000100101001001111010100100010010100100111101010010001001010010011110101 000100101001001111010100100010010100100111101010010001001010010011110101 000100101001001111010100100010010100100111101010010001001010010011110101 Chapter 3 Analyzing a Companys

000100101001001111010100100010010100100111101010010001001010010011110101 000100101001001111010100100010010100100111101010010001001010010011110101 000100101001001111010100100010010100100111101010010001001010010011110101 Chapter 3 Analyzing a Company’s Resources and Competitive Position 1 3 -1

“Before executives can chart a new strategy, they must reach common understanding of the company’s current position. ” W. Chan Kim and Renee Mauborgne

Chapter Outline u Evaluating How Well a Company’s Present u u 3 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 3 -3

Company Situation Analysis: The Key Questions 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? 5. What strategic issues merit managerial attention? 4 3 -4

Fig. 3. 1: Identifying the Components of a Single-Business Strategy 5 3 -5

How Well Is the Present Strategy Working? Two Key Steps u Qualitative assessment -- What is the strategy? è Competitive strategy è Competitive scope è Recent competitive moves è Functional strategies 6 u Quantitative assessment -- What are the results? è Is company achieving its financial and strategic objectives? è Is company an aboveaverage industry performer? 3 -6

What Is the Strategy? u Identify competitive approach è Low-cost leadership è Differentiation è Focus on a particular market niche u Determine competitive scope è Stages of industry’s production/distribution chain è Geographic coverage u Identify functional strategies u Examine recent strategic moves 7 3 -7

Key Indicators the Strategy of How Well Is Working u Trend in sales and market share u Acquiring and/or retaining customers u Trend in profit margins u Trend in net profits, ROI, and EVA u Overall financial strength and credit ranking u Efforts at continuous improvement activities u Trend in stock price and stockholder value u Image and reputation with customers u Leadership role(s) -- technology, quality, innovation, e-commerce, etc. 8 3 -8

What Are the Firm’s Strengths, Weaknesses, Opportunities and Threats ? u S W O T represents the first letter in è S trengths S è W eaknesses è O pportunities O è T hreats u For a company’s strategy to be well- W T conceived, it must be matched to both è Resource strengths and weaknesses è Best market opportunities and external threats to its well-being 9 3 -9

Identifying Resource Strengths and Competitive Capabilities u A strength is something a firm does well or an attribute that enhances its competitiveness èValuable competencies or know-how èValuable physical assets èValuable human assets èValuable organizational assets èValuable intangible assets èImportant competitive capabilities èAn attribute that places a company in a position of market advantage èAlliances or cooperative ventures with partners Resource strengths and competitive capabilities are competitive assets ! 10 3 - 10

Competencies vs. Core Competencies vs. Distinctive Competencies u A competence is the product of organizational learning and experience and represents real proficiency in performing an internal activity u A core competence is a well-performed internal activity that is central (not peripheral or incidental) to a company’s competitiveness and profitability u A distinctive competence is a competitively valuable activity that a company performs better than its rivals 11 3 - 11

Company Competencies and Capabilities u Stem from skills, expertise, and experience usually representing an è Accumulation of learning over time and è Gradual buildup of real proficiency in performing an activity u Involve deliberate efforts to develop the ability to do something, often entailing è Selecting people with requisite knowledge and skills è Upgrading or expanding individual abilities è Molding work products of individuals into a cooperative effort to create organizational ability è A conscious effort to create intellectual capital 12 3 - 12

Core Competencies -- A Valuable Company Resource u A competence becomes a core competence when the well-performed activity is central to a company’s competitiveness and profitability u Often, a core competence results from collaboration among different parts of a company u Typically, core competencies reside in a company’s people, not in assets on the balance sheet u A core competence gives a company a potentially valuable competitive capability and represents a definite competitive asset 13 3 - 13

Examples: Core Competencies u Expertise in integrating multiple technologies to create families of new products u Know-how in creating operating systems for cost efficient supply chain management u Speeding new/next-generation products to market u Better after-sale service capability u Skills in manufacturing a high quality product u System to fill customer orders accurately and swiftly 14 3 - 14

Distinctive Competence -- A Competitively Superior Resource u A distinctive competence is a competitively significant activity that a company performs better than its competitors ¿ A distinctive competence ä Represents a competitively valuable capability rivals do not have ä Presents attractive potential for being a cornerstone of strategy ä Can provide a competitive edge in the marketplace—because it represents a competitively superior resource strength #1 15 3 - 15

Examples: Distinctive Competencies u Sharp Corporation è Expertise in flat-panel display technology u Toyota, Honda, Nissan è Low-cost, high-quality manufacturing capability and short design-to-market cycles u Intel è Ability to design and manufacture ever more powerful microprocessors for PCs u Starbucks è Store ambience and innovative coffee drinks 16 3 - 16

Determining the Competitive Value of a Company Resource u 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 ? 17 3 - 17

Identifying Resource Weaknesses and Competitive Deficiencies u A weakness is something a firm lacks, does poorly, or a condition placing it at a disadvantage u Resource weaknesses relate to è Inferior or unproven skills, expertise, or intellectual capital è Lack of important physical, organizational, or intangible assets è Missing capabilities in key areas Resource weaknesses and deficiencies are competitive liabilities ! 18 3 - 18

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Identifying a Company’s Market Opportunities u Opportunities most relevant to a company are those offering è Good match with its financial and organizational resource capabilities è Best prospects for profitable long-term growth è Potential for competitive advantage 21 3 - 21

Identifying External Threats u Emergence of cheaper/better technologies u Introduction of better products by rivals u Entry of lower-cost foreign competitors u Onerous regulations u Rise in interest rates u Potential of a hostile takeover u Unfavorable demographic shifts u Adverse shifts in foreign exchange rates u Political upheaval in a country 22 3 - 22

Role of SWOT Analysis in Crafting a Better Strategy u Two key parts of SWOT analysis è Drawing conclusions about a company’s overall situation and è Acting on the conclusions to l Better match a company’s strategy to its resource strengths and market opportunities, l Correct the important weaknesses, and l Defend against external threats 23 3 - 23

Fig. 3. 2: The Three Steps of SWOT Analysis 24 3 - 24

Are the Company’s Prices and Costs Competitive? u Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company analysis u Key analytical tools è Value chain analysis è Benchmarking 25 3 - 25

The Concept of a Company Value Chain u A company’s business consists of all activities undertaken in designing, producing, marketing, delivering, and supporting its product or service u A company’s value chain consists of a linked set of value-creating activities performed internally u The value chain contains two types of activities è Primary activities -- where most of the value for customers is created è Support activities -- facilitate performance of the primary activities 26 3 - 26

Characteristics of Value Chain Analysis u Combined costs of all activities in a company’s value chain define the company’s internal cost structure u Compares a firm’s costs activity by activity against costs of key rivals è From raw materials purchase to è Price paid by ultimate customer u Pinpoints which internal activities are a source of cost advantage or disadvantage 27 3 - 27

Fig. 3. 3: Representative Company Value Chain 28 3 - 28

Fig. 3. 4: Representative Value Chain for an Entire Industry 29 3 - 29

The Value Chain System for an Entire Industry u Assessing a company’s cost competitiveness involves comparing costs all along the industry’s value chain u Suppliers’ value chains are relevant because è Costs, quality, and performance of inputs provided by suppliers influence a firm’s own costs and product performance u Forward channel allies’ value chains are relevant because è Forward channel allies’ costs and margins are part of price paid by ultimate end-user è Activities performed affect end-user satisfaction 30 3 - 30

Example: Key Value Chain Activities Pulp & Paper Industry Timber farming Logging Pulp mills Papermaking 31 3 - 31

Example: Key Value Chain Activities Home Appliance Industry Parts and components manufacture Assembly Wholesale distribution Retail sales 32 3 - 32

Example: Key Value Chain Activities Soft-Drink Industry Processing of basic ingredients Syrup manufacture Bottling and can filling Wholesale distribution Advertising Albertson’s Retailing 33 3 - 33

Example: Key Value Chain Activities Computer Software Industry Programming Disk loading Marketing Distribution 34 3 - 34

Activity-Based Costing: A Key Tool in Analyzing Costs u Determining whether a company’s costs are in line with those of rivals requires è Measuring how a company’s costs compare with those of rivals activity-by-activity u Requires having accounting data that measures the cost of each value chain activity u Activity-based accounting systems provide data for determining costs for each relevant value chain activity 35 3 - 35

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Benchmarking Costs of Key Value Chain Activities u Focuses on cross-company comparisons of how certain activities are performed and the costs associated with these activities è è è è 37 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 3 - 37

Objectives of Benchmarking u Determine whether a company is performing particular value chain activities efficiently by studying practices and procedures used by other companies u 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” u Assess if company’s costs in performing particular value chain activities are in line with competitors u Learn how other firms achieve lower costs u Take action to improve company’s cost competitiveness 38 3 - 38

Ethical Standards in Benchmarking: Do’s and Don’ts u Avoid talk about pricing or competitively sensitive costs u Don’t ask rivals for sensitive data u Don’t share proprietary data without clearance u Have impartial third party assemble and present competitively sensitive cost data with no names attached u Don’t disparage a rival’s business to outsiders based on data obtained 39 3 - 39

What Determines Whether a Company Is Cost Competitive? u Cost competitiveness depends on how well a company manages its value chain relative to how well competitors manage their value chains u 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 of Suppliers 40 Internally Performed Activities, Costs, & Margins of Forward Channel Allies Buyer/User Value Chains 3 - 40

Options to Correct Internal Cost Disadvantages u Implement use of best practices throughout company u Eliminate some cost-producing activities altogether u u u 41 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 3 - 41

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Translating Performance of Value Chain Activities to Competitive Advantage u A company can create competitive advantage by managing its value chain to è Integrate knowledge and skills of employees in competitively valuable ways è Leverage economies of learning / experience è Coordinate related activities in ways that build valuable capabilities è Build dominating expertise in a value chain activity critical to customer satisfaction or market success 43 3 - 43

Fig. 3. 5: Translating Performance of Value Chain Activities into Competitive Advantage 44 3 - 44

How Strong Is the Company’s Competitive Position? u Overall competitive position involves answering two questions è How does a company rank relative to competitors on the important factors that determine market success? è Does a company have a net competitive advantage or disadvantage vis-à-vis major competitors? 45 3 - 45

Assessing a Company’s 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 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 46 3 - 46

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Why Do a Competitive Strength Assessment ? u Reveals strength of firm’s competitive position vis-à-vis key rivals u Shows how firm stacks up against rivals, measure- by-measure—pinpoints firm’s competitive strengths and competitive weaknesses u Indicates whether firm is at a competitive advantage / disadvantage against each rival u Identifies possible offensive attacks (pit company strengths against rivals’ weaknesses) u Identifies possible defensive actions (a need to correct competitive weaknesses) 49 3 - 49

What Strategic Issues Merit Managerial Attention? u 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” ? u Requires thinking strategically about è Pluses and minuses in the industry and competitive situation è 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! 50 3 - 50

Identifying the Strategic Issues u How to stave off market challenges from new u u u 51 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? 3 - 51

Stating the Issues Clearly and Precisely u A well-stated issue involves such phrases as è “How to ……. ? ” è “Whether to ……. ? ” è “What should be done about ……. ? ” u Issues need to be precise, specific, and “cut straight to the chase” u Issues on the “the worry list” raise questions about è What actions need to be considered è What to think about doing 52 3 - 52