SM-4

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Analyzing a Company’s Resources and Competitive Position

4444Chapter

“Before executives

can chart a new

strategy, they must

reach common

understanding of

the company’s

current position.”W. Chan Kim and Renee Mauborgne

A SWOT Analysis A SWOT Analysis is a strategic planning tool

used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture or in any other situation requiring a decision. The technique is credited to Albert Humphrey,

who led a research project at Stanford University in the 1960s and 70's, using data from the Fortune 500 companies.

Strengths are attributes of the organization that are helpful to the achievement of the objective.

Weaknesses are attributes of the organization that are harmful to the achievement of the objective.

Opportunities are external conditions that are helpful to the achievement of the objective.

Threats are external conditions that are harmful to the achievement of the objective.

1. How can we Use each Strength?

2. How can we Stop each Weakness?

3. How can we Exploit each Opportunity?

4. How can we Defend against each Threat?

Possible examplesStrengths and Weaknesses Resources: financial, intellectual, location Customer Service Efficiency Competitive Advantages Infrastructure Quality Staff Management Price

Opportunities and Threats

Competitors' actions Economic conditions Interest rates Increasing market saturation Changes in laws and

regulations

Distribution Channels and Hours of operations

After sales service and Sales promotion techniques

Transportation and Delivery time Diversified fields,

Product line and multiple services/offers (Technical, Commercial, Designing & Turnkey Projects etc )

The required first step in SWOT analysis is the definition of the desired end state or objective. The definition of objective must be explicit and approved by all participants in the process.

This first step must be performed carefully because failure to identify correctly the end state aimed for leads to wasted resources and possibly failure of the enterprise.

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SWOT AnalysisManagers need to analyze

The general environmentThe firm’s industry and competitive environment

SWOT analysisStrengthsWeaknessesOpportunitiesThreatsBasic technique for analyzing firm and industry conditions

Company Situation Analysis:The Key Questions

1. How well is the company’spresent strategy working?

2. What are the company’s resourcestrengths and weaknesses and itsexternal opportunities and threats?

3. Are the company’s prices andcosts competitive?

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

5. What strategic issues meritfront-burner managerial attention?

Q #1: How Well Is the Company’s Present Strategy Working?

Identify competitive approach Low-cost leadership Differentiation Focus on a particular market niche

Determine competitive scope Geographic market coverage Operating stages in industry’s production/distribution

chain

Examine recent strategic moves Identify functional strategies

Key Issues

Approaches to Assess How Well the Present Strategy Is Working

Qualitative assessment –What is the strategy?

Completeness

Internal consistency

Rationale

Relevance

Quantitative assessment – What are the results? Is company achieving its

financial and strategic objectives?

Is company an above-average industry performer?

Key Indicators of How Wellthe Strategy Is Working

Trend in sales and market share Acquiring and/or retaining customers Trend in profit margins Trend in net profits, ROI, and EVA Overall financial strength and credit ranking Efforts at continuous improvement activities Trend in stock price and stockholder value Image and reputation with customers Leadership role(s) – Technology, quality,

innovation, e-commerce, etc.

S W O TS W O T represents the first letter in SS trengths WW eaknesses OO pportunities TT 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 well-being

S W

O T

Q #2: What Are the Company’s Strengths, Weaknesses, Opportunities and Threats ?

Identifying Resource Strengthsand Competitive Capabilities A strength is something a firm does well or an

attribute that enhances its competitiveness Valuable competencies or know-how Valuable physical assets Valuable human assets Valuable organizational assets Valuable intangible assets Important competitive capabilities An attribute that places a company in a position of

market advantage Alliances or cooperative ventures with partners

Resource strengths and competitivecapabilities are competitive assets!

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)to a company’s competitiveness and profitability

A distinctive competence is a competitively valuable activity a company performs better than its rivals

Company Competenciesand 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

A competence becomes a core competence when the well-performed activity is central to a company’s competitiveness and profitability

Often, a core competence results from collaboration among different parts of a company

Typically, core competencies reside in a company’s people, not in assets on a balance sheet

A core competence gives a company apotentially valuable competitive capabilityand represents a definite competitive asset

Core Competencies -- AValuable Company Resource

Examples: Core Competencies

Expertise in integrating multiple technologiesto create families of new products

Know-how in creating operating systemsfor cost efficient supply chain management

Speeding new/next-generation products to market

Better after-sale service capability

Skills in manufacturing a high quality product

System to fill customer orders accurately and swiftly

Distinctive Competence -- ACompetitively Superior Resource

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

A distinctive competence Represents a competitively valuable

capability rivals do not have Presents attractive potential for

being a cornerstone of strategy Can provide a competitive edge in the marketplace —

because it represents a competitively superior resource strength

# 1

Examples: Distinctive Competencies

Sharp Corporation Expertise in flat-panel display technology

Toyota and Honda Low-cost, high-quality manufacturing

capability and short design-to-market cycles Intel

Ability to design and manufactureever more powerful microprocessors for PCs

Wal-Mart Low-cost distribution and use of

state-of-the-art retail technology

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. Does the resource have staying power – is it durable?

3. Is the resource really competitively superior?

4. Can the resource be trumped by the different capabilities of rivals?

Determining the CompetitiveValue of a Company ResourceDetermining the CompetitiveValue of a Company Resource

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 areasResource weaknesses and deficiencies

are competitive liabilities!

Identifying Resource Weaknessesand Competitive DeficienciesIdentifying Resource Weaknessesand Competitive Deficiencies

Opportunities most relevant to acompany are those offering

Good match with its financial andorganizational resource capabilities

Best prospects for profitable long-term growth

Potential for competitive advantage

Identifying a Company’sMarket OpportunitiesIdentifying a Company’sMarket Opportunities

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

Role of SWOT Analysis inCrafting a Better Strategy The most important part of S W O TS W O T analysis is not

developing the 4 lists of strengths, weaknesses, opportunities, and threats, but rather

Using the 4 lists to draw conclusionsabout a company’s overall situation and

Acting on the conclusions to

Better match a company’s strategy to itsresource strengths and market opportunities,

Correct the important weaknesses, and

Defend against external threats

Fig. 4.2: The Three Stepsof SWOT Analysis

Q #4: Are the Company’sPrices and Costs Competitive? Assessing whether a firm’s costs are competitive

with those of rivals is a crucial part of company analysis

Key analytical tools

Value chain analysis

Benchmarking

The Concept of aCompany Value Chain A company’s business consists of all activities

undertaken in designing, producing, marketing, delivering, and supporting its product or service

A company’s value chain consists of a linked set of value-creating activities performed internally

The value chain contains two types of activities Primary activities – where most of

the value for customers is created

Support activities – facilitateperformance of the primary activities

Fig. 4.3: RepresentativeCompany Value Chain

Characteristics of Value Chain Analysis Combined costs of all activities in a company’s value

chain define the company’s internal cost structure

Compares a firm’s costs activityby activity against costs of key rivals

From raw materials purchase to

Price paid by ultimate customer

Pinpoints which internal activities are asource of cost advantage or disadvantage

Why Do ValueChains of Rivals Differ? Several factors can cause differences

in value chains of rival companies

Internal operations

Strategy

Approaches used in execution of the strategy

Underlying economics of the activities

Differences complicate task of assessingrivals’ relative cost positions

The Value Chain Systemfor 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 costsand product performance

Forward channel allies’ value chains are relevant because Costs and margins are part of price paid

by ultimate end-user Activities performed affect end-user satisfaction

Fig. 4.4: Representative Value Chain for an Entire Industry

Example: Value Chain Activities

Timber farming

Logging

Pulp mills

Papermaking

Distribution

Pulp & Paper Industry

Home Appliance Industry

Parts and components manufacture

Assembly

Wholesale distribution

Retail sales

Example: Value Chain ActivitiesExample: Value Chain Activities

Processing of basic ingredients

Syrup manufacture

Bottling and can filling

Wholesale distribution

Advertising

Retailing

Albertson’s

Example: Value Chain ActivitiesExample: Value Chain ActivitiesSoft Drink Industry

Programming

Disk loading

Marketing

Distribution

Example: Value Chain ActivitiesExample: Value Chain Activities

Software Computer Industry

Developing Data to Measure a Company’s Cost Competitiveness

After identifying key value chain activities, the next step involves breaking down departmental cost accounting data into costs of performing specific activities

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

Activity-Based Costing: A KeyTool 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 Activity-based costing entails

Defining expense categories accordingto specific activities performed and

Assigning costs to the activityresponsible for creating the cost

Benchmarking Costs ofKey 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 best practices in performing an activity

Understand the best practices in performingan activity – learn what is the “best” wayto do a particular activity from thosedemonstrating they are “best-in-world”

Learn how other firms achieve lower costs

Take action to improve company’s cost competitiveness

Ethical Standards in Benchmarking: Do’s and Don’ts

Avoid talk about pricing or competitively sensitive costs

Don’t ask rivals for sensitive data

Don’t share proprietary data without clearance

Have impartial third party assemble and present competitively sensitive cost data with no names attached

Don’t disparage a rival’s business to outsiders based on data obtained

What Determines if aCompany 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 costs are out-of-line, high-cost activities can exist in any of three areas in the industry value chain 1. Suppliers’ activities

2. Company’s own internal activities

3. Forward channel activitiesActivities, Costs, &

Margins ofForward

Channel Allies

InternallyPerformedActivities, Costs, &Margins

Activities, Costs, &

Margins ofSuppliers

Buyer/UserValue

Chains

Translating Performance of Value Chain Activities to Competitive Advantage A company can create competitive

advantage by managing its value chain to

Integrate knowledge and skills of employees in competitively valuable ways

Leverage economies of learning / experience

Coordinate related activities in waysthat build valuable capabilities

Build dominating expertisein a value chain activity criticalto customer satisfaction or market success

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

Q. #4: Is the Company Stronger or Weaker than Key Rivals?

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?

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 CompetitiveStrength Assessment ? Reveals strength of firm’s competitive position

vis-à-vis key rivals Shows how firm stacks up against rivals, measure-by-

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)

What Strategic IssuesMerit Managerial Attention?

Based on results of both industry and competitive analysis and an evaluation of a company’s competitiveness, what items should beon a company’s “worry list”?

Requires thinking strategically about Pluses and minuses in the industry

and competitive situation Company’s resource strengths and weaknesses

and attractiveness of its competitive positionA “good” strategy must address “what to do”

about each and every strategic issue!

Identifying the Strategic Issues

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?

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

Stating the IssuesClearly and PreciselyStating the IssuesClearly and Precisely

SupportActivities

Primary Activities

Value Chain AnalysisValue Chain AnalysisIdentifying Resources and Capabilities That Can Add Value

SupportActivities

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OutsourcingOutsourcing





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Strategic Choice to Purchase Some Activities From Outside Suppliers

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ServiceService

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MARGIN

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Firms often purchase a portionportion of their value-creating activities from specialty external suppliers who can perform these functions more efficientlymore efficiently

OutsourcingOutsourcingStrategic Choice to Purchase Some Activities From Outside Suppliers

Lets company focus on broader business issues by having outside experts handle various operational detailsLets company focus on broader business issues by having outside experts handle various operational details

Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing

Improve Business FocusImprove Business Focus

Permits firm to redirect efforts from non-core activities toward those that serve customers more effectivelyPermits firm to redirect efforts from non-core activities toward those that serve customers more effectively

Free Resources for Other PurposesFree Resources for Other Purposes

Provide Access to World-Class CapabilitiesProvide Access to World-Class Capabilities

Accelerate Business Re-Engineering BenefitsAccelerate Business Re-Engineering Benefits

Share RisksShare Risks

The specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications The specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications

Achieves re-engineering benefits more quickly by having outsiders--who have already achieved world-class standards--take over processAchieves re-engineering benefits more quickly by having outsiders--who have already achieved world-class standards--take over process

Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities

Core Competencies--Cautions and RemindersCore Competencies--Cautions and Reminders

Never take for granted that core competencies will continue to provide a source of competitive advantageNever take for granted that core competencies will continue to provide a source of competitive advantage

All core competencies have the potential to become Core RigiditiesAll core competencies have the potential to become Core Rigidities

Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment

Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment

Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats

Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats

ResourcesResources

** TangibleTangible** IntangibleIntangible

CapabilitiesCapabilities

Teams of ResourcesTeams of Resources

Sources ofSources of

CoreCoreCompetenciesCompetencies

CompetitiveCompetitiveAdvantageAdvantage

StrategicStrategicCompetitivenessCompetitiveness

Above-AverageAbove-AverageReturnsReturns

CompetitiveCompetitiveAdvantageAdvantage

Gained throughGained throughCore CompetenciesCore Competencies

DiscoveringDiscoveringCoreCore

CompetenciesCompetencies

ValueChain

Analysis

ValuableRareCostly to ImitateNonsubstitutable

****

* Outsource

Criteria ofSustainableAdvantages

Discovering Core CompetenciesDiscovering Core Competencies

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