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Chap004 understanding company's resources and position

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  • 1. Chapter 4 Analyzing a Company’s Resources and Competitive Position Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy State University-Florida and Western Region 4-1
  • 2. “Before executives can chart a new strategy, they must reach common understanding of the company’s current position.” W. Chan Kim and Renee Mauborgne
  • 3. 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 FrontBurner Managerial Attention? 4-3
  • 4. Company Situation Analysis: The Key Questions 1. How well is the company’s present strategy working? 2. What are the company’s resource strengths and weaknesses and its external opportunities and threats? 3. Are the company’s prices and costs competitive? 4. Is the company competitively stronger or weaker than key rivals? 5. What strategic issues merit front-burner managerial attention? 4-4
  • 5. Fig. 4.1: Identifying the Components of a Single-Business Company’s Strategy 4-5
  • 6. Q #1: How Well Is the Company’s Present Strategy Working? Key Issues  Identify competitive approach  Low-cost leadership  Differentiation  Focus on a particular market niche  Determine competitive scope  Geographic  Operating market coverage stages in industry’s production/distribution chain  Examine recent strategic moves  Identify functional strategies 4-6
  • 7. Approaches the Present  Qualitative assessment – What is the strategy?   Rationale  Relevance  Quantitative assessment – What are the results?  Is company achieving its financial and strategic objectives?  Is company an above-average industry performer? Internal consistency  4-7 Completeness to Assess How Well Strategy Is Working
  • 8. Key Indicators of How Well the 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, e-commerce, etc. 4-8 innovation,
  • 9. Q #2: What Are the Company’s Strengths, Weaknesses, Opportunities and Threats ?  S W O T represents the first letter in  S trengths  W eaknesses  O pportunities  T hreats S O W T  For a company’s strategy to be well-conceived, it must be  Matched  Aimed to its resource strengths and weaknesses at capturing its best market opportunities and erecting defenses against external threats to its well-being 4-9
  • 10. Identifying Resource Strengths and 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 competitive capabilities are competitive assets! 4-10
  • 11. 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-performed internal 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 4-11
  • 12. Company Competencies and 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 4-12
  • 13. 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 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 a potentially valuable competitive capability and represents a definite competitive asset 4-13
  • 14. Examples: Core Competencies  Expertise in integrating multiple technologies to create families of new products  Know-how in creating operating systems for 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 4-14
  • 15. Distinctive Competence -- A Competitively 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 #1  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 4-15
  • 16. 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 manufacture ever more powerful microprocessors for PCs  Wal-Mart  Low-cost distribution and use of state-of-the-art retail technology 4-16
  • 17. Determining the Competitive Value 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. 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? 4-17
  • 18. Identifying Resource Weaknesses and 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 deficiencies are competitive liabilities! 4-18
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  • 21. Identifying a Company’s Market Opportunities  Opportunities most relevant to a company are those offering   Best prospects for profitable long-term growth  4-21 Good match with its financial and organizational resource capabilities Potential for competitive advantage
  • 22. 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 4-22
  • 23. Role of SWOT Analysis in Crafting a Better Strategy  The most important part of S W O T analysis is not developing the 4 lists of strengths, weaknesses, opportunities, and threats, but rather  Using the 4 lists to draw conclusions about a company’s overall situation and  Acting on the conclusions to  Better match a company’s strategy to its resource strengths and market opportunities,  Correct the important weaknesses, and  Defend against external threats 4-23
  • 24. Fig. 4.2: The Three Steps of SWOT Analysis 4-24
  • 25. Q #4: Are the Company’s Prices 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 4-25
  • 26. The Concept of a Company 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 – facilitate performance of the primary activities 4-26
  • 27. Fig. 4.3: Representative Company Value Chain 4-27
  • 28. 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 activity by activity against costs of key rivals  From raw materials purchase to  Price paid by ultimate customer  Pinpoints which internal activities are a source of cost advantage or disadvantage 4-28
  • 29. Why Do Value Chains 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 assessing rivals’ relative cost positions 4-29
  • 30. The Value Chain System 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 costs and 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 4-30
  • 31. Fig. 4.4: Representative Value Chain for an Entire Industry 4-31
  • 32. Example: Value Chain Activities Pulp & Paper Industry Timber farming Logging Pulp mills Papermaking Distribution 4-32
  • 33. Example: Value Chain Activities Home Appliance Industry Parts and components manufacture Assembly Wholesale distribution Retail sales 4-33
  • 34. Example: Value Chain Activities Soft Drink Industry Processing of basic ingredients Syrup manufacture Bottling and can filling Wholesale distribution Advertising Retailing 4-34 Albertson’s
  • 35. Example: Value Chain Activities Software Computer Industry Programming Disk loading Marketing Distribution 4-35
  • 36. 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 4-36 a significant or growing proportion of costs
  • 37. Activity-Based Costing: A Key Tool 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 according to specific activities performed and  Assigning costs to the activity responsible for creating the cost 4-37
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  • 39. Benchmarking Costs of Key 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 4-39
  • 40. Objectives of Benchmarking  Identify best practices in performing an activity  Understand the best practices in performing an activity – learn what is the “best” way to do a particular activity from those demonstrating they are “best-in-world”  Learn how other firms achieve lower costs  Take action to improve company’s cost competitiveness 4-40
  • 41. 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 4-41
  • 42. What Determines if a Company 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 activities Activities, Costs, & Margins of Suppliers 4-42 Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Forward Channel Allies Buyer/User Value Chains
  • 43. Options to Correct Internal Cost Disadvantages  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 4-43
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  • 45. 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 ways that build valuable capabilities  Build dominating expertise in a value chain activity critical to customer satisfaction or market success 4-45
  • 46. Fig. 4.5: Translating Performance of Value Chain Activities into Competitive Advantage 4-46
  • 47. Q. #4: Is the or Weaker Company Stronger than Key Rivals?  Overall competitive position involves answering two questions  How does a company rank relative to competitors on each important factor that determines market success?  Does a company have a net competitive advantage or disadvantage vis-à-vis major competitors? 4-47
  • 48. 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 4-48
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  • 51. Why Do a Competitive 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) 4-51
  • 52. What Strategic Issues Merit Managerial Attention?  Based on results of both industry and competitive analysis and an evaluation of a company’s competitiveness, what items should be on 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! 4-52
  • 53. 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? 4-53
  • 54. Stating the Issues Clearly and Precisely  A well-stated issue involves such phrases as  “How to . . . ?”  “Whether  “What to . . . ?” 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  What 4-54 actions need to be considered to think about doing