crafting and executing strategy ch 4
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McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 4: Evaluating a Chapter 4: Evaluating a
Company’s Resources and Company’s Resources and
Competitive PositionCompetitive Position
Screen graphics created by:Jana F. Kuzmicki, Ph.D.
Troy University
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Chapter Learning Objectives
1. 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.
2. 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.
3. Learn how to evaluate a company’s competitive strength relative to key rivals.
4. Understand the role and importance of industry and competitive analysis and internal situation analysis in identifying strategic issues company managers must address.
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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?
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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?
Figure 4.1: Identifying Components of a Single-Business Company’s Strategy
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Question 1: How Well Is the Company’sPresent Strategy Working?
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 scopeBroad 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
Key ConsiderationsKey Considerations
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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.
Key Indicators of How Wellthe Strategy Is Working
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S W O TS W O T represents the first letter in SS trengths
WW eaknesses
OO pportunities
TT 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
S W
O T
Question 2: What Are the Company’s Strengths, Weaknesses, Opportunities and Threats ?
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A strength is something a firm does well or an attribute that enhances its competitivenessValuable skills, competencies, or capabilitiesValuable physical assetsValuable human assetsValuable organizational assetsValuable intangible assetsImportant competitive capabilitiesAn attribute placing a company in a position of
market advantageAlliances or cooperative ventures with partners
Identifying Resource Strengthsand Competitive Capabilities
Resource strengths and competitivecapabilities are competitive assets!
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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
A distinctive competence is a competitively valuable activity acompany performs better than its rivals
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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
Company Competencies and Capabilities
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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
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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 valuable
capability unmatched by rivals Can underpin and add real punch
to a company’s strategy Is a basis for sustainable competitive
advantage
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Distinctive Competence –A Competitively Superior Resource
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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 trumped bythe different capabilities of rivals?
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What Is a Resource-Based Strategy?
Companies with competitively valuable resource strengths and competenciesoften deploy these capabilities to Boost the competitive power
of 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
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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!
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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
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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
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S W O TS 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 TS 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
Role of SWOT Analysis inCrafting a Better Strategy
Figure 4.2: The Three Steps of SWOT Analysis
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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
Question 3: Are the Company’sPrices and Costs Competitive?
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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
Concept: Company Value Chain
Figure 4.3: A Representative Company Value Chain
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Combined costs of all activities in a company’s value chain define a 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
Characteristics of Value Chain Analysis
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Several factors give rise to differencesin value chains of rival companiesDifferent 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 assessing rivals’ relative cost positions
Why Do Value Chains of Rivals Differ?
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Assessing a company’s cost competitiveness involves comparing costs all along an industry’s value chain
Suppliers’ value chains are relevant because 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 relevant because Their costs and profit margins
represent “value added” and are partof the price paid by ultimate end-user
Activities they perform affectend-user satisfaction
The Value Chain Systemfor an Entire Industry
Figure 4.4: Representative Value Chain for an Entire Industry
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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 according
to specific activities performed and
Assigning costs to the activityresponsible for creating the cost
Activity-Based Costing: A KeyTool in Analyzing Costs
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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
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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
Benchmarking Costs ofKey Value Chain Activities
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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
Objectives of Benchmarking
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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
Activities, Costs, &
Margins ofForward
Channel Allies
InternallyPerformedActivities, Costs, &Margins
Activities, Costs, &
Margins ofSuppliers
Buyer/UserValue
Chains
What Determines If aCompany Is Cost Competitive?
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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
Options to CorrectInternal Cost Disadvantages
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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
Options to Correct aSupplier-Related Cost Disadvantage
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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 strategySwitch to cheaper distribution channels
Integrate forward into company-owned retail outlets
Options to Correct a Cost Disadvantage Associated With Activities of Forward Channel Allies
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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
Translating Performance of Value Chain Activities into Competitive Advantage
Figure 4.5: Translating Company Performance of Value Chain Activities into Competitive Advantage
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Whether a company is competitively stronger or weaker than key rivals hinges on the answers to two questions
How does the company rank relative to competitors on each important factor that determines market success?
Does the company have a net competitive advantage or disadvantage vis-à-vis major competitors?
Question 4: Is the Company Strongeror Weaker than Key Rivals?
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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
Assessing a Company’sCompetitive Strength vs. Key Rivals
Table 4.4: Illustrations of Unweightedand Weighted Strength Assessments
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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)
Why Do a CompetitiveStrength Assessment ?
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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 industry
and competitive situation Company’s resource strengths and weaknesses
and attractiveness of its competitive position
Question 5: What Strategic IssuesMerit Managerial Attention?
A “good” strategy must address “what to do” about each and every strategic issue!
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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 !
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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 growth
in light of slowing buyer demand? Whether to expand a company’s product line? Whether to acquire a rival firm? Whether to expand into foreign
markets rapidly or cautiously? What to do about aging demographics
of a company’s customer base?
Identifying the Strategic Issues: Some Possibilities