McGraw-Hill/Irwin

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

Chapter 4: Evaluating a
Companys Resources and
Competitive Position
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Chapter Learning Objectives
1. Understand how to evaluate a companys internal
situation and capabilities and identify the resource
strengths capable of becoming the cornerstone of
the companys strategic approach.
2. Grasp how and why activities performed internally
by a company and those performed externally by
its suppliers and forward channel allies determine a
companys cost structure and ability to compete
successfully.
3. Learn how to evaluate a companys competitive
strength relative to key rivals.
4. Understand the role and importance of industry
and competitive analysis and internal situation
analysis in identifying strategic issues company
managers must address.
4-3
Chapter Roadmap
Question 1: How Well Is the Companys
Present Strategy Working?
Question 2: What Are the Companys
Resource Strengths and Weaknesses and
Its External Opportunities and Threats?
Question 3: Are the Companys 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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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 its
external opportunities and threats?
3. Are the companys prices and
costs competitive?
4. Is the company competitively
stronger or weaker than key rivals?
5. What strategic issues merit
front-burner managerial attention?
Figure 4.1: Identifying Components of a Single-Business Companys Strategy
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Question 1: How Well Is the Companys
Present Strategy Working?
Must begin by understanding what the strategy is
Identify competitive approach
Low-cost leadership?
Differentiation?
Best-cost provider?
Focus on a particular market niche?
Determine competitive scope
Broad or narrow geographic market coverage?
In how many stages of industrys
production/distribution chain does the company
operate?
Examine recent strategic moves
Identify functional strategies
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 ROE
Overall financial strength and credit rating
Efforts at continuous improvement activities
Trend in stock price
Image and reputation with customers
Leadership role(s) Technology,
product quality, innovation, etc.
Key Indicators of How Well
the Strategy Is Working
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S W O T represents the first letter in
S trengths
W eaknesses
O pportunities
T hreats
For a companys 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 Companys 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

Identifying Resource Strengths
and Competitive Capabilities
Resource strengths and competitive
capabilities are competitive assets!
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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-performed
internal activity central (not peripheral or
incidental) to a companys competitiveness
and 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 companys
competitiveness and profitability
Often, a core competence is
knowledge-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 a
potentially valuable competitive capability
and represents a definite competitive asset
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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 valuable
capability unmatched by rivals
Can underpin and add real punch
to a companys strategy
Is a basis for sustainable competitive
advantage
# 1
Distinctive Competence
A Competitively Superior Resource
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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 really competitively superior?
2. Is the resource rare is it something rivals
lack?
3. Is the resource hard to copy?
4. Can the resource be trumped by
the different capabilities of rivals?
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What Is a Resource-Based Strategy?
Companies with competitively valuable
resource strengths and competencies
often deploy these capabilities to
Boost the competitive power
of their overall strategy
Bolster their position in the marketplace
Resource-based strategies
Attempt to exploit company resources to offer
value to customers in ways rival cannot match
Can focus on eroding the competitive potency
of a rival by developing different resources that
effectively substitute for the strengths of the rival
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Identifying Resource Weaknesses
and 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 deficiencies
are competitive liabilities!
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Identifying a Companys
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
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Identifying External Threats
Some possibilities:
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 and/or burdensome
government policies
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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 companys overall situation
Acting on the conclusions 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 in
Crafting a Better Strategy
Figure 4.2: The Three Steps of SWOT Analysis
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Assessing whether a firms 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 Companys
Prices and Costs Competitive?
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A companys business consists of all activities
undertaken in designing, producing, marketing,
delivering, and supporting its product or service
All these activities a company performs internally
combine to form a value chain so-called
because the underlying intent of a companys
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 Facilitate
performance of primary activities
Concept: Company Value Chain
Figure 4.3: A Representative Company Value Chain
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Combined costs of all activities in a
companys value chain define a companys
internal cost structure
Compares a firms costs activity
by activity against costs of key rivals
From raw materials purchase to
Price paid by ultimate customer
Pinpoints which internal activities are a
source of cost advantage or disadvantage
Characteristics of Value Chain Analysis
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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
Why Do Value Chains of Rivals Differ?
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Assessing a companys cost competitiveness
involves comparing costs all along an
industrys value chain
Suppliers value chains are relevant because
Costs, performance features, and quality of
inputs provided by suppliers influence a firms
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
Activities they perform affect
end-user satisfaction
The Value Chain System
for an Entire Industry
Figure 4.4: Representative Value Chain for an Entire Industry
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Determining whether a companys costs are
in line with those of rivals requires
Measuring how a companys costs compare
with those of rivals activity-by-activity
Requires having accounting
data to measure cost of each
value chain activity
Activity-based costing entails
Defining expense categories according
to specific activities performed and
Assigning costs to the activity
responsible for creating the cost
Activity-Based Costing: A Key
Tool in Analyzing Costs
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Developing Data to Measure a
Companys 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 defined
versus broadly defined activities
Guideline Develop separate cost
estimates for activities
Having different economics
Representing a significant or growing proportion of 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 of
Key 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 companys own cost competitiveness
Objectives of Benchmarking
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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 companys 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 companys own internal activities
3. Activities performed by forward channel allies
Activities,
Costs, &
Margins of
Forward
Channel Allies
Internally
Performed
Activities,
Costs, &
Margins
Activities,
Costs, &
Margins of
Suppliers
Buyer/User
Value
Chains
What Determines If a
Company Is Cost Competitive?
Activities,
Costs, &
Margins of
Suppliers
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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 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
Internal 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 business
of high-cost suppliers
Options to Correct a
Supplier-Related Cost Disadvantage
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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
Work closely with forward
channel allies to identify 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 capabilities
that rivals dont have or cant match and
thereby create a resource or capability-
based competitive advantage
Option 2: Perform value chain activities at a lower
overall cost than rivals and thereby
create a cost-based competitive
advantage
Translating Performance of Value Chain
Activities into Competitive Advantage
Figure 4.5: Translating Company Performance of
Value Chain Activities into Competitive Advantage
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Whether a company is competitively
stronger or weaker than key rivals hinges on
the answers to two questions
How does the company rank
relative to competitors on each
important factor that determines
market success?
Does the company have a net
competitive advantage or disadvantage
vis--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 strength of firm
Assessing a Companys
Competitive Strength vs. Key Rivals
Table 4.4: Illustrations of Unweighted
and Weighted Strength Assessments
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Reveals strength of firms competitive position
vis--vis key rivals
Shows how firm stacks up against rivals,
measure-by-measure pinpoints firms
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 Competitive
Strength Assessment ?
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Based on results of both industry and
competitive analysis and an evaluation
of a companys competitiveness,
what items should be on
a companys worry list?
Requires thinking strategically about
Pluses and minuses in the industry
and competitive situation
Companys resource strengths and weaknesses
and attractiveness of its competitive position
Question 5: What Strategic Issues
Merit Managerial Attention?
A good strategy must address what to do
about each and every strategic issue!
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A Clear Grasp of the Issues Is a
Prerequisite to Effective Action
Issues are best couched in such phrases as
How to . . . ?
Whether to . . . ?
What should be done about . . . ?
Issues need to be precisely stated
and cut straight to the chase
The issues on managements
worry list represent an agenda
for action
Sharp, clear understanding of the issues is a
big assist in figuring out what to do to
address and resolve them !
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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 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 foreign
markets rapidly or cautiously?
What to do about aging demographics
of a companys customer base?
Identifying the Strategic Issues:
Some Possibilities