Evaluating a Company’s

Resources and Competitive

Position

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

Question 1: How Well Is the Company’sPresent Strategy Working?

• 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

Key Considerations Key Considerations

• Qualitative assessment –Is the strategy well-conceived?

– Covers all the bases?

– Internally consistent?

– Makes sense?

– Timely and in step with marketplace?

• Quantitative assessment – What are the results?

– Is company achieving its financial and strategic objectives?

– Is company an above-average industry performer?

Approaches to Assess How Wellthe Present 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.

Key Indicators of How Wellthe Strategy Is Working

• S W O TS W O T represents the first letter in– SS trengths– WW eaknesses– OO pportunities– TT hreats

• 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

S W

O T

Question 2: What Are the Company’s Strengths, Weaknesses, Opportunities and Threats ?

• 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 competitivecapabilities are competitive assets!

Identifying Resource Strengthsand Competitive Capabilities

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-performedinternal activity central (not peripheral or incidental) to a company’s competitivenessand profitability

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

Examples: Distinctive Competencies

ToyotaLow-cost, high-quality

manufacturing of motor vehicles

StarbucksInnovative coffee drinks

and store ambience

Determining the CompetitivePower 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. Is the resource durable – does it have staying power?

3. Is the resource really competitively superior?

4. Can the resource be trumped bythe different capabilities of rivals?

Identifying a Company’sMarket Opportunities

• Opportunities most relevant to acompany are those offering

– Good match with its financial andorganizational resource capabilities

– Best prospects for profitable long-term growth

– Potential for competitive advantage

• S W O TS 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 TS W O T analysis is

– Using the 4 lists to draw conclusionsabout a company’s overall situation

– Acting on the conclusions to

• Better match a company’s strategy to itsresource strengths and market opportunities

• Correct the important weaknesses

• Defend against external threats

Role of SWOT Analysis inCrafting a Better Strategy

Examine Your Company’s SWOTs

• 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

Question 3: Are the Company’sPrices and Costs Competitive?

Fig. 4.3: A Representative Company Value Chain

Fig. 4.4: Representative Value Chain for an Entire Industry

Example: Value Chain ActivitiesPulp & Paper Industry

Timber farming

Logging

Pulp mills

Papermaking

Distribution

Example: Value Chain Activities

Parts and components manufacture

Assembly

Wholesale distribution

Retail sales

Home Appliance Industry

Processing of basic ingredients

Syrup manufacture

Bottling and can filling

Wholesale distribution

Advertising

Retailing

Example: Value Chain Activities

Albertson’s

Soft Drink Industry

Example: Value Chain ActivitiesComputer Software Industry

Programming

Disk loading

Marketing

Distribution

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 definedversus broadly defined activities

• Guideline – Develop separate costestimates for activities– Having different economics

– Representing a significant or growing proportion of costs

• 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

Benchmarking Costs ofKey Value Chain Activities

• 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 capabilitiesthat rivals don’t have or can’t match

Option 2: Do an overall better job than rivals oflowering combined costs of performingall the value chain activities

Translating Performance of Value Chain Activities into Competitive Advantage

• Overall competitive position involvesanswering two questions

– How does a company rank relativeto competitors on each importantfactor that determines market success?

– Does a company have a netcompetitive advantage or disadvantagevis-à-vis major competitors?

Question 4: Is the Company Strongeror Weaker than 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

Assessing a Company’sCompetitive Strength vs. Key Rivals

• Based on results of both industry and competitive analysis and an evaluation of a company’s competitiveness, what items should beon 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 positionA “good” strategy must address “what to do”

about each and every strategic issue!

Question 5: What Strategic IssuesMerit Managerial Attention?

The Five

Generic

Competitive

Strategies

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

“Competitive strategy is about being

different. It means deliberately

choosing to perform activities

differently or to perform different

activities than rivals to deliver a

unique mix of value.”

Michael E. Porter

Fig. 5.1: The Five Generic Competitive Strategies

Low-Cost Provider Strategies

• Make achievement of meaningful lower coststhan rivals the theme of firm’s strategy

• Include features and services in productoffering that buyers consider essential

• Find approaches to achieve a cost advantagein ways difficult for rivals to copy or match

Keys to SuccessKeys to Success

Low-cost leadership means low overall costs, not just low manufacturing or production costs!

Approach 1: Controlling the Cost Drivers

• Capture scale economies; avoid scale diseconomies• Capture learning and experience curve effects• Control percentage of capacity utilization• Pursue efforts to boost sales and spread costs such as R&D and

advertising over more units• Improve supply chain efficiency• Substitute use of low-cost for high-cost raw materials• Use online systems and sophisticated software to achieve operating

efficiencies• Adopt labor-saving operating methods• Use bargaining power to gain concessions from suppliers• Compare vertical integration vs. outsourcing

• Use direct-to-end-user sales/marketing methods

• Make greater use of online technology applications

• Streamline operations by eliminating low-value-added or unnecessary work steps

• Relocate facilities closer to suppliers or customers

• Offer basic, no-frills product/service

• Offer a limited product/service as opposed to a full product/service line

Approach 2: Revamping the Value Chain

Wal-Mart’s Approach toManaging Its Value Chain

Institute extensive information sharing with vendors via online systemsInstitute extensive information sharing with vendors via online systems

Pursue global procurement of some items and centralize most purchasing activities

Pursue global procurement of some items and centralize most purchasing activities

Invest in state-of-the-art automation at its distribution centersInvest in state-of-the-art automation at its distribution centers

Strive to optimize the product mix and achieve greater sales turnoverStrive to optimize the product mix and achieve greater sales turnover

Install security systems and store operating procedures that lower shrinkage rates

Install security systems and store operating procedures that lower shrinkage rates

Negotiate preferred real estate rental and leasing rates with real estate developers and owners of its store sites

Negotiate preferred real estate rental and leasing rates with real estate developers and owners of its store sites

Manage and compensate its workforce in a manner to yield lower labor costsManage and compensate its workforce in a manner to yield lower labor costs

• Price competition is vigorous• Product is standardized or readily available

from many suppliers• There are few ways to achieve

differentiation that have value to buyers• Most buyers use product in same ways• Buyers incur low switching costs • Buyers are large and have

significant bargaining power• Industry newcomers use introductory low prices

to attract buyers and build customer base

When Does a Low-CostStrategy Work Best?

• Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals

• Find ways to differentiate that create value for buyers and are not easily matched or cheaply copied by rivals

• Not spending more to achieve differentiationthan the price premium that can be charged

ObjectiveObjective

Keys to SuccessKeys to Success

Differentiation Strategies

Benefits of Successful Differentiation

A product / service with unique, appealing attributes allows a firm to

Command a premium price and/or

Increase unit sales and/or

Build brand loyalty

= Competitive Advantage

Whichhat is

unique?

• Unique taste – Dr. Pepper• Multiple features – Microsoft Windows and Office• Wide selection and one-stop shopping – Home Depot,

Amazon.com• Superior service -- FedEx, Ritz-Carlton• Spare parts availability – Caterpillar• Engineering design and performance – Mercedes, BMW• Prestige – Rolex• Product reliability – Johnson & Johnson• Quality manufacture – Karastan, Michelin, Toyota• Technological leadership – 3M Corporation• Top-of-line image – Ralph Lauren, Starbucks, Chanel

Types of Differentiation Themes

Signaling Value as Wellas Delivering Value

• Incomplete knowledge of buyers causes them tojudge value based on such signals as– Price– Attractive packaging– Extensive ad campaigns– Ad content and image– Seller facilities or professionalism and

personality of employees– Having a list of prestigious customers

• Signals of value may be as important as actual value when– Nature of differentiation is hard to quantify– Buyers are making first-time purchases– Repurchase is infrequent– Buyers are unsophisticated

When Does a DifferentiationStrategy Work Best?

• There are many ways to differentiate a productthat have value and please customers

• Buyer needs and uses are diverse

• Few rivals are following a similardifferentiation approach

• Technological change andproduct innovation are fast-paced

Best-Cost Provider Strategies

• Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation– Make an upscale product at a lower cost– Give customers more value for the money

• Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations

• Be the low-cost provider of a product with good-to-excellent product attributes, then use cost advantage to underprice comparable brands

Objectives

Focus / Niche Strategies

• Involve concentrated attention on a narrow piece of the total market

Serve niche buyers better than rivals

• Choose a market niche where buyershave distinctive preferences, specialrequirements, or unique needs

• Develop unique capabilities to serveneeds of target buyer segment

Objective

Keys to Success

• Geographic uniqueness

• Specialized requirements inusing product/service

• Special product attributesappealing only to niche buyers

Approaches to Defining a Market Niche

Examples of Focus Strategies

• Animal Planet and History Channel– Cable TV

• Google– Internet search engines

• Porsche– Sports cars

• Cannondale– Top-of-the line mountain bikes

• Enterprise Rent-a-Car– Provides rental cars to repair garage customers

• Bandag– Specialist in truck tire recapping

Your Opinion

Which of the five generic competitive strategies do you think the following companies are employing:

– The Saturn division of General Motors

– Abercrombie & Fitch

– Amazon.com

– Avon Products

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