CHAPTER 5

EVALUATING A COMPANY
RESOURCES,
CAPABILITIES, AND
COMPETITIVENESS

4-1
LO1 Learn how to assess how well a company’s current strategy is
working
LO2 Understand why a company’s resources and capabilities are
central to its strategic approach and how to evaluate their potential
for giving the company a competitive edge over rivals.
LO3 Grasp how a company’s value chain activities can affect the
company’s cost structure and customer value proposition.
LO4 Learn how to evaluate a company’s competitive strength relative to
key rivals.
LO5 Understand how a comprehensive evaluation of a company’s
external and internal situations can assist managers in making
critical decisions about their next strategic moves.

4-2
Evaluating a Firm’s Internal Situation

Question
Question 11 How
How well
well is
is the
the firm’s
firm’s strategy
strategy working?
working?

What
What are
are the
the firm’s
firm’s competitively
competitively important
important
Question
Question 22 resources
resources and
and capabilities?
capabilities?

Are
Are the
the firm’s
firm’s cost
cost structure
structure and
and customer
customer
Question
Question 33 value
value proposition
proposition competitive?
competitive?

Is
Is the
the firm
firm competitively
competitively stronger
stronger or
or weaker
weaker
Question
Question 44 than
than key
key rivals?
rivals?

What
What strategic
strategic issues
issues and
and problems
problems merit
merit
Question
Question 55 front-burner
front-burner managerial
managerial attention?
attention?

4-3
Question 1: How Well Is the Company’s
Strategy Working?
• The two best indicators of how well a firm’s
strategy is working are:
 Whether the firm is recording gains in financial
strength and profitability.
 Whether the firm’s competitive strength and market
standing is improving.

4-4
 Other Strategy Performance Indicators
• Trends in the firm’s sales and earnings growth.
• Trends in the firm’s stock price.
• The firm’s overall financial strength.
• The firm’s customer retention rate.
• The rate at which new customers are acquired.
• Changes in the firm’s image and reputation with
customers.
• Evidence of improvement in internal processes such
as defect rate, order fulfillment, delivery times, days
of inventory, and employee productivity

4-5
 Question 2: What Are the Company’s
Competitively Important Resources
and Capabilities?

• A company’s strategy and business model:

 Must be well-matched to its collection of resources and
capabilities.
 Requires a tight fit with a company’s internal situation.
 Is strengthened when exploiting resources that are
competitively valuable, rare, hard to copy, and not
easily trumped to rivals’ equivalent substitute resources

4-6
CORE CONCEPT

A
A resource is is aa competitive
competitive asset
asset that
that is owned
owned
or
or controlled
controlled byby aa firm;
firm; aa capability
capability is
is the
the
capacity
capacity of
of aa firm
firm to
to competently
competently perform
perform somesome
internal
internal activity.
activity. Capabilities
Capabilities are
are developed
developed and and
enabled
enabled through
through the the deployment
deployment ofof aa firm’s
firm’s
resources.
resources.

4-7
 Resource and Capability Analysis
• Analyzing the resources and capabilities of a
company is a two-step process:
1. Identify the company’s most competitively important
resources and capabilities
2. Apply the four tests of competitive power to ascertain
which resources and capabilities can support a
sustainable competitive advantage over rival firms.

4-8
CORE CONCEPT

Resource
Resource andand capability
capability analysis
analysis is
is aa powerful
powerful
tool
tool for
for sizing
sizing up
up aa company’s
company’s competitive
competitive assets
assets
and
and determining
determining ifif the
the assets
assets can
can support
support aa
sustainable
sustainable competitive
competitive advantage
advantage over
over market
market
rivals.
rivals.

4-9
 Identifying Competitively Important
Resources and Capabilities
• Common types of valuable resources and
competitive capabilities include:
 Skills or specialized expertise in a competitively
important capability
 Valuable physical assets
 Valuable human assets or intellectual capital
 Valuable organizational assets
 Valuable intangible assets
 Competitively valuable alliances or cooperative
ventures

4-10
TABLE 4.1 Common Types of Tangible and Intangible Resources

Tangible Resources
Physical State-of-the-art manufacturing plants and equipment,
resources efficient distribution facilities, attractive real estate
locations, or ownership of valuable natural resource
deposits.

Financial Cash and cash equivalents, marketable securities, and

resources other financial assets such as a company’s credit rating
and borrowing capacity

Technological Patents, copyrights, superior production technology, and

assets technologies that enable activities

Organizational Information and communication systems (servers,

resources workstations, etc.), proven quality control systems, and
strong network of distributors or retail dealers

4-11
TABLE 4.1 Common Types of Tangible and Intangible Resources

Intangible Resources
Human assets and An experienced and capable workforce, talented
intellectual capital employees in key areas, collective learning
embedded in the organization, or proven
managerial know-how.

Brand, image, and Brand names, trademarks, product or company

reputational assets image, buyer loyalty, and reputation for quality,
superior service.

Relationships Alliances or joint ventures that provide access to

technologies, specialized know-how, or
geographic markets, and trust established with
various partners

Company culture The norms of behavior, business principles, and

ingrained beliefs within the company.

4-12
Determining the Competitive Power of a
Company’s Resources and Capabilities

Is the resource or capability

competitively valuable?

Is the resource or capability rare—

Competitive is it something rivals lack?

Power
Tests Is the resource or capability
inimitable or hard to copy?

Is the resource or capability non-substitutable

or is it vulnerable to substitution from
different types of resources and capabilities?

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CORE CONCEPT

A
A core competence is is aa proficiently
proficiently performed
performed
internal
internal activity
activity that
that is
is central
central toto aa company’s
company’s
strategy
strategy and
and competitiveness.
competitiveness.
AA core
core competence
competence that
that is
is performed
performed with
with aa
very
very high
high level
level of
of proficiency
proficiency is referred to as
aa distinctive competence.
competence.

4-14
CORE CONCEPT

Companies
Companies thatthat lack
lack aa stand-alone
stand-alone resource
resource that
that
is
is competitively
competitively powerful
powerful may
may nonetheless
nonetheless
develop
develop a competitive advantage through
resource
resource bundles
bundles that enable
enable the superior
performance
performance of of important
important cross-functional
cross-functional
capabilities.
capabilities.
Rather
Rather thanthan try
try to
to match
match resources
resources possessed
possessed by by
aa rival
rival firm,
firm, aa firm
firm may
may develop
develop entirely
entirely different
different
resources
resources thatthat substitute
substitute for
for the
the strengths
strengths ofof the
the
rival.
rival.
4-15
The Importance of Dynamic Capabilities
in Sustaining Competitive Advantage
• Management’s organization-building
challenge has two elements:
1. Attending to ongoing recalibration of existing
capabilities and resources
2. Casting a watchful eye for opportunities to develop
totally new capabilities for delivering better customer
value and/or outcompeting rivals.

4-16
CORE CONCEPT

A
A dynamic
dynamic capability
capability is
is the
the ability
ability to
to modify,
modify,
deepen,
deepen, or
or reconfigure
reconfigure the
the company’s
company’s existing
existing
resources
resources and
and capabilities
capabilities in
in response
response toto its
its
changing
changing environment
environment or or market
market opportunities.
opportunities.

4-17
 Are Company Resources and Capabilities
Sufficient to Allow It to Seize Market
Opportunities and Nullify External Threats?

• SWOT represents the first letter in:

 Strengths Weaknesses Opportunities Threats
• A well-conceived strategy is:
 Matched to the firm’s resource strengths and
weaknesses
 Aimed at capturing the firm’s best market opportunities
and defending against external threats to its well-being

4-18
CORE CONCEPT

SWOT
SWOT analysis
analysis isis aa simple
simple but
but powerful
powerful tool
tool for
for
sizing
sizing up
up aa firm’s
firm’s internal
internal strengths
strengths andand
competitive
competitive deficiencies,
deficiencies, its
its market
market opportunities,
opportunities,
and
and the
the external
external threats
threats to
to its
its future
future well-being.
well-being.

4-19
 The Value of a SWOT Analysis

• The value of a SWOT analysis is in:

1. Drawing conclusions from the SWOT listings
about the firm’s overall situation.
2. Translating these conclusions into strategic
actions to better match the firm’s strategy to its
strengths and market opportunities, correcting
problematic weaknesses, and defending against
worrisome external threats.

4-20
Identifying a Company’s Internal Strengths
• A firm’s strengths determine whether its
competitive power in the marketplace will be
impressively strong or disappointingly weak.
• A firm that is well endowed with strengths
stemming from potent resources and core
competencies normally has considerable
competitive power.

4-21
TABLE 4.2 Factors to Consider When Identifying a Company’s Strengths,
Weaknesses, Opportunities, and Threats

Potential Internal Strengths and Competitive Capabilities

• Core competencies in ____ .
• A strong financial condition; ample financial resources to grow the business.
• Strong brand name image/company reputation.
• Economies of scale and/or learning and experience curve advantages over
rivals.
• Proprietary technology/superior technological skills/important patents.
• Cost advantages over rivals.
• Product innovation capabilities.
• Proven capabilities in improving production processes.
• Good supply chain management capabilities.
• Good customer service capabilities.
• Better product quality relative to rivals.
• Wide geographic coverage and/or strong global distribution capability.
• Alliances/joint ventures with other firms that provide access to valuable
technology, competencies, and/or attractive geographic markets.

4-22
TABLE 4.2 Factors to Consider When Identifying a Company’s Strengths,
Weaknesses, Opportunities, and Threats

Potential Internal Weaknesses and Competitive Deficiencies

• No clear strategic direction.
• No well-developed or proven core competencies.
• A weak balance sheet; burdened with too much debt.
• Higher overall unit costs relative to key competitors.
• A product/service with features and attributes inferior to those of rivals.
• Too narrow a product line relative to rivals.
• Weak brand image or reputation.
• Weaker dealer network than key rivals.
• Behind on product quality, R&D, and/or technological know-how.
• Lack of management depth.
• Short on financial resources to grow the business and pursue promising
initiatives.

4-23
TABLE 4.2 Factors to Consider When Identifying a Company’s Strengths,
Weaknesses, Opportunities, and Threats

Potential Market Opportunities

• Serving additional customer groups or market segments.
• Expanding into new geographic markets.
• Expanding the firm’s product line to meet a broader range of customer
needs.
• Utilizing existing company skills or technological know-how to enter new
product lines or new businesses.
• Falling trade barriers in attractive foreign markets.
• Acquiring rival firms or companies with attractive technological expertise
or capabilities.

4-24
TABLE 4.2 Factors to Consider When Identifying a Company’s Strengths,
Weaknesses, Opportunities, and Threats

Potential External Threats to a Company’s Future Prospects

• Increasing intensity of competition among industry rivals—may squeeze
profit margins.
• Slowdowns in market growth.
• Likely entry of potent new competitors.
• Growing bargaining power of customers or suppliers.
• A shift in buyer needs and tastes away from the industry’s product.
• Adverse demographic changes that threaten to curtail demand for the
industry’s product.
• Vulnerability to unfavorable industry driving forces.
• Restrictive trade policies on the part of foreign governments.
• Costly new regulatory requirements.

4-25
 Question 3: Are The Company’s Cost
Structure And Customer Value
Proposition Competitive?

• Why are cost structure and value important?

 A company must be both cost effective in delivering
value and in achieving a superior mix of differentiating
features to maintain the competitive edge of its
customer value proposition over those of its rivals,
especially in industries where price competition is a
dominant feature.
• Useful analytical tools:
 Value chain analysis
 Benchmarking
4-26
CORE CONCEPT

A
A company’s
company’s value
value chain
chain identifies
identifies the
the primary
primary
activities
activities that
that create
create customer
customer value and related
support
support activities.
activities.

4-27
FIGURE 4.1 A Representative Company Value Chain

4-28
FIGURE 4.1 A Representative Company Value Chain

4-29
Concepts & THE VALUE CHAIN FOR KP MACLANE,
Connections 4.1 A PRODUCER OF POLO SHIRTS

4-30
 Benchmarking: A Tool for Assessing
Whether a Company’s Value Chain
Activities Are Competitive
• Entails comparing how different firms perform
various value chain maintenance and then
making cross-company comparisons of the
costs and effectiveness of these activities:
 How materials are purchased
 How inventories are managed
 How products are assembled
 How customer orders are filled and shipped
 How maintenance is performed

4-31
CORE CONCEPT

Benchmarking
Benchmarking is is aa potent
potent tool
tool for
for learning
learning which
which
companies
companies areare best
best at
at performing
performing particular
particular
activities
activities and
and then
then using
using their
their techniques
techniques (or(or “best
“best
practices”)
practices”) to improve the cost and effectiveness
of
of aa company’s
company’s own
own internal
internal activities.
activities.

4-32
FIGURE 4.2 Representative Value Chain for an Entire Industry

4-33
 The Value Chain System
for an Entire Industry
• The value chains of forward channel partners
are relevant because
1. The costs and margins of the activities of distributors
and retail dealers are part of the price the consumer
ultimately pays and can dramatically affect the
company’s customer value proposition.
2. Accurately assessing the competitiveness of a firm’s
cost structure and value proposition helps its
managers understand an industry’s entire value chain
system, not just the firm’s own internal value chain.

4-34
 Strategic Options for Remedying
a Cost or Value Disadvantage
• There are three main areas of a firm’s overall
value chain where cost differences with
rivals can occur:
 A firm’s own internal activities
 Value chain activities performed by suppliers
 Value chain activities performed by forward channel
allies

4-35
 Improving Internally Performed
Value Chain Activities
1. Implement the use of best practices throughout the firm
2. Eliminate cost-producing activities by revamping value chain
3. Relocate high-cost internal activities to lower-cost areas
4. Outsource internal activities to vendors or contractors to
perform them more cheaply than in-house.
5. Invest in productivity-enhancing, cost-saving technology
6. Find ways around activities or items where costs are high
7. Redesign products and/or components to economize on
manufacturing or assembly costs
8. Reduce costs in supplier or forward portions of value chain
system to make up for higher internal costs

4-36
 Improving Supplier-Related
Value Chain Activities
• Remedying Supplier-Related Cost Disadvantages
 Pressure suppliers for lower prices
 Switch to lower-priced substitutes
 Collaborate closely with suppliers to identify mutual cost-saving
opportunities
 Integrate backward into business of high-cost suppliers
• Enhancing the Customer Value Proposition
 Selecting and retain best-quality performing suppliers
 Provide quality-based incentives to suppliers
 Integrate suppliers into the product design process

4-37
 Improving Value Chain Activities
of Forward Channel Allies
• Combat forward channel cost disadvantages by:
 Pressuring dealer-distributors and other forward channel allies to
reduce their costs and markups
 Working with forward channel allies to identify win-win
opportunities to reduce costs
 Changing to a more economical distribution strategy or integrate
forward into company-owned retail outlets
• Improve the customer value proposition by
 Engaging in cooperative advertising and promotions
 Providing training programs for dealers, distributors, or retailers
to improve the purchasing experience or customer service
 Creating and enforcing operating standards for resellers or
franchisees to ensure consistent store operations

4-38
 How Value Chain Activities Relate
to Resources and Capabilities
• A company’s value-creating activities are
enabled by its specific resources and
capabilities.
 Resources and capabilities that are both valuable
and rare provide a company with the necessary
preconditions for competitive advantage.
 When these assets are deployed in the form of a
value-creating activity, that potential is realized.

4-39
 Question 4: What Is the Company’s
Competitive Strength Relative
to Key Rivals?

• Determining a firm’s overall competitive

position requires answering two questions:
1. How does the company rank relative to competitors
on each of the important factors that determine
market success?
2. Does the company have a net competitive advantage
or disadvantage versus its major competitors?

4-40
Steps in a Competitive Strength Assessment

List
Listthe
theindustry’s
industry’skey
keysuccess
successfactors
factorsand
andother
othermeasures
measures
Step
Step 11 of
ofcompetitive
competitivestrength
strengthor
orweakness
weakness(6 (6to
to10
10measures).
measures).

Assign
Assignaaweight
weightto
toeach
eachmeasure
measureof
ofcompetitive
competitivestrength
strengthbased
based
Step
Step 22 on
onits
itsimportance
importanceininshaping
shapingcompetitive
competitivesuccess.
success.(The(Thesum
sumofof
the
theweights
weightsfor
foreach
eachmeasure
measuremust
mustadd
addup
upto
to1.0.).
1.0.).

Calculate
Calculatestrength
strengthratings
ratingsby
byscoring
scoringeach
eachcompetitor
competitoron
oneach
each
Step
Step 33 strength measure (use a scale where 1 is weak and 10 is strong)
strength measure (use a scale where 1 is weak and 10 is strong)
and
andmultiplying
multiplyingthe
theassigned
assignedrating
ratingby
bythe
theassigned
assignedweight.
weight.

Sum
Sumthe
theweighted
weightedstrength
strengthratings
ratingson
oneach
eachfactor
factorto
toget
getan
anoverall
overall
Step
Step 44 measure
measureof
ofcompetitive
competitivestrength
strengthfor
foreach
eachcompany
companybeing
beingrated.
rated.

Use
Usethe
theoverall
overallstrength
strengthratings
ratingsto
todraw
drawconclusions
conclusionsabout
aboutthe
thesize
size
Step
Step 55 and
andextent
extentof
ofthe
thefirm’s
firm’snet
netcompetitive
competitiveadvantage
advantageor
ordisadvantage
disadvantage
and
andto
totake
takespecific
specificnote
noteof
ofareas
areasof
ofstrength
strengthand
andweakness.
weakness.

4-41
TABLE 4.3 Illustration of a Competitive Strength Assessment

4-42
 Interpreting the Competitive
Strength Assessments
• Show how a firm compares against its rivals,
factor by factor or capability by capability.
• Indicate whether a firm is at net competitive
advantage or disadvantage against each rival.
• Provide guidelines for designing wise
offensive and defensive strategies.
• Point to competitive weaknesses of the firm
that will require defensive moves to correct.

4-43
 Question 5: What Strategic Issues
and Problems Must Be Addressed
by Management?

• The final and most important analytical step

is to zero in on exactly what strategic issues
company managers need to address.
 The results of industry and competitive analyses
pinpoint precisely the agenda items (“worry list”) that
management must attend to when engaged in
strategy making to improve the company’s
performance and business outlook.

4-44