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4
chapter
EVALUATING
A COMPANYS
RESOURCES,
COST POSITION, AND
COMPETITIVENESS
Copyri ght 2013 by The McGraw-H il l Companies, In c. All ri ghts reserved.McGraw-Hill/Irwin
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4-2
LO1Learn how to assess how well a companys
current strategy is working.
LO2Understand why a companys resources and
capabilities are central to its strategic approach
LO3Grasp activities that determine a companyscost structure and the value it provides to
customers.
LO4Learn how to evaluate a companys
competitive strength relative to key rivals
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4-3
Where Are We Now?
Question 1 How well is the firms strategy working?
Question 2What are the firm
s competitively important
resources and capabilities?
Question 3Are the firm
s cost structure and customer
value proposition competitive?
Question 4Is the firm competitively stronger or weaker
than key rivals?
Question 5What strategic issues and problems merit
front-burner managerial attention?
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Question 1: How Well Is the Company
s
Strategy Working?
The two best indicators of how well a firm
s
strategy is working are:
Whether the firm is recording gains in financial
strength and profitability.
Whether the firms competitive strength and market
standing is improving.
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Strategy Performance Indicators
Trends in the firm
s sales and earnings growth. Trends in the firms stock price.
The firms overall financial strength.
The firms customer retention rate.
The rate at which new customers are acquired.
Changes in the firms image and reputation with
customers.
Evidence of improvement in internal processes
such as defect rate, order fulfillment, delivery times,
days of inventory, and employee productivity.
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Question 2: What Are the Company
s
Competitively Important Resources
and Capabilities?
A company
s strategy and business model:
Must be well-matched to its collection of resources
and capabilitiesIs strengthened when exploiting resources that are
competitively valuable, rare, hard to copy, and not
easily trumped by rivalsequivalent substitute
resources
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Identifying Competitively Important
Resources and Capabilities
Common types of valuable resources and
competitive capabilities include:
Tangible assets (Physical, financial, technological,
organizational)intangible assets (human and intellectual, Brand and
reputation, relationships, culture)
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Core Concept
4-8
A resourceis a competitive asset that
is owned or controlled by a firm; a
capabilityis the capacity of a firm tocompetently perform some internal
activity. Capabilities are developed
and enabled through the deploymentof a firms resources.
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Determining the Competitive Power of a
Company
s Resources and Capabilities
Can it be trumped by substitute
resources
and competitive capabilities?
competitively valuable?
hard to copy or imitate?
rare?
Competitive
Power Tests
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Core Concept
4-10
A core competence is a proficiently performed
internal activity that is central to a companys
strategy and competitiveness.
A core competence that is performed with a
very high level of proficiency is referred to as
a distinctive competence.
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Core Concept
4-11
Companies that lack a stand-alone resourcethat is competitively powerful may
nonetheless develop a competitive advantage
through resource bundles that enable the
superior performance of important cross-
functional capabilities.
Rather than try to match the resources
possessed by a rival firm, a firm may developentirely different resources that substitutefor
the strengths of the rival.
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A Company
s Resources and
Capabilities Must Be Managed
DynamicallyManagement
s organization-building
challenge has two elements:
1. Attending to ongoing recalibration of existingcapabilities and resources
2. Watch for opportunities to develop totally new
capabilities for delivering better customer value
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Core Concept
4-13
A dynamic capability is developed when a
company has become proficient in modifying,
upgrading, or deepening its resources and
capabilities to sustain its competitiveness andprepare it to seize future market opportunities
and nullify external threats to its well-being.
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Are Company Resources and Capabilities
Sufficient to Allow It to Seize Market
Opportunities and Nullify External Threats?
SWOTrepresents the first letter in:
Strengths Weaknesses Opportunities Threats
A well-conceived strategy is:
Matched to the firms resource strengths and
weaknesses
Aimed at capturing the firms best market
opportunities and defending against external
threats to its well-being
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Core Concept
4-15
SWOT analysis is a simple but powerful
tool for sizing up a firms internal strengths
and competitive deficiencies, its marketopportunities, and the external threats to its
future well-being.
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TABLE 4.2 Factors to Consider When Identifying a Companys
Strengths, Weaknesses, Opportunities, and Threats
Potential Internal Strengths and Competitive CapabilitiesCore competencies in ____ .
A strong financial condition; ample financial resources to grow the business.
Strong brand name image/company reputation.
Economies of scale and/or learning and experience curve advantages over rivals.
Proprietary technology/superior technological skills/important patents.Cost advantages over rivals.
Product innovation capabilities.
Proven capabilities in improving production processes.
Good supply chain management capabilities.
Good customer service capabilities.Better product quality relative to rivals.
Wide geographic coverage and/or strong global distribution capability.
Alliances/joint ventures with other firms that provide access to valuable technology,
competencies, and/or attractive geographic markets.
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Identifying Resource Weaknesses
and Competitive Deficiencies
A weaknessor compet it ive def ic iency is
something a firm lacks or does poorly or
a condition that puts it at a disadvantage
in the marketplace such as:Deficiencies in competitively important physical,
organizational, or intangible assets
Missing or competitively inferior capabilities
in key areas
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TABLE 4.2 Factors to Consider When Identifying a Companys
Strengths, Weaknesses, Opportunities, and Threats
Potential Internal Weaknesses and Competitive DeficienciesNo clear strategic direction.
No well-developed or proven core competencies.
A weak balance sheet; burdened with too much debt.
Higher overall unit costs relative to key competitors.
A product/service with features and attributes inferior to those of rivals.
Too narrow a product line relative to rivals.
Weak brand image or reputation.
Weaker dealer network than key rivals.
Behind on product quality, R&D, and/or technological know-how.Lack of management depth.
Short on financial resources to grow the business and pursue promising
initiatives.
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TABLE 4.2 Factors to Consider When Identifying a Companys
Strengths, Weaknesses, Opportunities, and Threats
Potential Market OpportunitiesServing additional customer groups or market segments.
Expanding into new geographic markets.
Expanding the firms product line to meet a broader range of
customer needs.
Utilizing existing company skills or technological know-how to enter
new product lines or new businesses.
Falling trade barriers in attractive foreign markets.
Acquiring rival firms or companies with attractive technological
expertise or capabilities.
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Identifying a Company
s
Market Opportunities
Opportunities that are most relevant
to a firm are those offering:
Good match with its financial and
organizational resource and capabilities
The best prospects for growth and profitability
The most potential for competitive advantage
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TABLE 4.2 Factors to Consider When Identifying a Companys
Strengths, Weaknesses, Opportunities, and Threats
Potential External Threats to a Company
s Future ProspectsIncreasing intensity of competition among industry rivalsmay squeeze profit
margins.
Slowdowns in market growth.
Likely entry of potent new competitors.
Growing bargaining power of customers or suppliers.
A shift in buyer needs and tastes away from the industrys product.
Adverse demographic changes that threaten to curtail demand for the
industrys
product.
Vulnerability to unfavorable industry driving forces.
Restrictive trade policies on the part of foreign governments.
Costly new regulatory requirements.
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The Value of a SWOT Analysis
The value of a SWOT analysis is in:Drawing conclusions from the SWOT listings
about the firms overall situation.
Translating these conclusions into strategic
actions to better match the firms strategy to its
strengths and market opportunities, correcting
problematic weaknesses, and defending against
worrisome external threats.
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4-23
Question 3: Are the Company
s Cost
Structure and Customer Value
Proposition Competitive?
Why are cost structure and value important?
Assessing whether a firms costs and value
proposition are competitive is crucial, especially so in
industries where price competition is prevalent.
Useful analytical tools:
Value chain analysis
Benchmarking
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Core Concept
4-24
A companys value chain
identifies the primary activities that
create customer value and relatedsupport activities.
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FIGURE 4.1 A Representative Company Value Chain
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Benchmarking: A Tool for Assessing
Whether a Company
s Value Chain
Activities Are Competitive
Entails making cross-company comparisons
of how certain activities are performed and
the costs associated with:
How materials are purchased
How inventories are managed
How products are assembled
How customer orders are filled and shippedHow maintenance is performed
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Core Concept
4-27
Benchmarkingis a potent tool for learning
which firms are best at performing particular
activities and then using their techniques (or
best practices) to improve the cost andeffectiveness of a firms own internal activities.
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FIGURE 4.2 Representative Value Chain for an Entire Industry
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Strategic Options for Remedying
a Cost or Value Disadvantage
There are three main areas of a firm
s
overall value chain where cost differences
occur:
Activities performed by suppliers
A firms own internal activities
Activities performed by forward channel allies
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Remedying an Internal Cost
or Value Disadvantage
1. Implement the use of best practices throughout the firm
2. Eliminate some cost-producing activities by revamping value
chain
3. Relocate high-cost activities to lower-cost geographic areas
4. See if certain internally performed activities can be
outsourced to vendors or contractors
5. Invest in productivity-enhancing, cost-saving technology
6. Find ways around activities or items where costs are high
7. Redesign the product and/or its components to reducemanufacturing or assembly costs
8. Make up differences by reducing costs in supplier or forward
portions of value chain system
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Remedying a Supplier-Related
Cost Disadvantage
Pressure suppliers for lower prices
Switch to lower-priced substitutes
Collaborate closely with suppliers to identify
mutual cost-saving opportunities
Integrate backward into business of high-
cost suppliers
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Remedying a Cost Disadvantage
Associated with Activities
Performed by Forward Channel Allies
Pressure dealer-distributors and other
forward channel allies to reduce their costs
and markupsWork with forward channel 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
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Question 4: What Is the Company
s
Competitive Strength Relative
to Key Rivals?
Determining a firm
s overall competitive
position involves answering two questions:
1. How does the firm rank relative to its competitorson each industry key success factor?
2. Does the firm have a net competitive advantage
or disadvantage vis--vis its major competitors?
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Steps in a Competitive Strength Assessment
Step 1 List the industrys key success factors and other measures
of competitive strength or weakness (6 to 10 measures).
Step 2Assign a weight to each measure of competitive strength based
on its importance in shaping competitive success. (The sum of
the weights for each measure must add up to 1.0.)
Step 3Calculate strength ratings by scoring each competitor on each
strength measure (use a scale where 1 is weak and 10 is strong)
and multiplying the assigned rating by the assigned weight.
Step 4
Sum the weighted strength ratings on each factor to get an overall
measure of competitive strength for each company being rated.
Step 5Use the overall strength ratings to draw conclusions about the size
and extent of the firm
s net competitive advantage or disadvantage
and to take specific note of areas of strength and weakness.
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TABLE 4.3 Illustration of a Competitive Strength Assessment
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Interpreting the Competitive
Strength Assessments
Shows how firm stacks up against rivals,
measure by measure
Indicates whether firm is at a competitive
advantage or disadvantage against eachrival
Identifies possible offensive strategies that
can be waged against rivals
weaknesses Identifies the need for defensive actions to
correct competitive weaknesses
Q ti 5 Wh t St t i I
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Question 5: What Strategic Issues
and Problems Must Be Addressed
by Management?
Final and most important analytical step
in assessing Where are we now?
The results of industry and competitive analyses
pinpoint the issues and problems that management
must address in setting its agenda for actions to take
next to improve the firms performance and business
outlook.
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