comparing narrowly defined versus broadly defined activities

 Guideline
 

– Develop separate cost estimates for activities
Having different economics Representing a significant or growing proportion of costs

Activity-Based Costing: A Key Tool in Analyzing Costs
 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 cost of each value chain activity costing entails
 

 Activity-based

Defining expense categories according to specific activities performed and Assigning costs to the activity responsible for creating the cost


Benchmarking Costs of Key Value Chain Activities
 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

Objectives of Benchmarking
 Identify  Learn

best and most efficient means of performing various value chain activities 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 what other firms do to perform an activity at lower cost out what actions to take to improve a company’s own cost competitiveness

 Learn

 Figure

Ethical Principles in Benchmarking
 Avoid

actions implying an interest

 Treat

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

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

What Determines If a Company Is Cost Competitive?
 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 of Suppliers Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Forward Channel Allies Buyer/User Value Chains


Options to Correct Internal Cost Disadvantages
 

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 performed cheaper 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 Correct a Supplier-Related Cost Disadvantage
 Pressure  Switch

suppliers for lower prices

to lower-priced substitutes

 Collaborate

closely with suppliers to identify mutual cost-saving opportunities for just-in-time deliveries from suppliers to lower inventory and internal logistics costs backward into business of high-cost suppliers

 Arrange

 Integrate

Options to Correct a Cost Disadvantage Associated With Activities of Forward Channel Allies
 Pressure

dealer-distributors and other forward channel allies to reduce their costs to make the final price to buyers more competitive with prices of rivals closely with forward channel allies to identify win-win opportunities to reduce costs to a more economical distribution strategy

 Work

 Change
 

Switch to cheaper distribution channels Integrate forward into company-owned retail outlets

Test Your Knowledge
For a company to translate performance of value chain activities into competitive advantage, it
A. must (1) develop core competencies and maybe a distinctive competence that rivals don’t have or can’t quite match and that are instrumental in helping it deliver attractive value to customers or (2) be more cost efficient in how it performs value chain activities such that it has a low-cost advantage. B. has to develop more core competencies than rivals. C. must be more adept than rivals in using benchmarking and activity-based costing. D. has to position itself in the strategic group where profit margins are highest. E. Must adopt more best practices than rival firms.

Translating Performance of Value Chain Activities into Competitive Advantage

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 capabilities that rivals don’t have or can’t match Option 2: Do an overall better job than rivals of lowering combined costs of performing all the value chain activities

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


Question 4: Is the Company Stronger or Weaker than Key Rivals?
 Overall

competitive position involves answering two questions

How does a company rank relative to competitors on each important factor that determines market success? Does a company have a net competitive advantage or disadvantage vis-à-vis major competitors?

Assessing a Company’s Competitive Strength vs. Key Rivals
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



Why Do a Competitive Strength Assessment ?
 Reveals

strength of firm’s competitive position vis-à-vis key rivals  Shows how firm stacks up against rivals, measureby-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)

Test Your Knowledge
Which of the following statements is false?
A. The higher a company’s costs are above those of close rivals, the more competitively vulnerable it becomes. B. Because the value chains of rival companies tend to be quite similar, costs outside a company’s own value chain do not affect whether it is at a cost advantage or disadvantage vis-à-vis key rivals. C. A company’s cost competitiveness depends not only on the costs of internally performed value chain activities but also on the costs of activities performed by its suppliers and forward channel allies. D. The stronger a company’s financial performance and market position, the more likely it has a well-conceived, well-executed strategy. E. A competence is something a company is good at doing whereas a core competence is a proficiently performed internal activity that is central to a company’s strategy and competitiveness.

Question 5: What Strategic Issues Merit Managerial Attention?
 Based

on results of both industry and competitive analysis and an evaluation of a company’s competitiveness, what items should be on a company’s “worry list”? thinking strategically about
 

 Requires

Pluses and minuses in the industry and 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!

Stating the Issues Clearly and Precisely

well-stated issue involves such phrases as
“How to . . . ?” “Whether to . . . ?” “What should be done about . . . ?”

  

 Issues  Issues
 

need to be precise, specific, and “cut straight to the chase” on the “the worry list” raise questions about
What actions need to be considered What to think about doing

Identifying the Strategic Issues: Some Possibilities
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 growth in 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?


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?


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