chap004 understanding company's resources and position

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Analyzing a Analyzing a Company’s Resources Company’s Resources

and Competitive Positionand Competitive Position

Analyzing a Analyzing a Company’s Resources Company’s Resources

and Competitive Positionand Competitive Position

4444Chapter

Screen graphics created by:Jana F. Kuzmicki, Ph.D.

Troy State University-Florida and Western Region

““Before executives can Before executives can

chart a new strategy, they chart a new strategy, they

must reach common must reach common

understanding of the understanding of the

company’s current company’s current

position.”position.”W. Chan Kim and Renee Mauborgne

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Chapter RoadmapChapter RoadmapChapter RoadmapChapter 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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Company Situation Company Situation Analysis:Analysis:

The Key QuestionsThe Key Questions

Company Situation Company Situation Analysis:Analysis:

The Key QuestionsThe Key Questions1. How well is the company’s

present 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?

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Fig. 4.1: Identifying the Fig. 4.1: Identifying the Components of a Single-Business Components of a Single-Business

Company’s StrategyCompany’s Strategy

Fig. 4.1: Identifying the Fig. 4.1: Identifying the Components of a Single-Business Components of a Single-Business

Company’s StrategyCompany’s Strategy

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

Working?Working?

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

Working?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

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Approaches to Assess How Approaches to Assess How Well the Present Strategy Is Well the Present Strategy Is

WorkingWorking

Approaches to Assess How Approaches to Assess How Well the Present Strategy Is Well the Present Strategy Is

WorkingWorking 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?

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Key Indicators of How WellKey Indicators of How Wellthe Strategy Is Workingthe Strategy Is Working

Key Indicators of How WellKey Indicators of How Wellthe Strategy Is Workingthe 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.

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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

Q #2: What Are the Company’s Q #2: What Are the Company’s Strengths, Weaknesses, Strengths, Weaknesses,

Opportunities and Threats ? Opportunities and Threats ?

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Identifying Resource Identifying Resource StrengthsStrengths

and Competitive Capabilitiesand Competitive Capabilities

Identifying Resource Identifying Resource StrengthsStrengths

and Competitive Capabilitiesand 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!

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Competencies vs. Core Competencies vs. Core Competencies vs. Distinctive Competencies vs. Distinctive

CompetenciesCompetencies

Competencies vs. Core Competencies vs. Core Competencies vs. Distinctive Competencies vs. Distinctive

CompetenciesCompetencies 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

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Company CompetenciesCompany Competenciesand Capabilitiesand Capabilities

Company CompetenciesCompany Competenciesand Capabilitiesand 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

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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 -- ACore Competencies -- AValuable Company Valuable Company

ResourceResource

Core Competencies -- ACore Competencies -- AValuable Company Valuable Company

ResourceResource

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Examples: Core Examples: Core CompetenciesCompetencies

Examples: Core Examples: Core CompetenciesCompetencies

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

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Distinctive Competence -- ADistinctive Competence -- ACompetitively Superior Competitively Superior

ResourceResource

Distinctive Competence -- ADistinctive Competence -- ACompetitively Superior Competitively Superior

ResourceResource A distinctive competence is a competitively significant

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

Represents a competitively valuablecapability 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

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Examples: Distinctive Examples: Distinctive Competencies Competencies

Examples: Distinctive Examples: Distinctive Competencies 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

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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 CompetitiveDetermining the CompetitiveValue of a Company Value of a Company

ResourceResource

Determining the CompetitiveDetermining the CompetitiveValue of a Company Value of a Company

ResourceResource

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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!

Identifying Resource Identifying Resource WeaknessesWeaknesses

and Competitive Deficienciesand Competitive Deficiencies

Identifying Resource Identifying Resource WeaknessesWeaknesses

and Competitive Deficienciesand Competitive Deficiencies

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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’sIdentifying a Company’sMarket OpportunitiesMarket Opportunities

Identifying a Company’sIdentifying a Company’sMarket OpportunitiesMarket Opportunities

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Identifying External Identifying External ThreatsThreats

Identifying External Identifying External ThreatsThreats

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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Role of SWOT Analysis inRole of SWOT Analysis inCrafting a Better StrategyCrafting a Better StrategyRole of SWOT Analysis inRole of SWOT Analysis inCrafting a Better StrategyCrafting 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

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Fig. 4.2: The Three StepsFig. 4.2: The Three Stepsof SWOT Analysisof SWOT Analysis

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Q #4: Are the Company’sQ #4: Are the Company’sPrices and Costs Prices and Costs

Competitive?Competitive?

Q #4: Are the Company’sQ #4: Are the Company’sPrices and Costs Prices and Costs

Competitive?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

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The Concept of aThe Concept of aCompany Value ChainCompany Value Chain

The Concept of aThe Concept of aCompany Value ChainCompany 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 ofthe value for customers is created

Support activities – facilitateperformance of the primary activities

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Fig. 4.3: RepresentativeFig. 4.3: RepresentativeCompany Value ChainCompany Value Chain

Fig. 4.3: RepresentativeFig. 4.3: RepresentativeCompany Value ChainCompany Value Chain

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Characteristics of Characteristics of Value Chain AnalysisValue Chain Analysis

Characteristics of Characteristics of Value Chain AnalysisValue 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

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Why Do ValueWhy Do ValueChains of Rivals Differ?Chains of Rivals Differ?

Why Do ValueWhy Do ValueChains of Rivals Differ?Chains of Rivals Differ?

Several factors can cause differencesin 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

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The Value Chain SystemThe Value Chain Systemfor an Entire Industry for an Entire Industry

The Value Chain SystemThe Value Chain Systemfor an Entire Industry for 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

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Fig. 4.4: Representative Fig. 4.4: Representative Value Chain for an Entire Value Chain for an Entire

IndustryIndustry

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Example: Value Chain Example: Value Chain ActivitiesActivities


Timber farming

Logging

Pulp mills

Papermaking

Distribution

Pulp & Paper Industry

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Home Appliance Industry

Parts and components manufacture

Assembly

Wholesale distribution

Retail sales



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Processing of basic ingredients

Syrup manufacture

Bottling and can filling

Wholesale distribution

Advertising

Retailing

Albertson’s



Soft Drink Industry

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Programming

Disk loading

Marketing

Distribution



Software Computer Industry

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Developing Data to Measure a Developing Data to Measure a Company’s Cost Company’s Cost CompetitivenessCompetitiveness

Developing Data to Measure a Developing Data to Measure a Company’s Cost Company’s Cost CompetitivenessCompetitiveness

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 definedversus broadly defined activities

Guideline – Develop separate cost estimates for activities Having different economics

Representing a significant or growing proportion of costs

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Activity-Based Costing: A Activity-Based Costing: A KeyKey

Tool in Analyzing CostsTool in Analyzing Costs

Activity-Based Costing: A Activity-Based Costing: A KeyKey

Tool in Analyzing CostsTool 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

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Benchmarking Costs ofBenchmarking Costs ofKey Value Chain ActivitiesKey Value Chain Activities

Benchmarking Costs ofBenchmarking Costs ofKey Value Chain ActivitiesKey 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

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Objectives of Objectives of BenchmarkingBenchmarkingObjectives of Objectives of BenchmarkingBenchmarking

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

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

Don’tsDon’ts

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

Don’tsDon’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

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What Determines if aWhat Determines if aCompany Is Cost Company Is Cost

Competitive?Competitive?

What Determines if aWhat Determines if aCompany Is Cost Company Is Cost

Competitive?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 activities

Activities, Costs, &

Margins ofForward

Channel Allies

InternallyPerformedActivities, Costs, &Margins

Activities, Costs, &

Margins ofSuppliers

Buyer/UserValue

Chains

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Options to CorrectOptions to CorrectInternal Cost Internal Cost DisadvantagesDisadvantages

Options to CorrectOptions to CorrectInternal Cost Internal Cost DisadvantagesDisadvantages

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 performed

cheaper 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

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Translating Performance of Value Translating Performance of Value Chain Activities to Competitive Chain Activities to Competitive

AdvantageAdvantage

Translating Performance of Value Translating Performance of Value Chain Activities to Competitive Chain Activities to Competitive

AdvantageAdvantage 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

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

Advantage Advantage

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

Key Rivals?Key Rivals?

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

Key Rivals?Key Rivals? Overall competitive position involves

answering 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?

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Assessing a Company’s Assessing a Company’s Competitive Strength vs. Key Competitive Strength vs. Key

RivalsRivals

Assessing a Company’s Assessing a Company’s Competitive Strength vs. Key Competitive Strength vs. Key

RivalsRivals1. List industry key success factors and other relevant measures

of competitive strength2. 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

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Why Do a CompetitiveWhy Do a CompetitiveStrength Assessment ?Strength Assessment ?Why Do a CompetitiveWhy Do a CompetitiveStrength Assessment ?Strength 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)

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What Strategic IssuesWhat Strategic IssuesMerit Managerial Merit Managerial

Attention?Attention?

What Strategic IssuesWhat Strategic IssuesMerit Managerial Merit Managerial

Attention?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 position

A “good” strategy must address “what to do”about each and every strategic issue!

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Identifying the Strategic Identifying the Strategic IssuesIssues

Identifying the Strategic Identifying the Strategic IssuesIssues

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?

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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 IssuesStating the IssuesClearly and PreciselyClearly and Precisely

Stating the IssuesStating the IssuesClearly and PreciselyClearly and Precisely