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McGraw-Hill/Irwin Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 4: Evaluating aCompanys Resources and
Competitive Position
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Chapter Learning Objectives
1. Understand how to evaluate a companys internalsituation and capabilities and identify the resourcestrengths capable of becoming the cornerstone ofthe companys strategic approach.
2. Grasp how and why activities performed internally
by a company and those performed externally byits suppliers and forward channel allies determine acompanys cost structure and ability to competesuccessfully.
3. Learn how to evaluate a companys competitivestrength relative to key rivals.
4. Understand the role and importance of industryand competitive analysis and internal situationanalysis in identifying strategic issues company
managers must address.
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Chapter Roadmap
Ques t ion 1 : How Well Is the CompanysPresent Strategy Working?Ques t ion 2 : What Are the CompanysResource Strengths and Weaknesses and
Its External Opportunities and Threats?Ques t ion 3 : Are the Companys Prices andCosts Competitive?Ques t ion 4 : Is the Company CompetitivelyStronger or Weaker than Key Rivals?Ques t ion 5 : What Strategic Issues andProblems 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 itsexternal opportunities and threats?
3. Are the companys prices and costs competitive?
4. Is the company competitivelystronger or weaker than key rivals?
5. What strategic issues merit
front-burner managerial attention?
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Figure 4.1: Identifying Components of a Single- Business Companys Strategy
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Ques t ion 1 : How Well Is the Companys Present Strategy Working?
Must begin by understanding what the strategy isIdentify com pet it ive app roach
Low-cost leadership?Differentiation?Best-cost provider?Focus on a particular market niche?
Determine com pet it ive sco peBroad or narrow geographic market coverage?
In how many stages of industrysproduction/distribution chain does the companyoperate?
Examine recent s t ra tegic m ov es
Identify fun ct io nal s t ra tegies
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 ROEOverall financial strength and credit rating
Efforts at continuous improvement activities
Trend in stock priceImage and reputation with customers
Leadership role(s) Technology,
product quality, innovation, etc.
Key Indicators of How Wellthe Strategy Is Working
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S W O T represents the first letter inS trengths
W eaknesses
O pportunities
T hreats
For a companys strategy to be well- conce ived , it must be
Matched to its resource strengths andweaknesses
Aimed at capturing its best market opportunitiesand erecting defenses against external threats
to its well-being
S W
O T
Quest ion 2 : What Are the Companys Strengths,Weaknesses, Opportunities and Threats ?
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A s t rength is something a firm does well or anattribute that enhances its competitiveness
Valuable skills, competencies, or capabilitiesValuable physical assetsValuable human assetsValuable organizational assetsValuable intangible assetsImportant competitive capabilities
An attribute placing a company in a position ofmarket advantage
Alliances or cooperative ventures with partners
Identifying Resource Strengthsand Competitive Capabilities
Resou rce s t reng ths and com pet it ive
cap abil i t ies are co m pet i t ive asse ts!
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Competencies vs. Core Competenciesvs. Distinctive Competencies
A compe tence is the produ c t o forg anization al learning and exp er ience and represents real prof ic iency inperforming an internal activity
A core com petence is a well-performedinternal activity central (not peripheral orincidental) to a companys compet i t iveness
and pro f i tabi l i ty
A dis t inc t ive com petence is aco m pet i t ively v aluable ac t iv i ty a
company perform s b et ter than i t s r ivals
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Stem from sk i l ls , expert ise , andexperience usually representing an Accumulation of learning over time andGradual buildup of real prof ic iency in
perform ing an ac t iv i tyInvolve del iberate effo rts to develop theability to do something, often entailing
Selecting people with requisite knowledge and
skillsUpgrading or expanding individual abilitiesMolding work products of individuals into acooperative 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 compe tence becomes a corecompe tence when the well-performedactivity is central to a companyscompetitiveness and profitability
Often, a core com petence isknowledge-based, residing in people , not in assets on a balance sheet
A core com petence is typically the result ofcro ss -depar tm ent co l labo rat ion
A core com petence gives a company apotentially valuable co m pet i t ive capabi l i ty
and represents a definite co m pet i t ive ass e t
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A dis t inc t ive com petence is acompetitively valuable activity that acompany perform s bet ter than i tscompe t i to r s
A dis t inc t ive com petence is acom pet it ively p o ten t resou rcesou rce because it
Gives a company a com pet it ively va luablecapabi l i ty unm atched by rivalsCan underpin and add real pu nch to a companys strategyIs a bas is for sus tainable com pet it iveadvantage
# 1
Distinctive Competence A Competitively Superior Resource
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Determining the CompetitivePower of a Company Resource
To qualify as competitively valuable or tobe the basis for su s ta inable com pet i t iveadvantage, a resource must pass 4tests:
1. Is the resource really com pet it ive ly super ior?
2. Is the resource rare is it something rivalslack?
3. Is the resource hard to copy ?
4. Can the resource be t rumped bythe different capabilities of rivals?
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What Is a Resource-Based Strategy?
Companies with competitively valuableresource strengths and competenciesoften deploy these capabilities to
Boost the competitive power
of their overall strategyBolster their position in the marketplace
Resource-based strategies
Attempt to exploit company resources to offervalue to customers in ways rival cannot match
Can focus on eroding the competitive potencyof a rival by developing different resources that
effectively substitute for the strengths of the rival
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Identifying Resource Weaknessesand Competitive Deficiencies
A weakness is something a firm lacks, doespoorly, or a condition placing it at adisadvantage
Reso urc e w eakn ess es relate toInferior or unproven skills,expertise, or intellectual capital
Lack of important physical,
organizational, or intangible assetsMissing capabilities in key areas
Reso urc e weakn esses and def ic ienc ies
are com peti t ive liabi l i t ies!
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Identifying a Companys Market Opportunities
Opportunities m os t relevant to acompany are those offering
Good m atch with its financial andorganizational resource capabilities
Bes t p rosp ec t s for profi tablelong-term grow th
Potential for co m pet i tive advantage
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Identifying External Threats
Some possibilities:Emergence of cheaper/better technologiesIntroduction of better products by rivalsEntry of lower-cost foreign competitorsOnerous regulationsRise in interest ratesPotential of a hostile takeover
Unfavorable demographic shifts Adverse shifts in foreign exchange ratesPolitical upheaval and/or burdensome
government policies
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S W O T analysis invo lves m ore than ju s t d evelo p in g th e 4 l is ts of strengths,
weaknesses, opportunities, and threats
The most important part of S W O T analysis is
Using the 4 li s t s to d raw co nc lus ions about a companys overall situation
Ac t ing on the conc lus ions 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 inCrafting a Better Strategy
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Figure 4.2: The Three Steps of SWOT Analysis
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h
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Assess ing whether a firms cos t s arecompet i t ive with those of rivals is a crucialpart of company situation analysis
Key analyt ical to ols
Value chain analysis
Benchmarking
Quest ion 3 : Are the Companys Prices and Costs Competitive?
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A companys bus iness consists of all activ it iesundertaken in designing, producing, marketing,delivering, and supporting its product or service
All these activities a company performs internallycombine to form a value ch ain so-calledbecause the underlying intent of a companysactivities is to do things that ultimately cr eate valuefor buy ers
The value chain contains two typ es of act ivi t ies
Primary act ivi t ies Where most ofthe value for customers is created
Supp or t ac t iv i t ies Facilitateperformance of primary activities
Concept: Company Value Chain
i 4 3 A i C l Ch i
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Figure 4.3: A Representative Company Value Chain
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Combined cos t s of all activities in acompanys value chain def ine a companysin ternal co s t s t ruc ture
Compares a firms costs activity by activity against costs of key rivals
From raw materials purchase to
Price paid by ultimate customer
Pinpo in ts wh ich internal act ivi t ies are asource of cos t advantage or disadvantage
Characteristics of Value Chain Analysis
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Several fac tors give rise to d ifferences 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 themDifferences am on g th e value ch ains o fcom pet ing com panies com pl icate task ofassess ing rivals re lat ive co s t po si t ion s
Why Do Value Chains of Rivals Differ?
Th V l Ch i S
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Assessing a companys cos t com pet it iveness involves com par ing cos t s all along anindustrys value chainSuppliers value chains are relevant because
Costs, performance features, and quality ofinputs provided by suppliers influence a firmsown costs and product performance
Value ch ains of d is t r ibu tors and re tai lers arerelevant because
Their costs and profit marginsrepresent value added and are part of the price paid by ultimate end-user
Activities they perform affect
end-user satisfaction
The Value Chain Systemfor an Entire Industry
Fi 4 4 R t ti V l Ch i f E ti I d t
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Figure 4.4: Representative Value Chain for an Entire Industry
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A ti it B d C ti g A K
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Determining whether a companys costs arein line with those of rivals requires
Measuring how a companys costs comparewith those of rivals activity-by-activity
Requires having accountingdata to measure cost of eachvalue chain activity
A ctivi ty-based co st ing entailsDefining expense categories accordingto specific activities performed and
Assigning costs to the activity
responsible for creating the cost
Activity-Based Costing: A KeyTool in Analyzing Costs
D l i D M
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Developing Data to Measure aCompanys Cost Competitiveness
After identifying key value chain activities, the nextstep involves determining costs of performingspecific value chain activities using act ivi ty-basedcos t ing
Appropriate degree of dis aggregat ion depends onEconomics of activities
Value of comparing narrowly definedversus broadly defined activities
Guidel ine Develop separate costestimates for activities
Having different economics
Representing a significant or growing proportion of costs
B h ki C t f
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Focuses on c ross -com pany com par isons of h ow certain activities are performed andcos t s associated with these activities
Purchase of materials
Payment of suppliers
Management of inventories
Getting new products to market
Performance of quality controlFilling and shipping of customer orders
Training of employees
Processing of payrolls
Benchmarking Costs ofKey Value Chain Activities
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Identify best and most efficient means ofperforming various value chain activities
Learn what is the best way to perform aparticular activity from those companies whohave demonstrated that they are best -in-industry or best -in-world at performing theactivity
Learn what other firms do toperform an activity at lower cost
Figu re ou t wh at ac t ions to take to improve
a companys own cost competitiveness
Objectives of Benchmarking
Wh t D t i If
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Cost com pet it iveness depends on how well acompany manages its value ch ain relative tohow well competitors manage their value chainsWhen a companys costs are out -of-line, the
activities responsible for the higher costs maybe due to any of three parts of industry valuechain
1. Ac t iv i t ies per form ed by supp l iers
2. A companys owninternal act ivi t ies
3. Ac t iv i t ies per formed b y forw ard chann el a ll ies
Activities,Costs, &
Margins ofForward
Channel Allies
InternallyPerformedActivities,Costs, &Margins
Activities,Costs, &
Margins ofSuppliers
Buyer/UserValue
Chains
What Determines If aCompany Is Cost Competitive?
Options to Correct
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Implement use of best practices throughoutcompanyEliminate some cost-producing activitiesaltogether by revamping value chain systemRelocate high-cost activities tolower-cost geographic areasSee if high-cost activities can be performedcheaper by outside vendors/suppliersInvest in cost-saving technologyInnovate around troublesome cost componentsSimplify product designMake up difference by achieving savings in
backward or forward portions of value chain system
Options to CorrectInternal Cost Disadvantages
Options to Correct a
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Pressure suppliers for lower pricesSwitch to lower-priced substitutes
Collaborate closely with suppliers to identifymutual cost-saving opportunities
Arrange for just-in-time deliveries fromsuppliers to lower inventory and internallogistics costs
Integrate backward into businessof high-cost suppliers
Options to Correct aSupplier-Related Cost Disadvantage
O i C C Di d A i d
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Pressure dealer-distributors and otherforward channel allies to reduce their coststo make the final price to buyers morecompetitive with prices of rivals
Work closely with forwardchannel allies to identify win-winopportunities to reduce costs
Change to a more economical distributionstrategySwitch to cheaper distribution channels
Integrate forward into company-owned retail
outlets
Options to Correct a Cost Disadvantage AssociatedWith Activities of Forward Channel Allies
Translating Performance of Value Chain
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A company can create compet i t iveadvantage by out-managing rivals inperforming value chain activitiesin either/both of two ways
Opt ion 1 : Develop competencies and capabilitiesthat rivals dont have or cant match andthereby create a resource or capability-based competitive advantage
Opt ion 2 : Perform value chain activities at a loweroverall cost than rivals and therebycreate a cost-based competitiveadvantage
Translating Performance of Value ChainActivities into Competitive Advantage
Figure 4.5: Translating Company Performance of
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Value Chain Activities into Competitive Advantage
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Quest ion4 : Is the Company Stronger
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Whether a company is competitivelystronger or weaker than key rivals hinges onthe answers to two questions
How does the com pany rank relat ive to c om pet itors on eachimportant factor that determinesmarket success?
Does the company have a netco m pet it ive advantage or disadvantage vis--vis major competitors?
Quest ion 4 : Is the Company Strongeror Weaker than Key Rivals?
Assessing a Companys
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1. List indus t ry key su ccess fac to rs and otherrelevant measures of competitive strength
2. Rate f irm and key r iv als o n each factor usingrating scale of 1 to 10 (1 = very weak; 5 =average; 10 = very strong)
3. Decide whether to u se a w eigh ted orun w eighted rat ing sy s tem (a weighted systemis superior because chosen strength measuresare unlikely to be equally important)
4. Sum in dividu al rat ings to get an overallmeasure of competitive strength for each rival
5. Based on overall strength ratings, determineoveral l com pet it ive s t rength of f i rm
Assessing a Company s Competitive Strength vs. Key Rivals
Table 4.4: Illustrations of Unweighted
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and Weighted Strength Assessments
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Why Do a Competitive
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Reveals strength of firms competitive positionvis--vis key rivals
Shows how firm stacks up against rivals,measure-by-measure pinpoints firms
competitive strengths and competitiveweaknesses
Indicates whether firm is at a competitiveadvantage / disadvantage against each rival
Identifies possible offensive attacks (pitcompany strengths against rivals weaknesses)
Identifies possible defensive actions (a need tocorrect competitive weaknesses)
Why Do a CompetitiveStrength Assessment ?
Quest ion5 : What Strategic Issues
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Based on results of both industry andcompetitive analysis and an evaluationof a companys competitiveness, what items should be on
a companys worry list? Requires th ink ing s t ra tegical ly about
Pluses and minuses in the industryand competitive situation
Companys resource strengths and weaknessesand attractiveness of its competitive position
Quest ion 5 : What Strategic IssuesMerit Managerial Attention?
A good strategy m us t address what to do
abou t each and every s t ra tegic i ssu e!
A Clear Grasp of the Issues Is a
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A Clear Grasp of the Issues Is aPrerequisite to Effective Action
Issues are best couched in such phrases asHow to . . . ? Whether to . . . ? What should be done about . . . ?
Issues need to be precisely statedand cut straight to the chase The issues on managements worry list represent an agend afor ac t ion
Sharp, c lear un ders tanding of the i ssu es i s ab ig ass i s t in f igur ing ou t wh at to do to
add ress and reso lve them !
Identifying the Strategic Issues:
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How to stave off market challenges from newforeign 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 foreignmarkets rapidly or cautiously?What to do about aging demographicsof a companys customer base?
Identifying the Strategic Issues:Some Possibilities