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Evaluating a
Chapter Title
Company’s
Resources and
Competitive Position

Screen graphics created by:


16/e PPT Jana F. Kuzmicki, Ph.D.
Troy University-Florida Region

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved.


“Before executives can
chart a new strategy, they
must reach common
understanding of the
company’s current position.”
W. Chan Kim and Renee Mauborgne
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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?
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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?
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Fig. 4.1: Identifying the Components of
a Single-Business Company’s Strategy

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Question 1: How Well Is the Company’s
Present Strategy Working?
Key Considerations
 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
 Identify functional strategies
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Approaches to Assess How Well
the Present Strategy Is Working
 Qualitative assessment –  Quantitative assessment –
Is the strategy well- What are the results?
conceived?
 Is company achieving its
 Covers all the bases? financial and strategic
 Internally consistent? objectives?
 Makes sense?  Is company an above-
 Timely and in step with average industry
marketplace? performer?

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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,
innovation, e-commerce, etc.
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Question 2: What Are the Company’s Strengths,
Weaknesses, Opportunities and Threats ?
S W O T represents the first letter in
 S trengths S W
 W eaknesses
 O pportunities
 T hreats O T
 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
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Identifying Resource Strengths
and Competitive Capabilities
 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

Resource strengths and competitive


capabilities are competitive assets!
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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
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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
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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 corecompetence 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
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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
 Capability to fill customer orders accurately and
swiftly
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Distinctive Competence –
A Competitively Superior Resource
 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 #1
 Can underpin and add real punch
to a company’s strategy
 Is a basis for sustainable competitive advantage
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Examples: Distinctive Competencies

Toyota Starbucks
Low-cost, high-quality Innovative coffee drinks
manufacturing of motor and store ambience
vehicles

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Determining the Competitive
Power of a Company Resource
 Toqualify 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. Is the resource durable – does it have staying power?

3. Is the resource really competitively superior?

4. Can the resource be trumped by


the different capabilities of rivals?
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Test Your Knowledge

A distinctive competence
A. is a more important competitive asset than a core
competence.

B. represents uniquely strong capability relative to rival


companies—it qualifies as a competitively superior
resource strength with competitive advantage potential.

C. is a competitively important value chain activity that a


company performs better than its rivals.

D. can underpin and add real punch to a company's


strategy.

E. All of the above.


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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!
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Identifying a Company’s
Market Opportunities
 Opportunitiesmost 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

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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
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Role of SWOT Analysis in
Crafting a Better Strategy
 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


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Fig. 4.2: The Three Steps of SWOT Analysis

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For Discussion: Your Opinion

In doing SWOT analysis, why is it not sufficient just to


compile 4 lists (one each for resource strengths,
resource weaknesses, market opportunities, and
external threats) and then move on?

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Question 3: 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
situation analysis

 Key analytical tools

 Value chain analysis

 Benchmarking
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Concept: Company Value Chain

 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
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Fig. 4.3: A Representative Company Value Chain

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Example: Value Chain Activities
for a Bakery Goods Maker
Primary Activities Support Activities
 Supply chain management  Quality control
 Recipe development and  Human resource
testing management
 Mixing and baking
 Administration
 Packaging
 Sales and marketing
 Distribution

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Example: Value Chain Activities
for a Department Store Retailer
Primary Activities Support Activities
 Merchandise selection and  Site selection
purchasing  Hiring and training
 Store layout and product  Store maintenance
display
 Administrative activities
 Advertising
 Customer service

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

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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
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Why Do Value Chains of Rivals Differ?
 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
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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
 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
 The activities they perform affect end-user satisfaction
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Fig. 4.4: Representative Value Chain for an Entire Industry

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Example: Value Chain Activities

Pulp & Paper Industry

Timber farming

Logging

Pulp mills

Papermaking

Distribution
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Example: Value Chain Activities

Home Appliance Industry

Parts and components manufacture

Assembly

Wholesale distribution

Retail sales
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Example: Value Chain Activities

Soft Drink Industry

Processing of basic ingredients


Syrup manufacture
Bottling and can filling
Wholesale distribution
Advertising Albertson’s

Retailing
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Example: Value Chain Activities

Computer Software Industry

Programming

Disk loading

Marketing

Distribution
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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
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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
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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
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Objectives of Benchmarking

 Identifybest 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
 Figureout what actions to take to improve a
company’s own cost competitiveness
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Ethical Principles in Benchmarking
 Avoid actions implying an interest  Treat benchmarking interchange
in as confidential
 Restraint of trade  Use information obtained only for
 Market and/or customer stated purposes
allocation schemes
 Respect corporate culture of
 Price fixing
partner companies
 Bribery
 Use benchmarking contacts
 Refrain from acquiring trade
designated by partner company
secrets by any means viewed as
improper  Be fully prepared for each

 Be willing to provide same type of


exchange
information to a benchmarking  Provide partners with agenda and
partner questionnaire prior to exchange
 Communicate early to clarify  Follow through with commitments
expectations and avoid to partner in a timely manner
misunderstandings  Understand how partner wants
 Be honest and complete information provided used
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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 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
Internally Activities,
Activities,
Performed Costs, & Buyer/User
Costs, &
Activities, Margins of Value
Margins of
Costs, & Forward Chains
Suppliers
Margins Channel Allies

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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
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Options to Correct a
Supplier-Related Cost Disadvantage
 Pressure suppliers for lower prices

 Switch to lower-priced substitutes

 Collaborate closely with suppliers to identify mutual


cost-saving opportunities

 Arrange for just-in-time deliveries from suppliers to


lower inventory and internal logistics costs

 Integrate backward into business


of high-cost suppliers
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Options to Correct a Cost Disadvantage Associated
With Activities of Forward Channel Allies

 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


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Test Your Knowledge

For a company to translate performance of value chain


activities into competitive advantage, it
A. must (1) develop core competencies and maybe a
distinctive competence that rivals don’t have or can’t
quite match and that are instrumental in helping it deliver
attractive value to customers or (2) be more cost efficient
in how it performs value chain activities such that it has a
low-cost advantage.
B. has to develop more core competencies than rivals.
C. must be more adept than rivals in using benchmarking
and activity-based costing.
D. has to position itself in the strategic group where profit
margins are highest.
E. Must adopt more best practices than rival firms.
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Translating Performance of Value Chain
Activities into Competitive Advantage
 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

Option 2: Do an overall better job than rivals of


lowering combined costs of performing
all the value chain activities

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

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Question 4: Is the Company Stronger
or Weaker than Key Rivals?

 Overallcompetitive 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?

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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
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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)
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Test Your Knowledge
Which of the following statements is false?
A. The higher a company’s costs are above those of close rivals, the
more competitively vulnerable it becomes.
B. Because the value chains of rival companies tend to be quite
similar, costs outside a company’s own value chain do not affect
whether it is at a cost advantage or disadvantage vis-à-vis key
rivals.
C. A company’s cost competitiveness depends not only on the costs
of internally performed value chain activities but also on the costs
of activities performed by its suppliers and forward channel allies.
D. The stronger a company’s financial performance and market
position, the more likely it has a well-conceived, well-executed
strategy.
E. A competence is something a company is good at doing whereas a
core competence is a proficiently performed internal activity that is
central to a company’s strategy and competitiveness.
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Question 5: 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!
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Stating the Issues Clearly and Precisely

 A well-stated issue involves such phrases as


 “How to . . . ?”
 “Whether to . . . ?”
 “What should be done about . . . ?”
 Issuesneed 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
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Identifying the Strategic Issues:
Some Possibilities
 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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For Discussion: Your Opinion

Why is it important for company managers to develop


a “worry list” of strategic issues and problems that
they need to address and to resolve? Why can’t
managers just skip this step and go directly to the
task of choosing what strategy to employ?

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