Strategic Management Lecture 3


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Strategic Management Lecture 3

  1. 1. McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc. All rights reserved. 4 Chapter Title 15/e PPT Evaluating a Company’s Resources and Competitive Position Strategic Management
  2. 2. 4-2 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? Company Situation Analysis: The Key Questions
  3. 3. 4-3 Fig. 4.1: Identifying the Components of a Single-Business Company’s Strategy
  4. 4. 4-4 Question 1: How Well is the Company’s Present 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 to improve its C.P.  Identify functional strategies Key ConsiderationsKey Considerations
  5. 5. 4-5  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 Well the Present Strategy is Working
  6. 6. 4-6 Indicators of how Well a Company’s Strategy is working  Whether a firm’s sale is growing faster, slower, or about the same pace as the market as a whole thus resulting in a rising, eroding or stable market share  Whether the company is acquiring new customers at an attractive rate as well retaining existing customers  Whether the firm’s profit margins are increasing or decreasing; how well its margins compare to the same trends for other companies in the industry  Trends in net profits and return on investment and how these compare to the same trends for other companies in the industry
  7. 7. 4-7 Indicators of how Well a Company’s Strategy is Working  Whether the company’s overall profits and market and credit rating are improving or on the decline  Whether the company can demonstrate continuous improvements in such internal performance measures as days of inventory, employee productivity, unit cost etc.  How share holders view the company based on trends in the company’s stock price and share holders value  The firm’s image and reputation with its customers  How well the company stacks up against rivals on technology, product innovation, customer service, product quality, delivery, time, price, getting new products to market quickly, and other relevant factors on which buyers base their choice of brands
  8. 8. 4-8  S W O TS W O T represents the first letters in  SS trengths  WW eaknesses  OO pportunities  TT hreats  For a company’s strategy to be well- conceived, it must be  Matched to its resources/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 ?
  9. 9. 4-9  A strength is something a firm does well or an attribute that enhances its competitiveness  A skill, specialized expertise or competitively important capabilities  Skills in low cost operations,  Technological expertise  Defect free manufacturing  Proven capabilities in developing and introducing innovative products  Cutting edge supply chain management capabilities  Expertise in getting new products to the market quickly  Expertise in providing good customer service Resource strengths and competitive capabilities are competitive assets! Identifying Resource Strengths and Competitive Capabilities
  10. 10. 4-10 Identifying Resource Strengths and Competitive Capabilities  Valuable physical assets  State-of-the-art plants and equipments  Attractive real estate locations  World wide distribution facilities  Ownership of valuable natural resource deposits  Valuable human assets and intellectual capital  An experienced and capable workforce  Cutting edge knowledge in technology or other important business areas  Proven managerial knowledge
  11. 11. 4-11 Identifying Resource Strengths and Competitive Capabilities  Valuable organizational assets  Proven quality control systems  Propriety technology, key patents  State-of-the-art systems for doing business via internet  A strong network of distributors or retail dealers  Sizeable amounts of cash or marketable securities  A strong balance sheet  Valuable intangible assets  Powerful or well known brand name  A reputation for technological leadership  Strong buyer loyalty and goodwill
  12. 12. 4-12 Identifying Resource Strengths and Competitive Capabilities  An achievement or attribute that puts a company in a position of market advantage  Low overall cost relative to competitors  Market share leadership  A superior product  A wider product line than rivals  Wide geographic coverage  Competitively valuable alliances or cooperative ventures  Fruitful partnership with supplier that reduces cost and enhances product quality and performance  Joint ventures that provide access to valuable technologies, specialized know-how and/or geographic markets
  13. 13. 4-13 Competencies vs. Core Competencies vs. Distinctive Competencies  A competency is the product of organizational learning and experience and represents real proficiency in performing an internal activity  Some competencies relate to specific skills and expertise  They spring from proficiency in a single discipline or function and may be performed in single department or unit e.g.  Just in time inventory control  Low cost manufacturing efficiency • Other competencies are inherently multi-disciplinary and cross functional • They are a result of effective collaboration among people with different expertise working in different departments e.g.  Continuous product innovation comes from teaming the efforts of people or groups with expertise in market research, R&D, design, engineering, and market testing
  14. 14. 4-14 Competencies vs. Core Competencies vs. Distinctive Competencies  A core competency is a well-performed internal activity central (not peripheral or incidental) to a company’s competitiveness and profitability  A company may have more than one core competency in its resource portfolio  Rarely a company can legitimately claim more than two or three core competencies  More often a core competency is knowledge based residing in people and in a company’s intellectual capital and not in its assets on the balance sheet  A core competency is likely to be grounded in cross- department combination of knowledge and expertise rather than being a product of a single department
  15. 15. 4-15 Competencies vs. Core Competencies vs. Distinctive Competencies  A distinctive competency is a competitively valuable activity a company performs better than its rivals  Signifies greater proficiency than a core competency  The conceptual difference between a competency, core competency, and a distinctive competency draw attention to the fact that a company’s resource strengths and competitive capabilities are not always equal  Core competencies are competitively more important resource strengths than competencies because they add power to the company’s strategy and have a bigger positive impact on its market position and profitability
  16. 16. 4-16 Competencies vs. Core Competencies vs. Distinctive Competencies  A distinctive competency is a competitively potent resource strength for three reasons: 1. It gives a company competitively valuable capability that is unmatched by rivals 2. It has a potential for being the cornerstone of the company’s strategy 3. It can produce a competitive edge in the market place since it represents a level of proficiency that is superior to rivals
  17. 17. 4-17 What is the Competitive Power of a Resource Strength? 1. Is the resource strength hard to copy? 2. Is the resource strength durable – does it have staying power? 3. Is the resource really competitively superior? 4. Can the resource strength be trumped by different resource strengths and competitive capabilities of rivals?
  18. 18. 4-18 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 areasResource weaknesses and deficiencies are competitive liabilities!
  19. 19. 4-19
  20. 20. 4-20 Prentice Hall, 2000 Chapter 4 20 Internal Factor Analysis Summary (IFAS) Internal Factors Weight Rating Weighted Score Comments 1 2 3 4 5 1.00 Strengths Weaknesses Total Weighted Score Notes: 1. List strengths and weaknesses (5–10 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factor’s probable impact on the company’s strategic position. The total weights must sum to 1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the company’s response to that factor. 4. Multiply each factor’s weight times its rating to obtain each factor’s weighted score in Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells how well the company is responding to the strategic factors in its internal environment. Source: T. L. Wheelen and J. D. Hunger, “External Strategic Factors Analysis Summary (EFAS).” Copyright © 1991 by Wheelen and Hunger Associates. Reprinted by permission.
  21. 21. 4-21 Identifying a Company’s Market Opportunities  Opportunities most relevant to a company are those offering:  Good match with its financial and organizational resource capabilities  Best prospects for profitable long-term growth  Potential for competitive advantage
  22. 22. 4-22 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
  23. 23. 4-23
  24. 24. 4-24 Prentice Hall, 2000 Chapter 3 24 External Factor Analysis Summary (EFAS) External Strategic Factors Weight Rating Weighted Score Comments 1 2 3 4 5 1.00 Opportunities Threats Total Weighted Score Notes: 1. List opportunities and threats (5–10 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factor’s probable impact on the company’s strategic position. The total weights must sum to 1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the company’s response to that factor. 4. Multiply each factor’s weight times its rating to obtain each factor’s weighted score in Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells how well the company is responding to the strategic factors in its external environment. Source: T. L. Wheelen and J. D. Hunger, “External Strategic Factors Analysis Summary (EFAS).” Copyright © 1991 by Wheelen and Hunger Associates. Reprinted by permission.
  25. 25. 4-25 Fig. 4.2: The Three Steps of SWOT Analysis
  26. 26. 4-26 Prentice Hall, 2000 Chapter 5 26 SO Strategies Generate strategies here that use strengths to take advantage of opportunities ST Strategies Generate strategies here that use strengths to avoid threats WO Strategies Generate strategies here that take advantage of opportunities by overcoming weaknesses WT Strategies Generate strategies here that minimize weaknesses and avoid threats INTERNAL FACTORS (IFAS) EXTERNAL FACTORS (EFAS) Strengths (S) List 5 – 10 internal strengths here Weaknesses (W) List 5 – 10 internal weaknesses here Opportunities (O) List 5 – 10 external opportunities here Threats (T) List 5 – 10 external threats here TOWS Matrix 5.4 TOWS Matrix (Fig. 5.2) Source: Adapted from Long-Range Planning, April 1982, H. Weihrich, “The TOWS Matrix—A Tool for Situational Analysis” p. 60. Copyright 1982, with kind permission from H. Weihrich and Elsevier Science Ltd. The Boulevard, Langford Lane, Kidlington OX5 1GB, UK.
  27. 27. 4-27 The Strategic Position and Action Evaluation Matrix (SPACE)  Select a set of variables to define Financial Strength (FS), Competitive Advantage (CA), Environmental Stability (ES), and Industry Strength (IS)  Assign numerical value ranging from +1( worst) to +6 (best) to reach variable that make up FS and IS dimension.  Assign numerical value ranging from -1 ( best) to -6 ( worst) for ES and CA  Compute the average score for FS, IS, CA, and ES  Plot the average for FS, IS, CA, and ES on the appropriate axis  Add the two scores on the x axis and plot the resultant point on X. Add the two scores on the y-axis and plot the resultant point on Y. Plot the intersection of the new xy point  Draw a directional vector from the origin of the SPACE Matrix through the new intersection point. The vector reveals the type of strategies recommended for the organization: aggressive, competitive, defensive, or conservative
  28. 28. 4-28 Y axis X axis 1. Financial Strength (FS  Return on Investment  Leverage  Liquidity  Working capital  Cash Flow  Ease of Exit  Risk involved in business 1. Industry Strength ( IS)  Growth Potential  Profit potential  Financial stability  Technological Know-how  Resource utilization  Capital intensity  Ease of entry  Productivity, capacity utilization 2. Environmental Stability (ES) Technological Changes Rate of Inflation Demand Variability Price range of competitive products Barriers to entry Competitive pressure Price elasticity of demand 2. Competitive Advantage (CA)  Market Share  Product Quality  Product life cycle  Customer loyalty  Competition’s capacity utilization  Technological know-how  Control over suppliers and distributors
  29. 29. 4-29 Hypothetical example of SPACE Matrix (Y axis)Hypothetical example of SPACE Matrix (Y axis) Financial Strength (FS)Financial Strength (FS) Return on Investment = + 6Return on Investment = + 6 Leverage = + 5Leverage = + 5 Liquidity = + 5Liquidity = + 5 Working capital = + 5Working capital = + 5 Cash Flow = + 4Cash Flow = + 4 Ease of exit = +1Ease of exit = +1 Risk Involved = + 4Risk Involved = + 4 Total Score = + 30Total Score = + 30 Average Score = 30/7 = 4.28Average Score = 30/7 = 4.28 Environmental Stability ( ES)Environmental Stability ( ES) Technological change = - 4Technological change = - 4 Rate of Inflation = - 3Rate of Inflation = - 3 Demand variability = - 3Demand variability = - 3 Price range of competitivePrice range of competitive products = -5products = -5 Barriers to entry = - 1Barriers to entry = - 1 Competitive pressure = - 4Competitive pressure = - 4 Price elasticity of demand = - 3Price elasticity of demand = - 3 Total score = -23Total score = -23 Average Score = -23/7= - 3.28Average Score = -23/7= - 3.28
  30. 30. 4-30 SPACE Matrix Calculation X axisSPACE Matrix Calculation X axis Industry Strength ( IS)Industry Strength ( IS) Growth Potential = + 5Growth Potential = + 5 Profit Potential = +5Profit Potential = +5 Technological Know how = +Technological Know how = + 33 Resource utilization = +4Resource utilization = +4 Capital Requirement = +6Capital Requirement = +6 Ease of Entry = +6Ease of Entry = +6 Productivity, capacityProductivity, capacity utilization = +4utilization = +4 Total Score = +31Total Score = +31 Competitive Advantage (CA)Competitive Advantage (CA) Market Share = - 2Market Share = - 2 Product Quality = - 3Product Quality = - 3 Product life cycle = -2Product life cycle = -2 Customer Loyalty = -1Customer Loyalty = -1 Competition’s capacity utilization = -3Competition’s capacity utilization = -3 Technological Know how = -3Technological Know how = -3 Control over suppliers andControl over suppliers and Distributors = -1Distributors = -1 Total Score = 15Total Score = 15 Average CA Score = - 2.14Average CA Score = - 2.14
  31. 31. 4-31 SPACE Matrix CalculationsSPACE Matrix Calculations ES Average Score = -3.28 + Average FS Score( + 4.28) = + 1ES Average Score = -3.28 + Average FS Score( + 4.28) = + 1 Average CA Score = -2.14 + Average IS Score ( 4.42) = + 2.28Average CA Score = -2.14 + Average IS Score ( 4.42) = + 2.28 CACA ISIS FSFS ESES xx xx
  32. 32. 4-32 Examples of strategic profilesExamples of strategic profiles Aggressive profilesAggressive profiles Competitive ProfileCompetitive Profile Defensive ProfileDefensive Profile Conservative ProfileConservative Profile Conservative profileConservative profile
  33. 33. 4-33  An aggressive profile suggests and Innovator Strategy; the company is in a position to invest further and introduce new market offerings; product development and market development are real options here.  A conservative profile is suggestive of an Analyzer Strategy; the company will staunchly defend its domain while cautiously looking for new opportunities of diversification  A Competitive Profile may augur well for a flanker’s role, as the company may not have the resource strengths to meet the competitors head-on  A Defensive Profile is self-explanatory where the company is only looking to doggedly defend its domain and innovates only on the periphery. Interpreting the Profiles
  34. 34. 4-34  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’s Prices and Costs Competitive?
  35. 35. 4-35  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 of the value for customers is created)  Support activities that facilitate performance of the primary activities Concept: Company Value Chain
  36. 36. 4-36 Fig. 4.3: A Representative Company Value Chain
  37. 37. 4-37 Value Chain Activities in Service Firms  Wholesalers: Primary Activities: (a) merchandize selection and purchasing, (b) Inbound shipping and warehousing (c) outbound distribution to retailers  Department Store Retailer Primary Activities (a) merchandize selection and buying (b) store layout and product display (c) advertising and customer service  A Hotel Chain Primary Activities (a) site selection and construction (b) reservations (c) hotel operations (d) managing lineup of hotel locations
  38. 38. 4-38 Steps in Corporate Value Chain Analysis 1. Examine each product line’s value chain in terms of various activities involved in producing that product or service.  Which activities can be considered core competency or weakness  Can any core competency be labeled as distinctive competency 2. Examine the “linkages” within each product’s value chain  Linkages are the connections between the way one value activity is performed and the cost of performance of another activity 3. Examine the potential synergies among the value chain of different product lines/ businesses
  39. 39. 4-39 Why Value Chains of Rival Companies Often Differ?  A company’s value chain depends on:  the manner in which it performs its own business and internal operations,  its strategy, the approaches it is using to execute this strategy,  underlying economics of the activities themselves • Because these activities differ from company to company the value chain of rival companies differ and thus their cost positions
  40. 40. 4-40 Why Value Chains of Rival Companies Often Differ? a. Competing companies may differ on the degree of vertical integration - Comparing the value chain of a fully integrated and partially integrated rivals require adjusting the differences in scope of activities - The costs of internally performed activities for a manufacturer will be greater than the cost of internally performed activities of producers who buy the needed parts and components from outside suppliers and only perform assembly line operations
  41. 41. 4-41 Why Value Chains of Rival Companies Often Differ? b. There is legitimate reason to expect that value chain and cost differences between companies pursuing a low cost/ low price strategy and a rival that is positioned on high end of the market would be different c. Cost and price differences among rival firms can have their origin in activities performed by suppliers and distributors or by distribution channel allies involved in getting these product to end users - Suppliers or wholesale dealers may have excessively high cost or profit structures that jeopardize a company’s cost competitiveness even though its cost for internally performed activities are competitive
  42. 42. 4-42 The Value Chain System for Entire Industry Accurately assessing a company’s competitiveness in end use markets require that managers must understand the entire value chain system for delivering a product or service to end users, not just company’s own value chain  At the very least it means considering the value chain of suppliers and forward channel allies  Suppliers’ value chains are relevant because: 1. Suppliers perform activities and incur costs in creating and delivering the purchased inputs used in company’s own value chain 2. The costs, performance features and quality of these inputs influence a company’s own cost and product differentiation capabilities  Any thing a company can do to help its suppliers take cost out of their value chain activities or improve the quality and performance of the item being supplied can enhance its own competitiveness
  43. 43. 4-43 The Value Chain System for Entire Industry  Forward channel and customer value chain are relevant because: 1. The costs and margins of a company’s distribution allies are part of the price paid by end users 2. The activities that distribution allies perform affect end users’ satisfaction  For these reasons companies normally work closely with forward channel allies to perform these value chain activities in a mutually beneficial way
  44. 44. 4-44 Representative Value Chain for an Entire Industry
  45. 45. 4-45 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 defined versus broadly defined activities  Guideline – Develop separate cost estimates for activities  Having different economics  Representing a significant or growing proportion of costs
  46. 46. 4-46  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 Activity-Based Costing: A Key Tool in Analyzing Costs
  47. 47. 4-47
  48. 48. 4-48  Focuses on cross-company comparisons of how certain activities are performed and what costs are 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 of Key Value Chain Activities
  49. 49. 4-49 Strategic Options for Remedying a Cost Disadvantage  Company’s competitiveness on cost depends on how efficiently it manages the value chain activities relative to how well competitors manage theirs  There are three main areas in a company’s value chain where important differences in the cost of competing firms can occur 1. A company’s own activity segment 2. Supplier’s part of the industry value chain 3. The forward channel portion of the industry chain
  50. 50. 4-50 Remedying an Internal Cost Disadvantage 1. Implement the use of the best practices throughout the company particularly for high cost activities 2. Try to eliminate cost-producing activities altogether by revamping the value chain - cutting out low value added activities - bypassing the value chains and associated costs of distribution by marketing directly to end users 3. Relocate high cost manufacturing activities to other geographic areas 4. Whether certain internally performed activities can be outsourced more cheaply than they could be done in-house 5. Invest in productivity enhancing, cost saving technological improvements 6. Find ways to detour around the activities or items where costs are high 7. Redesign the product and/or some components to facilitate speedier and more economical manufacture or assembly 8. Try to make up the internal cost disadvantage by reducing the costs in supplier or forward channel portions of the industry value chain – usually the last resort
  51. 51. 4-51 Remedying a Supplier-Related Cost Disadvantage  Pressurizing suppliers for lower prices  Switching to lower-priced substitute inputs  Collaborating closely with suppliers to identify mutual cost saving opportunities  Just in time deliveries from supplier can lower: - company’s inventory and logistic costs - supplier can economize on their warehousing, shipping, and production scheduling costs  Companies may find it cheaper to integrate backward
  52. 52. 4-52 Remedying a Cost Disadvantage Associated with Activities Performed by Forward Channel Allies 1. Pressurize dealer distributors and other forward channel allies to reduce their costs and markups 2. Work closely with forward channel allies to identify win-win opportunities to reduce costs 3. Change to a more economical distribution strategy, including switching distribution channels or integrating forward into company-owned retail outlets
  53. 53. 4-53 Fig. 4.5: Translating Company Performance of Value Chain Activities into Competitive Advantage
  54. 54. 4-54  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? Question 4: Is the Company Stronger or Weaker than Key Rivals?
  55. 55. 4-55  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 positionA “good” strategy must address “what to do” about each and every strategic issue! Question 5: What Strategic Issues Merit Managerial Attention?