ch 04-the company’s internal environment

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Evaluating a Company’s Resources

and Competitive Position

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The Key Questions: Evaluating a Company’s Resources and

Competitive Position

1. How well is the company’s present strategy working?

2. What are the company’s resource strengths and weaknesses and its external opportunities and threats?

3. Are the company’s prices and costs competitive?

4. Is the company competitively stronger or weaker than key rivals?

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(1) How well is the company’s present strategy working?

A well-conceived and well-executed strategy is analyzed on the base of– Whether a company achieving the

established financial and strategic objectives

– Whether the company is an above-average industry performer

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(Examples) 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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(2) What are the company’s resource strengths and weaknesses and its external opportunities and

threats? A resource strength is something a company is

good at doing or an attribute that enhances its competitiveness in the marketplace– Valuable physical assets– Valuable human assets and intellectual capital– Valuable organizational assets– Valuable intangible assets– Competitively valuable alliances or cooperative

ventures

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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 company’s competitiveness and profitability

Often, a core competence isknowledge-based, residing in people,not in assets on a balance sheet

A core competence is typically the result of cross-department collaboration

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

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Examples: Core Competencies

Expertise in integrating multiple technologiesto create families of new products

Know-how in creating operating systemsfor cost efficient supply chain management

Speeding new/next-generation products to market

Better after-sale service capability Skills in manufacturing a high quality product Capability to fill customer orders accurately and

swiftly

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The Competitive Power of a Resource Strength

Is the resource strength hard to copy?– Unique: difficulty, huge investment, over long period

Is the resource strength durable?– Although the company faces the rapid speed at which

technologies or industry conditions are moving Is the resource really competitively superior?

– Is the resource better than rivals? Can the resource strength be trumped by the

different resource strengths and competitive capabilities of rivals?

– Other competencies bring other competition stream and as consequence, the competencies create other business approach in winning the competition

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Examples: Distinctive Competencies

ToyotaLow-cost, high-

quality manufacturing of motor vehicles

StarbucksInnovative coffee drinks and store

ambience

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Question 2: What Are the Company’s Strengths, 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 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, 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 in competitively important areas of the business

– Lack of important physical, organizational, or intangible assets

– Missing or competitively inferior capabilities in key areas

How much they matter in the marketplace & they are offset by the company’s resource strengths determine to some extent the weaknesses are competitively vulnerable

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Identifying a Company’s Market Opportunities

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

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Identifying External Threats

Emergence of cheaper/better technologies Introduction of better products by rivals Entry of lower-cost foreign competitors Regulations that are more burdensome 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

Instead of developing the 4 lists of strengths, weaknesses, opportunities, and threats, the most important part of S W O T analysis is– to draw conclusions about a company’s

overall situation (external and internal environment)

– to translate its conclusions into strategic actions to: Better match a company’s strategy to its

resource strengths and market opportunities Correct the important weaknesses Defend against external threats

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Question 3: Are the Company’s Prices and Costs Competitive?

Price-cost comparison is critical in a commodity-product industry as basis for the ruling market force;

Although competition centers on the different attributes of competing brands as much as on price, any costs they incur and any price premium they charge, the company has to be able to deliver ample value that buyers are willing to pay extra

Hence, to produce a company’s competitive price and cost are very important in responding the ruling market force, especially for winning its competition

Two analytical tools for that purpose are value chain and benchmarking

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Concept: Company Value Chain A company’s business consists of all activities

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

All these activities that 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

The value chain contains two types of activities– Primary activities that are foremost in creating

value for customers – Support activities that facilitate and enhance the

performance of the primary activities

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Fig. 4.3: A Representative Company Value Chain

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Characteristics of Value 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 asource of cost advantage or disadvantage

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Example: Value Chain Activities for a Bakery Goods Maker

Primary Activities Supply chain management Recipe development and testing Mixing and baking Packaging Sales and marketing Distribution

Support Activities Quality control Human resource management Administration

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Example: Value Chain Activities for a Hotel Chain

Primary Activities

Site selection and construction

Reservations Operation of hotel

properties Managing lineup

of hotel locations

Support Activities Accounting Hiring and training Advertising Building a brand and

reputation General

administration

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Example: Value Chain Activities for a Department Store Retailer

Primary Activities

Merchandise selection and purchasing

Store layout and product display

Advertising Customer service

Support Activities

Site selection Hiring and training Store maintenance Administrative activities

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Why Do Value Chains of Rivals Differ?

Different strategies Different operating practices Different degrees of vertical

integration

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The Value Chain System 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, performance features, and quality of

inputsprovided by suppliers influence a firm’s own costsand product performance

Value chains of distributors and retailers arerelevant because – their costs and profit margins represent “value

added” and are part of the price paid by ultimate end-user

– the activities they perform affect end-user satisfaction

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Fig. 4.4: Representative Value Chain for an Entire Industry

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Activity-Based Costing: A Key Tool 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 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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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 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 1. Activities performed by suppliers 2. A company’s own internal activities 3. Activities performed by forward channel

alliesActivities, Costs, &

Margins ofForward

Channel Allies

InternallyPerformedActivities, Costs, &Margins

Activities, Costs, &

Margins ofSuppliers

Buyer/UserValue

Chains

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BenchmarkingA potent tool for learning which companies are best at performing

particular activities and then using their activities and then using their

techniques (or “best practices”) to improve the cost and effectiveness of a

company’s own internal activities

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Objectives of Benchmarking To identify best and most efficient means

of performing various value chain activities

To learn what is the “best” way to perform a particular activity from those companies who have demonstrated that they are “best-in-industry” or “best-in-world” at performing the activity

To learn what other firms do to perform an activity at lower cost

To figure out what actions to take to improve a company’s own cost competitiveness

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Question 4: Is the Company Stronger or Weaker than Key Rivals?

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?

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Assessing a Company’sCompetitive 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 un-weighted 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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Components of a Company’s Competitive Key Success Factors/ Strength Measure The factors can be pick up from

– Benchmarking– SWOT

Important weight of attributes of key success factors/strength measure

Numbers of Rivals a company wants to measure

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Question 5: What Strategic IssuesMerit Managerial Attention?

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 position