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Chapter TitleChapter Title
16/e PPT16/e PPT
Evaluating a Company’s
Resources and Competitive
Position
Screen graphics created by:Jana F. Kuzmicki, Ph.D.
Troy University-Florida Region
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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“Before executives can
chart a new strategy,
they must reach
common understanding
of the company’s
current position.”W. Chan Kim and Renee
Mauborgne
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Chapter Roadmap
Question 1: How Well Is the Company’s Present Strategy Working?
Question 2: What Are the Company’s Resource Strengths and Weaknesses and Its External Opportunities and Threats?
Question 3: Are the Company’s Prices and Costs Competitive?
Question 4: Is the Company Competitively Stronger or Weaker than Key Rivals?
Question 5: What Strategic Issues and Problems Merit Front-Burner Managerial Attention?
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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?
Company Situation Analysis:The Key Questions
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Fig. 4.1: Identifying the Components ofa Single-Business Company’s Strategy
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Question 1: How Well Is the Company’sPresent Strategy Working?
Must begin by understanding what the strategy is Identify competitive approach
Low-cost leadership Differentiation Focus on a particular market niche
Determine competitive scope Broad or narrow geographic market coverage? In how many stages of industry’s production/distribution
chain does the company operate?
Examine recent strategic moves Identify functional strategies
Key Considerations Key Considerations
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Qualitative assessment –Is the strategy well-conceived?
Covers all the bases?
Internally consistent?
Makes sense?
Timely and in step with marketplace?
Quantitative assessment – What are the results?
Is company achieving its financial and strategic objectives?
Is company an above-average industry performer?
Approaches to Assess How Wellthe Present Strategy Is Working
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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.
Key Indicators of How Wellthe Strategy Is Working
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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
Question 2: What Are the Company’s Strengths, Weaknesses, Opportunities and Threats ?
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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 market
advantage Alliances or cooperative ventures with partners
Resource strengths and competitivecapabilities are competitive assets!
Identifying Resource Strengthsand Competitive Capabilities
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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 competitivenessand profitability
A distinctive competence is a competitively valuable activity a company performs better than its rivals
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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
Company Competencies and Capabilities
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Core Competencies –A Valuable Company Resource
A competence becomes a core competence when the well-performed activity is central to a company’s competitiveness 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 capabilityand represents a definite competitive asset
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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
Capability to fill customer orders accurately and swiftly
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A distinctive competence is a competitively valuable activity 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 company’s strategy
Is a basis for sustainable competitive advantage
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Distinctive Competence –A Competitively Superior Resource
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Examples: Distinctive Competencies
ToyotaLow-cost, high-quality
manufacturing of motor vehicles
StarbucksInnovative coffee drinks
and store ambience
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Determining the CompetitivePower of a Company Resource
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. 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?
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Test Your Knowledge
A distinctive competence
A. is a more important competitive asset than a core competence.
B. represents uniquely strong capability relative to rival companies—it qualifies as a competitively superior resource strength with competitive advantage potential.
C. is a competitively important value chain activity that a company performs better than its rivals.
D. can underpin and add real punch to a company's strategy.
E. All of the above.
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Identifying Resource Weaknessesand 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 deficienciesare competitive liabilities!
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Identifying a Company’sMarket Opportunities
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
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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
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S W O TS W O T analysis involves more than just developing the 4 lists of strengths, weaknesses, opportunities, and threats
The most important part of S W O TS W O T analysis is
Using the 4 lists to draw conclusionsabout a company’s overall situation
Acting on the conclusions to
Better match a company’s strategy to itsresource strengths and market opportunities
Correct the important weaknesses
Defend against external threats
Role of SWOT Analysis inCrafting a Better Strategy
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Fig. 4.2: The Three Steps of SWOT Analysis
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For Discussion: Your Opinion
In doing SWOT analysis, why is it not sufficient just to
compile 4 lists (one each for resource strengths,
resource weaknesses, market opportunities, and
external threats) and then move on?
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Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company situation analysis
Key analytical tools
Value chain analysis
Benchmarking
Question 3: Are the Company’sPrices and Costs Competitive?
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A company’s business consists of all activities undertaken in designing, producing, marketing, delivering, and supporting its product or service
All these activities that a company performs internally combine to form a value chain—so-called because the underlying intent of a company’s activities is to do things that ultimately create value for buyers
The value chain contains two types of activities
Primary activities (where most ofthe value for customers is created)
Support activities that facilitateperformance of the primary activities
Concept: Company Value Chain
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Fig. 4.3: A Representative Company Value Chain
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Example: Value Chain Activitiesfor a Bakery Goods Maker
Primary Activities Supply chain management
Recipe development and testing
Mixing and baking
Packaging
Sales and marketing
Distribution
Support Activities
Quality control
Human resource management
Administration
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Example: Value Chain Activitiesfor a Department Store Retailer
Primary Activities Merchandise selection and
purchasing Store layout and product
display Advertising Customer service
Support Activities Site selection Hiring and training Store maintenance Administrative activities
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Example: Value ChainActivities for a Hotel Chain
Primary Activities Site selection and
construction
Reservations
Operation of hotel properties
Managing lineupof hotel locations
Support Activities
Accounting
Hiring and training
Advertising
Building a brand and reputation
Generaladministration
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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
Characteristics of Value Chain Analysis
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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 while others outsource them
Differences among the value chains of competing companies complicate task of assessingrivals’ relative cost positions
Why Do Value Chains of Rivals Differ?
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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
Value chains of distributors and retailers arerelevant because Their costs and profit margins represent “value added”
and are part of the price paid by ultimate end-user The activities they perform affect end-user satisfaction
The Value Chain Systemfor an Entire Industry
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Fig. 4.4: Representative Value Chain for an Entire Industry
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Example: Value Chain Activities
Pulp & Paper Industry
Timber farming
Logging
Pulp mills
Papermaking
Distribution
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Example: Value Chain Activities
Parts and components manufacture
Assembly
Wholesale distribution
Retail sales
Home Appliance Industry
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Processing of basic ingredients
Syrup manufacture
Bottling and can filling
Wholesale distribution
Advertising
Retailing
Example: Value Chain Activities
Albertson’s
Soft Drink Industry
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Example: Value Chain Activities
Computer Software Industry
Programming
Disk loading
Marketing
Distribution
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Developing Data to Measure a Company’s Cost Competitiveness
After identifying key value chain activities, the next step involves determining costs of performing specific value chain activities using activity-based costing
Appropriate degree of disaggregation depends on Economics of activities
Value of comparing narrowly definedversus broadly defined activities
Guideline – Develop separate costestimates for activities Having different economics
Representing a significant or growing proportion of costs
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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 costof each value chain activity
Activity-based costing entails Defining expense categories according
to specific activities performed and Assigning costs to the activity
responsible for creating the cost
Activity-Based Costing: A KeyTool in Analyzing Costs
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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
Benchmarking Costs ofKey Value Chain Activities
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Identify best and most efficient means of performing various value chain activities
Learn what is the “best” way to perform a particular activity from those companies who have demonstrated that they are “best-in-industry” or “best-in-world” at performing the activity
Learn what other firms do to perform an activity at lower cost
Figure out what actions to take to improve a company’s own cost competitiveness
Objectives of Benchmarking
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Ethical Principles in Benchmarking
Avoid actions implying an interest in
Restraint of trade Market and/or customer
allocation schemes Price fixing Bribery
Refrain from acquiring trade secrets by any means viewed as improper
Be willing to provide same type of information to a benchmarking partner
Communicate early to clarify expectations and avoid misunderstandings
Be honest and complete
Treat benchmarking interchange as confidential
Use information obtained only for stated purposes
Respect corporate culture of partner companies
Use benchmarking contacts designated by partner company
Be fully prepared for each exchange
Provide partners with agenda and questionnaire prior to exchange
Follow through with commitments to partner in a timely manner
Understand how partner wants information provided used
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Cost competitiveness depends on how well a company manages its value chain relative to how well competitors manage their value chains
When a company’s costs are out-of-line, the activities responsible for the higher costs may be due to any of three parts of industry value chain 1. Activities performed by suppliers 2. A company’s own internal activities 3. Activities performed by forward channel allies
Activities, Costs, &
Margins ofForward
Channel Allies
InternallyPerformedActivities, Costs, &Margins
Activities, Costs, &
Margins ofSuppliers
Buyer/UserValue
Chains
What Determines If aCompany Is Cost Competitive?
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Implement use of best practices throughout company
Eliminate some cost-producing activities altogether by revamping value chain system
Relocate high-cost activities to lower-cost geographic areas
See if high-cost activities can be performedcheaper by outside vendors/suppliers
Invest in cost-saving technology
Innovate around troublesome cost components
Simplify product design
Make up difference by achieving savings in backward or forward portions of value chain system
Options to CorrectInternal Cost Disadvantages
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Pressure suppliers for lower prices
Switch to lower-priced substitutes
Collaborate closely with suppliers to identify mutual 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 aSupplier-Related Cost Disadvantage
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Pressure dealer-distributors and other forward channel allies 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
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Test Your Knowledge
For a company to translate performance of value chain activities into competitive advantage, it
A. must (1) develop core competencies and maybe a distinctive competence that rivals don’t have or can’t quite match and that are instrumental in helping it deliver attractive value to customers or (2) be more cost efficient in how it performs value 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 profit margins are highest.
E. Must adopt more best practices than rival firms.
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A company can create competitive advantage by out-managing rivals in performing value chain activities in either/both of two ways
Option 1: Develop competencies and capabilitiesthat rivals don’t have or can’t match
Option 2: Do an overall better job than rivals oflowering combined costs of performingall the value chain activities
Translating Performance of Value Chain Activities into Competitive Advantage
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Fig. 4.5: Translating Company Performance of Value Chain Activities into Competitive Advantage
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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 Strongeror Weaker than Key Rivals?
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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 Company’sCompetitive Strength vs. Key Rivals
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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)
Why Do a CompetitiveStrength Assessment ?
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Test Your Knowledge
Which of the following statements is false?A. The higher a company’s costs are above those of close rivals, the
more competitively vulnerable it becomes.
B. Because the value chains of rival companies tend to be quite similar, costs outside a company’s own value chain do not affect whether it is at a cost advantage or disadvantage vis-à-vis key rivals.
C. A company’s 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 company’s financial performance and market position, the more likely it has a well-conceived, well-executed strategy.
E. A competence is something a company is good at doing whereas a core competence is a proficiently performed internal activity that is central to a company’s strategy and competitiveness.
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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 position
A “good” strategy must address “what to do”about each and every strategic issue!
Question 5: What Strategic IssuesMerit Managerial Attention?
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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
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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?
Identifying the Strategic Issues: Some Possibilities
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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 to resolve? Why can’t
managers just skip this step and go directly to the
task of choosing what strategy to employ?