EVALUATING A COMPANY’S RESOURCES, COST POSITION, AND COMPETITIVENESS Chapter 4 MGT 4380

Strategic Management Process

Where are we now? Two facets of the company’s situation The industry and competitive environments in which the company operates—its external environment The company’s resources and organizational capabilities—its internal environment Resource strengths and weaknesses Cost position Culture and the strength of its leadership

Where are we now? Question 1 How well is the firm’s strategy working? What are the firm’s competitively important resources and capabilities? Question 3 Are the firm’s cost structure and customer value proposition competitive? Question 4 Is the firm competitively stronger or weaker than key rivals? Question 5 What strategic issues and problems merit front-burner managerial attention?

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 firm’s competitive strength and market standing is improving

Performance Indicators Easier to measure (financial measures) Trends in the firm’s sales and earnings growth E.g., sales growth, COGS, net earnings, etc. Trends in the firm’s stock price E.g., stock price, P/E ratio, volatility, etc. The firm’s overall financial strength E.g., current/quick ratios, DuPont ratios, debt-to-equity/assets, cash flow ratio, etc. Harder to measure (strategic measures) The firm’s customer retention rate The rate at which new customers are acquired Changes in the firm’s 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

Performance Indicators Financial Measures Exercise Using Nike, Inc.’s 2013 10-K report, calculate the following performance indicators: Net Profit Margin Asset Turnover Current Ratio Quick Ratio (Acid Test) P/E Ratio

Performance Indicators Financial Measures Exercise Using Nike, Inc.’s 2013 10-K report, calculate the following performance indicators: Net Profit Margin = $2,485 / $25,313 = 0.0982 or 9.82% Asset Turnover Current Ratio Quick Ratio (Acid Test) P/E Ratio

Performance Indicators Financial Measures Exercise Using Nike, Inc.’s 2013 10-K report, calculate the following performance indicators: Net Profit Margin = $2,485 / $25,313 = 0.0982 or 9.82% Asset Turnover = $25,313 / $17,584 = 1.44 Current Ratio Quick Ratio (Acid Test) P/E Ratio

Performance Indicators Financial Measures Exercise Using Nike, Inc.’s 2013 10-K report, calculate the following performance indicators: Net Profit Margin = $2,485 / $25,313 = 0.0982 or 9.82% Asset Turnover = $25,313 / $17,584 = 1.44 Current Ratio = $13,626 / $ 3,926 = 3.47 Quick Ratio (Acid Test) P/E Ratio

Performance Indicators Financial Measures Exercise Using Nike, Inc.’s 2013 10-K report, calculate the following performance indicators: Net Profit Margin = $2,485 / $25,313 = 0.0982 or 9.82% Asset Turnover = $25,313 / $17,584 = 1.44 Current Ratio = $13,626 / $ 3,926 = 3.47 Quick Ratio (Acid Test) = ($3,337 + $3,434) / $3,926 = 1.73 P/E Ratio

Performance Indicators Financial Measures Exercise Using Nike, Inc.’s 2013 10-K report, calculate the following performance indicators: Net Profit Margin = $2,485 / $25,313 = 0.0982 or 9.82% Asset Turnover = $25,313 / $17,584 = 1.44 Current Ratio = $13,626 / $ 3,926 = 3.47 Quick Ratio (Acid Test) = ($3,337 + $3,434) / $3,926 = 1.73 P/E Ratio = $72.59 / $3.13 = 23.19

Question 2: What Are the Company’s Competitively Important Resources and Capabilities? Resources—general assets possessed by a firm Tangible resources—physical resources that can be readily seen, touched, and/or quantified Plant, property, and equipment, cash, etc. Intangible resources—non-physical resources that can be difficult to quantify or be seen Patents, trademarks, “secret family recipes”, etc. Capabilities—what organizations can do based on what resources they possess New product development, customer service, etc. Dynamic capabilities—a unique ability to create new capabilities; ability to “update” capabilities

Common Types of Tangible and Intangible Resources Physical resources State-of-the-art manufacturing plants and equipment, efficient distribution facilities, attractive real estate locations, or ownership of valuable natural resource deposits Financial resources Cash and cash equivalents, marketable securities, and other financial assets such as a company’s credit rating and borrowing capacity Technological assets Patents, copyrights, superior production technology, and technologies that enable activities Organizational resources Information and communication systems (servers, workstations, etc.), proven quality control systems, and strong network of distributors or retail dealers

Common Types of Tangible and Intangible Resources Human assets and intellectual capital An experienced and capable workforce, talented employees in key areas, collective learning embedded in the organization, or proven managerial know-how Brand, image, and reputational assets Brand names, trademarks, product or company image, buyer loyalty, and reputation for quality, superior service Relationships Alliances or joint ventures that provide access to technologies, specialized know-how, or geographic markets, and trust established with various partners Company culture The norms of behavior, business principles, and ingrained beliefs within the company

But what makes a resource or capability competitive? 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 capabilities Is strengthened when exploiting resources that are competitive But what makes a resource or capability competitive?

Question 2: What Are the Company’s Competitively Important Resources and Capabilities? The Resource-Based View (RBV) Firms are constantly seeking to gain advantage and to translate that advantage into earnings. Firms must appear more attractive than other options in the eyes of customers at the moment that customers decide to purchase. To do this, firms make deliberate decisions about the procurement, development, and deployment of assets and resources used to produce advantage.

Resource-Based View (RBV) The RBV holds that competitive advantage emerges from resources and capabilities that meet four criteria: Value Rarity Inimitability Non-substitutability

Resource-Based View (RBV) Value Valuable resources are resources that consumers desire or resources that give a firm an ability to produce products and services that consumers want A good location for a retail outlet A good credit rating A key technology Valuable resources can be both tangible and intangible

Resource-Based View (RBV) Rarity How common is the resource or capability in question? Rare resources are those that are relatively uncommon among competitors Rareness adds to value

Resource-Based View (RBV) Inimitability Advantage from valuable and rare resources will diminish if imitated by competitors Diffusion of key capabilities can undermine competitive advantage Outsourcing can yield benefits. However, while the savings from outsourcing are appealing, it is important to consider the long term implications for imitability and rarity Understanding what is or is not an effective imitation means understanding the nature of the value that the product or service provides Is Dr. Thunder a good imitation of Dr. Pepper?

Resource-Based View (RBV) Non-Substitutability Imitation can be difficult (or even illegal) Thus, it can makes sense to substitute it with some equivalent resource The ability to substitute the value generating function of a resource reduces its value and its ability to sustain competitive advantage

A Company’s Resources and Capabilities Must Be Managed Dynamically Management’s organization-building challenge has two elements: Attending to ongoing recalibration of existing capabilities and resources Casting a watchful eye for opportunities to develop totally new capabilities for delivering better customer value and/or outcompeting rivals A dynamic capability is developed when a company has become proficient in modifying, upgrading, or deepening its resources and capabilities to sustain its competitiveness and prepare it to seize future market opportunities and nullify external threats to its well-being.

Let’s take a 5 minute break

SWOT Analysis Strengths Weaknesses Opportunities Threats SWOT represents the first letter in: Strengths Weaknesses Opportunities Threats A well-conceived strategy is: Matched to the firm’s resource strengths and weaknesses Aimed at capturing the firm’s best market opportunities and defending against external threats to its well-being

SWOT Analysis Identifying Internal Strengths What are the resources and capabilities within a firm that make it more competitive? A firm’s strengths determine whether its competitive power in the marketplace will be impressively strong or disappointingly weak A firm that is well endowed with strengths stemming from potent resources and core competencies normally has considerable competitive power

SWOT Analysis Identifying Internal Weaknesses What are the factors within a firm that limit or restrict its competitiveness in the market? Deficiencies in competitively important physical, organizational, or intangible assets Missing or competitively inferior capabilities in key areas

SWOT Analysis Identifying External Opportunities What are factors in the environment that present opportunities to the firm? Good match with its financial and organizational resource capabilities The best prospects for growth and profitability The most potential for competitive advantage

SWOT Analysis Identifying External Threats What are factors in the environment that present threats to the firm? Can vary from moderate to critical Occur in a firm’s immediate industry, another industry, or in the larger macro-environment

SWOT Analysis The value of a SWOT analysis is in: Drawing conclusions from the SWOT listings about the firm’s overall situation Translating these conclusions into strategic actions to: Better match the firm’s strategy to its strengths and market opportunities Correcting problematic weaknesses Defending against worrisome external threats

Constraints Analysis A constraints analysis helps identify root causes of problems that restrict an ideal outcome Simple process Identify problems that you believe restrict the outcome Draw causal arrows from one problem to another if you believe that they are causal Identify the root cause(s); the problems that have no arrows pointing at them are root causes and should be dealt with first

Constraints Analysis Cause D Cause B Cause A Problem Cause C Cause E Cause G Cause F

Question 3: Are the Company’s Cost Structure and Customer Value Proposition Competitive? Why are cost structure and value important? Important to keep a firm’s costs inline with competitors Allows for more appealing value propositions Useful analytical tools: Value chain analysis Benchmarking

The Value Chain The Value Chain A tool for decomposing the value generating activities of an organization. Term reflects that at each step, the product or service becomes more valuable The value chain is based on a simple but powerful idea, that the value customers see and the value that leads to profits result from a series of distinct but interconnected activities.

A Representative Company Value Chain

The Value Chain Primary Activities: actions that are directly involved in creating and distributing goods and services Inbound Logistics—the arrival of raw materials Operations—the actual production process Outbound Logistics—the movement of finished products to customers Marketing & Sales—work to attract customers and convince them to make purchases Service—the extent to which a firm provides assistance to their customers

The Value Chain Support Activities: structures that provide underlying support primary activities Firm Infrastructure—how the firm is organized (structure) Human Resource Management—involves the recruitment, training, and compensation of employees Technology—use of computerization and telecommunications to support activities Procurement—process of negotiating for and purchasing raw materials

The Value Chain Value chain analysis can be used to systematically breakdown the costs of producing a firm’s market offerings This can be used to identify where adjustments are necessary

Benchmarking Benchmarking is a tool for learning which firms are best at performing particular activities and then using their techniques (or “best practices”) to improve the cost and effectiveness of a firm’s own internal activities 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 shipped How maintenance is performed Combined with value chain analysis, these two tools can help a firm identify what parts of the value chain can and to what extent should be improved

The Value Chain System for an Entire Industry A firm’s customer value proposition and cost competitiveness also depend on the value chain activities of its suppliers and forward channel allies Managers must understand an industry’s entire value chain system for delivering a product or service to customers, not just the firm’s own internal value chain There are three main areas of a firm’s overall value chain where cost differences occur: Activities performed by suppliers A firm’s own internal activities Activities performed by forward channel allies

Representative Value Chain for an Entire Industry

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

Remedying an Internal Cost or Value Disadvantage Implement the use of best practices throughout the firm Eliminate some cost-producing activities by revamping value chain Relocate high-cost activities to lower-cost geographic areas See if certain internally performed activities can be outsourced to vendors or contractors Invest in productivity-enhancing, cost-saving technology Find ways around activities or items where costs are high Redesign the product and/or its components to reduce manufacturing or assembly costs Make up differences by reducing costs in supplier or forward portions of value chain system

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 markups Work with forward channel allies to identify win-win opportunities to reduce costs (synergize) Change to a more economical distribution strategy: Switch to cheaper distribution channels Integrate forward into company-owned retail outlets

Question 4: What Is the Company’s Competitive Strength Relative to Key Rivals? Determining a firm’s overall competitive position involves answering two questions: How does the firm rank relative to its competitors on each industry key success factor? Does the firm have a net competitive advantage or disadvantage vis-à-vis its major competitors?

Question 5: What Strategic Issues and Problems Must Be Addressed by Management? Final and most important analytical step in assessing “Where are we now?” Using analyses, pinpoint the issues and problems that management must address This helps to set an agenda for working to improve a firm’s performance and competitive position Results of such analyses combine with external analyses and inform the other steps in the strategic management process