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Chapter 3

Analyzing a Analyzing a Company’s Resources Company’s Resources

and Competitive and Competitive Position Position

““Before executives can chart a Before executives can chart a

new strategy, they must reach new strategy, they must reach

common understanding of the common understanding of the

company’s current position.”company’s current position.”

W. Chan Kim and Renee Mauborgne

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Chapter OutlineChapter OutlineChapter OutlineChapter Outline

Evaluating How Well a Company’s Present Strategy is Working

Sizing Up a Company’s Resource Strengths and Weaknesses and Its External Opportunities and Threats

Analyzing Whether a Company’s Prices and Costs are Competitive

Assessing a Company’s Competitive Strength Identifying the Strategic Issues that Merit

Managerial Attention

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Company Situation Analysis:Company Situation Analysis:The Key QuestionsThe Key Questions

Company Situation Analysis:Company Situation Analysis:The Key QuestionsThe Key Questions

1. How well is the company’spresent strategy working?

2. What are the company’s resourcestrengths and weaknesses and itsexternal opportunities and threats?

3. Are the company’s prices andcosts competitive?

4. Is the company competitively strongeror weaker than key rivals?

5. What strategic issues meritmanagerial attention?

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Fig. 3.1: Identifying the Components Fig. 3.1: Identifying the Components of a Single-Business Strategyof a Single-Business Strategy

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How Well Is theHow Well Is thePresent Strategy Working?Present Strategy Working?

How Well Is theHow Well Is thePresent Strategy Working?Present Strategy Working?

Qualitative assessment -- What is the strategy? Competitive strategy Competitive scope Recent competitive

moves Functional strategies

Quantitative assessment -- What are the results? Is company achieving

its financial and strategic objectives?

Is company an above-average industry performer?

Two Key Steps

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What Is the Strategy?What Is the Strategy?What Is the Strategy?What Is the Strategy?

Identify competitive approach Low-cost leadership Differentiation Focus on a particular market niche

Determine competitive scope Stages of industry’s production/distribution chain Geographic coverage

Identify functional strategies Examine recent strategic moves

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Key Indicators of How WellKey Indicators of How Wellthe Strategy Is Workingthe Strategy Is Working

Key Indicators of How WellKey Indicators of How Wellthe Strategy Is Workingthe 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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What Are the Firm’s Strengths, What Are the Firm’s Strengths, Weaknesses, Opportunities and Threats ? Weaknesses, Opportunities and Threats ?

What Are the Firm’s Strengths, What Are the Firm’s Strengths, Weaknesses, Opportunities and Threats ? Weaknesses, Opportunities and Threats ?

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 both Resource strengths and weaknesses Best market opportunities and external

threats to its well-being

S W

O T

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Identifying Resource StrengthsIdentifying Resource Strengthsand Competitive Capabilitiesand Competitive Capabilities

Identifying Resource StrengthsIdentifying Resource Strengthsand Competitive Capabilitiesand Competitive Capabilities

A strength is something a firm does well or an attribute that enhances its competitivenessValuable competencies or know-howValuable physical assetsValuable human assetsValuable organizational assetsValuable intangible assetsImportant competitive capabilitiesAn attribute that places a company in

a position of market advantageAlliances or cooperative ventures with partners

Resource strengths and competitivecapabilities are competitive assets !

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Competencies vs. Core CompetenciesCompetencies vs. Core Competenciesvs. Distinctive Competenciesvs. 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 that is central (not peripheral or incidental) to a company’s competitiveness and profitability

A distinctive competence is a competitively valuable activity that a company performs better than its rivals

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Company CompetenciesCompany Competenciesand Capabilitiesand Capabilities

Company CompetenciesCompany Competenciesand Capabilitiesand 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 -- ACore Competencies -- AValuable Company Resource 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 results from collaboration among different parts of a company

Typically, core competencies reside in a company’s people, not in assets on the balance sheet

A core competence gives a company apotentially valuable competitive capabilityand represents a definite competitive asset

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Examples: Core CompetenciesExamples: 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 -- ADistinctive Competence -- ACompetitively Competitively SuperiorSuperior Resource Resource

# 1

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

Presents attractive potential for being a cornerstone of strategy

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

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Examples: Distinctive Competencies Examples: Distinctive Competencies Examples: Distinctive Competencies Examples: Distinctive Competencies

Sharp Corporation Expertise in flat-panel display technology

Toyota, Honda, Nissan Low-cost, high-quality manufacturing

capability and short design-to-market cycles Intel

Ability to design and manufactureever more powerful microprocessors for PCs

Starbucks Store ambience and innovative coffee

drinks

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Determining the CompetitiveDetermining the CompetitiveValue of a Company ResourceValue of a Company Resource

To qualify as the basis for sustainable competitive advantage, a “resource” is measured by 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 WeaknessesIdentifying Resource Weaknessesand Competitive Deficienciesand 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 capitalLack of important physical,

organizational, or intangible assetsMissing capabilities in key areas

Resource weaknesses and deficienciesare competitive liabilities !

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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

Identifying a Company’sIdentifying a Company’sMarket OpportunitiesMarket Opportunities

Identifying a Company’sIdentifying a Company’sMarket OpportunitiesMarket Opportunities

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Identifying External ThreatsIdentifying 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 inRole of SWOT Analysis inCrafting a Better StrategyCrafting a Better StrategyRole of SWOT Analysis inRole of SWOT Analysis inCrafting a Better StrategyCrafting a Better Strategy

Two key parts of SWOT analysis

Drawing conclusions abouta company’s overall situation

and

Acting on the conclusions to

Better match a company’s strategy to its resource strengths and market opportunities,

Correct the important weaknesses, and

Defend against external threats

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Fig. 3.2: The Three StepsFig. 3.2: The Three Stepsof SWOT Analysisof SWOT Analysis

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Are the Company’sAre the Company’sPrices and Costs Competitive?Prices and Costs Competitive?

Assessing whether a firm’s 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 aThe Concept of aCompany Value ChainCompany Value Chain

The Concept of aThe Concept of aCompany Value ChainCompany Value Chain

A company’s business consists of all activities undertaken in designing, producing, marketing, delivering, and supporting its product or service

A company’s value chain consists of a linked set of value-creating activities performed internally

The value chain contains two types of activities Primary activities -- where most of the value

for customers is created Support activities -- facilitate performance of

the primary activities

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Characteristics of Characteristics of Value Chain AnalysisValue Chain Analysis

Characteristics of Characteristics of Value Chain AnalysisValue 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 activityby 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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Fig. 3.3: RepresentativeFig. 3.3: RepresentativeCompany Value ChainCompany Value Chain

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Fig. 3.4: Representative Value Chain Fig. 3.4: Representative Value Chain for an Entire Industryfor an Entire Industry

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The Value Chain SystemThe Value Chain Systemfor an Entire Industry for an Entire Industry

The Value Chain SystemThe Value Chain Systemfor an Entire Industry 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, quality, and performance of inputs

provided by suppliers influence a firm’s own costs and product performance

Forward channel allies’ value chains are relevant because Forward channel allies’ costs and margins are

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

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Example: Key Value Chain ActivitiesExample: Key Value Chain Activities

Timber farming

Logging

Pulp mills

Papermaking

Pulp & Paper Industry

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Parts and components manufacture

Assembly

Wholesale distribution

Retail sales

Home Appliance Industry

Example: Key Value Chain ActivitiesExample: Key Value Chain Activities

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Processing of basic ingredients

Syrup manufacture

Bottling and can filling

Wholesale distribution

Advertising

RetailingAlbertson’s

Soft-Drink Industry

Example: Key Value Chain ActivitiesExample: Key Value Chain Activities

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Programming

Disk loading

Marketing

Distribution

Computer Software Industry

Example: Key Value Chain ActivitiesExample: Key Value Chain Activities

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Activity-Based Costing: A KeyActivity-Based Costing: A KeyTool in Analyzing CostsTool in Analyzing Costs

Activity-Based Costing: A KeyActivity-Based Costing: A KeyTool in Analyzing CostsTool 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 that measures the cost of each value chain activity

Activity-based accounting systemsprovide data for determining costsfor each relevant value chain activity

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Benchmarking Costs ofBenchmarking Costs ofKey Value Chain ActivitiesKey Value Chain Activities

Benchmarking Costs ofBenchmarking Costs ofKey Value Chain ActivitiesKey Value Chain Activities

Focuses on cross-company comparisons of how certain activities are performed and the 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 BenchmarkingObjectives of BenchmarkingObjectives of BenchmarkingObjectives of Benchmarking

Determine whether a company is performing particular value chain activities efficiently by studying practices and procedures used by other companies

Understand the best practices in performingan activity -- learn what is the “best” wayto do a particular activity from thosedemonstrating they are “best-in-world”

Assess if company’s costs in performing particular value chain activities are in line with competitors

Learn how other firms achieve lower costs

Take action to improve company’s cost competitiveness

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Ethical Standards in Benchmarking: Ethical Standards in Benchmarking: Do’s and Don’tsDo’s and Don’ts

Avoid talk about pricing or competitively sensitive costs

Don’t ask rivals for sensitive data

Don’t share proprietary data without clearance

Have impartial third party assemble and present competitively sensitive cost data with no names attached

Don’t disparage a rival’s business to outsiders based on data obtained

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What Determines Whether aWhat Determines Whether aCompany Is Cost Competitive?Company Is Cost Competitive?

What Determines Whether aWhat Determines Whether aCompany Is Cost Competitive?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,” the “high-cost” activities can exist in any of three areas in the industry value chain 1. Suppliers’ activities 2. Company’s own internal activities 3. Forward channel activities

Activities, Costs, &

Margins ofForward

Channel Allies

InternallyPerformedActivities, Costs, &Margins

Activities, Costs, &

Margins ofSuppliers

Buyer/UserValue

Chains

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Options to CorrectOptions to CorrectInternal Cost DisadvantagesInternal Cost Disadvantages

Options to CorrectOptions to CorrectInternal Cost DisadvantagesInternal 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 Translating Performance of Value Chain Activities to Competitive AdvantageActivities to Competitive Advantage

Translating Performance of Value Chain Translating Performance of Value Chain Activities to Competitive AdvantageActivities 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 Leverage economies of learning / experience Coordinate related activities in ways

that build valuable capabilities Build dominating expertise

in a value chain activity criticalto customer satisfaction or market success

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Fig. 3.5: Translating Performance of Value Fig. 3.5: Translating Performance of Value Chain Activities into Competitive AdvantageChain Activities into Competitive Advantage

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How Strong Is the Company’s How Strong Is the Company’s Competitive Position?Competitive Position?

How Strong Is the Company’s How Strong Is the Company’s Competitive Position?Competitive Position?

Overall competitive position involves answering two questions

How does a company rank relative to competitors on the important factorsthat determine market success?

Does a company have a netcompetitive advantage ordisadvantage vis-à-vis major competitors?

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Assessing a Company’s Competitive Assessing a Company’s Competitive Strength vs. Key RivalsStrength vs. Key Rivals

Assessing a Company’s Competitive Assessing a Company’s Competitive Strength vs. Key RivalsStrength 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 usually superior because the 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 the overall strength ratings, determine overall competitive position of firm

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Why Do a CompetitiveWhy Do a CompetitiveStrength Assessment ?Strength Assessment ?Why Do a CompetitiveWhy Do a CompetitiveStrength Assessment ?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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What Strategic IssuesWhat Strategic IssuesMerit Managerial Attention?Merit Managerial Attention?

What Strategic IssuesWhat Strategic IssuesMerit Managerial Attention?Merit Managerial Attention?

Based on the results of both industry and competitive analysis and an evaluation of a company’s competitiveness, what items should be on the 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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Identifying the Strategic IssuesIdentifying the Strategic IssuesIdentifying the Strategic IssuesIdentifying the Strategic Issues

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 expand into foreign markets rapidly or

cautiously? What to do about aging demographics of a

company’s customer base?

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Stating the IssuesStating the IssuesClearly and PreciselyClearly and Precisely

Stating the IssuesStating the IssuesClearly and PreciselyClearly and Precisely

A well-stated issue involves such phrases as “How to …….?” “Whether to …….?” “What should be done about …….?”

Issues need 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