24084932 Strategic Management Analysing a Company s Resources and Copetitive Position
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Transcript of 24084932 Strategic Management Analysing a Company s Resources and Copetitive Position
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Analyzing a company's resources and competitive
position
How well is the company's present strategy working?
It is very important to study the company's competitive approach to
understand the working of the company's present strategy.
We need to study
if the company is striving to be low-cost leader or stressing to differentiate
its products.
is it concentrating on serving a broad spectrum of customers or a narrow
niche market.
what is its geographical coverage.
is it operational in just a single stage of industry's production/distribution
system or is vertically integrated across several stages.
the latest moves to improve competitive position and performance.
what are the functional strategies in R&D, production and other
departments.
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The two best quantitative indicators of the performance of
present strategy are:
1. whether the company's is achieving its stated financial and
strategic objectives
2. whether the company is an above-average industry
performer.
Failure on these two fronts indicate either poor strategy
making or less than competent strategy execution or both.
Other indicators of how well a company's strategy is working
include:
1. Whether the firm's sales are growing faster, slower or about the
same pace as the market as a whole, thus resulting in a rising,
eroding or stable market share.
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2. Whether the company is acquiring new customers at an attractive rate as well
as retaining existing customers.
3. Whether the firm's profit margins are increasing or decreasing and how well its
margins compare to rival firms' margins.
4. Trends in the firm's net profits and returns on investment and how thesecompare to the same trends for other companies in the industry.
5. Whether the company's overall financial strength and credit rating are
improving or on the decline.
6. Whether the company can demonstrate continuous improvement in such
internal performance measures as days of inventory, employee productivity,unit cost, defect rate, scrap rate, delivery time, warranty costs.
7. How shareholders view the company based on trends in the company's stock
price and shareholder value, relative to stock prices of other companies in the
industry.
8. The firm's image and reputation with its customers.
9. How well the company stacks up against rivals on technology, product
innovation, customer service, product quality, delivery time, price, getting
newly developed products to market quickly and other factors on which the
buyers base their choice of brands.
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A company's strong performance on these parameters
indicates a sound strategy.
What are the company's resource strengths and weaknesses andits external opportunities and threats?
A good SWOT analysis provides the basis for crafting a
strategy that capitalizes on the company's resources and aims
at capturing the company's best opportunities and defendsagainst the threats.
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Identifying company resources strengths and competitive
capabilities
A strength is something a company is good at doing or an
attribute that enhances its competitiveness.
It can take the following forms:
1. A skill or important expertise - low cost manufacturing capability,
technological know-how, defect free manufacturing. e.g. Japanese
precision manufacturing, Chinese mass manufacturing, Indiansoftware
2. Valuable physical assets - state-of-the-art plants and equipments,
real estate location, worldwide distribution facilities or ownership of
valuable natural resources. e.g. Toyota, Jharkhand
3. Valuable human assets - an experienced and capable workforce,talented employees in key areas, cutting-edge knowledge and
intellectual capital, collective learning embedded in the organization
or proven managerial know-how. e.g. McKinsey, KPMG
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4. Valuable organizational assets - proven quality control systems,
proprietary technology, key patents, mineral rights, highly trained
customer service representatives, sizable amounts of cash and
marketable securities, a strong balance sheet and credit rating or a
comprehensive list of customers' e-mail addresses.
5. Valuable intangible assets - well-known brand name, reputation for
technological leadership or a strong buyer loyalty and goodwill.
6. Competitive capabilities - product innovation capabilities, short
development times in bringing new products to markets, a strong
dealer network, cutting-edge supply chain management capabilities,quickness in responding to changing market conditions and emerging
opportunities, or state-of-the-art systems for doing business via the
internet.
7. An achievement or attribute that puts the company in a position of
market advantage - low overall costs relative to competitors, marketshare leadership, a superior product, wider product line than rivals,
wide geographical coverage, well-known brand name, superior e-
commerce capabilities or exceptional customer service.
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8. Competitively valuable alliances or cooperative ventures - fruitful
partnerships with suppliers that reduce costs and/or enhance product
quality and performance; alliances and joint ventures that provide
access to valuable technologies, competencies or geographical
markets.
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Company competencies and competitive capabilities
A company's resource strength relates to specific skills and
expertise and sometimes it is the pooled knowledge and
expertise of different groups. e.g. new product innovationrequires expertise of various departments like R&D,
engineering and design, cost-effective manufacturing and
market testing.
Company competencies can range from merely a competencein performing an activity to a core competence to a distinctive
competence.
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Competence
A competence is something an organization is good at doing.
It is nearly always the product of experience.
It originates with deliberate efforts to develop the
organizational ability to do something.
It is about selecting people with the requisite knowledge and
skills, upgrading individual abilities as needed and molding
the efforts and work products of individuals into a cooperativegroup effort to create organizational ability.
As expertise builds and company gains proficiency in
performing the activity consistently well at an acceptable cost
the ability evolves into a true competence and companycapability. e.g. proficiency in specific knowledge, selecting
good locations for retail outlets, merchandising and product
display
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Core competence
A core competence is a proficiently performed internal activity
that is central to a company's strategy and competitiveness.
It is more valuable than a competence because of its role in the
company's strategy and its contribution to making the company
success.
It can relate to any of the several aspects of a company's
business. A company may have more than one core competence, but it is
difficult to have more than two or three. E.g. ITC has core
competence in distribution and customization of taste
It is usually knowledge based, residing in people and is acompany intellectual capital.
Generally it is also an cross-departmental combinations of
knowledge and expertise.
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Distinctive competence
A distinctive competence is a competitively valuable activity
that a company performs better than its rivals. E.g. search
engine of Google, product design of Apple
It is a competitively superior strength.
A competency translates into a distinctive competence when
the company enjoys competitive superiority when performing
that activity.
A core competence becomes real competitive advantage only
when it rises to the level of a distinctive competence. e.g.
Sharp corporation in LCDs, Toyota in low-cost, high quality
manufacturing and short design-to-market cycles for newmodels
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It is important in terms of strategy-making because
it gives a competitively valuable capability
it has the potential for being the cornerstone of strategy
it produce competitive edge in the marketplace
It is advantageous when a firm has a distinctive competence
which rivals do not have and it is very costly and time
consuming for rivals to acquire the skill. E.g. processor design
capabilities of Intel
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What is the competitive power of a resource strength?
The competitive power of a company's strength is measured
by the following four tests:
1. Is the resource strength hard to copy?
The more difficult and expensive it is to imitate a company's
resource strength, the greater its potential competitive value.
Resources tend to be difficult to copy when:
They are unique (real estate location, patent)
Must be built over time in ways that are difficult to imitate (brand
name, mastery of a technology)
When it needs big capital investment (a state-of-the-art
manufacturing plant) e.g. Wal-Mart's competence in super efficient distribution and
store operations capabilities.
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2. Is the resource strength durable - does it have staying
power?
The longer the competitive value of a resource lasts, the
greater its value. e.g. Intel's expertise in chip design has staying power, Indian
software industry's expertise in off-shoring may be nullified by
other countries in the near future,
3. Is the resource really competitively superior?
e.g. Jaguar was acquired by Tatas, Nirma was able to
penetrate the low cost detergent market,
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4. Can the resource strength be trumped by the different
resource strengths and competitive capabilities of rivals?
e.g. Bajaj scooters lost its market share to other two wheelers
like hero Honda, HMT watches lost the market to Titan,
Most of the firms have a mixed bag of resources - one or two
valuable, some good and many satisfactory.
Only a few market leaders have the distinctive competence.
A company can derive competitive advantage from a
collection of good-to-adequate resources that collectively
have competitive power in the marketplace.
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e.g. Toshiba's laptop computers were the global market
leaders through most of the 1990s, an indicator that Toshiba
had competitively valuable resource strength.
The actual facts are- they were not faster than rival's laptops
- they did not have bigger screens
- no more memory
- no longer battery power- no superior performance features
- no superior technical support services
- they were not cheaper
- they seldom were ranked first in various ratings in the overall
performance
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The advantages for Toshiba were a combination of good
resource strengths and capabilities like
its strategic partnerships with suppliers of laptop components
efficient assembly capability design expertise
skills in choosing quality components
a wide selection of models
an attractive mix of built-in performance features against price better-than-average reliability of its models
good technical support services
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Identifying company resource weaknesses and competitive deficiencies
A weakness or competitive deficiency is something a company lacks or
does poorly (in comparison to others) or a condition that puts it at a
disadvantage in the marketplace.
It can relate to:
1. inferior or unproven skills, expertise or intellectual capital in
competitively important areas of business
2. deficiencies in competitively important physical, organizational or
intangible assets3. missing or competitively inferior capabilities in key areas.
How much the resource weakness makes it competitively vulnerable
depends on how much they matter in the marketplace and if can
they be overcome by company's strengths.
Sizing up a company's complement of resource capabilities anddeficiencies is like a strategic balance sheet, in which resources
strengths are competitive assets and resource weaknesses are
competitive liabilities.
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Identifying a company's market opportunities
Market opportunity plays a vital role in the strategy
formulation of a company.
It is important to indentify opportunities and appraise the
growth and profit potential of each one.
A company's opportunities can be plentiful or scarce and can
range from widely attractive (an absolute "must" to pursue) to
marginally interesting (the growth and profit potential arequestionable) to unsuitable (no good match with company's
strength and capabilities).
Every industry opportunity is not a company opportunity.
A opportunity is most relevant to the company when itmatches with the company's financial and organizational
resource capabilities.
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Identifying threats to a company's future profitability
They are factors in the company's external environment that
pose threat to its profitability and competitive well-being.
Threats include: emergence of cheaper or better technologies e.g. typewriters replaced
by DTP
rivals' introduction of new or improved products . E.g Nirma
lower-cost foreign competitors' entry into a company's stronghold new regulations that may be more burdensome to a company than its
competitors
vulnerability to a rise in interest rates
the potential of a hostile takeover
unfavorable demographic shifts
adverse changes in foreign exchange rates
political upheaval in a foreign country where the company has
facilities
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External threats may pose a moderate degree of adversity or
they may be imposing enough to make the company's
position, situation and outlook tenuous.
The management must identify these threats and initiatestrategic changes to neutralize or lessen the threat.
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What do the SWOT listings reveal?
SWOT analysis helps in drawing conclusions about the
company's overall situation and acting on those conclusions to
better match the strategy to its strength and marketopportunities and to correct weaknesses and defend against
external threats.
The following questions help in SWOT analysis of a company:1. Does the company have an attractive set of resource strengths? Does it
have any strong core competencies or a distinctive competence? Are
the company's strengths and capabilities well matched to the industry
key success factors? Do they add adequate power to the company's
strategy? Will the company's current strengths and capabilities matterin the future?
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2. How serious are the company's weaknesses and competitive
deficiencies? Are they mostly inconsequential and readily correctable
or could they prove fatal if not remedied soon? Are some of the
company's weaknesses in areas that relate to the industry's key
success factors? Are there any weaknesses that if uncorrected wouldkeep the company from pursuing an otherwise attractive opportunity?
Does the company have important resource gaps that need to be filled
for it to move up in the industry rankings and/or boost its profitability?
3. Do the company's resource strengths and competitive capabilities (its
competitive assets) outweigh its resource weaknesses andcompetitive deficiencies (its competitive liabilities) by an attractive
margin?
4. Does the company have attractive market opportunities that are well
suited to its resource strengths and competitive capabilities? Does the
company lack the resources and capabilities to pursue any of the mostattractive opportunities?
5. Are the threats alarming, or are they something the company appears
able to deal with and defend against?
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6. All things considered, how strong is the company's overall situation?
Where on a scale of 1 to 10 (where 1 is alarmingly weak and 10 is
exceptionally strong) should the firm's position and overall situation
be ranked? What aspects of the company's situation are particularly
attractive? What aspects are the most concern?
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The following questions help us to know the importance of
SWOT listings for strategic action:
1. Which competitive capabilities need to be strengthened immediately
(so as to add greater power to the company's strategy and boost salesand profitability)? Do new types of competitive capabilities need to be
put in place to help the company better respond to emerging industry
and competitive situations? Which resources and capabilities need to
be given greater emphasis and which merit less emphasis? Should the
company emphasize leveraging its existing resource strengths and
capabilities or does it need to create new resource strengths and
capabilities?
2. What actions should be taken to reduce the company's competitive
liabilities? Which weaknesses or competitive deficiencies are in urgent
need of correction?
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3. Which market opportunities should be top priority in future strategic
initiatives (because they are good fits with the company's resource
strengths and competitive capabilities, present attractive growth and
profit prospects, and/or offer the best potential for securing
competitive advantages)? Which opportunities to be ignored, at leastfor the time being (because they offer less growth potential or are not
suited to the company's resources and capabilities)?
4. What should the company be doing to guard against the threats to its
well-being?
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Are the company's prices and costs competitive?
Competitors have an opportunity to cut the price when their
cost of production is substantially lower than their
competitors.
One of the most important signs of a company's business
position being strong or precarious is whether its prices and
costs are competitive with industry rivals.
The trend is more strong in a commodity product industry andlower-cost companies have an advantage.
Even in industries where products are differentiated according
to their attributes, it is necessary to keep the cost in line with
competitors, to ensure that premium charged on the productscreate value to the customers.
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A small disparity in price is justified when the product or
service has highly differentiated attributes than the
competitor offers.
The two analytical tools useful for determining if thecompany's costs and prices are competitive are:
value chain analysis
benchmarking
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The concept of a company value chain
A company's value chain consists of the linked set of value-
creating activities the company performs internally.
It consists of two broad categories of activities primary activities that are foremost in creating value for customers
support activities that facilitate and enhance the performance of the
primary activities
It includes a profit margin, a mark up over the cost of performing
the value-creating activities.
Assigning the company's operating costs and assets to each
individual activity in the chain provides cost estimate and capital
requirements.
Manner in which one activity is done can affect the costs of
performing other activities. e.g. cost of producing Japanese
VCRSs was reduced from $ 1300 to $ 300 with focus on better
design
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Cost of each activity contributes to whether the company's
overall cost position relative to rivals is favorable or
unfavorable.
The tasks of value chain analysis and benchmarking are todevelop the data for comparing a company's costs activity
against the costs of key rivals and to learn which internal
activities are a source of cost advantage or disadvantage.
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Why the value chains of rival companies often differ
The value chain of rival companies differ because
the manner in which it performs each activity reflect the evolution of
its own particular business and internal operations its strategy
the approaches it is using to execute its strategy
the underlying economics of the activities themselves
e.g. costs of internally performed activities for a fully integratedmanufacturer will be greater than a partially integrated
manufacturer.
A company pursuing a low-cost/low-price strategy and a rival
that is positioned on the high end differ in their value chain.
The cost and price differences among rival companies depends
on activities performed by suppliers or by distribution channel
allies involved in getting the product to end users.
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If the suppliers or wholesalers/retailers have excessively high
cost structure or profit margin then it jeopardizes a company's
cost competitiveness even though its costs for internally
performed activities are competitive.
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The value chain system for an entire industry
Accurately assessing a company's competitiveness in end-use
markets require that company managers understand the
entire value chain system for delivering a product or service toend users, not just the company's own value chain.
Suppliers value chain are relevant because suppliers perform
activities and incur cost in creating and delivering the
purchased inputs used in a company's own value chain. The costs, performance features and quality of these inputs
influence a company's own cost and product differentiation
capabilities.
This is a powerful reason for working collaboratively withsuppliers in managing supply chain activities.
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Forward channels are relevant because
- the costs and margins of a company's distribution allies are part of
the price the end user pays
- the activities that distribution allies perform effect the end user'ssatisfaction.
Hence company' strive for mutually beneficial ways of doing
business with these channels.
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Developing the data to measure a company's cost
competitiveness
It involves disaggregating or breaking down of departmental
cost accounting data into the costs of performing specificactivities.
The amount of disaggregation depends on the economics of
the activities.
A good guideline is to develop separate cost estimates foractivities having different economics and for activities
representing a significant or growing proportion of cost.
Traditional accounting defines costs according to broad
categories of expenses like wages and salaries, employeebenefits. etc.
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A new method, activity based costing, entails defining
expense categories according to the specific activities being
performed and then assigning costs to the activity responsible
for creating the cost. To fully understand the costs of activities all along the industry
value chain, cost estimates for activities performed in the
competitively relevant portions of suppliers' and customers'
value chains also have to be developed. Despite the tediousness and imprecision the payoff in
exposing the costs of a particular activity makes activity-based
costing a valuable analytical tool.
The size of a company's cost advantage or disadvantage variesfrom item to item, different consumer groups (if different
distribution channels are used) and different geographic
markets.
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Benchmarking the costs of key value chain activities
Benchmarking is a tool that allows a company to determine
whether the manner in which it performs particular functions and
activities represents industry "best practices" when both cost andeffectiveness are taken into account.
Benchmarking is done by companies to compare their cost against
competitors' and sometimes against companies in other industries
who are efficient.
The objectives of benchmarking are to identify the best practices in
performing an activity, to learn how other companies have achieved
low cost or better results and to improve a company
competitiveness.
e.g. Xerox learning from Japanese manufacturers, Toyotaimplementing just-in-time system after studying supermarkets in
USA, Southwest reduced turnaround time at stops by studying pit
crews on auto racing circuits.
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The tough part of benchmarking is to gain access to
information about other companies practices and costs.
Information is collected from published reports, trade groups,
industry research firms, taking to knowledgeable industryanalysts, customers and suppliers.
It is further complicated by use of different cost accounting
systems.
Consulting firms, several councils and associates and otheronline benchmarking organizations help in benchmarking by
collecting data and distributing them without identifying the
source. This helps companies to avoid disclosing competitively
sensitive data to rivals and reduces risks of ethical problems.
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Strategic options for remedying a cost disadvantage
Value chain analysis and benchmarking are important as
strategy tools because a company's competitiveness depends
on how efficiently it manages these actives compared tocompetitors.
The three main areas where costs of competing firms can
differ are:
a company's own activity segments suppliers' part of industry value chain
forward channel portion of the industry chain
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When the cost disadvantage in due to internal factors any of the
following strategic approaches can be used:
1. Implement the use of best practices throughout the company,
particularly for high cost activities.2. Try to eliminate some cost-producing activities altogether by
revamping the value chain.
3. Relocate high-cost activities to geographic areas where they can be
performed cost effectively.
4. Search activities which can be outsourced to vendors or contractors.5. Invest in productivity-enhancing, cost-saving technological activities.
6. Innovate around the troublesome cost components.
7. Simplify the product design so that it can be manufactured or
assembled quickly and more economically.
8. Try to make up the internal cost disadvantage by achieving savings in
other two parts of the value chain system.
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Translating proficient performance of value chain activities to
competitive advantage
Competencies and capabilities in value chain activities can be
translated into competitive advantage. Since attributes and features are easy to clone, the real
competitive advantage comes from pleasing the buyers.
The process of translating is:
1. Management makes efforts to build competencies and capabilities toadd power to its strategy and competitiveness.
2. The company invests in a couple of these competencies to take them
to the level of core competence.
3. Further learning and investments can take the core competence to a
level of distinctive competence.4. This distinctive competence will become attractive competitive
advantage which will be difficult for the rivals to match.