chap004 internal

8/12/2019 Chap004 Internal

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4

chapter

EVALUATING

A COMPANYS

RESOURCES,

COST POSITION, AND

COMPETITIVENESS

Copyri ght 2013 by The McGraw-H il l Companies, In c. All ri ghts reserved.McGraw-Hill/Irwin


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LO1Learn how to assess how well a companys

current strategy is working.

LO2Understand why a companys resources and

capabilities are central to its strategic approach

LO3Grasp activities that determine a companyscost structure and the value it provides to

customers.

LO4Learn how to evaluate a companys

competitive strength relative to key rivals


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4-3

Where Are We Now?

Question 1 How well is the firms strategy working?

Question 2What are the firm

s competitively important

resources and capabilities?

Question 3Are the firm

s cost structure and customer

value proposition competitive?

Question 4Is the firm competitively stronger or weaker

than key rivals?

Question 5What strategic issues and problems merit

front-burner managerial attention?


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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 firms competitive strength and market

standing is improving.


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Strategy Performance Indicators

Trends in the firm

s sales and earnings growth. Trends in the firms stock price.

The firms overall financial strength.

The firms customer retention rate.

The rate at which new customers are acquired.

Changes in the firms 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.


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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 capabilitiesIs strengthened when exploiting resources that are

competitively valuable, rare, hard to copy, and not

easily trumped by rivalsequivalent substitute

resources


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Identifying Competitively Important

Resources and Capabilities

Common types of valuable resources and

competitive capabilities include:

Tangible assets (Physical, financial, technological,

organizational)intangible assets (human and intellectual, Brand and

reputation, relationships, culture)


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Core Concept

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A resourceis a competitive asset that

is owned or controlled by a firm; a

capabilityis the capacity of a firm tocompetently perform some internal

activity. Capabilities are developed

and enabled through the deploymentof a firms resources.


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Determining the Competitive Power of a

Company

s Resources and Capabilities

Can it be trumped by substitute

resources

and competitive capabilities?

competitively valuable?

hard to copy or imitate?

rare?

Competitive

Power Tests


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Core Concept

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A core competence is a proficiently performed

internal activity that is central to a companys

strategy and competitiveness.

A core competence that is performed with a

very high level of proficiency is referred to as

a distinctive competence.


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Core Concept

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Companies that lack a stand-alone resourcethat is competitively powerful may

nonetheless develop a competitive advantage

through resource bundles that enable the

superior performance of important cross-

functional capabilities.

Rather than try to match the resources

possessed by a rival firm, a firm may developentirely different resources that substitutefor

the strengths of the rival.


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A Company

s Resources and

Capabilities Must Be Managed

DynamicallyManagement

s organization-building

challenge has two elements:

1. Attending to ongoing recalibration of existingcapabilities and resources

2. Watch for opportunities to develop totally new

capabilities for delivering better customer value


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Core Concept

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A dynamic capability is developed when a

company has become proficient in modifying,

upgrading, or deepening its resources and

capabilities to sustain its competitiveness andprepare it to seize future market opportunities

and nullify external threats to its well-being.


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Are Company Resources and Capabilities

Sufficient to Allow It to Seize Market

Opportunities and Nullify External Threats?

SWOTrepresents the first letter in:

Strengths Weaknesses Opportunities Threats

A well-conceived strategy is:

Matched to the firms resource strengths and

weaknesses

Aimed at capturing the firms best market

opportunities and defending against external

threats to its well-being


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Core Concept

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SWOT analysis is a simple but powerful

tool for sizing up a firms internal strengths

and competitive deficiencies, its marketopportunities, and the external threats to its

future well-being.


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TABLE 4.2 Factors to Consider When Identifying a Companys

Strengths, Weaknesses, Opportunities, and Threats

Potential Internal Strengths and Competitive CapabilitiesCore 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.


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Identifying Resource Weaknesses

and Competitive Deficiencies

A weaknessor compet it ive def ic iency is

something a firm lacks or does poorly or

a condition that puts it at a disadvantage

in the marketplace such as:Deficiencies in competitively important physical,

organizational, or intangible assets

Missing or competitively inferior capabilities

in key areas


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Potential Internal Weaknesses and Competitive DeficienciesNo 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.


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Potential Market OpportunitiesServing additional customer groups or market segments.

Expanding into new geographic markets.

Expanding the firms 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.


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Identifying a Company

s

Market Opportunities

Opportunities that are most relevant

to a firm are those offering:

Good match with its financial and

organizational resource and capabilities

The best prospects for growth and profitability

The most potential for competitive advantage


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Potential External Threats to a Company

s Future ProspectsIncreasing intensity of competition among industry rivalsmay 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 industrys product.

Adverse demographic changes that threaten to curtail demand for the

industrys

product.

Vulnerability to unfavorable industry driving forces.

Restrictive trade policies on the part of foreign governments.

Costly new regulatory requirements.


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The Value of a SWOT Analysis

The value of a SWOT analysis is in:Drawing conclusions from the SWOT listings

about the firms overall situation.

Translating these conclusions into strategic

actions to better match the firms strategy to its

strengths and market opportunities, correcting

problematic weaknesses, and defending against

worrisome external threats.


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Question 3: Are the Company

s Cost

Structure and Customer Value

Proposition Competitive?

Why are cost structure and value important?

Assessing whether a firms costs and value

proposition are competitive is crucial, especially so in

industries where price competition is prevalent.

Useful analytical tools:

Value chain analysis

Benchmarking


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Core Concept

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A companys value chain

identifies the primary activities that

create customer value and relatedsupport activities.


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FIGURE 4.1 A Representative Company Value Chain


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Benchmarking: A Tool for Assessing

Whether a Company

s Value Chain

Activities Are Competitive

Entails making cross-company comparisons

of how certain activities are performed and

the costs associated with:

How materials are purchased

How inventories are managed

How products are assembled

How customer orders are filled and shippedHow maintenance is performed


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Core Concept

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Benchmarkingis a potent tool for learning

which firms are best at performing particular

activities and then using their techniques (or

best practices) to improve the cost andeffectiveness of a firms own internal activities.


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FIGURE 4.2 Representative Value Chain for an Entire Industry


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Strategic Options for Remedying

a Cost or Value Disadvantage

There are three main areas of a firm

s

overall value chain where cost differences

occur:

Activities performed by suppliers

A firms own internal activities

Activities performed by forward channel allies


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Remedying an Internal Cost

or Value Disadvantage

1. Implement the use of best practices throughout the firm

2. Eliminate some cost-producing activities by revamping value

chain

3. Relocate high-cost activities to lower-cost geographic areas

4. See if certain internally performed activities can be

outsourced to vendors or contractors

5. Invest in productivity-enhancing, cost-saving technology

6. Find ways around activities or items where costs are high

7. Redesign the product and/or its components to reducemanufacturing or assembly costs

8. Make up differences by reducing costs in supplier or forward

portions of value chain system


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Remedying a Supplier-Related

Cost Disadvantage

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


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Remedying a Cost Disadvantage

Associated with Activities

Performed by Forward Channel Allies

Pressure dealer-distributors and other

forward channel allies to reduce their costs

and markupsWork with forward channel allies to identify

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


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Question 4: What Is the Company

s

Competitive Strength Relative

to Key Rivals?

Determining a firm

s overall competitive

position involves answering two questions:

1. How does the firm rank relative to its competitorson each industry key success factor?

2. Does the firm have a net competitive advantage

or disadvantage vis--vis its major competitors?


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Steps in a Competitive Strength Assessment

Step 1 List the industrys key success factors and other measures

of competitive strength or weakness (6 to 10 measures).

Step 2Assign a weight to each measure of competitive strength based

on its importance in shaping competitive success. (The sum of

the weights for each measure must add up to 1.0.)

Step 3Calculate strength ratings by scoring each competitor on each

strength measure (use a scale where 1 is weak and 10 is strong)

and multiplying the assigned rating by the assigned weight.

Step 4

Sum the weighted strength ratings on each factor to get an overall

measure of competitive strength for each company being rated.

Step 5Use the overall strength ratings to draw conclusions about the size

and extent of the firm

s net competitive advantage or disadvantage

and to take specific note of areas of strength and weakness.


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TABLE 4.3 Illustration of a Competitive Strength Assessment


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Interpreting the Competitive

Strength Assessments

Shows how firm stacks up against rivals,

measure by measure

Indicates whether firm is at a competitive

advantage or disadvantage against eachrival

Identifies possible offensive strategies that

can be waged against rivals

weaknesses Identifies the need for defensive actions to

correct competitive weaknesses

Q ti 5 Wh t St t i I


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Question 5: What Strategic Issues

and Problems Must Be Addressed

by Management?

Final and most important analytical step

in assessing Where are we now?

The results of industry and competitive analyses

pinpoint the issues and problems that management

must address in setting its agenda for actions to take

next to improve the firms performance and business

outlook.

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