Kabarak University

1. Kabarak University Strategic Analysis: Part 1 - Internal Scrutiny: Evaluating Company’s Resources and Competitive Position Lecturer : Dr Kamau

2. Learning Objectives • Understand how to evaluate company’s internal situation and capabilities and identify the resource strengths that will be key to company’s strategic approach. • Grasp how and why activities performed 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. Internal Analysis: Making Meaningful Comparisons 1. Comparison with past performance 4. Comparison with success factors in industry 2. Stages of industry evolution Perspectives to use 3. Benchmarking – comparison with competitors

4. Fig. 4.1: Identifying the Components ofa Single-Business Company’s Strategy

5. 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 • 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

6. Qualitative assessment –Is the strategy well-conceived? Covers all the bases? Internally consistent? Makes sense? Timely and in step with marketplace? 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 Wellthe Present Strategy Is Working

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, ROI, • 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. 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?

11. Company Situation Analysis& Analytic Tools • In probing for answers to these questions, four analytical tools : • SWOT analysis, • Value chain analysis, • Benchmarking, • Competitive strength assessment

12. SWOT Analysis Based on assumption an effective strategy derives from a sound “fit” between a firm’s internal resources and its external situation Numerous environmental opportunities A major favorable situation in a firm’s environment Major environmental threats A major unfavorable situation in a firm’s environment Substantial internal strengths A resource advantage relative to competitors and the needs of markets firm serves Critical internal weaknesses A limitation or deficiency in one or more resources or competencies relative to competitors

13. SWOT Analysis • SWOT analysis is an executive summary of the different elements of strategic analysis. Under SWOT, the detailed analysis of an organisation's external environmental and internal resource position is distilled and summarised into key factors. • Once the key SWOT elements have been identified, it can be productive to prepare a grid with strengths and weaknesses and opportunities and threats. • Identification of an organisation's situational position by means of a SWOT analysis is an important phase in prior to consideration of strategic options which is the subject of the next chapter. Appropriate strategies are likely to: • align opportunities and strengths • transform weaknesses, and • overcome threats

14. SWOT Analysis

15. 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 • 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

16. Identifying Resource Strengths and 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 e.g. low overall cost, market share, superior product, widen product line or geographical coverage than rivals etc. • Alliances or cooperative ventures with partners (e.g. with suppliers, distributors, access to valuable technologies etc) Resource strengths and competitivecapabilities arecompetitive assets!

17. 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 competitivenessand profitability e.g. 3M Corporation • A distinctive competence is a competitively valuable activity a company performs better than its rivals e.g.Toyota’s low cost, high quality manufacturing of automobiles “ Lean Production” is far superior to that of other automakers, Starbucks and innovative coffee drinks and inviting store ambience.

18. 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

19. 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, a core competence isknowledge-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 definite competitive asset

20. 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 • Capability to fill customer orders accurately and swiftly

21. # 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 resource source because it • Gives a company a competitively valuablecapability unmatched by rivals • Can underpin and add real punchto a company’s strategy • Is a basis for sustainable competitive advantage

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

23. Resource Based View (RBV)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 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 trumpedbythe different capabilities of rivals?

24. 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 deficienciesarecompetitive liabilities!

27. 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

28. 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

29. Role of SWOT Analysis inCrafting a Better Strategy • S W O T analysis involves more than just 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

30. Fig. 4.2: The Three Steps of SWOT Analysis

31. Value Chain Analysis: 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 situation analysis • Key analytical tools • Value chain analysis • Benchmarking

32. 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 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 • The value chain contains two types of activities • Primary activities (where most ofthe value for customers is created) • Support activities that facilitateperformance of the primary activities

33. What is Value Chain Analysis? • Focuses on how a business creates customer value by examining contributions of different internal activities to that value • Divides a business into a set of activities within the business • Starts with inputs a firm receives • Finishes with firm’s products or services and after-sales service to customers • Allows for better identification of a firm’s strengths and weaknesses since the business is viewed as a process

34. Fig. 4.3: A Representative Company Value Chain

35. Primary Activities Supply chain management Recipe development and testing Mixing and baking Packaging Sales and marketing Distribution Support Activities Quality control Human resource management Administration Example: Value Chain Activitiesfor a Bakery Goods Maker

36. Example Value Chain: Airline Costs

37. Primary Activities Merchandise selection and purchasing Store layout and product display Advertising Customer service Support Activities Site selection Hiring and training Store maintenance Administrative activities Example: Value Chain Activitiesfor a Department Store Retailer

38. Primary Activities Site selection and construction Reservations Operation of hotel properties Managing lineupof hotel locations Support Activities Accounting Hiring and training Advertising Building a brand and reputation Generaladministration Example: Value ChainActivities for a Hotel Chain

39. 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

40. Why Do Value Chains of Rivals Differ? • Several factors give rise to differencesin 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

41. The Value Chain System for 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 • Value chains of distributors and retailers arerelevant because • Their costs and profit margins represent “value added” and are part of the price paid by ultimate end-user • The activities they perform affect end-user satisfaction

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

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

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

45. 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

46. 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 cost of 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

48. Benchmarking Costs of Key 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

49. 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 to perform an activity at lower cost • Figure out what actions to take to improve a company’s own cost competitiveness

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