Evaluating Company Resources and Competitive Capabilities

1. Evaluating Company Resources and Competitive Capabilities Chapter 4

2. “Quote” “Understand what really makes a company ‘tick’.” Charles R. Scott “If a company is not ‘best in world’ at a critical activity, it is sacrificing competitive advantage by performing that activity with its existing technique.” James Brian Quinn • The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill

3. Chapter Outline • How Well the Company’s Present Strategy Is Working • SWOT Analysis • Resource Strengths and Weaknesses • Opportunities and Threats • Strategic Cost Analysis and Value Chains • Assess a Firm’s Competitive Position • Identify Strategic Issues

4. Primary Activities and Costs Purchased Supplies and Inbound Logistics Operations Distribution And Outbound Logistics Sales and Marketing Service Profit Margin Product R&D, Technology, Systems Development Support Activities and Costs Human Resources Management General Administration Figure 4.2: Typical Company Value Chain

5. Activities, Costs, & Margins of Suppliers Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners Buyer or End User Value Chains Figure 4.3: The Value Chain System for an Entire Industry A Company’s Own Value Chain Supplier Value Chains Forward Channel Value Chains Internally Performed Activities, Costs, & Margins

6. Company Situation Analysis:The Key Questions 1.How well is firm’s present strategy working? 2.What are the firm’s resource strengths and weaknesses and its external opportunities and threats? 3.Are firm’s prices and costs competitive? 4.How strong is firm’s competitive position relative to rivals? 5.What strategic issues does the firm face?

7. Question 1: How Well is thePresent Strategy Working? • What are some aspects of a firm’s current business level strategy that should be examined when evaluating the effectiveness of a particular strategy? • What are some possible measures used to evaluate a strategy? • It is important to understand TRUE FALSE functional strategies when evaluating the effectiveness of the business strategy.

8. Question 2: What Are the Firm’s Strengths and Weaknesses? • What is the definition of a firm’s strength? • What is the definition of a firm’s weakness? • A firm’s brand name can be a True False a strength.

9. Question 2: What Are the Firm’s Strengths and Weaknesses ? • Core competencies develop True False instantly. • When does a resource/competency provide for a sustainable competitive advantage? • What is the difference between a core competency • A firm’s particular distinctive True False competencywill alwaysprovide a firm with a competitive advantage.

10. Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage Costly to Imitate Nonsub-stitutable Competitive Consequences Performance Implications Valuable Rare Below Average Returns Competitive Disadvantage NO NO NO NO Competitive Parity Average Returns YES NO NO YES/NO Temporary Competitive Advantage Aver./Above Average Returns YES YES NO YES/NO Sustainable CompetitiveAdvantage Above Average Returns YES YES YES YES UNDERSTAND WHY EACH LEADS TO DIFFERENT PERFORMANC LEVELS)

11. Resources Distinctive Competence Superior Profits Capabilities Competency and Business Strategy Differentiation • Superior • Efficiency • Quality • Innovation • Customer • responsiveness Value Creation Low Cost

12. Examples: Distinctive Competencies • Sharp Corporation • Expertise in flat-panel display technology • Toyota, Honda, Nissan • Low-cost, high-quality manufacturing capability and short design-to-market cycles • Intel • Ability to design and manufacture ever more powerful microprocessors for PCs • Motorola • Defect-free manufacture (six-sigma quality) of cell phones

13. Question 2a: What are the external opportunities and threats? • For a company’s strategy to be well-conceived, it must be matched toboth • Resource strengths and weaknesses • Best market opportunities and externalthreats to its well-being • Is every industry opportunity an opportunity that every firm in the industry is equipped to pursue? • Must every industry threat be addressed by a firm? • What is the purpose of doing a SWOT analysis?

14. Potential Resource Strengths Potential Resource Weaknesses Potential External Opportunities Potential External Threats • Powerful strategy • Strong financial condition • Strong brand name image/reputation • Widely recognized market leader • Proprietary technology • Cost advantages • Strong advertising • Product innovation skills • Good customer service • Better product quality • Alliances or JVs • No clear strategic direction • Obsolete facilities • Weak balance sheet; excess debt • Higher overall costs than rivals • Missing some key skills/competencies • Subpar profits • Internal operating problems . . . • Falling behind in R&D • Too narrow product line • Weak marketing skills • Serving additional customer groups • Expanding to new geographic areas • Expanding product line • Vertical integration • Acquisition of rivals • Alliances or JVs to expand coverage • Openings to exploit new technologies • Entry of potent new competitors • Loss of sales to substitutes • Slowing market growth • Adverse shifts in exchange rates & trade policies • Costly new regulations • Vulnerability to business cycle • Growing leverage of customers or suppliers • Reduced buyer needs for product • Demographic changes Adapted from Table 4.1: SWOT Analysis -What to Look For

15. Strategic Management Principle A company is well-advised to pass on a particular market opportunity unless it has or can build the resource capabilities to capture it!

16. Question 3: Are the Company’sPrices and Costs Competitive? • Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company analysis • Key analytical tools • Strategic cost analysis • Value chain analysis • Benchmarking

17. Question 3: Are the Company’sPrices and Costs Competitive? • What factors are part of a firm’s cost structure? • When is it justifiable to have costs that are higher than competitors? • Would you expect a firm with a higher product price to follow a differentiation or low cost strategy? • Do firms in the same industry perform the value chain activities in the same manner?

18. What is Strategic Cost Analysis? • Focuses on a firm’s costsrelative to its rivals • Compares a firm’s costs activity by activity against costs of key rivals • From raw materials purchase to • Price paid by ultimate customer • Pinpoints which internal activities are a source of cost advantage or disadvantage

19. What Determines Whether aCompany is Cost Competitive? • A company’scost competitiveness depends on how well it manages its value chain relative to how well competitors manage their value chains • Where in the value chain should a company look to reduce its costs?

20. Strategic Cost Analysis • What are some things that firms in a industry can do to reduce their suppliers’ costs? • What are some things a firm can do to improve costs in the forward activities of the value chain? • What are some things a firm can do to improve its internal costs? • What is benchmarking?

21. Question 4: How Strong is the Company’s Competitive Position? • The strength of a company’s competitive position in the marketplace hinges on • Whether firm’s position can be expected to improve or deteriorate if present strategy is continued • How firm ranks relative to key rivals on each industry KSF and relevant measure of competitive strength • Whether firm has a sustainable competitive advantage or finds itself at disadvantage relative to certain rivals • Ability of firm to defend its position in light of • Industry driving forces • Competitive pressures • Anticipated moves of rivals

22. Assessing a Company’s Competitive Strength versus 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 unweightedrating 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.Determine whether firm enjoys a competitive advantage or suffers from a competitive disadvantage based on the overall strength ratings

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

24. Identifying the Strategic Issues • Is the present strategy adequate in light of competitive pressures and driving forces? • Is the strategy well-matched to the industry’s future key success factors? • Does the company need new or different resource strengths and competitive capabilities? • Does present strategy adequately protect against external threats and resource deficiencies? • Is firm vulnerable to competitive attack by rivals? • Where are strong/weak spots in present strategy?