strategic management

1. McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 4: Evaluating a
Company’s Resources and
Competitive Position
Screen graphics created by:
Jana F. Kuzmicki, Ph.D.
Troy University

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. “Organizations succeed in a
competitive marketplace over the
long run because they can do certain
things their customers value better
than can their competitors.”
Robert Hayes, Gary Pisano, and David Upton

4. 4-4
Chapter Learning Objectives
1. Understand how to evaluate a company’s internal
situation and capabilities and identify the resource
strengths capable of becoming the cornerstone of
the company’s strategic approach.
2. Grasp how and why activities performed internally
by a company and those performed externally by
its suppliers and forward channel allies determine a
company’s cost structure and ability to compete
successfully.
3. Learn how to evaluate a company’s competitive
strength relative to key rivals.
4. Understand the role and importance of industry
and competitive analysis and internal situation
analysis in identifying strategic issues company
managers must address.

5. 4-5
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?

6. 4-6
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?

7. Figure 4.1: Identifying Components of a Single-Business Company’s Strategy
4-7

8. 4-8
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?
Best-cost provider?
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

9. Approaches to Assessing How Well
the Present Strategy Is Working
 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?
4-9

10. 4-10
 Trend in sales and market share
 Acquiring and/or retaining customers
 Trend in profit margins
 Trend in net profits, EPS, and ROE
 Overall financial strength and credit rating
 Efforts at continuous improvement activities
 Trend in stock price
 Image and reputation with customers
 Leadership role(s) – Technology,
product quality, innovation, etc.
Key Indicators of How Well
the Strategy Is Working

11. Table 4.1: Key Financial Ratios: How to
Calculate Them and What They Mean
4-11

12. Table 4.1: Key Financial Ratios: How to
Calculate Them and What They Mean (con’t)
4-12

13. 4-13
 S W O T represents the first letter in
 S trengths
 W eaknesses
 O pportunities
 T 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 ?

14. 4-14
 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
Identifying Resource Strengths
and Competitive Capabilities
Resource strengths and competitive
capabilities are competitive assets!

15. 4-15
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

16. 4-16
 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

17. 4-17
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 is
knowledge-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 a
potentially valuable competitive capability
and represents a definite competitive asset

18. 4-18
Examples: Core Competencies
 Expertise in integrating multiple
technologies to create families
of new products
 Know-how in 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

19. 4-19
 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 valuable
capability unmatched by rivals
 Can underpin and add real punch
to a company’s strategy
 Is a basis for sustainable competitive
advantage
# 1
Distinctive Competence –
A Competitively Superior Resource

20. Examples: Distinctive Competencies
Toyota
Low-cost, high-quality
manufacturing of motor
vehicles
Starbucks
Innovative coffee drinks
and store ambience
4-20

21. 4-21
Determining the Competitive
Power 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 really competitively superior?
2. Is the resource rare – is it something rivals lack?
3. Is the resource hard to copy?
4. Can the resource be trumped by
the different capabilities of rivals?

22. 4-22
What Is a Resource-Based Strategy?
 Companies with competitively valuable
resource strengths and competencies
often deploy these capabilities to
 Boost the competitive power
of their overall strategy
 Bolster their position in the marketplace
 Resource-based strategies
 Attempt to exploit company resources to offer
value to customers in ways rival cannot match
 Can focus on eroding the competitive potency
of a rival by developing different resources that
effectively substitute for the strengths of the rival

23. 4-23
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!

24. Table 4.2: What to Look for in Identifying a
Company’s Strengths, Weaknesses, Opportunities, and Threats
4-24

25. 4-25
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

26. 4-26
Identifying External Threats
Some possibilities:
 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 and/or burdensome
government policies

27. 4-27
 S 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 T analysis is
Using the 4 lists to draw conclusions
about a company’s overall situation
Acting on the conclusions to
Better match a company’s strategy to its
resource strengths and market opportunities
Correct the important weaknesses
Defend against external threats
Role of SWOT Analysis in
Crafting a Better Strategy

28. Figure 4.2: The Three Steps of SWOT Analysis
4-28

29. 4-29
 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?

30. 4-30
 A company’s business consists of all activities
undertaken in designing, producing, marketing,
delivering, and supporting its product or service
 All these activities 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 – Facilitate
performance of primary activities
Concept: Company Value Chain

31. Figure 4.3: A Representative Company Value Chain
4-31

32. Example: Value Chain Activities
for 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
4-32

33. Example: Value Chain Activities
for 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
4-33

34. Example: Value Chain
Activities for a Hotel Chain
Primary Activities
 Site selection and
construction
 Reservations
 Operation of hotel
properties
 Managing lineup
of hotel locations
Support Activities
 Accounting
 Hiring and training
 Advertising
 Building a brand and
reputation
 General
administration
4-34

35. 4-35
 Combined costs of all activities in a
company’s value chain define a 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
Characteristics of Value Chain Analysis

36. 4-36
 Several factors give rise to differences
in 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
assessing rivals’ relative cost positions
Why Do Value Chains of Rivals Differ?

37. 4-37
 Assessing a company’s cost competitiveness
involves comparing costs all along an
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
 Value chains of distributors and retailers are
relevant because
 Their costs and profit margins
represent “value added” and are part
of the price paid by ultimate end-user
 Activities they perform affect
end-user satisfaction
The Value Chain System
for an Entire Industry

38. Figure 4.4: Representative Value Chain for an Entire Industry
4-38

39. Example: Value Chain Activities
Pulp & Paper Industry
Timber farming
Logging
Pulp mills
Papermaking
Distribution
4-39

40. Example: Value Chain Activities
Parts and components
manufacture
Assembly
Wholesale distribution
Retail sales
Home Appliance Industry
4-40

41. Example: Value Chain Activities
Processing of basic ingredients
Syrup manufacture
Bottling and can filling
Wholesale distribution
Advertising
Retailing
Soft Drink Industry
Publix
4-41

42. Example: Value Chain Activities
Computer Software Industry
Programming
Disk loading
Marketing
Distribution
4-42

43. 4-43
 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

44. 4-44
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

45. Table 4.3: The Difference between Traditional Cost Accounting and Activity-
Based Cost Accounting: An Example from Air Conditioner Manufacturing
4-45

46. 4-46
 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 of
Key Value Chain Activities

47. 4-47
 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

48. 4-48
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
 Obtain prior permission of
benchmarking partner to use
partner’s name with data
 Honor wishes of partners
regarding use of information
 Establish specific ground rules
up front with partners
 Check with legal counsel if any
information gathering
procedure is in doubt
 Do not ask partners for
sensitive data
 Use an ethical third party to
assemble competitive data
 Treat benchmarking
interchange as confidential

49. 4-49
 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 of
Forward
Channel Allies
Internally
Performed
Activities,
Costs, &
Margins
Activities,
Costs, &
Margins of
Suppliers
Buyer/User
Value
Chains
What Determines If a
Company Is Cost Competitive?

50. 4-50
 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
Options to Correct
Internal Cost Disadvantages

51. 4-51
 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 business
of high-cost suppliers
Options to Correct a
Supplier-Related Cost Disadvantage

52. 4-52
 Pressure dealer-distributors and other
forward channel allies to reduce their costs
to make the final price to buyers more
competitive with prices of rivals
 Work closely 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
Options to Correct a Cost Disadvantage Associated
With Activities of Forward Channel Allies

53. 4-53
 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 capabilities
that rivals don’t have or can’t match and
thereby create a resource or capability-
based competitive advantage
Option 2: Perform value chain activities at a lower
overall cost than rivals and thereby
create a cost-based competitive
advantage
Translating Performance of Value Chain
Activities into Competitive Advantage

54. Figure 4.5: Translating Company Performance of
Value Chain Activities into Competitive Advantage
4-54

55. 4-55
 Whether a company is competitively
stronger or weaker than key rivals hinges on
the answers to two questions
 How does the company rank
relative to competitors on each
important factor that determines
market success?
 Does the company have a net
competitive advantage or disadvantage
vis-à-vis major competitors?
Question 4: Is the Company Stronger
or Weaker than Key Rivals?

56. 4-56
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 strength of firm
Assessing a Company’s
Competitive Strength vs. Key Rivals

57. Table 4.4: Illustrations of Unweighted
and Weighted Strength Assessments
4-57

58. 4-58
 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 Competitive
Strength Assessment ?

59. 4-59
 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
Question 5: What Strategic Issues
Merit Managerial Attention?
A “good” strategy must address “what to do”
about each and every strategic issue!

60. 4-60
A Clear Grasp of the Issues Is a
Prerequisite to Effective Action
 Issues are best couched in such phrases as
 “How to . . . ?”
 “Whether to . . . ?”
 “What should be done about . . . ?”
 Issues need to be precisely stated
and “cut straight to the chase”
 The issues on management’s
“worry list” represent an agenda
for action
Sharp, clear understanding of the issues is a
big assist in figuring out what to do to
address and resolve them !

61. 4-61
 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