Analyzing a Company’s Resources and Competitive Position

Outline Sizing Up a Company’s Resource Strengths and Weaknesses Assessing a Company’s Competitive Strength Identifying the Strategic Issues that Merit Managerial Attention

The Key Questions 1. How well is the company’s present strategy working? 2. What are the company’s resource strengths and weaknesses and its external opportunities and threats? 3. Are the company’s pricing strategy competitive? 4. How competitive is the company vis-à-vis its rivals? 5. What strategic issues merit managerial attention?

Evaluating How Well the Company’s Present Strategy Is Working Start by identifying the company’s present strategy What is the company’s basic competitive approach - Low-cost leadership? Differentiation? Market segmentation? What geographic area does the company compete? What recent strategic moves has the company made What functional strategies is the company using

Identifying the Components of a Single-Business Company’s Strategy

Approaches to Assess How Well the Present Strategy Is Working Quantitative assessment – Is the strategy producing good results? Is company achieving its financial and strategic objectives? Qualitative assessment – Is the strategy complete (in the sense of covering all the bases)? Are the various pieces of the strategy internally consistent and mutually supportive (as opposed to being in conflict with each other)? Is there sound rationale for the strategy?

Key Indicators of How Well the Strategy Is Working Market share Account management Profit margins ROI Share price Improving/eroding image and reputation Technology

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

Identifying Resource Strengths and Competitive Capabilities A strength is something a firm does well or an attribute that enhances its competitiveness Know-how Physical assets Human capital Intangible assets Strong strategic alliances or partnerships Resource strengths and competitive capabilities are competitive assets!

Competencies vs. Core Competencies vs. Distinctive Competencies A competence is an activity that a company performs with real proficiency—it is usually the product of organizational learning and experience A core competence is a well-performed internal activity central to a company’s strategy, competitiveness, and profitability A distinctive competence is a competitively valuable activity a company performs better than its rivals

Company Competencies and Capabilities Stem from skills, expertise, and cross-functional collaboration Are usually the product of deliberate efforts to develop expertise and competitive prowess Selecting people with requisite skills and know-how Upgrading or expanding individual abilities Building competitively valuable intellectual capital

Core Competencies -- A Valuable Company Resource A competence becomes a core competence when an activity that a company performs particularly well is central to its strategy, competitiveness, and profitability Typically, a core competence Results from collaboration among different parts of a company—it grows out of cross-functional know-how and expertise rather than skills/expertise that resides within a single department or operating unit Is intellectual capital and resides in a company’s people, not as assets on the balance sheet Gives a company a potentially valuable competitive capability and is thus a competitive asset

Examples of Core Competencies Product innovation Supply chain management Product development After-sales service Total quality management

Determining the Competitive Value of a Company Resource To be the basis for sustainable competitive advantage, a “resource” must possess the following: : 1. Is the resource hard for rivals to copy? 2. Does the resource have staying power – is it durable? 3. Does it actually outclass what rivals have and provide a meaningful edge in attracting and/or pleasing customers? 4. Can the resource be trumped by the different capabilities of rivals?

Identifying a Company’s Market Opportunities Opportunities most relevant to a company are those offering Good match with its financial and organizational resource capabilities Best prospects for profitable long-term growth Potential for competitive advantage

Identifying External Threats Slow market growth Emergence of cheaper/better technologies Introduction of better products by rivals Entry of lower-cost foreign competitors Onerous regulations Potential of a hostile takeover Unfavorable demographic shifts Adverse shifts in foreign exchange rates Attractive substitute products

Role of SWOT Analysis in Crafting a Better Strategy The most important part of S W O T analysis is using the 4 lists of strengths, weaknesses, opportunities, and threats To draw conclusions about a company’s overall situation and Acting on the conclusions to Better match a company’s strategy to its resource strengths and market opportunities Correct the important weaknesses Defend against external threats

The Three Steps of SWOT Analysis

Concept of a Company Value Chain A company’s business consists of all activities undertaken in designing, producing, marketing, delivering, and supporting its product or service This linked set of activities that are performed internally create value for the customer (the “value” of all the activities is reflected in the price that buyers pay for the product or service—hence the term value chain) A company’s value chain consists of two types of activities Primary activities – where most of the value for customers is created Support activities – facilitate performance of the primary activities

A Representative Company Value Chain

The Value Chain System for an Entire Industry Accurately determining a company’s cost competitiveness involves comparing costs all along the industry’s entire 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 Forward channel allies’ value chains are relevant because Costs and margins are part of price paid by ultimate end-user Activities performed affect end-user satisfaction

A Representative Value Chain for an Entire Industry

Example of Industry Value Chain Home Appliance Industry Parts and components manufacture Assembly Wholesale distribution Retail sales

Example of Industry Value Chain Soft Drink Industry Processing of basic ingredients Syrup manufacture Bottling and can filling Wholesale distribution Advertising Retailing

Developing Data to Measure a Company’s Cost Competitiveness After identifying key value chain activities, the next step involves breaking down departmental cost accounting data into costs of performing specific activities Appropriate degree of disaggregation depends on Economics of activities Value of comparing narrowly defined versus broadly defined activities Guideline – Develop separate cost estimates for activities Having different economics Representing a significant or growing proportion of costs

Activity-Based Costing: Key Tool 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 according to specific activities performed and Assigning costs to the activity responsible for creating the cost

Benchmarking: A Tool for Comparing Costs of Key Value Chain Activities Benchmarking involves gathering the data needed to make cross-company comparisons of how certain activities are performed costs associated with these activities Benchmarking can involve cross-company comparisons of Supply chain activities Materials purchasing and materials costs Systems for paying suppliers Management of inventories Getting new products to market Quality control Filling and shipping of customer orders Training of employees Processing of payrolls

Objectives of Benchmarking Identify “best practices” in performing each activity in the value chain Learn the methods, techniques, and approaches used by other firms to Lower costs Achieve better results Understand the “best practices” Take action to improve company’s cost competitiveness and methods of operation by implementing best practices

Good Value Chain Management Is the Key to Being Cost Competitive A company’s cost competitiveness depends on how well the company manages its value chain relative to how well its competitors manage their value chains When a company discovers its costs are out-of-line, the high-cost activities can exist in any of three areas in the industry value chain 1. Suppliers’ activities 2. Company’s own internal activities 3. Forward channel activities Activities, Costs, & Margins of Forward Channel Allies Internally Performed Margins Suppliers Buyer/User Value Chains

Determining Whether a Company Is Competitively Stronger or Weaker than Key Rivals Evaluating the strength of a company’s overall competitive position involves answering two questions How does a company rank relative to its key rivals on each important factor that determines market success? Does the company have a net competitive advantage or disadvantage vis-à-vis its major competitors?

A Sampling of Possible Strategic Issues 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? How to stave off market challenges from new foreign competitors? What to do about aging demographics of a company’s customer base?