GOKARAJU RANGARAJU INSTITUTE OF ENGINEERING AND TECHNOLOGY DEPARTMENT OF MANAGEMENT STUDIES
MBA III SEMESTER
STRATEGIC MANAGEMENT MANUAL-4 (for private circulation only)
Chapter 4: Evaluating a Company’s Resources and Competitive Position
2 Chapter Learning Objectives
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.
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.
Learn how to evaluate a company’s competitive strength relative to key rivals. Understand the role and importance of industry and competitive analysis and
internal situation analysis in identifying strategic issues company managers must address.
3 Chapter Roadmap
a. Question 1: How Well Is the Company’s Present Strategy Working?
b. Question 2: What Are the Company’s Resource Strengths and Weaknesses and Its External Opportunities and Threats?
c. Question 3: Are the Company’s Prices and Costs Competitive?
d. Question 4: Is the Company Competitively Stronger or Weaker than Key Rivals? e. Question 5: What Strategic Issues and Problems Merit Front-Burner Managerial
Attention?
4 Company Situation Analysis: The Key Questions
a. How well is the company’s present strategy working?
b. What are the company’s resource strengths and weaknesses and its external opportunities and threats?
c. Are the company’s prices and costs competitive?
d. Is the company competitively stronger or weaker than key rivals? e. What strategic issues merit front-burner managerial attention?
6 Question 1: How Well Is the Company’s Present Strategy Working?
a. Must begin by understanding what the strategy is b. Identify competitive approach
c. Low-cost leadership? d. Differentiation? e. Best-cost provider?
f. Focus on a particular market niche? g. Determine competitive scope
h. Broad or narrow geographic market coverage?
i. In how many stages of industry’s production/distribution chain does the company operate?
j. Examine recent strategic moves k. Identify functional strategies
7 Key Indicators of How Well the Strategy Is Working
a. Trend in sales and market share b. Acquiring and/or retaining customers c. Trend in profit margins
d. Trend in net profits, EPS, and ROE
e. Overall financial strength and credit rating f. Efforts at continuous improvement activities g. Trend in stock price
h. Image and reputation with customers
i. Leadership role(s) – Technology, product quality, innovation, etc.
8 Question 2: What Are the Company’s Strengths, Weaknesses, Opportunities and Threats ?
a. S W O T represents the first letter in i. S trengths
ii. W eaknesses iii. O pportunities iv. T hreats
b. For a company’s strategy to be well-conceived, it must be i. Matched to its resource strengths and weaknesses
ii. Aimed at capturing its best market opportunities and erecting defenses against external threats to its well-being
9 Identifying Resource Strengths and Competitive Capabilities
a. A strength is something a firm does well or an attribute that enhances its competitiveness
i. Valuable skills, competencies, or capabilities ii. Valuable physical assets
iii. Valuable human assets
iv. Valuable organizational assets v. Valuable intangible assets
vi. Important competitive capabilities
vii. An attribute placing a company in a position of market advantage viii. Alliances or cooperative ventures with partners
a. A competence is the product of organizational learning and experience and represents real proficiency in performing an internal activity
b. A core competence is a well-performed internal activity central (not peripheral or incidental) to a company’s competitiveness and profitability
c. A distinctive competence is a competitively valuable activity a company performs better than its rivals
11 Company Competencies and Capabilities
a. Stem from skills, expertise, and experience usually representing an i. Accumulation of learning over time and
ii. Gradual buildup of real proficiency in performing an activity
b. Involve deliberate efforts to develop the ability to do something, often entailing i. Selecting people with requisite knowledge and skills
ii. Upgrading or expanding individual abilities
iii. Molding work products of individuals into a cooperative effort to create organizational ability
iv. A conscious effort to create intellectual capital 12 Core Competencies – A Valuable Company Resource
a. A competence becomes a core competence when the well-performed activity is central to a company’s competitiveness and profitability
b. Often, a core competence is knowledge-based, residing in people, not in assets on a balance sheet
c. A core competence is typically the result of cross-department collaboration d. A core competence gives a company a potentially valuable competitive capability
and represents a definite competitive asset
13 Distinctive Competence – A Competitively Superior Resource
a. A distinctive competence is a competitively valuable activity that a company performs better than its competitors
b. A distinctive competence is a competitively potent resource source because it i. Gives a company a competitively valuable capability unmatched by rivals ii. Can underpin and add real punch to a company’s strategy
iii. Is a basis for sustainable competitive advantage 14 Determining the Competitive Power of a Company Resource
a. To qualify as competitively valuable or to be the basis for sustainable competitive advantage, a “resource” must pass 4 tests:
ii. Is the resource rare – is it something rivals lack? iii. Is the resource hard to copy?
iv. Can the resource be trumped by the different capabilities of rivals? 15 What Is a Resource-Based Strategy?
a. Companies with competitively valuable resource strengths and competencies often deploy these capabilities to
i. Boost the competitive power of their overall strategy ii. Bolster their position in the marketplace
b. Resource-based strategies
i. Attempt to exploit company resources to offer value to customers in ways rival cannot match
ii. Can focus on eroding the competitive potency of a rival by developing different resources that effectively substitute for the strengths of the rival 16 Identifying Resource Weaknesses and Competitive Deficiencies
a. A weakness is something a firm lacks, does poorly, or a condition placing it at a disadvantage
b. Resource weaknesses relate to
i. Inferior or unproven skills, expertise, or intellectual capital ii. Lack of important physical, organizational, or intangible assets iii. Missing capabilities in key areas
Note: Resource weaknesses and deficiencies are competitive liabilities! 17 Identifying a Company’s Market Opportunities
a. Opportunities most relevant to a company are those offering
i. Good match with its financial and organizational resource capabilities ii. Best prospects for profitable long-term growth
iii. Potential for competitive advantage 18 Identifying External Threats
Some possibilities:
i. Emergence of cheaper/better technologies ii. Introduction of better products by rivals iii. Entry of lower-cost foreign competitors iv. Onerous regulations
v. Rise in interest rates
vii. Unfavorable demographic shifts
viii. Adverse shifts in foreign exchange rates
ix. Political upheaval and/or burdensome government policies 19 Role of SWOT Analysis in Crafting a Better Strategy
a. S W O T analysis involves more than just developing the 4 lists of strengths, weaknesses, opportunities, and threats
b. The most important part of S W O T analysis is
i. Using the 4 lists to draw conclusions about a company’s overall situation
ii. Acting on the conclusions to
1. Better match a company’s strategy to its resource strengths and market opportunities
2. Correct the important weaknesses 3. Defend against external threats 20 Figure 4.2: The Three Steps of SWOT Analysis
a. Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company situation analysis
b. Key analytical tools c. Value chain analysis d. Benchmarking
22 Concept: Company Value Chain
a. A company’s business consists of all activities undertaken in designing, producing, marketing, delivering, and supporting its product or service
b. 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
c. The value chain contains two types of activities
d. Primary activities – Where most of the value for customers is created e. Support activities – Facilitate performance of primary activities 23 Figure 4.3: A Representative Company Value Chain
a. Combined costs of all activities in a company’s value chain define a company’s internal cost structure
b. Compares a firm’s costs activity by activity against costs of key rivals i. From raw materials purchase to
ii. Price paid by ultimate customer
c. Pinpoints which internal activities are a source of cost advantage or disadvantage
25 Why Do Value Chains of Rivals Differ?
a. Several factors give rise to differences in value chains of rival companies i. Different strategies
ii. Different operating practices iii. Different technologies
iv. Different degrees of vertical integration
v. Some companies may perform particular activities internally while others outsource them
b. Differences among the value chains of competing companies complicate task of assessing rivals’ relative cost positions
26 The Value Chain System for an Entire Industry
a. Assessing a company’s cost competitiveness involves comparing costs all along an industry’s value chain
b. Suppliers’ value chains are relevant because
i. Costs, performance features, and quality of inputs provided by suppliers influence a firm’s own costs and product performance
c. Value chains of distributors and retailers are relevant because
i. Their costs and profit margins represent “value added” and are part of the price paid by ultimate end-user
28 Activity-Based Costing: A Key Tool in Analyzing Costs
a. Determining whether a company’s costs are in line with those of rivals requires i. Measuring how a company’s costs compare with those of rivals
activity-by-activity
b. Requires having accounting data to measure cost of each value chain activity c. Activity-based costing entails
i. Defining expense categories according to specific activities performed and ii. Assigning costs to the activity responsible for creating the cost
29 Developing Data to Measure a Company’s Cost Competitiveness
a. After identifying key value chain activities, the next step involves determining costs of performing specific value chain activities using activity-based costing b. Appropriate degree of disaggregation depends on
i. Economics of activities
ii. Value of comparing narrowly defined versus broadly defined activities c. Guideline – Develop separate cost estimates for activities
i. Having different economics
a. Focuses on cross-company comparisons of how certain activities are performed and costs associated with these activities
i. Purchase of materials ii. Payment of suppliers iii. Management of inventories iv. Getting new products to market
v. Performance of quality control
vi. Filling and shipping of customer orders vii. Training of employees
viii. Processing of payrolls 31 Objectives of Benchmarking
a. Identify best and most efficient means of performing various value chain activities
b. Learn what is the “best” way to perform a particular activity from those companies who have demonstrated that they are industry” or “best-in-world” at performing the activity
c. Learn what other firms do to perform an activity at lower cost
d. Figure out what actions to take to improve a company’s own cost competitiveness
32 What Determines If a Company Is Cost Competitive?
a. Cost competitiveness depends on how well a company manages its value chain relative to how well competitors manage their value chains
b. 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
i. Activities performed by suppliers ii. A company’s own internal activities
iii. Activities performed by forward channel allies
33 Options to Correct Internal Cost Disadvantages
a. Implement use of best practices throughout company
c. Relocate high-cost activities to lower-cost geographic areas
d. See if high-cost activities can be performed cheaper by outside vendors/suppliers e. Invest in cost-saving technology
f. Innovate around troublesome cost components g. Simplify product design
h. Make up difference by achieving savings in backward or forward portions of value chain system
34 Options to Correct a Supplier-Related Cost Disadvantage a. Pressure suppliers for lower prices
b. Switch to lower-priced substitutes
c. Collaborate closely with suppliers to identify mutual cost-saving opportunities d. Arrange for just-in-time deliveries from suppliers to lower inventory and internal
logistics costs
e. Integrate backward into business of high-cost suppliers
35 Options to Correct a Cost Disadvantage Associated With Activities of Forward Channel Allies
a. 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
b. Work closely with forward channel allies to identify win-win opportunities to reduce costs
c. Change to a more economical distribution strategy i. Switch to cheaper distribution channels
ii. Integrate forward into company-owned retail outlets
36 Translating Performance of Value Chain Activities into Competitive Advantage a. 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
38 Question 4: Is the Company Stronger or Weaker than Key Rivals?
a. Whether a company is competitively stronger or weaker than key rivals hinges on the answers to two questions
i. How does the company rank relative to competitors on each important factor that determines market success?
ii. Does the company have a net competitive advantage or disadvantage vis-à-vis major competitors?
39 Assessing a Company’s Competitive Strength vs. Key Rivals
a. List industry key success factors and other relevant measures of competitive strength
b. Rate firm and key rivals on each factor using rating scale of 1 to 10 (1 = very weak; 5 = average; 10 = very strong)
c. 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)
d. Sum individual ratings to get an overall measure of competitive strength for each rival
40 Table 4.4: Illustrations of Unweighted and Weighted Strength Assessments
41 Why Do a Competitive Strength Assessment ?
a. Reveals strength of firm’s competitive position vis-à-vis key rivals
b. Shows how firm stacks up against rivals, measure-by-measure – pinpoints firm’s competitive strengths and competitive weaknesses
c. Indicates whether firm is at a competitive advantage / disadvantage against each rival
d. Identifies possible offensive attacks (pit company strengths against rivals’ weaknesses)
e. Identifies possible defensive actions (a need to correct competitive weaknesses) 42 Question 5: What Strategic Issues Merit Managerial Attention?
a. 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”? b. Requires thinking strategically about
i. Pluses and minuses in the industry and competitive situation
43. A Clear Grasp of the Issues Is a Prerequisite to Effective Action a. Issues are best couched in such phrases as
i. “How to….. ?” ii. “Whether to….?”
iii. “What should be done about ... ?”
b. Issues need to be precisely stated and “cut straight to the chase”
c. The issues on management’s “worry list” represent an agenda for action
Note: Sharp, clear understanding of the issues is a big assist in figuring out what to do to address and resolve them !
44. Identifying the Strategic Issues: Some Possibilities
a. How to stave off market challenges from new foreign competitors? b. How to combat price discounting of rivals?
c. How to reduce a company’s high costs?
d. How to sustain a company’s present growth in light of slowing buyer demand? e. Whether to expand a company’s product line?
f. Whether to acquire a rival firm?
g. Whether to expand into foreign markets rapidly or cautiously?