Chapter

4
Analyzing a Companys Resources and Competitive Position
Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy State University-Florida and Western Region
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Before executives can

chart a new strategy, they

must reach common

understanding of the

companys current position.

W. Chan Kim and Renee Mauborgne

Chapter Roadmap
Question 1: How Well Is the Companys Present Strategy

Working? Question 2: What Are the Companys Resource Strengths and Weaknesses and Its External Opportunities and Threats? Question 3: Are the Companys Prices and Costs Competitive? Question 4: Is the Company Competitively Stronger or Weaker than Key Rivals? Question 5: What Strategic Issues and Problems Merit FrontBurner Managerial Attention?
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Company Situation Analysis: The Key Questions

1. How well is the companys present strategy working? 2. What are the companys resource strengths and weaknesses and its external opportunities and threats? 3. Are the companys 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 Companys Strategy

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Q #1: How Well Is the Companys Present Strategy Working?

Key Issues
Identify competitive approach
Low-cost

leadership

Differentiation Focus

on a particular market niche market coverage

Determine competitive scope

Geographic Operating

stages in industrys production/distribution chain

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 What

What is the strategy?

are the results?

Completeness Internal consistency Rationale Relevance

Is company achieving its financial and strategic objectives? Is company an above-average industry 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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Q #2: What Are the Companys Strengths, Weaknesses, Opportunities and Threats ?
S W O T represents the first letter in
S

trengths eaknesses pportunities hreats

W O T

S O

W T

For a companys 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 competencies or know-how Valuable physical assets Valuable human assets Valuable organizational assets Valuable intangible assets Important competitive capabilities An attribute that places a company in a position of market advantage Alliances or cooperative ventures with partners

Resource strengths and competitive capabilities are competitive assets!

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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 companys 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 companys competitiveness and profitability

Often, a core competence results from collaboration

among different parts of a company

Typically, core competencies reside in a companys

people, not in assets on a balance sheet

A core competence gives a company a

potentially valuable competitive capability and represents a definite competitive asset

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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 System to fill customer orders accurately and swiftly
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Distinctive Competence -- A Competitively Superior Resource

A distinctive competence is a competitively significant activity

that a company performs better than its competitors

A distinctive competence
Represents

a competitively valuable capability rivals do not have

#1

Presents
Can

attractive potential for being a cornerstone of strategy

provide a competitive edge in the marketplace because it represents a competitively superior resource strength

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Examples: Distinctive Competencies

Sharp Corporation
Expertise

in flat-panel display technology

Toyota and Honda

Low-cost,

high-quality manufacturing capability and short design-to-market cycles to design and manufacture ever more powerful microprocessors for PCs distribution and use of state-of-the-art retail technology

Intel
Ability

Wal-Mart
Low-cost

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Determining the Competitive Value of a Company Resource

To qualify as competitively valuable or to be the basis for

sustainable competitive advantage, a resource must pass 4 tests:

1. Is the resource hard to copy?

2. Does the resource have staying power is it durable?

3. Is the resource really competitively superior? 4. Can the resource be trumped by the different capabilities of rivals?
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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 Companys Market Opportunities

Opportunities most relevant to a

company are those offering

Good

match with its financial and organizational resource capabilities prospects for profitable long-term growth

Best

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

The most important part of S W O T analysis is not

developing the 4 lists of strengths, weaknesses, opportunities, and threats, but rather
Using

the 4 lists to draw conclusions about a companys overall situation and

Acting

on the conclusions to

Better match a companys strategy to its

resource strengths and market opportunities,

Correct the important weaknesses, and
Defend against external threats
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Fig. 4.2: The Three Steps of SWOT Analysis

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Q #4: Are the Companys Prices and Costs Competitive?

Assessing whether a firms costs are competitive with those of

rivals is a crucial part of company analysis

Key analytical tools

Value

chain analysis

Benchmarking

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The Concept of a Company Value Chain

A companys business consists of all activities undertaken in

designing, producing, marketing, delivering, and supporting its product or service

A companys value chain consists of a linked set of value-

creating activities performed internally

The value chain contains two types of activities
Primary Support

activities where most of the value for customers is created activities facilitate performance of the primary activities

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Fig. 4.3: Representative Company Value Chain

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Characteristics of Value Chain Analysis

Combined costs of all activities in a companys value chain

define the companys internal cost structure

Compares a firms costs activity

by activity against costs of key rivals

From
Price

raw materials purchase to

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 can cause differences

in value chains of rival companies

Internal Strategy

operations

Approaches
Underlying

used in execution of the strategy

economics of the activities

Differences complicate task of assessing

rivals relative cost positions

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The Value Chain System for an Entire Industry

Assessing a companys cost competitiveness involves

comparing costs all along the industrys value chain Suppliers value chains are relevant because
Costs,

performance features, and quality of inputs provided by suppliers influence a firms own costs and product performance

Forward channel allies value chains are relevant because

Costs

and margins are part of price paid by ultimate end-user Activities performed affect end-user satisfaction

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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 Retailing
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Albertsons

Example: Value Chain Activities

Software Computer Industry Programming Disk loading

Marketing
Distribution
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Developing Data to Measure a Companys Cost Competitiveness

After identifying key value chain activities, the next step

involves breaking down departmental cost accounting data into costs of performing specific activities
Appropriate degree of disaggregation depends on
Economics Value

of activities

of comparing narrowly defined versus broadly defined activities different economics a significant or growing proportion of costs

Guideline Develop separate cost estimates for activities

Having

Representing
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Activity-Based Costing: A Key Tool in Analyzing Costs

Determining whether a companys costs are in line with those

of rivals requires
Measuring

how a companys 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
Identify best practices in performing an activity

Understand the best practices in performing

an activity learn what is the best way to do a particular activity from those demonstrating they are best-in-world
Learn how other firms achieve lower costs Take action to improve companys cost competitiveness
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Ethical Standards in Benchmarking: Dos and Donts

Avoid talk about pricing or

competitively

sensitive costs
Dont ask rivals for sensitive data Dont share proprietary data without clearance Have impartial third party assemble and present competitively

sensitive cost data with no names attached

Dont disparage a rivals business to outsiders based on data

obtained
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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 costs are out-of-line, high-cost activities can exist in any of three areas in the industry value chain
1. Suppliers activities 2. Companys own internal activities 3. Forward channel activities
Activities, Costs, & Margins of Suppliers Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Forward Channel Allies

Buyer/User Value Chains

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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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Translating Performance of Value Chain Activities to Competitive Advantage

A company can create competitive advantage by managing its

value chain to
Integrate

knowledge and skills of employees in competitively valuable ways economies of learning / experience

Leverage

Coordinate

related activities in ways that build valuable capabilities dominating expertise in a value chain activity critical to customer satisfaction or market success

Build

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

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Q. #4: Is the Company Stronger or Weaker than Key Rivals?

Overall competitive position involves

answering two questions

How

does a company rank relative to competitors on each important factor that determines market success? a company have a net competitive advantage or disadvantage vis--vis major competitors?

Does

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Assessing a Companys 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 firms competitive position

vis--vis key rivals Shows how firm stacks up against rivals, measure-by-measure pinpoints firms 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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What Strategic Issues Merit Managerial Attention?

Based on results of both industry and competitive analysis and

an evaluation of a companys competitiveness, what items should be on a companys worry list? Requires thinking strategically about
Pluses

and minuses in the industry and competitive situation Companys 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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Identifying the Strategic Issues

How to stave off market challenges from new foreign competitors? How to combat price discounting of rivals? How to reduce a companys high costs? How to sustain a companys present growth

in light of slowing buyer demand?

Whether to expand a companys 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 companys customer

base?
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Stating the Issues Clearly and Precisely

A well-stated issue involves such phrases as
How

to . . . ? to . . . ? should be done about . . . ?

Whether What

Issues need to be precise, specific,

and cut straight to the chase

Issues on the the worry list

raise questions about

What What
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actions need to be considered to think about doing