S 5 A Competitive analysis of firms

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The internal appraisal process

Evaluating a Company·s Resources

and Competitive Position



1. What are the companys resourcestrengths and weaknesses and itsexternal opportunities and threats?

2. Are the companys prices andcosts competitive?

3. Is the company competitively strongeror weaker than key rivals?

4.W

hat strategic issues meritfront-burner managerial attention?

5. HowWell Is the Companys Present StrategyWorking?

Company Situation Analysis:

The Key Questions



S W O TS W O T represents the first letter in

± ± SS trengths

± ± W W eaknesses

± ± OO pportunities

± ± T T hreats

For a companys strategy to be well-conceived, it mustbe

± Matched to its resource strengths and weaknesses

± Aimed at capturing its best market opportunities anderecting defenses against external threats to its well-being

S W

O T

What Are the Companys Strengths, Weaknesses,

Opportunities and Threats ?



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 marketadvantage

± Alliances or cooperative ventures with partners

Resource strengths and competitive

capabilities are competitive assets!

Identifying Resource Strengths

and Competitive Capabilities



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-performedinternal activity central (not peripheral or incidental) toa companys competitiveness

and profitability

A distinctive competence is a competitively valuable

activity a company performs better than its rivals



Stem from skills, expertise, and experience usually representing an ± Accumulation of learning over time and

± G

radual buildup of real proficiency in performing an activity

Involve deliberate efforts to develop the abilityto 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



Core Competencies

A Valuable Company Resource

A competence becomes a core competence when thewell-performed activity is central to a companyscompetitiveness and profitability

Often, a core competence isknowledge-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 apotentially valuable competitive capability and represents a definite competitive asset





A distinctive competence is a competitively valuableactivity that a company performs better than its competitors

A distinctive competence is a competitively potent resource source because it

± Gives a company a competitively valuablecapability unmatched by rivals

±Can underpin and add real punchto a companys strategy

± Is a basis for sustainable competitive advantage

# 1

Distinctive Competence

A Competitively Superior Resource



Examples: Distinctive Competencies

Toyota

Low-cost, high-quality

manufacturing of motor

vehicles

Starbucks

Innovative coffee drinks

and store ambience



Determining the Competitive

Power of a Company Resource

To qualify as competitively valuable or to be the basisfor 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 bythe different capabilities of rivals?



Test Your Knowledge

A distinctive competence

A. is a more important competitive asset than a corecompetence.

B. represents uniquely strong capability relative to rivalcompaniesit qualifies as a competitively superior resource

strength with competitive advantage potential.

C. is a competitively important value chain activity that acompany 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

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!



What to look for in a company to

identify its strengths?



Identifying a Companys

Market Opportunities

Opportunities most relevant to acompany are those offering

± Good match with its financial andorganizational resource capabilities

± Best prospects for profitable

long-term growth

± P otential for competitive advantage



Identifying External Threats

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 in a country



S W O TS W O T analysis involves more than j ust developing the 4 lists of strengths, weaknesses, opportunities, and threats

The most important part of S W O TS W O T analysis is

± U sing the 4 lists to draw conclusionsabout a companys overall situation

± Acting on the conclusions to

Better match a companys strategy to itsresource strengths and market opportunities

Correct the important weaknesses

Defend against external threats

Role of SWOT Analysis in

Crafting a Better Strategy



Fig. 4.2: The Three Steps of SWOT Analysis



Assessing whether a firms costs are competitivewith those of rivals is a crucial part of companysituation analysis

Key analytical tools

± Value chain analysis

± Benchmarking

Are the Companys

Prices and Costs Competitive?



A companys business consists of all activities undertaken indesigning, producing, marketing, delivering, and supporting itsproduct or service

All these activities that a company performs internally combine to

form a value chainso-called because the underlying intent of acompanys activities is to do things that ultimately create value for

buyers

The value chain contains two types of activities

± P rimary activities (where most of the value for customers is created)

± Support activities that facilitateperformance of the primary activities

Concept: Company Value Chain



V a l u e

C h a i n



22

Primary Activities

Inbound Logistics

Receiving, storing, and disseminating inputs. E.g.,

warehousing, inventory control

Operations

Transforming inputs into the final product form



23

Primary Activities

Outbound LogisticsCollecting, storing and distributing the product tobuyers

Marketing and Sales

Providing a means and incentive which allowbuyers to purchase the product

Service

Providing service to enhance or maintain thevalue of the product



24

Support Activities

Procurement

Function of purchasing inputs used in the value

chain

Technology Development



25

Support Activities

Human ResourceManagement

Firm Infrastructure

planning, finance, accounting, legal, etc.



Assessing the value of value chain

components

In order to derive a quantifiable value fromeach of the VC components, it is essential tounderstand how much of the overall costs are

charged by each of these VC activities ± Identify the cost components

± Assign costs to operations and assets

± Identify the cost drivers for each of the VCcomponents

± Assess whether the cost drivers can be adopted toalign with the companys goals/objectives



Do an exercise for your adopted

company

Refer the company which was adopted

Map the value chain for its core business

Identify and assign the costs for each value chain

component

Identify the cost drivers for each of the valuecomponent

Assess whether these cost drivers can be turnedto your companys advantage, if so, how do theyalign with your core competencies



Example: Value Chain Activities

for a Bakery Goods Maker

P rimary Activities

Supply chain management

Recipe development and

testing

Mixing and baking

Packaging

Sales and marketing

Distribution

Support Activities

Quality control

Human resourcemanagement

Administration




for a Department Store Retailer

P rimary Activities

Merchandise selection and

purchasing

Store layout and productdisplay

Advertising

Customer service

Support Activities

Site selection

Hiring and training

Store maintenance

Administrative activities



Example: Value Chain

Activities for a Hotel Chain

P rimary Activities

Site selection and

construction

Reservations

Operation of hotel

properties

M

anaging lineupof hotel locations

Support Activities

Accounting

Hiring and training

Advertising

Building a brand and

reputation

General

administration



C ombined costs of all activities in a companys valuechain define the companys internal cost structure

C ompares a firms costs activityby activity against costs of key rivals

± From raw materials purchase to

± Price paid by ultimate customer

P inpoints which internal activities are asource of cost advantage or disadvantage

Characteristics of Value Chain

Analysis



Several factors give rise to differencesin value chains of rival companies

± Different strategies

± Different operating practices

± Different technologies

± Different degrees of vertical integration

± Some companies may perform particular activities internally whileothers outsource them

Differences among the value chains of competing companies complicate task of assessingrivals relative cost positions

Why Do Value Chains of Rivals

Differ?



Assessing a companys cost competitiveness involvescomparing costs all along the industrys value chain

Suppliers value chains are relevant because

±

Costs, performance features, and quality of inputsprovided by suppliers influence a firms own costsand product performance

V alue chains of distributors and retailers arerelevant because

± Their costs and profit margins represent value addedand are part of the price paid by ultimate end-user

± The activities they perform affect end-user satisfaction

The Value Chain System

for an Entire Industry



Fig. 4.4: Representative Value Chain for an Entire Industry




Pulp & Paper Industry

Timber farming

Logging

Pulp mills

Papermaking

Distribution




Parts and components manufacture

Assembly

Wholesale distribution

Retail sales

Home Appliance Industry



Processing of basic ingredients

Syrup manufacture

Bottling and can filling

Wholesale distributionAdvertising

Retailing


Albertson¶s

Soft Drink Industry




Computer Software Industry

Programming

Disk loading

Marketing

Distribution



Developing Data to Measure a

Companys Cost Competitiveness

After identifying key value chain activities, the next step

involves determining costs of performing specific value chainactivities using activity-based costing

Appropriate degree of disaggregation depends on

± Economics of activities

± Value of comparing narrowly definedversus broadly defined activities

Guideline Develop separate cost

estimates for activities ± Having different economics

± Representing a significant or growing proportion of costs



Determining whether a companys costs are inline with those of rivals requires

± Measuring how a companys costs compare withthose of rivals activity-by-activity

Requires having accounting data to measure costof each value chain activity

Activity-based costing entails

±

Defining expense categories accordingto specific activities performed and

± Assigning costs to the activityresponsible for creating the cost

Activity-Based Costing: A Key

Tool in Analyzing Costs





Pressure suppliers for lower prices

Switch to lower-priced substitutes

Collaborate closely with suppliers to identifymutual cost-saving opportunities

Arrange for just-in-time deliveries from suppliers

to lower inventory and internal logistics costs

Integrate backward into businessof high-cost suppliers

Options to Correct a

Supplier-Related Cost Disadvantage



Pressure dealer-distributors and other forward channelallies to reduce their costs to makethe final price to buyers more competitivewith prices of rivals

Work closely with forward channel allies toidentify 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



Test Your Knowledge

For a company to translate performance of value chainactivities into competitive advantage, it

A. must (1) develop core competencies and maybe a distinctivecompetence that rivals dont have or cant quite match and

that are instrumental in helping it deliver attractive value tocustomers or (2) be more cost efficient in how it performsvalue 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 profitmargins are highest.

E. Must adopt more best practices than rival firms.



A company can create competitive advantage byout-managing rivals in performing value chainactivities in either/both of two ways

Option 1: Develop competencies and capabilitiesthat rivals dont have or cant match

Option 2: Do an overall better job than rivals of lowering combined costs of performingall the value chain activities

Translating Performance of Value Chain Activities

into Competitive Advantage



Fig. 4.5: Translating Company Performance of

Value Chain Activities into Competitive Advantage



Overall competitive position involvesanswering two questions

± How does a company rank relativeto competitors on each importantfactor that determines market success?

± Does a company have a netcompetitive advantage or disadvantagevis-à-vis major competitors?

Question 4: Is the Company Stronger

or Weaker than 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

Assessing a Companys

Competitive Strength vs. Key Rivals







Reveals strength of firms competitive positionvis-à-vis key rivals

Shows how firm stacks up against rivals, measure-by-measure pinpoints firms competitivestrengths and competitive weaknesses

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

Identifies possible offensive attacks (pit companystrengths against rivals weaknesses)

Identifies possible defensive actions (a need tocorrect competitive weaknesses)

Why Do a Competitive

Strength Assessment ?



Test Your Knowledge

Which of the following statements is false?

A. The higher a companys costs are above those of close rivals, the morecompetitively vulnerable it becomes.

B. Because the value chains of rival companies tend to be quite similar, costsoutside a companys own value chain do not affect whether it is at a cost

advantage or disadvantage vis-à-vis key rivals.

C. A companys 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 companys financial performance and market position, themore likely it has a well-conceived, well-executed strategy.

E. A competence is something a company is good at doing whereas a corecompetence is a proficiently performed internal activity that is central toa companys strategy and competitiveness.



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

A good strategy must address what to do

about each and every strategic issue!

Question 5: What Strategic Issues

Merit Managerial Attention?



Stating the Issues Clearly and

Precisely

A well-stated issue involves such phrases as

± How to . . . ?

± Whether to . . . ?

±What should be done about . . . ?

Issues need to be precise, specific,and cut straight to the chase

Issues on the the worry list

raise questions about ± What actions need to be considered

± What to think about doing



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



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 toresolve? Why cant managers just skip this step

and go directly to the task of choosing what

strategy to employ?

Documents

S 5 A Competitive analysis of firms