Chap004 understanding company's resources and position
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Analyzing a Analyzing a Company’s Resources Company’s Resources
and Competitive Positionand Competitive Position
Analyzing a Analyzing a Company’s Resources Company’s Resources
and Competitive Positionand Competitive Position
4444Chapter
Screen graphics created by:Jana F. Kuzmicki, Ph.D.
Troy State University-Florida and Western Region
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““Before executives can Before executives can
chart a new strategy, they chart a new strategy, they
must reach common must reach common
understanding of the understanding of the
company’s current company’s current
position.”position.”W. Chan Kim and Renee Mauborgne
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Chapter RoadmapChapter RoadmapChapter RoadmapChapter 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 Company Situation Analysis:Analysis:
The Key QuestionsThe Key Questions
Company Situation Company Situation Analysis:Analysis:
The Key QuestionsThe Key Questions1. How well is the company’s
present 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 competitively strongeror weaker than key rivals?
5. What strategic issues meritfront-burner managerial attention?
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Fig. 4.1: Identifying the Fig. 4.1: Identifying the Components of a Single-Business Components of a Single-Business
Company’s StrategyCompany’s Strategy
Fig. 4.1: Identifying the Fig. 4.1: Identifying the Components of a Single-Business Components of a Single-Business
Company’s StrategyCompany’s Strategy
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Q #1: How Well Is the Q #1: How Well Is the Company’s Present Strategy Company’s Present Strategy
Working?Working?
Q #1: How Well Is the Q #1: How Well Is the Company’s Present Strategy Company’s Present Strategy
Working?Working?
Identify competitive approach Low-cost leadership Differentiation Focus on a particular market niche
Determine competitive scope Geographic market coverage Operating stages in industry’s production/distribution chain
Examine recent strategic moves Identify functional strategies
Key Issues
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Approaches to Assess How Approaches to Assess How Well the Present Strategy Is Well the Present Strategy Is
WorkingWorking
Approaches to Assess How Approaches to Assess How Well the Present Strategy Is Well the Present Strategy Is
WorkingWorking Qualitative assessment –
What is the strategy?
Completeness
Internal consistency
Rationale
Relevance
Quantitative assessment – What are the results? Is company achieving its
financial and strategic objectives?
Is company an above-average industry performer?
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Key Indicators of How WellKey Indicators of How Wellthe Strategy Is Workingthe Strategy Is Working
Key Indicators of How WellKey Indicators of How Wellthe Strategy Is Workingthe Strategy Is Working
Trend in sales and market share Acquiring and/or retaining customers Trend in profit margins Trend in net profits, ROI, and EVA Overall financial strength and credit ranking Efforts at continuous improvement activities Trend in stock price and stockholder value Image and reputation with customers Leadership role(s) – Technology, quality, innovation,
e-commerce, etc.
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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
Q #2: What Are the Company’s Q #2: What Are the Company’s Strengths, Weaknesses, Strengths, Weaknesses,
Opportunities and Threats ? Opportunities and Threats ?
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Identifying Resource Identifying Resource StrengthsStrengths
and Competitive Capabilitiesand Competitive Capabilities
Identifying Resource Identifying Resource StrengthsStrengths
and Competitive Capabilitiesand Competitive Capabilities A strength is something a firm does well or an attribute that
enhances its competitiveness Valuable competencies or know-how Valuable physical assets Valuable human assets Valuable organizational assets Valuable intangible assets Important competitive capabilities An attribute that places a company in a position of market advantage Alliances or cooperative ventures with partners
Resource strengths and competitivecapabilities are competitive assets!
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Competencies vs. Core Competencies vs. Core Competencies vs. Distinctive Competencies vs. Distinctive
CompetenciesCompetencies
Competencies vs. Core Competencies vs. Core Competencies vs. Distinctive Competencies vs. Distinctive
CompetenciesCompetencies 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 competitiveness and profitability
A distinctive competence is a competitively valuable activity a company performs better than its rivals
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Company CompetenciesCompany Competenciesand Capabilitiesand Capabilities
Company CompetenciesCompany Competenciesand Capabilitiesand Capabilities
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
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A competence becomes a core competence when the well-performed activity is central to a company’s competitiveness and profitability
Often, a core competence results from collaboration among different parts of a company
Typically, core competencies reside in a company’s people, not in assets on a balance sheet
A core competence gives a company apotentially valuable competitive capabilityand represents a definite competitive asset
Core Competencies -- ACore Competencies -- AValuable Company Valuable Company
ResourceResource
Core Competencies -- ACore Competencies -- AValuable Company Valuable Company
ResourceResource
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Examples: Core Examples: Core CompetenciesCompetencies
Examples: Core Examples: Core CompetenciesCompetencies
Expertise in integrating multiple technologiesto create families of new products
Know-how in creating operating systemsfor cost efficient supply chain management
Speeding new/next-generation products to market
Better after-sale service capability
Skills in manufacturing a high quality product
System to fill customer orders accurately and swiftly
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Distinctive Competence -- ADistinctive Competence -- ACompetitively Superior Competitively Superior
ResourceResource
Distinctive Competence -- ADistinctive Competence -- ACompetitively Superior Competitively Superior
ResourceResource A distinctive competence is a competitively significant
activity that a company performs better than its competitors A distinctive competence
Represents a competitively valuablecapability rivals do not have
Presents attractive potential for being a cornerstone of strategy
Can provide a competitive edge in the marketplace —because it represents a competitively superior resource strength
# 1
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Examples: Distinctive Examples: Distinctive Competencies Competencies
Examples: Distinctive Examples: Distinctive Competencies Competencies
Sharp Corporation Expertise in flat-panel display technology
Toyota and Honda Low-cost, high-quality manufacturing
capability and short design-to-market cycles Intel
Ability to design and manufactureever more powerful microprocessors for PCs
Wal-Mart Low-cost distribution and use of
state-of-the-art retail technology
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To qualify as competitively valuable or to be the basis for sustainable competitive advantage, a “resource” must pass 4 tests:
1. Is the resource hard to copy?
2. Does the resource have staying power – is it durable?
3. Is the resource really competitively superior?
4. Can the resource be trumped by the different capabilities of rivals?
Determining the CompetitiveDetermining the CompetitiveValue of a Company Value of a Company
ResourceResource
Determining the CompetitiveDetermining the CompetitiveValue of a Company Value of a Company
ResourceResource
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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!
Identifying Resource Identifying Resource WeaknessesWeaknesses
and Competitive Deficienciesand Competitive Deficiencies
Identifying Resource Identifying Resource WeaknessesWeaknesses
and Competitive Deficienciesand Competitive Deficiencies
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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
Identifying a Company’sIdentifying a Company’sMarket OpportunitiesMarket Opportunities
Identifying a Company’sIdentifying a Company’sMarket OpportunitiesMarket Opportunities
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Identifying External Identifying External ThreatsThreats
Identifying External Identifying External ThreatsThreats
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 in a country
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Role of SWOT Analysis inRole of SWOT Analysis inCrafting a Better StrategyCrafting a Better StrategyRole of SWOT Analysis inRole of SWOT Analysis inCrafting a Better StrategyCrafting a Better Strategy
The most important part of S W O TS W O T analysis is not developing the 4 lists of strengths, weaknesses, opportunities, and threats, but rather
Using the 4 lists to draw conclusionsabout a company’s overall situation and
Acting on the conclusions to
Better match a company’s strategy to itsresource strengths and market opportunities,
Correct the important weaknesses, and
Defend against external threats
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Fig. 4.2: The Three StepsFig. 4.2: The Three Stepsof SWOT Analysisof SWOT Analysis
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Q #4: Are the Company’sQ #4: Are the Company’sPrices and Costs Prices and Costs
Competitive?Competitive?
Q #4: Are the Company’sQ #4: Are the Company’sPrices and Costs Prices and Costs
Competitive?Competitive? Assessing whether a firm’s costs are competitive with those of
rivals is a crucial part of company analysis
Key analytical tools
Value chain analysis
Benchmarking
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The Concept of aThe Concept of aCompany Value ChainCompany Value Chain
The Concept of aThe Concept of aCompany Value ChainCompany Value Chain
A company’s business consists of all activities undertaken in designing, producing, marketing, delivering, and supporting its product or service
A company’s value chain consists of a linked set of value-creating activities performed internally
The value chain contains two types of activities
Primary activities – where most ofthe value for customers is created
Support activities – facilitateperformance of the primary activities
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Fig. 4.3: RepresentativeFig. 4.3: RepresentativeCompany Value ChainCompany Value Chain
Fig. 4.3: RepresentativeFig. 4.3: RepresentativeCompany Value ChainCompany Value Chain
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Characteristics of Characteristics of Value Chain AnalysisValue Chain Analysis
Characteristics of Characteristics of Value Chain AnalysisValue Chain Analysis
Combined costs of all activities in a company’s value chain define the 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
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Why Do ValueWhy Do ValueChains of Rivals Differ?Chains of Rivals Differ?
Why Do ValueWhy Do ValueChains of Rivals Differ?Chains of Rivals Differ?
Several factors can cause differencesin value chains of rival companies
Internal operations
Strategy
Approaches used in execution of the strategy
Underlying economics of the activities
Differences complicate task of assessingrivals’ relative cost positions
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The Value Chain SystemThe Value Chain Systemfor an Entire Industry for an Entire Industry
The Value Chain SystemThe Value Chain Systemfor an Entire Industry for an Entire Industry
Assessing a company’s cost competitiveness involves comparing costs all along the 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 costsand 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
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Fig. 4.4: Representative Fig. 4.4: Representative Value Chain for an Entire Value Chain for an Entire
IndustryIndustry
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Example: Value Chain Example: Value Chain ActivitiesActivities
Example: Value Chain Example: Value Chain ActivitiesActivities
Timber farming
Logging
Pulp mills
Papermaking
Distribution
Pulp & Paper Industry
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Home Appliance Industry
Parts and components manufacture
Assembly
Wholesale distribution
Retail sales
Example: Value Chain Example: Value Chain ActivitiesActivities
Example: Value Chain Example: Value Chain ActivitiesActivities
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Processing of basic ingredients
Syrup manufacture
Bottling and can filling
Wholesale distribution
Advertising
Retailing
Albertson’s
Example: Value Chain Example: Value Chain ActivitiesActivities
Example: Value Chain Example: Value Chain ActivitiesActivities
Soft Drink Industry
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Programming
Disk loading
Marketing
Distribution
Example: Value Chain Example: Value Chain ActivitiesActivities
Example: Value Chain Example: Value Chain ActivitiesActivities
Software Computer Industry
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Developing Data to Measure a Developing Data to Measure a Company’s Cost Company’s Cost CompetitivenessCompetitiveness
Developing Data to Measure a Developing Data to Measure a Company’s Cost Company’s Cost CompetitivenessCompetitiveness
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 definedversus broadly defined activities
Guideline – Develop separate cost estimates for activities Having different economics
Representing a significant or growing proportion of costs
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Activity-Based Costing: A Activity-Based Costing: A KeyKey
Tool in Analyzing CostsTool in Analyzing Costs
Activity-Based Costing: A Activity-Based Costing: A KeyKey
Tool in Analyzing CostsTool 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 accordingto specific activities performed and
Assigning costs to the activityresponsible for creating the cost
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Benchmarking Costs ofBenchmarking Costs ofKey Value Chain ActivitiesKey Value Chain Activities
Benchmarking Costs ofBenchmarking Costs ofKey Value Chain ActivitiesKey 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 Management of inventories Getting new products to market Performance of quality control Filling and shipping of customer orders Training of employees Processing of payrolls
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Objectives of Objectives of BenchmarkingBenchmarkingObjectives of Objectives of BenchmarkingBenchmarking
Identify best practices in performing an activity
Understand the best practices in performingan activity – learn what is the “best” wayto do a particular activity from thosedemonstrating they are “best-in-world”
Learn how other firms achieve lower costs
Take action to improve company’s cost competitiveness
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Ethical Standards in Ethical Standards in Benchmarking: Do’s and Benchmarking: Do’s and
Don’tsDon’ts
Ethical Standards in Ethical Standards in Benchmarking: Do’s and Benchmarking: Do’s and
Don’tsDon’ts Avoid talk about pricing or competitively
sensitive costs
Don’t ask rivals for sensitive data
Don’t share proprietary data without clearance
Have impartial third party assemble and present competitively sensitive cost data with no names attached
Don’t disparage a rival’s business to outsiders based on data obtained
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What Determines if aWhat Determines if aCompany Is Cost Company Is Cost
Competitive?Competitive?
What Determines if aWhat Determines if aCompany Is Cost Company Is Cost
Competitive?Competitive? Cost competitiveness depends on how well a company
manages its value chain relative to how well competitors manage their value chains
When costs are out-of-line, 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 ofForward
Channel Allies
InternallyPerformedActivities, Costs, &Margins
Activities, Costs, &
Margins ofSuppliers
Buyer/UserValue
Chains
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Options to CorrectOptions to CorrectInternal Cost Internal Cost DisadvantagesDisadvantages
Options to CorrectOptions to CorrectInternal Cost Internal Cost DisadvantagesDisadvantages
Implement use of best practices throughout company Eliminate some cost-producing activities altogether by revamping
value chain system Relocate high-cost activities to lower-cost geographic areas See if high-cost activities can be performed
cheaper 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
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Translating Performance of Value Translating Performance of Value Chain Activities to Competitive Chain Activities to Competitive
AdvantageAdvantage
Translating Performance of Value Translating Performance of Value Chain Activities to Competitive Chain Activities to Competitive
AdvantageAdvantage A company can create competitive advantage by managing its
value chain to
Integrate knowledge and skills of employees in competitively valuable ways
Leverage economies of learning / experience
Coordinate related activities in waysthat build valuable capabilities
Build dominating expertisein a value chain activity criticalto customer satisfaction or market success
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Fig. 4.5: Translating Performance of Fig. 4.5: Translating Performance of Value Chain Activities into Competitive Value Chain Activities into Competitive
Advantage Advantage
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Q. #4: Is the Company Q. #4: Is the Company Stronger or Weaker than Stronger or Weaker than
Key Rivals?Key Rivals?
Q. #4: Is the Company Q. #4: Is the Company Stronger or Weaker than Stronger or Weaker than
Key Rivals?Key Rivals? Overall competitive position involves
answering two questions
How does a company rank relativeto competitors on each importantfactor that determines market success?
Does a company have a netcompetitive advantage or disadvantagevis-à-vis major competitors?
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Assessing a Company’s Assessing a Company’s Competitive Strength vs. Key Competitive Strength vs. Key
RivalsRivals
Assessing a Company’s Assessing a Company’s Competitive Strength vs. Key Competitive Strength vs. Key
RivalsRivals1. List industry key success factors and other relevant measures
of competitive strength2. 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 position of firm
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Why Do a CompetitiveWhy Do a CompetitiveStrength Assessment ?Strength Assessment ?Why Do a CompetitiveWhy Do a CompetitiveStrength Assessment ?Strength Assessment ?
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)
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What Strategic IssuesWhat Strategic IssuesMerit Managerial Merit Managerial
Attention?Attention?
What Strategic IssuesWhat Strategic IssuesMerit Managerial Merit Managerial
Attention?Attention? Based on results of both industry and competitive analysis and
an evaluation of a company’s competitiveness, what items should beon a 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
A “good” strategy must address “what to do”about each and every strategic issue!
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Identifying the Strategic Identifying the Strategic IssuesIssues
Identifying the Strategic Identifying the Strategic IssuesIssues
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?
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A well-stated issue involves such phrases as “How to . . . ?” “Whether to . . . ?” “What should be done about . . . ?”
Issues need to be precise, specific, and “cut straight to the chase”
Issues on the “the worry list”raise questions about What actions need to be considered What to think about doing
Stating the IssuesStating the IssuesClearly and PreciselyClearly and Precisely
Stating the IssuesStating the IssuesClearly and PreciselyClearly and Precisely