McGraw-Hill/Irwin Copyright © 2011 The McGraw-Hill Companies, All Rights Reserved. Chapter 4 Internal Situation Analysis: Evaluating a Company’s Resources, Cost Position, and Competitive Strength

4-2 Key Questions in Situation Analysis  Question 1: How well is the company’s strategy working?  Question 2: What are the company’s competitively important resources and capabilities?  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?

4-3 Situation Analysis Question 1: How Well is the Company’s Strategy Working? 1.Is the company achieving its financial and strategic objectives? 2.Is the company an above-average industry performer?

4-4 Performance Indicators  Trends in sales and earnings growth  Trends in the company’s stock price  The company’s overall financial strength  The rate at which new customers are acquired  Image and reputation with customers  Evidence of improvement in internal processes such as defect rate, order fulfillment, and days of inventory

4-5 Situation Analysis Question 2: 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 competitively valuable, rare, hard to copy, and not easily trumped to rivals’ equivalent substitute resources

4-6 Resource-Based Strategies  Resource-based strategies attempt to exploit a company’s valuable and rare resources and competitive capabilities to deliver value to customers in ways rivals find it difficult to match

4-7 Identifying Competitively Important Resources and Capabilities  Common types of valuable resources and competitive capabilities include Skills or specialized expertise in a competitively important capability Valuable physical assets Valuable human assets or intellectual capital Valuable organizational assets Valuable intangible assets Competitively valuable alliances or cooperative ventures

4-8 Determining the Competitive Power of a Company Resource  Is the resource really competitively valuable?  Is the resource rare and something rivals lack?  Is the resource hard to copy or imitate?  Can the resource be trumped by the substitute resource strengths and competitive capabilities of rivals?

4-9 Strategies for Addressing Resource Deficiencies  Companies lacking a competitively powerful stand-alone resource may be able to support its strategy with a bundle of resources.  Companies may be able to neutralize the power of rivals’ resources and capabilities by developing substitute resources to accomplish the same purpose.

4-10 Resources and Capabilities as the Foundation of Competitive Advantage  A competence represents real proficiency in performing an internal activity  A core competence is a well-performed internal activity central to a company’s competitiveness and profitability  A distinctive competence is a competitively valuable activity a company performs better than its rivals

4-11 Taking Inventory of a Company’s Strengths, Weaknesses, Opportunities and Threats  S W O T represents the first letter in S trengths W eaknesses O pportunities T 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 defending against external threats to its well- being

4-12 Identifying Resource Weaknesses and Competitive Deficiencies  A weakness is something a firm lacks, does poorly, or a condition placing it at a disadvantage in the marketplace  Resource weaknesses relate to Inferior or unproven skills, expertise, or intellectual capital Deficiencies in competitively important physical, organizational, or intangible assets Missing or competitive inferior capabilities in key areas

4-13 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 growth and profitability Most potential for competitive advantage

4-14 Identifying External Threats to Profitability and Competitiveness  Entry of lower-cost foreign competitors  Burdensome regulations  Rise in interest rates  Potential of a hostile takeover  Unfavorable demographic shifts  Adverse shifts in foreign exchange rates

4-15 Overall Value of a SWOT Analysis  Ability to draw conclusions about the company’s overall situation.  Ability to translate into strategic actions: Better match the company’s strategy to its resource strengths and market opportunities, Correcting problematic weaknesses, and Defending against worrisome external threats.

4-16 Situation Analysis Question 3: How Competitive Are the Company’s Prices and Costs?  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

4-17 Company Value Chain

4-18 Benchmarking Costs of Key Value Chain Activities  Focuses on cross-company comparisons of how certain activities are performed and costs associated with these activities Purchase of materials Payment of suppliers Getting new products to market Performance of quality control Filling and shipping of customer orders

4-19 Industry Value Chain

4-20 Strategic Options for Remedying a Cost Disadvantage  There are three main areas of a company’s overall value chain where cost differences occur 1. Activities performed by suppliers 2. A company’s own internal activities 3. Activities performed by forward channel allies

4-21 Correcting Internal Cost Disadvantages  Implement best practices throughout the company  Try to eliminate some cost-producing activities altogether by revamping value chain  Relocate high-cost activities to lower- cost geographic areas  See if high-cost activities can be outsourced

4-22 Correcting Internal Cost Disadvantages  Invest in productivity enhancing, cost- saving technology  Find ways to detour around activities or items where costs are high  Redesign the product or its components to reduce manufacturing costs  Make up difference by achieving savings in backward or forward portions of value chain system

4-23 Correcting Supplier-Related Cost Disadvantages  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

4-24 Correcting Cost Disadvantages Associated With Forward Channel Allies  Pressure dealer-distributors to reduce their costs  Work closely 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

4-25 Situation Analysis Question 4: What Is the Company’s Competitive Strength?  Overall competitive position involve answering two questions How does a company rank relative to competitors on each industry key success factor? Does a company have a net competitive advantage or disadvantage vis-à-vis major competitors?

4-26 Competitive Strength Assessments

4-27 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 each rival  Identifies possible offensive strategies that can be waged against rivals’ weaknesses  Identifies the need for defensive actions to correct competitive weaknesses

4-28 Situation Analysis Question 5: What Strategic Issues Must be Addressed by Management?  Final and most important analytical step in assessing “Where are we now?”  Based on results of both industry and competitive analysis  Pinpointing the precise things that should be on management’s “worry list”?