4 Evaluating a Chapter Title Companys Resources and

4 Evaluating a Chapter Title Company’s Resources and Competitive Position 15/e PPT Mc. Graw-Hill/Irwin Screen graphics created by: Jana F. Kuzmicki, Ph. D. Troy University-Florida Region © 2007 The Mc. Graw-Hill Companies, Inc. All rights reserved.

“Before executives can chart a new strategy, they must reach common understanding of the company’s current position. ” W. Chan Kim and Renee Mauborgne 4 -2

Chapter Roadmap u Question 1: How Well Is the Company’s Present Strategy Working? u Question 2: What Are the Company’s Resource Strengths and Weaknesses and Its External Opportunities and Threats? u Question 3: Are the Company’s Prices and Costs Competitive? u Question 4: Is the Company Competitively Stronger or Weaker than Key Rivals? u Question 5: What Strategic Issues and Problems Merit Front-Burner Managerial Attention? 4 -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 front-burner managerial attention? 4 -4

Fig. 4. 1: Identifying the Components of a Single-Business Company’s Strategy 4 -5

Question 1: How Well Is the Company’s Present Strategy Working? Key Considerations u Must begin by understanding what the strategy is è Identify competitive approach n Low-cost leadership n Differentiation n Focus on a particular market niche è Determine competitive scope n Broad or narrow geographic market coverage? n In how many stages of industry’s production/distribution chain does the company operate? è Examine è Identify recent strategic moves functional strategies 4 -6

Approaches to Assess How Well the Present Strategy Is Working u Qualitative assessment – Is the strategy wellconceived? è Covers all the bases? è Internally consistent? è Makes sense? è Timely and in step with marketplace? u Quantitative assessment – What are the results? 4 -7 è Is company achieving its financial and strategic objectives? è Is company an aboveaverage industry performer?

Key Indicators of How Well the Strategy 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. 4 -8

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Question 2: What Are the Company’s Strengths, Weaknesses, Opportunities and Threats ? u S W O T represents the first letter in è S trengths S W è W eaknesses è O pportunities O è T hreats T u For a company’s strategy to be well-conceived, it must be è Matched to its resource strengths and weaknesses è Aimed at capturing its best market opportunities and erecting defenses against external threats to its wellbeing 4 -11

Identifying Resource Strengths and Competitive Capabilities u. A strength is something a firm does well or an attribute that enhances its competitiveness è è è è 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 competitive capabilities are competitive assets! 4 -12

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 central (not peripheral or incidental) to a company’s competitiveness and profitability u. A distinctive competence is a competitively valuable activity a company performs better than its rivals 4 -13

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 4 -14

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 is knowledge-based, residing in people, not in assets on a balance sheet u. A core competence is typically the result of crossdepartment collaboration u. A core competence gives a company a potentially valuable competitive capability and represents a definite competitive asset 4 -15

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 u Better u Skills new/next-generation products to market after-sale service capability in manufacturing a high quality product u Capability to fill customer orders accurately and swiftly 4 -16

Distinctive Competence – A Competitively Superior Resource u. A distinctive competence is a competitively valuable activity that a company performs better than its competitors u. A distinctive competence is a competitively potent resource because it è Gives a company a competitively valuable capability unmatched by rivals #1 è Can underpin and add real punch to a company’s strategy è Is a basis for sustainable competitive advantage 4 -17

Examples: Distinctive Competencies Toyota Starbucks Low-cost, high-quality manufacturing of motor vehicles Innovative coffee drinks and store ambience 4 -18

Determining the Competitive Power of a Company Resource u 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 by the different capabilities of rivals? 4 -19

Test Your Knowledge A distinctive competence A. is a more important competitive asset than a core competence. B. represents uniquely strong capability relative to rival companies—it qualifies as a competitively superior resource strength with competitive advantage potential. C. is a competitively important value chain activity that a company performs better than its rivals. D. can underpin and add real punch to a company's strategy. E. All of the above. 4 -20

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! 4 -21

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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 4 -24

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 u Rise regulations 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 4 -25

Role of SWOT Analysis in Crafting a Better Strategy u S W O T analysis involves more than just developing the 4 lists of strengths, weaknesses, opportunities, and threats u The most important part of S W O T analysis is è Using the 4 lists to draw conclusions about a company’s overall situation è Acting on the conclusions to n Better match a company’s strategy to its resource strengths and market opportunities n Correct the important weaknesses n Defend against external threats 4 -26

Fig. 4. 2: The Three Steps of SWOT Analysis 4 -27

For Discussion: Your Opinion In doing SWOT analysis, why is it not sufficient just to compile 4 lists (one each for resource strengths, resource weaknesses, market opportunities, and external threats) and then move on? 4 -28

Question 3: 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 situation analysis u Key analytical tools è Value chain analysis è Benchmarking 4 -29

Concept: 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 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 u The value chain contains two types of activities è Primary activities (where most of the value for customers is created) è Support activities that facilitate performance of the primary activities 4 -30

Fig. 4. 3: A Representative Company Value Chain 4 -31

Example: Value Chain Activities for a Bakery Goods Maker Primary Activities Support Activities u Supply chain management u Quality control u Recipe development and testing u Human resource management u Mixing and baking u Packaging u Administration u Sales and marketing u Distribution 4 -32

Example: Value Chain Activities for a Department Store Retailer Primary Activities u u Support Activities Merchandise selection and purchasing Store layout and product display u Advertising u Customer service 4 -33 u Site selection u Hiring and training u Store maintenance u Administrative activities

Example: Value Chain Activities for a Hotel Chain Primary Activities u Site selection and construction u Reservations u Operation of hotel properties u Support Activities Managing lineup of hotel locations 4 -34 u Accounting u Hiring and training u Advertising u Building a brand reputation u General administration

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 4 -35

Why Do Value Chains of Rivals Differ? u u Several factors give rise to differences in value chains of rival companies è Different strategies è Different operating practices è Different technologies è Different degrees of vertical integration è Some companies may perform particular activities internally while others outsource them Differences among the value chains of competing companies complicate task of assessing rivals’ relative cost positions 4 -36

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, performance features, and quality of inputs provided by suppliers influence a firm’s own costs and product performance u Value chains of distributors and retailers are relevant because è Their costs and profit margins represent “value added” and are part of the price paid by ultimate end-user è The activities they perform affect end-user satisfaction 4 -37

Fig. 4. 4: Representative Value Chain for an Entire Industry 4 -38

Example: Value Chain Activities Pulp & Paper Industry Timber farming Logging Pulp mills Papermaking Distribution 4 -39

Example: Value Chain Activities Home Appliance Industry Parts and components manufacture Assembly Wholesale distribution Retail sales 4 -40

Example: Value Chain Activities Soft Drink Industry Processing of basic ingredients Syrup manufacture Bottling and can filling Wholesale distribution Advertising Retailing 4 -41 Albertson’s

Example: Value Chain Activities Computer Software Industry Programming Disk loading Marketing Distribution 4 -42

Developing Data to Measure a Company’s Cost Competitiveness u After identifying key value chain activities, the next step involves determining costs of performing specific value chain activities using activity-based costing u Appropriate degree of disaggregation depends on è Economics of activities è Value of comparing narrowly defined versus broadly defined activities u Guideline – Develop separate cost estimates for activities è Having different economics è Representing a significant or growing proportion of costs 4 -43

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 to measure cost of each value chain activity u Activity-based costing entails è Defining expense categories according to specific activities performed and è Assigning costs to the activity responsible for creating the cost 4 -44

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Benchmarking Costs of Key Value Chain Activities u Focuses on cross-company comparisons of how certain activities are performed and costs associated with these activities è Purchase of materials è Payment of suppliers è Management of inventories è Getting new products to market è Performance of quality control è Filling and shipping of customer orders è Training of employees è Processing of payrolls 4 -46

Objectives of Benchmarking u Identify best and most efficient means of performing various value chain activities u 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 u Learn what other firms do to perform an activity at lower cost u Figure out what actions to take to improve a company’s own cost competitiveness 4 -47

Ethical Principles in Benchmarking u Avoid actions implying an interest u Treat benchmarking interchange as confidential u Use information obtained only for stated purposes u Respect corporate culture of partner companies u Use benchmarking contacts designated by partner company u Be fully prepared for each exchange u Provide partners with agenda and questionnaire prior to exchange u Follow through with commitments to partner in a timely manner u Understand how partner wants information provided used in Restraint of trade è Market and/or customer allocation schemes è Price fixing è Bribery è u Refrain from acquiring trade secrets by any means viewed as improper u Be willing to provide same type of information to a benchmarking partner u Communicate early to clarify expectations and avoid misunderstandings u Be honest and complete 4 -48

What Determines If 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 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 allies Activities, Costs, & Margins of Suppliers Internally Performed Activities, Costs, & Margins of Forward Channel Allies 4 -49 Buyer/User Value Chains

Options to Correct Internal Cost Disadvantages u Implement use of best practices throughout company u Eliminate some cost-producing activities altogether by revamping value chain system u Relocate high-cost activities to lower-cost geographic areas u See if high-cost activities can be performed cheaper by outside vendors/suppliers u Invest in cost-saving technology u Innovate around troublesome cost components u Simplify product design u Make up difference by achieving savings in backward or forward portions of value chain system 4 -50

Options to Correct a Supplier-Related Cost Disadvantage u Pressure u Switch suppliers for lower prices to lower-priced substitutes u Collaborate closely with suppliers to identify mutual cost-saving opportunities u Arrange for just-in-time deliveries from suppliers to lower inventory and internal logistics costs u Integrate backward into business of high-cost suppliers 4 -51

Options to Correct a Cost Disadvantage Associated With Activities of Forward Channel Allies u Pressure dealer-distributors and other forward channel allies to reduce their costs to make the final price to buyers more competitive with prices of rivals u Work closely with forward channel allies to identify win-win opportunities to reduce costs u Change to a more economical distribution strategy è Switch to cheaper distribution channels è Integrate forward into company-owned retail outlets 4 -52

Test Your Knowledge For a company to translate performance of value chain activities into competitive advantage, it A. must (1) develop core competencies and maybe a distinctive competence that rivals don’t have or can’t quite match and that are instrumental in helping it deliver attractive value to customers or (2) be more cost efficient in how it performs value chain activities such that it has a low-cost advantage. B. has to develop more competencies than rivals. C. must be more adept than rivals in using benchmarking and activity-based costing. D. has to position itself in the strategic group where profit margins are highest. E. Must adopt more best practices than rival firms. 4 -53

Translating Performance of Value Chain Activities into Competitive Advantage u. 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 capabilities that rivals don’t have or can’t match Option 2: Do an overall better job than rivals of lowering combined costs of performing all the value chain activities 4 -54

Fig. 4. 5: Translating Company Performance of Value Chain Activities into Competitive Advantage 4 -55

Question 4: Is the Company Stronger or Weaker than Key Rivals? u Overall competitive position involves answering two questions è How does a company rank relative to competitors on each important factor that determines market success? è Does a company have a net competitive advantage or disadvantage vis-à-vis major competitors? 4 -56

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 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 4 -57

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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, measureby-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) 4 -60

Test Your Knowledge Which of the following statements is false? A. The higher a company’s costs are above those of close rivals, the more competitively vulnerable it becomes. B. Because the value chains of rival companies tend to be quite similar, costs outside a company’s own value chain do not affect whether it is at a cost advantage or disadvantage vis-à-vis key rivals. C. A company’s cost competitiveness depends not only on the costs of internally performed value chain activities but also on the costs of activities performed by its suppliers and forward channel allies. D. The stronger a company’s financial performance and market position, the more likely it has a well-conceived, well-executed strategy. E. A competence is something a company is good at doing whereas a core competence is a proficiently performed internal activity that is central to a company’s strategy and competitiveness. 4 -61

Question 5: What Strategic Issues Merit Managerial Attention? u Based on results of both industry and competitive analysis and an evaluation of a company’s competitiveness, what items should be on a 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! 4 -62

Stating the Issues Clearly and Precisely u. A well-stated issue involves such phrases as è “How to. . . ? ” è “Whether è “What to. . . ? ” 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 4 -63

Identifying the Strategic Issues: Some Possibilities How to stave off market challenges from new foreign competitors? u How to combat price discounting of rivals? u How to reduce a company’s high costs? u How to sustain a company’s present growth in light of slowing buyer demand? u Whether to expand a company’s product line? u Whether to acquire a rival firm? u Whether to expand into foreign markets rapidly or cautiously? u What to do about aging demographics of a company’s customer base? u 4 -64

For Discussion: Your Opinion Why is it important for company managers to develop a “worry list” of strategic issues and problems that they need to address and to resolve? Why can’t managers just skip this step and go directly to the task of choosing what strategy to employ? 4 -65