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EVALUATING A COMPANY’S RESOURCES, COST POSITION, AND COMPETITIVENESS
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
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LO1 Learn how to assess how well a company’s current strategy is working.
LO2 Understand why a company’s resources and capabilities are central to its strategic approach and how to evaluate their potential for giving the company a competitive edge over rivals.
LO3 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 the value it provides to customers.
(cont’d)
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LO4 Learn how to evaluate a company’s competitive strength relative to key rivals.
LO5 Understand how a comprehensive evaluation of a company’s external and internal situations can assist managers in making critical decisions about their next strategic moves.
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“Where Are We Now?”
Question 1 How well is the firm’s strategy working?
Question 2What are the firm’s competitively important resources and capabilities?
Question 3Are the firm’s cost structure and customer value proposition competitive?
Question 4Is the firm competitively stronger or weaker than key rivals?
Question 5What strategic issues and problems merit front-burner managerial attention?
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Question 1: How Well Is the Company’sStrategy Working?
The two best indicators of how well a firm’s strategy is working are:Whether the firm is recording gains in financial
strength and profitability.
Whether the firm’s competitive strength and market standing is improving.
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Strategy Performance Indicators
Trends in the firm’s sales and earnings growth.
Trends in the firm’s stock price.
The firm’s overall financial strength.
The firm’s customer retention rate.
The rate at which new customers are acquired.
Changes in the firm’s image and reputation with customers.
Evidence of improvement in internal processes such as defect rate, order fulfillment, delivery times, days of inventory, and employee productivity.
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Question 2: What Are the Company’sCompetitively Important Resources
and Capabilities?
A company’s strategy and business model: Must be well-matched to its collection of resources
and capabilitiesIs strengthened when exploiting resources that are
competitively valuable, rare, hard to copy, and not easily trumped by rivals’ equivalent substitute resources
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Identifying Competitively Important Resources and Capabilities
Common types of valuable resources and competitive capabilities include:Skills or specialized expertise in a competitively
important capabilityValuable physical assetsValuable human assets or intellectual capitalValuable organizational assetsValuable intangible assetsCompetitively valuable alliances or cooperative
ventures
Core Concept
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A resource is a competitive asset that is owned or controlled by a firm; a capability is the capacity of a firm to competently perform some internal activity. Capabilities are developed and enabled through the deployment of a firm’s resources.
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TABLE 4.1 Common Types of Tangible and Intangible Resources
Tangible Resources
Physical resources
State-of-the-art manufacturing plants and equipment, efficient distribution facilities, attractive real estate locations, or ownership of valuable natural resource deposits
Financial resources
Cash and cash equivalents, marketable securities, and other financial assets such as a company’s credit rating and borrowing capacity
Technological assets
Patents, copyrights, superior production technology, and technologies that enable activities
Organizational resources
Information and communication systems (servers, workstations, etc.), proven quality control systems, and strong network of distributors or retail dealers
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TABLE 4.1 Common Types of Tangible and Intangible Resources
Intangible Resources
Human assets and intellectual capital
An experienced and capable workforce, talented employees in key areas, collective learning embedded in the organization, or proven managerial know-how
Brand, image, and reputational assets
Brand names, trademarks, product or company image, buyer loyalty, and reputation for quality, superior service
Relationships Alliances or joint ventures that provide access to technologies, specialized know-how, or geographic markets, and trust established with various partners
Company culture The norms of behavior, business principles, and ingrained beliefs within the company
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Determining the Competitive Power of a Company’s Resources and Capabilities
Can the resource or capability be trumped by substitute resources
and competitive capabilities?
Is the resource or capability really competitively valuable?
Is the resource or capability hard to copy or imitate?
Is the resource or capability rare—is it something rivals lack?
Competitive Power Tests
Core Concept
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A core competence is a proficiently performed internal activity that is central to a company’s strategy and competitiveness.
A core competence that is performed with a very high level of proficiency is referred to as a distinctive competence.
Core Concept
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Companies that lack a stand-alone resource that is competitively powerful may nonetheless develop a competitive advantage through resource bundles that enable the superior performance of important cross-functional capabilities.
Rather than try to match the resources possessed by a rival firm, a firm may develop entirely different resources that substitute for the strengths of the rival.
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A Company’s Resources and Capabilities Must Be Managed
Dynamically
Management’s organization-building challenge has two elements:
1. Attending to ongoing recalibration of existing capabilities and resources
2. Casting a watchful eye for opportunities to develop totally new capabilities for delivering better customer value and/or outcompeting rivals
Core Concept
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A dynamic capability is developed when a company has become proficient in modifying, upgrading, or deepening its resources and capabilities to sustain its competitiveness and prepare it to seize future market opportunities and nullify external threats to its well-being.
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Are Company Resources and Capabilities Sufficient to Allow It to Seize Market
Opportunities and Nullify External Threats?
SWOT represents the first letter in:
Strengths Weaknesses Opportunities Threats
A well-conceived strategy is:Matched to the firm’s resource strengths and
weaknesses
Aimed at capturing the firm’s best market opportunities and defending against external threats to its well-being
Core Concept
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SWOT analysis is a simple but powerful tool for sizing up a firm’s internal strengths and competitive deficiencies, its market opportunities, and the external threats to its future well-being.
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Identifying a Company’s Internal Strengths
A firm’s strengths determine whether its competitive power in the marketplace will be impressively strong or disappointingly weak.
A firm that is well endowed with strengths stemming from potent resources and core competencies normally has considerable competitive power.
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TABLE 4.2 Factors to Consider When Identifying a Company’s Strengths, Weaknesses, Opportunities, and Threats
Potential Internal Strengths and Competitive Capabilities
•Core competencies in ____ .
•A strong financial condition; ample financial resources to grow the business.
•Strong brand name image/company reputation.
•Economies of scale and/or learning and experience curve advantages over rivals.
•Proprietary technology/superior technological skills/important patents.
•Cost advantages over rivals.
•Product innovation capabilities.
•Proven capabilities in improving production processes.
•Good supply chain management capabilities.
•Good customer service capabilities.
•Better product quality relative to rivals.
•Wide geographic coverage and/or strong global distribution capability.
•Alliances/joint ventures with other firms that provide access to valuable technology, competencies, and/or attractive geographic markets.
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Identifying Resource Weaknessesand Competitive Deficiencies
A weakness or competitive deficiency is something a firm lacks or does poorly or a condition that puts it at a disadvantage in the marketplace such as:Deficiencies in competitively important physical,
organizational, or intangible assets
Missing or competitively inferior capabilities in key areas
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TABLE 4.2 Factors to Consider When Identifying a Company’s Strengths, Weaknesses, Opportunities, and Threats
Potential Internal Weaknesses and Competitive Deficiencies
•No clear strategic direction.
•No well-developed or proven core competencies.
•A weak balance sheet; burdened with too much debt.
•Higher overall unit costs relative to key competitors.
•A product/service with features and attributes inferior to those of rivals.
•Too narrow a product line relative to rivals.
•Weak brand image or reputation.
•Weaker dealer network than key rivals.
•Behind on product quality, R&D, and/or technological know-how.
•Lack of management depth.
•Short on financial resources to grow the business and pursue promising
initiatives.
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TABLE 4.2 Factors to Consider When Identifying a Company’s Strengths, Weaknesses, Opportunities, and Threats
Potential Market Opportunities
•Serving additional customer groups or market segments.
•Expanding into new geographic markets.
•Expanding the firm’s product line to meet a broader range of customer needs.
•Utilizing existing company skills or technological know-how to enter new product lines or new businesses.
•Falling trade barriers in attractive foreign markets.
•Acquiring rival firms or companies with attractive technological expertise or capabilities.
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Identifying a Company’s Market Opportunities
Opportunities that are most relevant to a firm are those offering:Good match with its financial and
organizational resource capabilities
The best prospects for growth and profitability
The most potential for competitive advantage
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Identifying Threats to a Company’s Future Profitability
The emergence of cheaper or better technologies Rivals’ introduction of new or improved products The entry of lower-cost foreign competitors into a
firm’s market stronghold New regulations that are more burdensome
to a firm than to its competitors Vulnerability of the firm to a rise in interest rates The potential of a hostile takeover Unfavorable demographic shifts Adverse changes in foreign exchange rates
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TABLE 4.2 Factors to Consider When Identifying a Company’s Strengths, Weaknesses, Opportunities, and Threats
Potential External Threats to a Company’s Future Prospects
•Increasing intensity of competition among industry rivals—may squeeze profit
margins.
•Slowdowns in market growth.
•Likely entry of potent new competitors.
•Growing bargaining power of customers or suppliers.
•A shift in buyer needs and tastes away from the industry’s product.
•Adverse demographic changes that threaten to curtail demand for the industry’s
product.
•Vulnerability to unfavorable industry driving forces.
•Restrictive trade policies on the part of foreign governments.
•Costly new regulatory requirements.
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The Value of a SWOT Analysis
The value of a SWOT analysis is in:Drawing conclusions from the SWOT listings
about the firm’s overall situation.
Translating these conclusions into strategic actions to better match the firm’s strategy to its strengths and market opportunities, correcting problematic weaknesses, and defending against worrisome external threats.
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Question 3: Are the Company’s Cost Structure and Customer Value
Proposition Competitive?
Why are cost structure and value important?Assessing whether a firm’s costs and value
proposition are competitive is crucial, especially so in industries where price competition is prevalent.
Useful analytical tools:Value chain analysisBenchmarking
Core Concept
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A company’s value chain identifies the primary activities that create customer value and related support activities.
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FIGURE 4.1 A Representative Company Value Chain
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FIGURE 4.1 A Representative Company Value Chain
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Concepts and Connections 4.1Value Chain Activities and Costs for Just Coffee, a Producer of Fair Trade Organic Coffee
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Benchmarking: A Tool for Assessing Whether a Company’s Value Chain
Activities Are Competitive
Entails making cross-company comparisons of how certain activities are performed and the costs associated with:How materials are purchasedHow inventories are managedHow products are assembledHow customer orders are filled and shippedHow maintenance is performed
Core Concept
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Benchmarking is a potent tool for learning which firms are best at performing particular activities and then using their techniques (or “best practices”) to improve the cost and effectiveness of a firm’s own internal activities.
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FIGURE 4.2 Representative Value Chain for an Entire Industry
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The Value Chain System for an Entire Industry
A firm’s customer value proposition and cost competitiveness depend not only on its internally performed activities, but also on the value chain activities of its suppliers and forward channel allies.
Accurately assessing the competitiveness of a firm’s cost structure and value proposition requires that managers understand an industry’s entire value chain system for delivering a product or service to customers, not just the firm’s own internal value chain.
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Strategic Options for Remedying a Cost or Value Disadvantage
There are three main areas of a firm’s overall value chain where cost differences occur: Activities performed by suppliers
A firm’s own internal activities
Activities performed by forward channel allies
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Remedying an Internal Cost or Value Disadvantage
1. Implement the use of best practices throughout the firm
2. Eliminate some cost-producing activities by revamping value chain
3. Relocate high-cost activities to lower-cost geographic areas
4. See if certain internally performed activities can be outsourced to vendors or contractors
5. Invest in productivity-enhancing, cost-saving technology
6. Find ways around activities or items where costs are high
7. Redesign the product and/or its components to reduce manufacturing or assembly costs
8. Make up differences by reducing costs in supplier or forward portions of value chain system
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Remedying a Supplier-Related Cost Disadvantage
Pressure suppliers for lower pricesSwitch to lower-priced substitutesCollaborate closely with suppliers to identify
mutual cost-saving opportunities Integrate backward into business of high-
cost suppliers
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Remedying a Cost Disadvantage Associated with Activities
Performed by Forward Channel Allies
Pressure dealer-distributors and other forward channel allies to reduce their costs and markups
Work with forward channel allies to identify win-win opportunities to reduce costs
Change to a more economical distribution strategy:Switch to cheaper distribution channelsIntegrate forward into company-owned retail outlets
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Question 4: What Is the Company’s Competitive Strength Relative
to Key Rivals?
Determining a firm’s overall competitive position involves answering two questions:
1. How does the firm rank relative to its competitors on each industry key success factor?
2. Does the firm have a net competitive advantage or disadvantage vis-à-vis its major competitors?
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Steps in a Competitive Strength Assessment
Step 1List the industry’s key success factors and other measures of competitive strength or weakness (6 to 10 measures).
Step 2Assign a weight to each measure of competitive strength based on its importance in shaping competitive success. (The sum of the weights for each measure must add up to 1.0.)
Step 3Calculate strength ratings by scoring each competitor on each strength measure (use a scale where 1 is weak and 10 is strong) and multiplying the assigned rating by the assigned weight.
Step 4Sum the weighted strength ratings on each factor to get an overall measure of competitive strength for each company being rated.
Step 5Use the overall strength ratings to draw conclusions about the size and extent of the firm’s net competitive advantage or disadvantage and to take specific note of areas of strength and weakness.
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TABLE 4.3 Illustration of a Competitive Strength Assessment
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Interpreting the Competitive Strength Assessments
Shows how firm stacks up against rivals, measure by measure
Indicates whether firm is at a competitive advantage or disadvantage against each rival
Identifies possible offensive strategies that can be waged against rivals’ weaknesses
Identifies the need for defensive actions to correct competitive weaknesses
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Question 5: What Strategic Issues and Problems Must Be Addressed
by Management?
Final and most important analytical step in assessing “Where are we now?”The results of industry and competitive analyses
pinpoint the issues and problems that management must address in setting its agenda for actions to take next to improve the firm’s performance and business outlook.
