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

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Page 1: Crafting and Executing Strategy Ch 4

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?

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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

# 1

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

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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

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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

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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

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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

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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