STRATEGIC MANAGEMENT COURSE

Master in Management Program

STRATEGIC CAPABILITIES

UNIT 3

Professor Maria Nikishina

Term II Year 2020
 Strategic management Unit 3

HOW WELL IS THE COMPANY’S PRESENT STRATEGY WORKING?

Three best indicators of how well a company’s strategy is working are:

1. Whether it is achieving its stated financial and strategic objectives

2. Whether its financial performance is above the industry average

3. Whether it is gaining customers and gaining market share

 Strategic management Unit 3

HOW WELL IS THE COMPANY’S PRESENT STRATEGY WORKING?

Strategic success in a firm’s present competitive approach requires asking:
1) Has the firm taken successful actions in attracting customers & improving its market position?

2) Has the firm gained a sustainable competitive advantage based on low product costs or better
product offerings?

3) Is the firm appropriately concentrating its resources on serving broad spectrum of customers
or narrow market niche?

4) Are the firm’s functional strategies in R&D, production, marketing, finance, HR, IT
strengthening its competitive position?

5) Has the firm been successful in its efforts to establish alliances with other enterprises?
 Strategic management Unit 3

COMPONENTS OF A SINGLE-BUSINESS COMPANY’S STRATEGY

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 SPECIFIC INDICATORS OF STRATEGIC SUCCESS

Sales and earnings growth trends

Stock price trends
Company’s overall financial strength
Customer retention rate
Rate of new customers acquired
Evidence of improvement in internal processes
defect rate, order fulfillment, delivery times, days of inventory, and
employee productivity
Strategic Management Principle: Sluggish financial performance and second-rate market accomplishments
almost always signal weak strategy, weak execution, or both.

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 Strategic management Unit 3

SWOT ANALYSIS IN STRATEGIC MANAGEMENT

 SWOT can help explain why a strategy is working well (or not) by taking a close look a
company's strengths in relation to its weaknesses & in relation to the strengths and
weaknesses of competitors.
1. Are the firm’s strengths enough to make up for its weaknesses?
2. Has the firm’s strategy built on these strengths and shielded the firm from its weaknesses?
3. Do the firm's strengths exceed those of its rivals?
 SWOT can help determine whether a strategy has been effective in fending off external threats
and positioning the firm to take advantage of market opportunities.

 SWOT analysis - diagnostic tool popular for its ease of use (can be used to evaluate efficacy of a
strategy and as the basis for crafting a strategy from outset to determine whether the firm is
positioned to pursue new market opportunities and to defend against emerging threats to its
future well-being).
 Strategic management Unit 3

WHAT ARE THE COMPANY’S STRENGTHS AND WEAKNESSES IN RELATION

TO THE MARKET OPPORTUNITIES AND EXTERNAL THREATS?
SWOT analysis is a tool for identifying situational reasons underlying a firm’s
performance.

INTERNAL STRENGTHS (THE BASIS FOR STRATEGY)

INTERNAL WEAKNESSES (DEFICIENT CAPABILITIES)

MARKET OPPORTUNITIES (STRATEGIC OBJECTIVES)

EXTERNAL THREATS (STRATEGIC DEFENSES)

 IDENTIFYING A COMPANY’S INTERNAL STRENGTHS

A firm’s strengths represent its competitive assets. Basing a firm’s strategy on its most competitively
valuable strengths gives the firm its best chance for market success.

• A competence is an activity that a firm has learned to perform with proficiency and at an
acceptable cost—a true capability, in other words.

• A core competence is an activity that a firm performs proficiently and that is also central to its
strategy and competitive success.

• A distinctive competence is a competitively important activity that a firm performs better than its
rivals—it represents a competitively superior internal strength.

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 IDENTIFYING A COMPANY’S INTERNAL WEAKNESS
WEAKNESS=is something a firm lacks or does poorly (in comparison to others) or a condition
that puts it at a competitive disadvantage in the marketplace.

Types of weaknesses:

 Inferior or unproven skills, expertise, or intellectual capital in competitively important

areas of the business

 Deficiencies in physical, organizational, or intangible assets

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 IDENTIFYING EXTERNAL THREATS
Simply making lists of a firm’s strengths, weaknesses, opportunities, and threats is not enough. The payoff from
SWOT analysis comes from the conclusions about a firm’s situation and the implications for strategy
improvement that flow from the four lists!

Types of threats:
 Normal course-of-business
 Sudden-death (survival)

Considering threats:
 Identify threats to the firm’s future prospects
 Evaluate strategic actions to be taken to neutralize or lessen impact

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 Strategic management Unit 3

WHAT TO LOOK FOR IN IDENTIFYING A COMPANY’S STRENGTHS,

WEAKNESSES, OPPORTUNITIES, AND THREATS

Strengths and Competitive Assets Weaknesses and Competitive Deficiencies

• Ample financial resources to grow the business • No distinctive core competencies

• Strong brand-name image or company reputation • Lack of attention to customer needs

• Cost advantages over rivals • Weak balance sheet, too much debt

• Attractive customer base • Higher costs than competitors

• Proprietary technology, superior technological skills, • Too narrow a product line relative to rivals
important patents

• Strong bargaining power over suppliers or buyers • Weak brand image or reputation

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 Strategic management Unit 3

WHAT TO LOOK FOR IN IDENTIFYING A COMPANY’S STRENGTHS,

WEAKNESSES, OPPORTUNITIES, AND THREATS
Strengths and Competitive Assets (continued) Weaknesses and Competitive Deficiencies (continued)

• Superior product quality • Lack of adequate distribution capability

• Wide geographic coverage or strong global • Lack of management depth

distribution capability

• Alliances or joint ventures that provide access to • A plague of internal operating problems or obsolete
valuable technology competencies, or attractive facilities
geographic markets • Too much underutilized plan capacity

Looks like a strategic balance sheet, where strengths represent competitive assets and weaknesses
represent competitive liabilities. Ideally, the company’s competitive assets should outweigh its competitive
liabilities by an ample margin.

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 Strategic management Unit 3

WHAT TO LOOK FOR IN IDENTIFYING A COMPANY’S STRENGTHS,

WEAKNESSES, OPPORTUNITIES, AND THREATS
Market Opportunities External Threats

• Meet sharply rising buyer demand for the industry’s • Increasing intensity of competition
product

• Serve additional customer groups or market segments • Slowdowns in market growth

• Expand into new geographic markets • Likely entry of potent new competitions
• Expand the company’s product line to meet a broader • Growing bargaining power of customers or
range of customer needs suppliers

• Enter new product lines or new businesses • A shift in buyer needs and tastes away from the
industry’s product
• Take advantage of failing trade barriers in attractive • Adverse demographic changes that threaten to
foreign markets curtail demand for the industry’s product

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 Strategic management Unit 3

WHAT TO LOOK FOR IN IDENTIFYING A COMPANY’S STRENGTHS,

WEAKNESSES, OPPORTUNITIES, AND THREATS

Market Opportunities (continued) External Threats (continued)

• Take advantage of an adverse change in the • Adverse economic conditions that threaten
fortunes of rival firms critical suppliers or distributors

• Acquire rival firms or companies with attractive • Changes in technology—particularly disruptive

technological expertise or competencies technology that can undermine the company’s
distinctive competencies

• Take advantage of emerging technological • Restrictive foreign trade policies

developments to innovate • Costly new regulatory requirements
• Enter into alliances or other cooperative ventures • Tight credit conditions
• Rising prices on energy or other key inputs

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 WHAT DO SWOT LISTINGS REVEAL?
 SWOT analysis process involves more than making four lists!

Crafting new strategy:

• SWOT is the foundation for positioning the firm to use its strengths to seize
opportunities and to shore up its competitive deficiencies to mitigate external
threats.

Assessing the effectiveness of existing strategy:

• SWOT insights into the firm’s overall business situation can translate into
recommended strategic actions.

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 STEPS INVOLVED IN SWOT: IDENTIFY FOUR COMPONENTS OF SWOT, DRAW
CONCLUSIONS, TRANSLATE IMPLICATIONS INTO STRATEGIC ACTIONS

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 Strategic management Unit 3

HOW DO VALUE CHAIN ACTIVITIES IMPACT COMPANY’S COST

STRUCTURE AND ITS CUSTOMER VALUE PROPOSITION?
Strategic Management Principle
The higher a firm’s costs are above those of close rivals, the
more competitively vulnerable it becomes.
The greater the amount of customer value that a company can
offer profitably relative to close rivals, the less competitively
vulnerable the company becomes.

Signs of firm’s competitive strength:

 Its prices and costs are in line with rivals.
 Its customer-value proposition is competitive and cost effective.
 Its bundled capabilities are yielding a sustainable competitive
advantage.
 COMPARING VALUE CHAINS OF RIVAL COMPANIES

VALUE CHAIN ANALYSIS

• Facilitates a comparison, activity-by-activity, of how effectively and efficiently a firm delivers value
to its customers (even rivals in the same industry may differ significantly in terms of the activities
they perform).

VALUE CHAIN ANALYSIS PROCESS

• Segregates a firm’s operations into different types of primary and secondary activities to identify
major components of its internal cost structure
• Uses activity-based costing to evaluate activities
• Same for significant competitors

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 VALUE CHAIN SYSTEM

 A company’s value chain is embedded in a larger system of activities that includes the value chains of
its suppliers and the value chains of whatever wholesale distributors and retailers it utilizes in getting
its product/service to end users.

 This value chain system (sometimes called vertical chain) has implications that extend far beyond the
company’s costs.

Strategic Management Principle:

Company’s cost competitiveness depends not only on the costs of internally performed
activities (its own value chain) but also on costs in the value chains of its suppliers and
distribution channel allies.

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 Strategic management Unit 3

REPRESENTATIVE VALUE CHAIN SYSTEM

A typical value chain system that incorporates the value chains of suppliers and forward-channel allies. Specific activities
constituting value chain systems vary significantly from industry to industry.

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 BENCHMARKING: ASSESSING THE COST AND EFFECTIVENESS OF VALUE
CHAIN ACTIVITIES

BENCHMARKING
Involves improving internal activities based on learning from other companies’ “best
practices”
Assesses whether the cost competitiveness and effectiveness of a company’s value chain
activities are in line with its competitors’ activities

Sources of benchmarking information:

 Market data reports from consulting companies and market analysts, publications of
industry trade groups and government agencies, and customers.
 Visits to benchmark firms.

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 BENCHMARKING IN THE SOLAR INDUSTRY
The cost of solar power production is dropping rapidly, leading to lower solar power process for consumers and expanding
market for solar companies. According to Solar Energy Industries Association, over 11 gigawatts (GW) of solar serving electric
utilities were installed in 2016-enough to supply power for approximately 1.8 million households. Simultaneously, the solar
landscape is becoming more competitive. As of 2017, 46 firms had installed a cumulative total of over 45 (GW) of solar serving
electric utilities in the US.
As competition grows, benchmarking plays an increasingly critical role in assessing a solar company’s relative costs and price
positioning compared to other firms. This is often measured using the all-in installation and production costs/kilowatt hour
generated by solar asset called “Levelized Cost of Energy”. Kilowatt hours are units of electricity that are sold to clients.
In 2008, the SunPower – one of the largest solar firms in the US – used benchmarking to target 50% decrease in its solar LCOE by
2012. This early benchmarking strategy helped the company to defend against new market entrants offering lower prices. But
between 2009 and 2014, the overall industry fell by 78% leading the company to conclude that an even more aggressive
approach was needed to manage downward pricing pressure. Over 2017, SunPower’s quarterly earnings calls highlighted effects
to compete on benchmark prices by simplifying its company structure; divesting from non-core assets; and diversifying beyond
the low-cost, large-scale utility solar market and into residential and commercial solar where it could compete more easily on
price.
Continuing to anticipate and adapt to falling solar process requires reliable industry data on benchmark costs. For solar to pay a
major role in US power generation, cost must keep decreasing. As solar companies race toward lower costs, benchmarking will
continue to be a core strategic tool in determining pricing and market positioning.

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 STRATEGIC OPTIONS FOR REMEDYING A COST OR VALUE DISADVANTAGE

Areas in the total value chain system assess ways to improve efficiency and effectiveness:

1) Internal activity segments,

2) Suppliers’ part of the value chain system,
3) Forward-channel portion of the value chain system.

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 IMPROVING INTERNALLY PERFORMED VALUE CHAIN ACTIVITIES

• Implement best practices throughout the firm, particularly for high-value activities.
• Redesign products, components and activities to facilitate speedier and more
economical manufacture or assembly.
• Relocate high-cost activities to external value chains to be performed more cheaply
by vendors or contractors.
• Reallocate resources to activities that address buyers’ most important purchase
criteria.
• Adopt productivity-enhancing, cost-saving technological improvements that spur
innovation, improve design, and enhance creativity.

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 IMPROVING SUPPLIER-RELATED VALUE CHAIN ACTIVITIES

• Pressure suppliers for lower prices.

• Switch to lower-priced substitute inputs.
• Collaborate closely with suppliers to identify mutual cost-saving opportunities.
• Work with suppliers to enhance the firm’s differentiation.
• Select and retain suppliers who meet higher-quality standards.
• Coordinate with suppliers to enhance design or other features desired by customers.
• Provide incentives to suppliers to meet higher-quality standards, and assist suppliers in
their efforts to improve.

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 IMPROVING VALUE CHAIN ACTIVITIES OF DISTRIBUTION PARTNERS

Achieving cost-based competitiveness:

1) Pressure forward-channel allies to reduce their costs and markups.
2) Collaborate with forward-channel allies to identify win-win opportunities to
reduce costs.
3) Change to a more economical distribution strategy, including switching to
cheaper distribution channels (selling direct via the Internet).

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 TRANSLATING PROFICIENT PERFORMANCE OF VALUE CHAIN ACTIVITIES
INTO COMPETITIVE ADVANTAGE
Option 1: Beat rivals by creating more customer value from value chain activities, for a
differentiation-based competitive advantage

1. Managers decide to perform value chain activities in ways that drive improvements in quality,
features, performance, and other differentiation-enhancing aspects.

2. Competencies gradually emerge in performing value chain activities that drive improvements in
quality, features, and performance.

3. Company proficiency in performing some of these differentiation-enhancing activities rises to the

level of a core competence.

4. Company proficiency in performing the core competence continues to build and evolves into a
distinctive competence.

5. Company gains a competitive advantage based on superior differentiation capabilities.

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 TRANSLATING PROFICIENT PERFORMANCE OF VALUE CHAIN ACTIVITIES
INTO COMPETITIVE ADVANTAGE

Option 2: Beat rivals by conducting value chain activities more efficiently, for a cost-based
competitive advantage

1. Company managers decide to perform value chain activities in the most cost-efficient manner.

2. Competencies gradually emerge in driving down the cost of value chain activities (such as production,
inventory management, etc.).

3. Company capabilities in performing certain value chain activities more efficiently rise to the level of a core
competence.

4. Company proficiency in performing the core competence continues to build and evolves into a distinctive
competence.

5. Company gains a competitive advantage based on superior differentiation capabilities.

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 Strategic management Unit 3

IS THE COMPANY COMPETITIVELY STRONGER OR WEAKER THAN KEY

RIVALS?
 Using resource analysis, value chain analysis, and benchmarking to determine a company’s
competitiveness on value and cost is necessary but not sufficient!
 A more comprehensive assessment needs to be made of the firm’s overall competitive strength.

1) How does the firm rank relative to competitors on each of the important factors that
determine market success?
2) Does the firm have a net competitive advantage or disadvantage versus major competitors?

Strategic Management Principles:

High-weighted competitive strength ratings signal a strong competitive position and possession of competitive
advantage; low ratings signal a weak position and competitive disadvantage.
 STEPS IN THE COMPETITIVE STRENGTH ASSESSMENT PROCESS

1. Make list of industry’s key success factors and measures of competitive strength/weakness (6
to 10 measures usually suffice).
2. Assign weights to each competitive strength measure based on its perceived importance (sum
of the weights for each measure must add up to 1).
3. Calculate weighted strength ratings by scoring each competitor on each strength measure
(using 1-to-10 rating scale, where 1 is very weak and 10 is very strong) and multiplying the
assigned rating by the assigned weight.
4. Sum the weighted strength ratings on each factor to get overall measure of competitive
strength for each firm.
5. Use overall strength ratings to draw conclusions about the firm’s net competitive advantage
or disadvantage and to take specific note of areas of strength and weakness.

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© McGraw-Hill Education.
Overall competitive strength scores
indicate how all different strength
measures add up—whether the firm is
at a net overall competitive advantage
or disadvantage against each rival.

competitiveness versus rivals.

strength rating, the stronger its overall
REPRESENTATIVE WEIGHTED COMPETITIVE STRENGTH ASSESSMENT

The higher a firm’s overall weighted

 STRATEGIC IMPLICATIONS OF A COMPETITIVE STRENGTH ASSESSMENT

• The higher a firm’s overall weighted strength rating, the stronger its overall
competitiveness versus rivals.
• The rating score indicates the total net competitive advantage for a firm relative to
other firms.
• Firms with high competitive strength scores are targets for benchmarking.
• The ratings show how a firm compares against rivals, factor by factor (or capability
by capability).
• Strength scores can be useful in deciding what strategic moves to make.

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 STRATEGIC PRIORITY “HOW TO” ISSUES

 Compiling a “priority list” of problems creates an agenda of strategic issues (merit prompt
managerial attention).

 A good strategy must contain ways to deal with all the strategic issues and obstacles that
stand in the way of the company’s financial and competitive success in the years ahead.

• How to meet challenges of new foreign competitors

• How to combat the price discounting of rivals
• How to both reduce high costs and prepare for price reductions
• How to sustain growth as buyer demand slows
• How to adapt to the changing demographics of the firm’s customer base

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 STRATEGIC PRIORITY “SHOULD WE” ISSUES

Pinpointing the specific issues that management needs to address sets the agenda for deciding
what actions to take next to improve the company’s performance and business outlook.

• Expand rapidly or cautiously into foreign markets?

• Reposition the firm to move to a different strategic group?
• Counter increasing buyer interest in substitute products?
• Expand the firm’s product line?
• Correct the firm’s competitive deficiencies by acquiring a rival firm with the missing
strengths?

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