Analyzing a Company’s Resources and Competitive Position

2. 4 Chapter Analyzing a Company’s Resources and Competitive Position Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy State University-Florida and Western Region

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

5. Company Situation Analysis:The Key Questions 1. How well is the company’spresent strategy working? 2. What are the company’s resourcestrengths and weaknesses and itsexternal opportunities and threats? 3. Are the company’s prices andcosts competitive? 4. Is the company competitively strongeror weaker than key rivals? 5. What strategic issues meritfront-burner managerial attention?

6. Fig. 4.1: Identifying the Components of a Single-Business Company’s Strategy

7. Q #1: How Well Is the Company’s Present Strategy Working? Key Issues • Identify competitive approach • Low-cost leadership • Differentiation • Focus on a particular market niche • Determine competitive scope • Geographic market coverage • Operating stages in industry’s production/distribution chain • Examine recent strategic moves • Identify functional strategies

8. Qualitative assessment –What is the strategy? Completeness Internal consistency Rationale Relevance 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 Well the Present Strategy Is Working

9. Key Indicators of How Wellthe 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.

10. S W O T Q #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

11. Identifying Resource Strengthsand Competitive Capabilities • A strength is something a firm does well or an attribute that enhances its competitiveness • Valuable competencies or know-how • Valuable physical assets • Valuable human assets • Valuable organizational assets • Valuable intangible assets • Important competitive capabilities • An attribute that places a company in a position of market advantage • Alliances or cooperative ventures with partners Resource strengths and competitivecapabilities are competitive assets!

12. 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 competitiveness and profitability • A distinctive competence is a competitively valuable activity a company performs better than its rivals

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

14. Core Competencies -- AValuable Company Resource • A competence becomes a core competence when the well-performed activity is central to a company’s competitiveness and profitability • Often, acore competence results from collaboration among different parts of a company • Typically, core competencies reside in a company’s people, not in assets on a balance sheet • A core competence gives a company apotentially valuable competitive capabilityand represents a definite competitive asset

15. 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 • System to fill customer orders accurately and swiftly

16. # 1 Distinctive Competence -- ACompetitively Superior Resource • A distinctive competence is a competitively significant activity that a company performs better than its competitors • A distinctive competence • Represents a competitivelyvaluablecapabilityrivals do not have • Presents attractive potential for being a cornerstone of strategy • Can provide acompetitive edge in the marketplace —because it represents a competitively superior resource strength

17. Examples: Distinctive Competencies • Sharp Corporation • Expertise in flat-panel display technology • Toyota and Honda • Low-cost, high-quality manufacturingcapability and short design-to-market cycles • Intel • Ability to design and manufactureever more powerful microprocessors for PCs • Wal-Mart • Low-cost distribution and use ofstate-of-the-art retail technology

18. Determining the CompetitiveValue 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.Does the resource have staying power–is itdurable? 3.Is the resource really competitively superior? 4.Can the resource be trumpedby the different capabilities of rivals?

19. Identifying Resource Weaknessesand 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 • Lack of important physical,organizational, or intangible assets • Missing capabilities in key areas Resource weaknesses and deficienciesare competitive liabilities!

22. 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

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

24. Role of SWOT Analysis inCrafting a Better Strategy • The most important part of S W O T analysis is not developing the 4 lists of strengths, weaknesses, opportunities, and threats, but rather • Using the 4 lists to draw conclusionsabout a company’s overall situation and • Acting on the conclusions to • Better match a company’s strategy to itsresource strengths and market opportunities, • Correct the important weaknesses, and • Defend against external threats

25. Fig. 4.2: The Three Stepsof SWOT Analysis

26. Q #4: 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 • Value chain analysis • Benchmarking

27. The Concept of aCompany Value Chain • A company’s business consists of all activities undertaken in designing, producing, marketing, delivering, and supporting its product or service • A company’s value chain consists of a linked set of value-creating activities performed internally • The value chain contains two types of activities • Primary activities – where most ofthe value for customers is created • Support activities – facilitateperformance of the primary activities

28. Fig. 4.3: RepresentativeCompany Value Chain

29. 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

30. Why Do ValueChains of Rivals Differ? • Several factors can cause differencesin value chains of rival companies • Internal operations • Strategy • Approaches used in execution of the strategy • Underlying economics of the activities • Differences complicate task of assessingrivals’ relative cost positions

31. The Value Chain Systemfor 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 • Forward channel allies’ value chains are relevant because • Costs and margins are part of price paidby ultimate end-user • Activities performed affect end-user satisfaction

32. Fig. 4.4: Representative Value Chain for an Entire Industry

33. Example: Value Chain Activities Pulp & Paper Industry Timber farming Logging Pulp mills Papermaking Distribution

34. Example: Value Chain Activities Home Appliance Industry Parts and components manufacture Assembly Wholesale distribution Retail sales

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

36. Example: Value Chain Activities Software Computer Industry Programming Disk loading Marketing Distribution

37. Developing Data to Measure a Company’s Cost Competitiveness • After identifying key value chain activities, the next step involves breaking down departmental cost accounting data into costs of performing specific activities • Appropriate degree of disaggregation depends on • Economics of activities • Value of comparing narrowly definedversus broadly defined activities • Guideline – Develop separate cost estimates for activities • Having different economics • Representing a significant or growing proportion of costs

38. Activity-Based Costing: A KeyTool 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 costof each value chain activity • Activity-based costing entails • Defining expense categories accordingto specific activities performed and • Assigning costs to the activityresponsible for creating the cost

40. Benchmarking Costs ofKey Value Chain Activities • 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

41. Objectives of Benchmarking • Identify best practices in performing an activity • Understand the best practices in performingan activity – learn what is the “best” wayto do a particular activity from thosedemonstrating they are “best-in-world” • Learn how other firms achieve lower costs • Take action to improve company’s cost competitiveness

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

43. Activities, Costs, & Margins of Suppliers Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Forward Channel Allies Buyer/User Value Chains What Determines if aCompany 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 costs are out-of-line, 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

44. Options to CorrectInternal Cost Disadvantages • Implement use of best practices throughout company • Eliminate some cost-producing activities altogether by revamping value chain system • Relocate high-cost activities to lower-cost geographic areas • See if high-cost activities can be performedcheaper 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

46. Translating Performance of Value Chain Activities to Competitive Advantage • A company can create competitive advantage by managing its value chain to • Integrate knowledge and skills of employees in competitively valuable ways • Leverage economies of learning / experience • Coordinate related activities in waysthat build valuable capabilities • Build dominating expertisein a value chain activity criticalto customer satisfaction or market success

47. Fig. 4.5: Translating Performance of Value Chain Activities into Competitive Advantage

48. Q. #4: Is the Company Stronger or Weaker than Key Rivals? • Overall competitive position involvesanswering two questions • How does a company rankrelativeto competitors on each importantfactor that determines market success? • Does a company have a netcompetitive advantage or disadvantagevis-à-vis major competitors?

49. 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