Crafting and Executing Strategy Ch 4

1. Chapter 4: Evaluating a Company’s Resources and Competitive Position Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University

2. Chapter Learning Objectives • Understand how to evaluate a company’s internal situation and capabilities and identify the resource strengths capable of becoming the cornerstone of the company’s strategic approach. • Grasp how and why activities performed internally by a company and those performed externally by its suppliers and forward channel allies determine a company’s cost structure and ability to compete successfully. • Learn how to evaluate a company’s competitive strength relative to key rivals. • Understand the role and importance of industry and competitive analysis and internal situation analysis in identifying strategic issues company managers must address.

3. 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?

4. 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 competitivelystronger or weaker than key rivals? 5. What strategic issues meritfront-burner managerial attention?

5. Figure 4.1: Identifying Components of a Single-Business Company’s Strategy 4-5

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

7. 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, EPS, and ROE • Overall financial strength and credit rating • Efforts at continuous improvement activities • Trend in stock price • Image and reputation with customers • Leadership role(s) – Technology,product quality, innovation, etc.

8. S W O T Question 2: What Are the Company’s Strengths, Weaknesses, Opportunities and Threats ? • S W O T represents the first letter in • Strengths • Weaknesses • O pportunities • Threats • 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

9. Identifying Resource Strengthsand Competitive Capabilities • A strength is something a firm does well or an attribute that enhances its competitiveness • 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 competitivecapabilities are competitive assets!

10. Competencies vs. Core Competencies vs. Distinctive Competencies • A competence is the product of organizational learning and experience and represents real proficiencyin performing an internal activity • A core competence is a well-performedinternal activity central(not peripheral or incidental) to a company’s competitivenessand profitability • A distinctive competence is a competitively valuable activity acompany performs better than its rivals

11. Company Competencies and 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

12. 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, acore competenceisknowledge-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 definitecompetitive asset

13. # 1 Distinctive Competence –A Competitively Superior Resource • A distinctive competence is a competitively valuable activity that a company performs better than its competitors • A distinctive competence is a competitively potent resourcesource because it • Gives a company a competitively valuablecapability unmatched by rivals • Canunderpin and add real punchto a company’s strategy • Is a basis for sustainable competitive advantage

14. Determining the CompetitivePower 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 really competitively superior? 2. Is the resource rare – is it something rivals lack? 3.Is the resource hard to copy? 4.Can the resource be trumpedbythe different capabilities of rivals?

15. What Is a Resource-Based Strategy? • Companies with competitively valuable resource strengths and competenciesoften deploy these capabilities to • Boost the competitive powerof their overall strategy • Bolster their position in the marketplace • Resource-based strategies • Attempt to exploit company resources to offer value to customers in ways rival cannot match • Can focus on eroding the competitive potency of a rival by developing different resources that effectively substitute for the strengths of the rival

16. Identifying Resource Weaknessesand Competitive Deficiencies • A weaknessis 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!

17. Identifying a Company’sMarket Opportunities • Opportunities most relevantto acompany are those offering • Good matchwith its financial andorganizational resource capabilities • Best prospectsfor profitable long-term growth • Potentialforcompetitive advantage

18. Identifying External Threats Some possibilities: • 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 and/or burdensome government policies

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

20. Figure 4.2: The Three Steps of SWOT Analysis 4-20

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

22. 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 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 – Where most ofthe value for customers is created • Support activities – Facilitateperformance of primary activities

23. Figure 4.3: A Representative Company Value Chain 4-23

24. Characteristics of Value Chain Analysis • Combined costs of all activities in a company’s value chain define a company’s internal cost structure • Comparesa 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

25. Why Do Value Chains of Rivals Differ? • Several factors give rise todifferencesin value chains of rival companies • Different strategies • Different operating practices • Different technologies • Different degrees of vertical integration • Some companies may perform particular activities internally while others outsource them • Differences among the value chains of competing companies complicate task of assessingrivals’ relative cost positions

26. The Value Chain Systemfor an Entire Industry • Assessing a company’s cost competitiveness involves comparing costs all along an industry’s value chain • Suppliers’ value chains are relevantbecause • Costs, performance features, and quality of inputs provided by suppliers influence a firm’s own costs and product performance • Value chains of distributors and retailers are relevantbecause • Their costs and profit marginsrepresent “value added” and are partof the price paid by ultimate end-user • Activities they perform affectend-user satisfaction

27. Figure 4.4: Representative Value Chain for an Entire Industry 4-27

28. 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 accountingdata to measure cost of eachvalue chain activity • Activity-based costing entails • Defining expense categories accordingto specific activities performed and • Assigning costs to the activityresponsible for creating the cost

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

30. 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

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

32. 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 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

33. Options to CorrectInternal Cost Disadvantages • Implement use of best practices throughout company • Eliminate some cost-producing activitiesaltogether by revamping value chain system • Relocate high-cost activities tolower-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

34. Options to Correct aSupplier-Related Cost Disadvantage • Pressure suppliers for lower prices • Switch to lower-priced substitutes • Collaborate closely with suppliers to identify mutual cost-saving opportunities • Arrange for just-in-time deliveries from suppliers to lower inventory and internal logistics costs • Integrate backward into businessof high-cost suppliers

35. Options to Correct a Cost Disadvantage Associated With Activities of Forward Channel Allies • 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 • Work closely with forwardchannel allies to identify win-win opportunities to reduce costs • Change to a more economical distribution strategy • Switch to cheaper distribution channels • Integrate forward into company-owned retail outlets

36. Translating Performance of Value Chain Activities into Competitive Advantage • A company can create competitive advantage by out-managing rivals in performing value chain activitiesin either/both of two ways Option 1: Develop competencies and capabilitiesthat rivals don’t have or can’t match and thereby create a resource or capability-based competitive advantage Option 2: Perform value chain activities at a lower overall cost than rivals and thereby create a cost-based competitive advantage

37. Figure 4.5: Translating Company Performance of Value Chain Activities into Competitive Advantage 4-37

38. Question 4: Is the Company Strongeror Weaker than Key Rivals? • Whether a company is competitively stronger or weaker than key rivals hinges on the answers to two questions • How does the company rankrelative to competitors on each important factor that determines market success? • Does the company have a net competitive advantage or disadvantagevis-à-vis major competitors?

39. 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 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 strength of firm

40. Table 4.4: Illustrations of Unweightedand Weighted Strength Assessments 4-40

41. 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)

42. Question 5: What Strategic IssuesMerit Managerial Attention? • Based on results of both industry and competitive analysis and an evaluationof a company’s competitiveness,what items should be ona company’s “worry list”? • Requires thinking strategically about • Pluses and minuses in the industryand competitive situation • 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!

43. A Clear Grasp of the Issues Is a Prerequisite to Effective Action • Issues are best couched in such phrases as • “How to . . . ?” • “Whether to . . . ?” • “What should be done about . . . ?” • Issues need to be precisely stated and “cut straight to the chase” • The issues on management’s“worry list” represent an agenda for action Sharp, clear understanding of the issues is a big assist in figuring out what to do to address and resolve them !

44. Identifying the Strategic Issues: Some Possibilities • How to stave off market challenges from new foreign competitors? • How to combat price discounting of rivals? • How to reduce a company’s high costs? • How to sustain a company’s present growthin light of slowing buyer demand? • Whether to expand a company’s product line? • Whether to acquire a rival firm? • Whether to expand into foreignmarkets rapidly or cautiously? • What to do about aging demographicsof a company’s customer base?