STRATEGY Chapter 4 Core Concepts and Analytical Approaches ... · PDF fileCore Concepts and...

STRATEGYCore Concepts and Analytical Approaches

Chapter 4PowerPoint Slides

Copyright © 2012 GLO-BUS Software, Inc.

2nd Edition

Chapter 4 Learning ObjectivesChapter 4 Learning Objectives

1.1. Learn how to determine whether a firm’s strategy is Learn how to determine whether a firm’s strategy is

working well and to evaluate a firm’s resource working well and to evaluate a firm’s resource strengths, competencies, competitive capabilities, and strengths, competencies, competitive capabilities, and

resource weaknesses.resource weaknesses.

2.2. Understand the meaning and significance of company Understand the meaning and significance of company

and industry value chains.and industry value chains.

3.3. Gain proficiency in using four analytical tools to Gain proficiency in using four analytical tools to

evaluate a firm’s ability to compete successfully: SWOT evaluate a firm’s ability to compete successfully: SWOT

analysis, value chain analysis, benchmarking, and analysis, value chain analysis, benchmarking, and competitive strength assessment.competitive strength assessment.

4.4. Learn what to look for in identifying the strategic issues Learn what to look for in identifying the strategic issues company managers must address.company managers must address.

4–5Copyright © 2012 by Glo-Bus Software, Inc.

Chapter 4 RoadmapChapter 4 Roadmap

■■ Evaluating a Firm’s Resources and Ability to Compete Evaluating a Firm’s Resources and Ability to Compete

Successfully: The Five Questions to Answer Successfully: The Five Questions to Answer

►► Question 1Question 1:: How Well Is the Firm’s Present Strategy Working?How Well Is the Firm’s Present Strategy Working?

►► Question 2Question 2:: Are the Firm’s Resources and Capabilities Are the Firm’s Resources and Capabilities

Attractive and WellAttractive and Well--matched to Its Market matched to Its Market

Opportunities and External Threats?Opportunities and External Threats?

►► Question 3Question 3:: Are the Firm’s Prices and Costs Competitive? Are the Firm’s Prices and Costs Competitive?

►► Question 4Question 4:: Is the Firm Competitively Stronger or Weaker Is the Firm Competitively Stronger or Weaker than than

Key Rivals?Key Rivals?

►► Question 5Question 5:: What Strategic Issues and Problems Merit FrontWhat Strategic Issues and Problems Merit Front--

burner Managerial Attention?burner Managerial Attention?

Copyright © 2012 by Glo-Bus Software, Inc. 4–6

Thinking Strategically about a Firm’s Ability Thinking Strategically about a Firm’s Ability

to Compete Successfullyto Compete Successfully

■■ The analytical spotlight in evaluating a firm’s ability to The analytical spotlight in evaluating a firm’s ability to

compete successfully is trained on 5 questions:compete successfully is trained on 5 questions:

►► How well is the firm’s present strategy working?How well is the firm’s present strategy working?

►► Does it have strong resource capabilities and are they well Does it have strong resource capabilities and are they well

matched to its market opportunities and the external threats to its matched to its market opportunities and the external threats to its future wellfuture well--being?being?

►► Are the firm’s prices and costs competitive and does it have an Are the firm’s prices and costs competitive and does it have an appealing customer value proposition?appealing customer value proposition?

►► Is the firm competitively stronger or weaker than key rivals?Is the firm competitively stronger or weaker than key rivals?

►► What strategic issues merit frontWhat strategic issues merit front--burner managerial attention?burner managerial attention?


Question Question 11:: How Well Is the Firm’sHow Well Is the Firm’s

Present Strategy Working?Present Strategy Working?

■■ Begin by understanding what its strategy is:Begin by understanding what its strategy is:

►► Identify the company’s competitive approachIdentify the company’s competitive approach

•• LowerLower--costs relative to rivals?costs relative to rivals?

•• A different or better product/service?A different or better product/service?

•• Superior ability to serve a particular Superior ability to serve a particular

market niche or group of buyers?market niche or group of buyers?

►►Determine its competitive scopeDetermine its competitive scope

•• Broad or narrow geographic market coverage?Broad or narrow geographic market coverage?

•• Wide or barrow product line?Wide or barrow product line?

►►Examine recent strategic movesExamine recent strategic moves

►► Identify functional strategiesIdentify functional strategies

Copyright © 2012 by Glo-Bus Software, Inc. 4–8 4–9

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

Figure

Copyright © 2012 by Glo-Bus Software, Inc.




Key Indicators of How Well Key Indicators of How Well

A Company’s Strategy Is WorkingA Company’s Strategy Is Working

■■ Best indicators:Best indicators:

►► Whether the firm is meeting or beating its financial and strategic Whether the firm is meeting or beating its financial and strategic performance targetsperformance targets

►► Whether the firm is an aboveWhether the firm is an above--average industry performer.average industry performer.

►► WWhether hether the the firm firm is gaining customers is gaining customers and outcompeting and outcompeting one or one or

more of its close rivals.more of its close rivals.

Persistent shortfalls in meeting performance targets Persistent shortfalls in meeting performance targets and weak performance relative to rivals are reliable and weak performance relative to rivals are reliable warning signs that the firm has a weak strategy or warning signs that the firm has a weak strategy or

suffers from poor strategy execution or both.suffers from poor strategy execution or both.


Other Good Indicators Other Good Indicators of How Well of How Well

a Company’s a Company’s Strategy Is WorkingStrategy Is Working

■■ Whether the firm’s sales are growing faster, slower, or at about the same pace as Whether the firm’s sales are growing faster, slower, or at about the same pace as the market as a whole, thus resulting in a rising, eroding, or stable market share.the market as a whole, thus resulting in a rising, eroding, or stable market share.

■■ Whether the company is acquiring new customers at an attractive rate, as well as Whether the company is acquiring new customers at an attractive rate, as well as

retaining existing customers.retaining existing customers.

■■ Whether the firm’s image and reputation with its customers is growing stronger or Whether the firm’s image and reputation with its customers is growing stronger or

weaker.weaker.

■■ How How well the company stacks up against rivals on product innovation, customer well the company stacks up against rivals on product innovation, customer service, product quality, delivery time, price, getting newly developed products to service, product quality, delivery time, price, getting newly developed products to

market quickly, and other relevant factors affecting buyers’ choice of brands.market quickly, and other relevant factors affecting buyers’ choice of brands.

■■ Whether the firm’s profit margins are increasing or decreasing and how well its Whether the firm’s profit margins are increasing or decreasing and how well its margins compare to the profit margins of rival firms.margins compare to the profit margins of rival firms.

■■ Trends in the firm’s net profits and return on investment and how these compare to Trends in the firm’s net profits and return on investment and how these compare to

the same trends for rival companies.the same trends for rival companies.

■■ Whether the company’s overall financial strength and credit rating are improving or Whether the company’s overall financial strength and credit rating are improving or

growing weaker.growing weaker.


Evaluating a Company’s Financial Evaluating a Company’s Financial

PerformancePerformance

■■ Accurate diagnosis of a company’s financial Accurate diagnosis of a company’s financial performance and financial statements performance and financial statements requires requires some numbersome number--crunching.crunching.

■■ The financial ratios in Table 4.1 are intended to The financial ratios in Table 4.1 are intended to provide guidance and direction in what numbers provide guidance and direction in what numbers need to be calculated and how to interpret them. need to be calculated and how to interpret them.

4–12Copyright © 2012 by Glo-Bus Software, Inc. 4–13

4.1 Key Financial Ratios: How to Calculate Them and What They MeanTable


4–14








Question 2:Question 2: Are the Firm’s Resources and Capabilities Are the Firm’s Resources and Capabilities Attractive and WellAttractive and Well--matched to Its Market matched to Its Market Opportunities and External Threats?Opportunities and External Threats?

■■ SWOT Analysis SWOT Analysis is a simple but powerful analytic tool for is a simple but powerful analytic tool for

evaluating a whether a firm’s overall situation is fundamentally evaluating a whether a firm’s overall situation is fundamentally

healthy or unhealthy.healthy or unhealthy.

►► Zeros in on the firm’s resource Zeros in on the firm’s resource Strengths Strengths andand WeaknessesWeaknesses, ,

market market OpportunitiesOpportunities, and external , and external ThreatsThreats. .

■■ A firstA first--rate SWOT analysis aids managers in crafting a rate SWOT analysis aids managers in crafting a

strategy that:strategy that:

►► Capitalizes on the company’s resource strengthsCapitalizes on the company’s resource strengths

►► Aims squarely at capturing its best market opportunities Aims squarely at capturing its best market opportunities

►► Defends against external threats to the company’s future wellDefends against external threats to the company’s future well--

being and business prospectsbeing and business prospects


Identifying Company Resource StrengthsIdentifying Company Resource Strengths

■■ A A resource strength resource strength is something a firm does well is something a firm does well

or an attribute that enhances its competitivenessor an attribute that enhances its competitiveness

■■ Resource strengths can take any of several forms: Resource strengths can take any of several forms:

►► A skill, specialized expertise, or competitively important A skill, specialized expertise, or competitively important

capabilitycapability

►► Valuable physical assetsValuable physical assets

►► Valuable Valuable human assets and intellectual capitalhuman assets and intellectual capital

►► Valuable organizational assetsValuable organizational assets

►► Valuable intangible assetsValuable intangible assets

►► An achievement or attribute that puts the firm in a position of An achievement or attribute that puts the firm in a position of market advantage market advantage

►► Competitively valuable alliances or cooperative ventures Competitively valuable alliances or cooperative ventures


Core ConceptCore Concept

A company’s resource strengths represent A company’s resource strengths represent its its competitive competitive assets assets and are and are big determinants of its big determinants of its competitiveness and ability to succeed in competitiveness and ability to succeed in the the marketplacemarketplace..

44––1818Copyright © 2012 by GloCopyright © 2012 by Glo--Bus Software, Inc.Bus Software, Inc.

Assessing a Firm’s Strengths and CapabilitiesAssessing a Firm’s Strengths and Capabilities

A A firm’s firm’s skill or proficiency in performing different facets of its operations skill or proficiency in performing different facets of its operations can range from one of minimal ability to the other extreme of being able can range from one of minimal ability to the other extreme of being able to perform the activity better than any other company in the industry. to perform the activity better than any other company in the industry.

■■ Core Concept: Core Concept: A firm has a A firm has a competencecompetence in performing an activity in performing an activity when, over time, it gains the experience and knowwhen, over time, it gains the experience and know--how to perform an how to perform an activity consistently well and at acceptable cost.activity consistently well and at acceptable cost.

■■ Core Concept: Core Concept: A A core competencecore competence is an activity that a firm is an activity that a firm performs quite well and that is also performs quite well and that is also central central to its strategy and to its strategy and competitiveness. competitiveness.

►► A A core competence core competence is a more important resource than a is a more important resource than a competencecompetencebecause it adds power to a firm’s strategy and has a bigger positive because it adds power to a firm’s strategy and has a bigger positive impact on its market position and profitability.impact on its market position and profitability.

■■ Core Concept: Core Concept: A A distinctive competencedistinctive competence is a competitively is a competitively important activity that a firm performs important activity that a firm performs betterbetter than its rivalsthan its rivals——it it represents represents a a competitively superior resource strength.competitively superior resource strength.



A A firm firm has a has a competencecompetence in performing in performing an activity an activity when, over time, it gains the when, over time, it gains the experience and experience and

knowknow--how how to perform an activity to perform an activity consistently well consistently well and at acceptable cost.and at acceptable cost.



A A core competence core competence is an activity that is an activity that a firm a firm performs performs quite well and that is quite well and that is also central also central to its to its

strategy and competitiveness. strategy and competitiveness.

A core A core competence is a more important competence is a more important resource resource

strength strength than a competence because it than a competence because it adds adds power power to a to a firm’s firm’s strategy and has a strategy and has a bigger bigger

positive positive impact on its competitive strength impact on its competitive strength and and profitabilityprofitability..






A A distinctive competence distinctive competence is a is a competitively competitively important important activity that a activity that a firm performs better firm performs better than than

its rivalsits rivals——it thus represents it thus represents a competitively a competitively superior resource strengthsuperior resource strength..


Building a Company Competence Building a Company Competence or Capabilityor Capability

■■ A firm’s proficiency rises from mere ability to A firm’s proficiency rises from mere ability to perform an activity to a true competence when it perform an activity to a true competence when it

is able to is able to perform the activity consistently well perform the activity consistently well and at acceptable costand at acceptable cost..

►►Achieving competence begins with deliberate efforts Achieving competence begins with deliberate efforts

to simply develop the ability to perform an activity, to simply develop the ability to perform an activity, however imperfectly or inefficiently. however imperfectly or inefficiently.

►►Then, as experience builds and the company gains Then, as experience builds and the company gains proficiency to perform the activityproficiency to perform the activity consistently well consistently well andand

at an acceptable costat an acceptable cost, its ability evolves into a true , its ability evolves into a true

competence and capability. competence and capability.


Where Are Company Competencies Located?Where Are Company Competencies Located?

■■ Some competencies relate to specific skills and Some competencies relate to specific skills and

expertise in a single discipline or function and are expertise in a single discipline or function and are

performed in a single organizational unit. performed in a single organizational unit.

■■ Other competencies are Other competencies are inherently multiinherently multi--disciplinary disciplinary and and

crosscross--functional, resulting from effective collaboration functional, resulting from effective collaboration

among people with different expertise in different among people with different expertise in different

organizational units.organizational units.

Virtually all organizational competencies are Virtually all organizational competencies are knowledgeknowledge--

basedbased, residing in the intellectual capital of company , residing in the intellectual capital of company

personnel.personnel.


Core CompetenciesCore Competencies

■■ A A Core Competence Core Competence is a more competitively valuable is a more competitively valuable

resource strength than a competence because of its resource strength than a competence because of its key role in the firm’s strategy and its contribution to the key role in the firm’s strategy and its contribution to the

firm’s market success and profitability.firm’s market success and profitability.

►► Most core competencies are grounded Most core competencies are grounded in crossin cross--department department combinations of knowledge and expertise rather than combinations of knowledge and expertise rather than in the in the

skills and efforts of skills and efforts of a single department or work a single department or work group.group.

■■ Examples of Core Competencies:Examples of Core Competencies:

►► The ability to speed new/nextThe ability to speed new/next--generation products to marketgeneration products to market

►► Skills in producing a highSkills in producing a high--quality product at a low costquality product at a low cost

►► The capability to fill customer orders accurately and swiftly.The capability to fill customer orders accurately and swiftly.


Why a Distinctive Competence MattersWhy a Distinctive Competence Matters

■■ A A Distinctive CompetenceDistinctive Competence►►Signifies greater proficiency than a core competence Signifies greater proficiency than a core competence

because it represents a level of proficiency that rivals because it represents a level of proficiency that rivals do not have.do not have.

►►Adds Adds real real punch and power to a punch and power to a firm’s firm’s strategystrategybecause it represents a because it represents a competitively competitively superior superior resource strengthresource strength

►► Has potential Has potential for producing a competitive advantage for producing a competitive advantage whenwhen::

•• It relates to an activity important to market successIt relates to an activity important to market success

•• Rival companies do not have offsetting competenciesRival companies do not have offsetting competencies

•• It is costly and timeIt is costly and time--consuming for rivals to imitate the consuming for rivals to imitate the competencecompetence


Determining Whether a Firm Has a Competitively Determining Whether a Firm Has a Competitively Attractive Collection of ResourcesAttractive Collection of Resources

■■ It is important for a firm to identify which skills and It is important for a firm to identify which skills and

proficiencies qualify as a proficiencies qualify as a competencecompetence, which represent , which represent a a core competencecore competence, and which represent a , and which represent a distinctive distinctive

competencecompetence..

►► Both core competencies and distinctive competencies are Both core competencies and distinctive competencies are valuable and act to enhance a company’s competitiveness. valuable and act to enhance a company’s competitiveness.

►► Some competencies merely enable market survival because Some competencies merely enable market survival because most rivals also have them.most rivals also have them.

►► Not having an important competence or competitive capability Not having an important competence or competitive capability

that rivals have can result in competitive disadvantage.that rivals have can result in competitive disadvantage.





Dynamic CapabilitiesDynamic Capabilities——The The Importance of Keeping Company Competencies Importance of Keeping Company Competencies

Freshly Honed Freshly Honed and on the Cuttingand on the Cutting--EdgeEdge

■■ Why must a firm polish, update, or augment its current Why must a firm polish, update, or augment its current

competencies competencies and and capabilities?capabilities?

►►To To effectively respond to ongoing changes effectively respond to ongoing changes in in

customer customer needs and needs and expectationsexpectations

►►To To protect protect its longits long--term term competitiveness against the competitiveness against the

strategic strategic maneuvering of maneuvering of rivals to win bigger sales rivals to win bigger sales and and market shares.market shares.

►►To help improve its performance over the longTo help improve its performance over the long--termterm


Important Important PointPoint

Important Important PointPoint

A firm requires a dynamically evolving portfolio of competencies and capabilities in order to sustain its competitiveness and help drive improvements in its performance.

Four Ways to Test the Competitive Power Four Ways to Test the Competitive Power

of of a Resource Strength or Capabilitya Resource Strength or Capability

■■ There are four tests of the competitive power of a There are four tests of the competitive power of a

resource strength or capability: resource strength or capability:

1.1. Does the resource strength or capability have competitive Does the resource strength or capability have competitive

valuevalue??

2.2. Do many or most rivals have much the same resources or Do many or most rivals have much the same resources or capabilities?capabilities?

3.3. Is the resource or capability hard to copy?Is the resource or capability hard to copy?

4.4. Can the resource strength be trumped by the different resource Can the resource strength be trumped by the different resource strengths and competitive capabilities of rivals?strengths and competitive capabilities of rivals?


Core Core ConceptConcept

Core Core ConceptConcept

The degree of success a company enjoys in the marketplace hinges on the competitive power of its resources—the set of competencies, capabilities, and competitive assets at its command.

■■ A powerful strategy A powerful strategy

■■ Core competencies in _______. Core competencies in _______.

■■ A distinctive competence in _______.A distinctive competence in _______.

■■ A product that is strongly A product that is strongly differentiated from those of rivalsdifferentiated from those of rivals

■■ Competencies and capabilities that Competencies and capabilities that

are well matched to industry key are well matched to industry key success factorssuccess factors

■■ A strong financial condition; ample A strong financial condition; ample

financial resources for growthfinancial resources for growth

■■ Strong brand name/image/reputationStrong brand name/image/reputation

■■ An attractive customer baseAn attractive customer base

■■ Proprietary technology/superior Proprietary technology/superior

technological skills/important patentstechnological skills/important patents

■■ Superior intellectual capital relative to Superior intellectual capital relative to key rivalskey rivals

■■ Cost advantages over rivalsCost advantages over rivals

■■ Skills in advertising and promotionSkills in advertising and promotion

■■ Product innovation capabilitiesProduct innovation capabilities

■■ Proven capabilities in improving Proven capabilities in improving

production processesproduction processes

■■ Good supply chain management Good supply chain management

capabilitiescapabilities

■■ Good customer service capabilitiesGood customer service capabilities

■■ Better product quality relative to rivalsBetter product quality relative to rivals

■■ Wide geographic coverage and/or Wide geographic coverage and/or

strong global distribution strong global distribution capabilitycapability

■■ Important alliances / joint ventures Important alliances / joint ventures

with other firmswith other firms

What to Look For in Identifying a Firm’s What to Look For in Identifying a Firm’s Resource Strengths and Competitive CapabilitiesResource Strengths and Competitive Capabilities


4.2 What to Look for in Identifying a Firm’s Resource StrengthsTable


• A powerful strategy

• Core competencies in _______

• A distinctive competence in _______

• A product that is strongly differentiated from those of rivals

• Competencies and capabilities that are well matched to industry key success factors

• A strong financial condition; ample financial resources to grow the business

• Strong brand name image/company reputation

• An attractive customer base

• Proprietary technology / superior technological skills / important patents

• Superior intellectual capital relative to key rivals

• Cost advantages over rivals

• Skills in advertising and promotion

• Product innovation capabilities

• Proven capabilities in improving production processes

• Good supply chain management capabilities

• Good customer service capabilities

• Better product quality relative to rivals

• Wide geographic coverage and/or strong global distribution capability

• Alliances / joint ventures with other firms that provide access to valuable technology,

competencies, and/or attractive geographic markets

Tying Strategy to Competitively Tying Strategy to Competitively

Powerful Resource StrengthsPowerful Resource Strengths

Why should a firm’s strategy be based on its most Why should a firm’s strategy be based on its most competitively powerful resource strengths and competitively powerful resource strengths and

capabilities? capabilities?

Because anchoring a firm’s strategy in its most valuable Because anchoring a firm’s strategy in its most valuable resource strengths resource strengths gives the firm gives the firm its best chances its best chances for for

competitive successcompetitive success

►► A firm’s resource strengths are central in delivering value to A firm’s resource strengths are central in delivering value to customers and winning business away from rivals.customers and winning business away from rivals.

►► It is very difficult for rivals to outcompete a firm having powerful It is very difficult for rivals to outcompete a firm having powerful resources and capabilities that are hard to copy and hard to trumpresources and capabilities that are hard to copy and hard to trump..

►► A strategy grounded in competitively superior resource strengths A strategy grounded in competitively superior resource strengths

helps achieve a sustainable competitive advantage.helps achieve a sustainable competitive advantage.


Identifying Company Resource WeaknessesIdentifying Company Resource Weaknesses

and Competitive Deficienciesand Competitive Deficiencies

■■ A resource weakness, or competitive deficiencyA resource weakness, or competitive deficiency

►► Is something a firm lacks, does poorly (in comparison Is something a firm lacks, does poorly (in comparison to rivals) or a condition that puts it at a disadvantage to rivals) or a condition that puts it at a disadvantage

in the marketplace.in the marketplace.

■■ Resource weaknesses relate to:Resource weaknesses relate to:

►► Inferior or unproven skills, capabilities, expertise, or Inferior or unproven skills, capabilities, expertise, or intellectual capital in important areas of the business.intellectual capital in important areas of the business.

►►Deficiencies in competitively important physical, Deficiencies in competitively important physical, organizational, or intangible assets.organizational, or intangible assets.

►►Missing or Missing or competitively competitively weak weak capabilities in key capabilities in key areasareas






A A firm’s firm’s resource weaknesses resource weaknesses are shortcomings are shortcomings that that constitute competitive liabilitiesconstitute competitive liabilities..

Important Point:Important Point: The degree to which The degree to which a a firm’s firm’s

resource weaknesses make it competitively resource weaknesses make it competitively vulnerable vulnerable depends on depends on how much they matter in how much they matter in

the marketplace and the marketplace and the extent to which the extent to which they they may may be partially or wholly offset be partially or wholly offset by the by the firm’s firm’s resource resource

strengths.strengths.


■■ No clear strategic directionNo clear strategic direction

■■ Resources that are not well matched to Resources that are not well matched to industry key success factorsindustry key success factors

■■ No wellNo well--developed or proven core developed or proven core competencies competencies

■■ A weak balance sheet; burdened with too A weak balance sheet; burdened with too much debt; much debt;

■■ Higher overall unit costs relative to key Higher overall unit costs relative to key competitorscompetitors

■■ Weak or unproven product innovation Weak or unproven product innovation capabilitiescapabilities

■■ A product/service with hoA product/service with ho--hum attributes hum attributes or features inferior to those of rivalsor features inferior to those of rivals

■■ Too narrow a product line relative to Too narrow a product line relative to rivalsrivals

■■ Weak brand image or reputationWeak brand image or reputation

■■ Weaker dealer network than key rivals Weaker dealer network than key rivals and/or lack of adequate global and/or lack of adequate global distribution capabilitydistribution capability

■■ Behind on product quality, R&D, and/or Behind on product quality, R&D, and/or technological knowtechnological know--howhow

■■ In the wrong strategic groupIn the wrong strategic group

■■ Losing market share because…Losing market share because…

■■ Lack of management depthLack of management depth

■■ Inferior intellectual capital relative to Inferior intellectual capital relative to rivalsrivals

■■ Subpar profitability because…Subpar profitability because…

■■ Plagued with internal operating problems Plagued with internal operating problems or obsolete facilitiesor obsolete facilities

■■ Short on financial resources to grow the Short on financial resources to grow the business and pursue promising initiativesbusiness and pursue promising initiatives

■■ Too much underutilized plant Too much underutilized plant capacitycapacity

What to Look For in Identifying a Company’s What to Look For in Identifying a Company’s Resource Weaknesses and Competitive DeficienciesResource Weaknesses and Competitive Deficiencies


4–36

4.2 What to Look for in Identifying a Firm’s WeaknessesTable


• No clear strategic direction

• Resources that are not well matched to an industry’s key success factors

• No well-developed or proven core competencies

• A weak balance sheet; burdened with too much debt

• Higher overall unit costs relative to key competitors

• Weak or unproven product innovation capabilities

• A product/service with ho-hum attributes or features inferior to those of rivals

• Too narrow a product line relative to rivals

• Weak brand image or reputation

• Weaker dealer network than key rivals and/or inadequate global distribution capability

• Behind on product quality, R&D, and/or technological know-how

• In the wrong strategic group

• Losing market share because…

• Lack of management depth

• Inferior intellectual capital relative to rivals

• Subpar profitability because…

• Plagued with internal operating problems or obsolete facilities

• Short on financial resources to grow the business and pursue promising initiatives

• Too much underutilized plant capacity

Market OpportunitiesMarket Opportunities

■■ Managers can’t properly tailor strategy to the firm’s Managers can’t properly tailor strategy to the firm’s

situation without first identifying its market opportunities situation without first identifying its market opportunities and appraising the growth and profit potential each one and appraising the growth and profit potential each one

holds.holds.

■■ A firm’s market opportunities canA firm’s market opportunities can

►► Be plentiful or scarce, fleeting or lastingBe plentiful or scarce, fleeting or lasting

►► Range from Range from wildly attractive wildly attractive (an absolute “must” to pursue) (an absolute “must” to pursue) toto

Marginally interesting Marginally interesting (because of the high risks or large capital (because of the high risks or large capital

requirements or unappealing revenue growth and profit potentials) requirements or unappealing revenue growth and profit potentials) toto

UnsuitableUnsuitable (because the firm’s resource strengths and capabilities (because the firm’s resource strengths and capabilities

are illare ill--suited to capturing particular opportunities).suited to capturing particular opportunities).


Identifying a Firm’s Market OpportunitiesIdentifying a Firm’s Market Opportunities

■■ While a firm’s strategy should always be aimed While a firm’s strategy should always be aimed at capturing good market opportunities, the at capturing good market opportunities, the

opportunities opportunities most relevant most relevant to a company are to a company are those that:those that:

►►Match up well with the firm’s financial and Match up well with the firm’s financial and

organizational resource capabilitiesorganizational resource capabilities

►►Offer the best prospects for growth and profitabilityOffer the best prospects for growth and profitability

►►Present the most potential for competitive advantagePresent the most potential for competitive advantage


RuleRuleRuleRuleA firm should pass on a particular market opportunity unless it has or can acquire the resources and capabilities to capture it.

■■ Openings to win market share Openings to win market share from rivals from rivals

■■ Sharply rising buyer demand Sharply rising buyer demand for the industry’s productfor the industry’s product

■■ Serving additional customer Serving additional customer groups or market segmentsgroups or market segments

■■ Expanding into new geographic Expanding into new geographic markets markets

■■ Expanding the firm’s product Expanding the firm’s product line to meet a broader range line to meet a broader range of customer needsof customer needs

■■ Utilizing firm’s present skills Utilizing firm’s present skills or technological knowor technological know--how how to enter new product lines to enter new product lines or new businessesor new businesses

■■ Online sales via the Internet Online sales via the Internet

■■ Integrating forward or backward Integrating forward or backward

■■ Falling trade barriers in attractive Falling trade barriers in attractive foreign marketsforeign markets

■■ Acquiring Acquiring rivals with rivals with attractive attractive

technological expertise or technological expertise or capabilitiescapabilities

■■ Entering into alliances or joint Entering into alliances or joint ventures to expand the firm’s ventures to expand the firm’s market coverage or boost its market coverage or boost its competitive capabilitycompetitive capability

■■ Openings to exploit emerging Openings to exploit emerging new technologiesnew technologies

4–39

What to Look For in Identifying a Company’s What to Look For in Identifying a Company’s

Market OpportunitiesMarket Opportunities





4–40

4.2 What to Look for in Identifying Market OpportunitiesTable


• Openings to win market share from rivals

• Sharply rising buyer demand for the industry’s product

• Serving additional customer groups or market segments

• Expanding into new geographic markets

• Expanding the company’s product line to meet a broader range of customer needs

• Utilizing existing company skills or technological knowhow to enter new product lines or new businesses

• Online sales via the Internet

• Integrating forward or backward

• Falling trade barriers in attractive foreign markets

• Acquiring rival firms or companies with attractive technological expertise or capabilities

• Entering into alliances or joint ventures to expand the firm’s market coverage or boost

its competitive capability

• Openings to exploit emerging new technologies

Identifying External Threats to Identifying External Threats to

a Firm’s Future Profitabilitya Firm’s Future Profitability

■■ Factors in a firm’s external environment can pose Factors in a firm’s external environment can pose

threatsthreats to its profitability and competitive wellto its profitability and competitive well--beingbeing

■■ External threats External threats may pose no more than a moderate may pose no more than a moderate

degree of adversity, or they may be so imposing as to degree of adversity, or they may be so imposing as to make a firm’s situation and outlook quite tenuous. make a firm’s situation and outlook quite tenuous.

■■ On rare occasions, market shocks can give birth to a On rare occasions, market shocks can give birth to a suddensudden--death threat death threat that throws a firm into an that throws a firm into an

immediate crisis and battle to survive.immediate crisis and battle to survive.


■■ Increasing intensity of competition Increasing intensity of competition among industry rivalsamong industry rivals——may may

squeeze profit marginssqueeze profit margins

■■ Slowdowns in market growthSlowdowns in market growth

■■ Likely entry of potent new Likely entry of potent new

competitorscompetitors

■■ Loss of sales to substitute Loss of sales to substitute

products products

■■ Growing bargaining power of Growing bargaining power of

customers or supplierscustomers or suppliers

■■ A shift in buyer needs and tastes A shift in buyer needs and tastes away from the industry’s productaway from the industry’s product

■■ Adverse demographic changes Adverse demographic changes that threaten to curtail demand for that threaten to curtail demand for

the industry’s productthe industry’s product

■■ Vulnerability to unfavorable Vulnerability to unfavorable industry driving forces industry driving forces

■■ Restrictive trade policies on the Restrictive trade policies on the part of foreign governments part of foreign governments

■■ Costly new regulatory Costly new regulatory

requirementsrequirements

■■ Tight credit conditionsTight credit conditions

■■ Rising energy pricesRising energy prices

What to Look For in Identifying External What to Look For in Identifying External

Threats to a Firm’s Future ProfitabilityThreats to a Firm’s Future Profitability


4.2 What to Look for in Identifying External ThreatsTable


• Increasing intensity of competition among industry rivals—may squeeze profit margins

• Slowdowns in market growth

• Likely entry of potent new competitors

• Loss of sales to substitute products

• Growing bargaining power of customers or suppliers

• A shift in buyer needs and tastes away from the industry’s product

• Adverse demographic changes that threaten to curtail demand for the industry’s

product

• Vulnerability to unfavorable industry driving forces

• Restrictive trade policies on the part of foreign governments

• Costly new regulatory requirements

• Tight credit conditions

• Rising energy prices

4–44

4.2 The Three Steps of SWOT Analysis: Identify, Draw Conclusions, Translate into Strategic Action

Figure


The Second Step of SWOT Analysis:The Second Step of SWOT Analysis:

Drawing Conclusions from the Four ListsDrawing Conclusions from the Four Lists

What conclusions can be drawn from the four SWOT lists is often What conclusions can be drawn from the four SWOT lists is often

revealed in the answers to the following questions:revealed in the answers to the following questions:■■ What are the attractive aspects of the firm’s situation?What are the attractive aspects of the firm’s situation?

■■ What aspects are of the most concern?What aspects are of the most concern?

■■ Could one or more of the Could one or more of the firm’s weaknesses and competitive deficiencies prove firm’s weaknesses and competitive deficiencies prove

fatal if not fatal if not remedied, or are they either inconsequential or correctable?remedied, or are they either inconsequential or correctable?

■■ Do Do the firm’s resource strengths and competitive capabilities the firm’s resource strengths and competitive capabilities outweigh outweigh its resource its resource

weaknesses and competitive weaknesses and competitive deficiencies by a little or a lot (or not at all)?deficiencies by a little or a lot (or not at all)?

■■ Does Does the company have attractive market opportunities that are well suited to its the company have attractive market opportunities that are well suited to its

resource strengths resource strengths and competitive and competitive capabilitiescapabilities??

■■ Does Does the company lack the company lack certain certain resources resources and/or and/or capabilities to pursue any of capabilities to pursue any of the the

most most attractive opportunities?attractive opportunities?

■■ Are any of the external Are any of the external threats threats of major concern, of major concern, or are they something the or are they something the

company appears able to company appears able to withstand and/or defend withstand and/or defend againstagainst??

■■ Considering the four lists, where on a scale of 1 to 10 (where 1 is alarmingly weak Considering the four lists, 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 and 10 is exceptionally strong) should the firm’s position and overall situation be

ranked? ranked? Copyright © 2012 by Glo-Bus Software, Inc. 4–45




The Third Step of SWOT Analysis:The Third Step of SWOT Analysis:

Taking Actions to Improve StrategyTaking Actions to Improve Strategy

■■ A firm’s resource strengths and competitive capabilities A firm’s resource strengths and competitive capabilities

should always serve as the cornerstones of its strategyshould always serve as the cornerstones of its strategy

►► Placing heavy reliance on a company’s best competitive assets is Placing heavy reliance on a company’s best competitive assets is

the soundest route to attracting customers and competing the soundest route to attracting customers and competing

successfully against rivalssuccessfully against rivals

■■ Managers should try to correct competitive weaknesses Managers should try to correct competitive weaknesses

that that

►► Make the company vulnerableMake the company vulnerable

►► Hold down profitabilityHold down profitability

►► Disqualify the company from pursuing a particularly attractive Disqualify the company from pursuing a particularly attractive opportunityopportunity


The Third Step of SWOT Analysis:The Third Step of SWOT Analysis:

Taking Actions to Improve Strategy (Cont’d)Taking Actions to Improve Strategy (Cont’d)

■■ Managers should aim the firm’s strategy squarely at Managers should aim the firm’s strategy squarely at

capturing those market opportunities that are both capturing those market opportunities that are both attractive and suited to the company’s collection of attractive and suited to the company’s collection of

strengths and capabilitiesstrengths and capabilities

■■ How much attention to devote to defending against How much attention to devote to defending against

external threats to the firm’s market position and future external threats to the firm’s market position and future

performance hinges on performance hinges on

►► How vulnerable the firm isHow vulnerable the firm is

►► Whether there are attractive defensive moves that can be taken Whether there are attractive defensive moves that can be taken

to lessen the impact of particular threatsto lessen the impact of particular threats

►► Whether the costs of undertaking such moves represent the best Whether the costs of undertaking such moves represent the best

use of company resourcesuse of company resources


Question 3:Question 3: Are the Firm’s Prices and Costs Competitive Are the Firm’s Prices and Costs Competitive and Does It Have an Appealing Customer and Does It Have an Appealing Customer Value Proposition?Value Proposition?

■■ The most telling signs of the strength of a firm’s The most telling signs of the strength of a firm’s

business position arebusiness position are

►► Whether its prices are justified by the value it delivers to Whether its prices are justified by the value it delivers to customerscustomers

►► Whether its prices and costs are competitive with industry rivals.Whether its prices and costs are competitive with industry rivals.

■■ Two analytical tools are particularly useful in Two analytical tools are particularly useful in

determining whether a firm’s customer value determining whether a firm’s customer value

proposition, prices, and costs are competitive: proposition, prices, and costs are competitive:

►► Value chain analysisValue chain analysis

►► BenchmarkingBenchmarking


What Does the Term “Value Chain” Mean?What Does the Term “Value Chain” Mean?

■■ All of the various activities a firm performs internally All of the various activities a firm performs internally

combine to form acombine to form a value chainvalue chain——because because creating value creating value for customers for customers is what chains a firm’s various activities is what chains a firm’s various activities

into a purposeful group of functions and tasks.into a purposeful group of functions and tasks.

■■ A firm’s value chain consists of two broad categories of A firm’s value chain consists of two broad categories of

activities activities

►► Primary activities Primary activities that are foremost in the firm’s scheme for that are foremost in the firm’s scheme for delivering value to customersdelivering value to customers

►► Support activities Support activities that facilitate and enhance the performance of that facilitate and enhance the performance of

primary activities.primary activities.

A firm has no sound business justification for performing any A firm has no sound business justification for performing any activity that does not result in greater value for customers.activity that does not result in greater value for customers.



A company’s A company’s value chain value chain identifies identifies the the primary primary activities activities it performs that create customer it performs that create customer value value

and and the related support activities. the related support activities.

The The “outputs“outputs” of ” of an organization’s value chain an organization’s value chain activities are activities are the value delivered to customers the value delivered to customers and and the resulting the resulting revenues it collects. revenues it collects.

The The “inputs” “inputs” are all are all of the resources required to of the resources required to

conduct conduct the various the various value chain activities; use value chain activities; use of of these resources these resources creates costs.creates costs.

44––5050Copyright © 2012 by GloCopyright © 2012 by Glo--Bus Software, Inc.Bus Software, Inc. 4–51

4.3 A Representative Company Value ChainFigure





4–52

Representative Primary Activities in a Company’s Value Chain

Figure 4.3(cont’d)


• Supply Chain Management—Activities, costs, and assets associated with purchasing fuel, energy, raw materials, parts and components, merchandise, and consumable

items from vendors; receiving, storing and disseminating inputs from suppliers;

inspection; and inventory management.

• Operations—Activities, costs, and assets associated with converting inputs into final

product from (producing, assembly, packaging, equipment maintenance, facilities,

operations, quality assurance, environmental protection).

• Distribution—Activities, costs, and assets dealing with physically distributing the

product to buyers (finished goods warehousing, order processing, order picking and

packing, shipping, delivery vehicle operations, establishing and maintaining a network

of dealers and distributors).

• Sales and Marketing—Activities, costs, and assets related to sales force efforts,

advertising and promotion, market research and planning, and dealer/distributor

support.

• Service—Activities, costs, and assets associated with providing assistance to buyers,

such as installations, spare parts delivery, maintenance and repair, technical

assistance, buyer inquiries, and complaints.

4–53

Representative Support Activities in a Company’s Value Chain

Figure 4.3 (cont’d)


• Product R&D, Technology, and Systems Development—Activities, costs, and assets relating to product R&D, process R&D, process design improvement,

equipment design, computer software development, telecommunications systems,

computer-assisted design and engineering, database capabilities, and development of

computerized support systems.

• Human Resource Management—Activities, costs, and assets associated with the

recruitment, hiring, training, development, and compensation of all types of personnel;

labor relations activities; and development of knowledge-based skills and core competencies.

• General Administration—Activities, costs, and assets relating to general

management, accounting and finance, legal regulatory affairs, safety and security, management information systems, forming strategic alliances and collaborating with

strategic partners, and other overhead functions.

■■ Primary ActivitiesPrimary Activities

►► Supply chain managementSupply chain management

►► Recipe development and Recipe development and testingtesting

►► Mixing and bakingMixing and baking

►► PackagingPackaging

►► Sales and marketingSales and marketing

►► DistributionDistribution

■■ Support ActivitiesSupport Activities

►► Quality controlQuality control

►► Human resource Human resource managementmanagement

►► AdministrationAdministration

Example: Example: Value Chain Activities Value Chain Activities

for a Bakery Goods Makerfor a Bakery Goods Maker


■■ Primary ActivitiesPrimary Activities

►► Merchandise selection and Merchandise selection and

purchasingpurchasing

►► Store layout and product Store layout and product

displaydisplay

►► AdvertisingAdvertising

►► Customer serviceCustomer service

■■ Support ActivitiesSupport Activities

►► Site selectionSite selection

►► Hiring and trainingHiring and training

►► Store maintenanceStore maintenance

►► Administrative activitiesAdministrative activities

Example:Example: Value Chain Activities for a Value Chain Activities for a

Department Store RetailerDepartment Store Retailer


Rivals’ Value Chains Are Rivals’ Value Chains Are Often DifferentOften Different

■■ Several factors cause the value chains Several factors cause the value chains of rival firms to be different:of rival firms to be different:

►►Different strategies Different strategies

►►Different operating practicesDifferent operating practices

►►Different technologiesDifferent technologies

►►Different degrees of vertical integration Different degrees of vertical integration

►►Some firms perform certain activities internally Some firms perform certain activities internally while others outsource themwhile others outsource them

Differences in the value chains of competing firms Differences in the value chains of competing firms

complicate assessment of their relative cost positions.complicate assessment of their relative cost positions.


Which Company’s Value Chain Is Best?Which Company’s Value Chain Is Best?

■■ Differences in the value chains of competing firms raise two Differences in the value chains of competing firms raise two very important questions:very important questions:

1.1.Whose value chain delivers the best customer value Whose value chain delivers the best customer value

relative to the prices being charged?relative to the prices being charged?

When one competitor employs a value chain approach that delivers When one competitor employs a value chain approach that delivers greater value to customers relative to the price it charges, it gains greater value to customers relative to the price it charges, it gains

competitive advantage even if its costs are equivalent to (or maybe competitive advantage even if its costs are equivalent to (or maybe

even higher than) those of its close rivals.even higher than) those of its close rivals.

2.2.Which company has the lowest cost value chain?Which company has the lowest cost value chain?

When close competitors deliver much the same value to customers, When close competitors deliver much the same value to customers, charge comparable prices, and employ very similar value chains, charge comparable prices, and employ very similar value chains,

then competitive advantage accrues to the firm that operates its then competitive advantage accrues to the firm that operates its

value chain most costvalue chain most cost--efficiently to deliver equivalent customer value efficiently to deliver equivalent customer value at lower cost or greater customer value at the same cost.at lower cost or greater customer value at the same cost.






The greater the value a The greater the value a firm firm can can profitably deliver profitably deliver to its customers relative to the to its customers relative to the value delivered value delivered by by

close rivals, the less close rivals, the less competitively vulnerable competitively vulnerable it it becomes. becomes.

The The higher a higher a firm’s costs firm’s costs relative to those of rivals relative to those of rivals delivering comparable customer delivering comparable customer value at a value at a

comparable pricecomparable price, , the more the more competitively competitively vulnerable it becomes.vulnerable it becomes.


A A Firm’s Firm’s Primary and Support Activities Identify the Primary and Support Activities Identify the Major Components Major Components of Its of Its Internal Cost StructureInternal Cost Structure

■■ Combined costs of primary and secondary value chain activities Combined costs of primary and secondary value chain activities comprise a firm’s internal cost structure.comprise a firm’s internal cost structure.

■■ The cost of each activity contributes to whether firm’s overall cost The cost of each activity contributes to whether firm’s overall cost position relative to rivals is favorable or unfavorable.position relative to rivals is favorable or unfavorable.

■■ ActivityActivity--based accounting cost estimates are needed for each broad based accounting cost estimates are needed for each broad category of primary and secondary activities in a firm’s value chain.category of primary and secondary activities in a firm’s value chain.

►► Cost estimates for Cost estimates for more more specific specific activities within each broad activities within each broad category may be needed if a company discovers that it has a category may be needed if a company discovers that it has a cost disadvantage cost disadvantage visvis--àà--vis rivals and wants to pin down the vis rivals and wants to pin down the exact source or activity causing the cost exact source or activity causing the cost disadvantage.disadvantage.

A firm’s own A firm’s own internal costs internal costs are insufficient to assess are insufficient to assess whether its product offering and customer value whether its product offering and customer value proposition are competitive with those of rivals.proposition are competitive with those of rivals.


Value Chain System for an Entire IndustryValue Chain System for an Entire Industry

■■ A firm’s value chain is embedded in a larger system of activities that A firm’s value chain is embedded in a larger system of activities that

includes the value chains of its suppliers and the value chains of includes the value chains of its suppliers and the value chains of

whatever wholesale distributors and retailers it utilizes in getting its whatever wholesale distributors and retailers it utilizes in getting its product or service to end usersproduct or service to end users

■■ Suppliers’ value chains are relevant because suppliers perform Suppliers’ value chains are relevant because suppliers perform

activities and incur costs in creating and delivering the purchased activities and incur costs in creating and delivering the purchased inputs utilized in a firm’s own valueinputs utilized in a firm’s own value--creating activities. creating activities.

■■ The value chains of a firm’s distribution channel partners are The value chains of a firm’s distribution channel partners are relevant because costs and margins of a firm’s distributors and relevant because costs and margins of a firm’s distributors and

retail dealers represent “value added” and are part of the price the retail dealers represent “value added” and are part of the price the

ultimate consumer paysultimate consumer pays——and thus affect whether endand thus affect whether end--use buyers use buyers view a firm’s product/service as being price competitive.view a firm’s product/service as being price competitive.


4.4 A Representative Value Chain for an Entire IndustryFigure


Example:Example: Components of the Industry Value Chain Components of the Industry Value Chain System in the Pulp and Paper Industry System in the Pulp and Paper Industry


Pulp millsPulp millsPapermakingPapermaking

DistributionDistributionTimber farmingTimber farmingLoggingLogging

Example:Example: Components of the Industry Value Chain Components of the Industry Value Chain System in the System in the Home Home Appliance IndustryAppliance Industry


AssemblyAssembly Wholesale Wholesale distributiondistribution

RetailRetailsalessales

Parts and Parts and components components manufacturemanufacture




Example:Example: Components of the Industry Value Chain Components of the Industry Value Chain System in the System in the Soft Soft Drink IndustryDrink Industry


AdvertisingAdvertising

Today’s Special Today’s Special 10% Off 10% Off

All Diet ColasAll Diet Colas

RetailingRetailing

Bottling and Bottling and can fillingcan filling

Wholesale Wholesale distributiondistribution

Processing Processing of basic of basic

ingredientsingredients

Syrup Syrup manufacturingmanufacturing

Example:Example: Components of the Industry Value Chain Components of the Industry Value Chain System in the System in the Computer Computer Software IndustrySoftware Industry


MarketingMarketing DistributionDistributionProgrammingProgramming

Upgrade Now to Upgrade Now to New Version 3.0New Version 3.0

Disk loadingDisk loading

Why the Values Chains of Suppliers Why the Values Chains of Suppliers

and Distribution Allies Matter?and Distribution Allies Matter?

A A firm’s firm’s costcost--competitiveness depends competitiveness depends not only not only on on the costs of internally performed the costs of internally performed activities (its activities (its own own value chain) but also on costs in the value chain) but also on costs in the value chains value chains of its suppliers and distribution of its suppliers and distribution channel allies.channel allies.

As a consequence, As a consequence, accurately assessing a accurately assessing a firm’s firm’s competitiveness entails scrutinizing the competitiveness entails scrutinizing the nature and nature and costs of costs of value chain activities value chain activities across an industry’s entire value chain system across an industry’s entire value chain system for delivering a product or service for delivering a product or service to endto end--use use customerscustomers..


Industry Value Chains Have to Be Considered in Industry Value Chains Have to Be Considered in Determining a Firm’s Cost CompetitivenessDetermining a Firm’s Cost Competitiveness

■■ Assessing a firm’s competitiveness entails scrutinizing Assessing a firm’s competitiveness entails scrutinizing

the costs of activities across the entire industry value the costs of activities across the entire industry value chain:chain:

►► The costs of activities comprising a firm’s own value chain The costs of activities comprising a firm’s own value chain

►► The costs of activities comprising the value chains of its suppliersThe costs of activities comprising the value chains of its suppliers

►► The costs of activities comprising the value chains of its The costs of activities comprising the value chains of its

distribution alliesdistribution allies

■■ The costs then have to be compared to the costs of the The costs then have to be compared to the costs of the

value chains employed by close rivals (including their value chains employed by close rivals (including their suppliers and distribution allies) in order to determine if suppliers and distribution allies) in order to determine if

a firm’s cost position compares favorably or unfavorably a firm’s cost position compares favorably or unfavorably

with its key rivals.with its key rivals.


Benchmarking: Benchmarking: A Tool for Assessing A Tool for Assessing

Whether Whether a a Firm’s Value Firm’s Value Chain Costs Are in LineChain Costs Are in Line

■■ Benchmarking entails comparing how well Benchmarking entails comparing how well different firms perform key value chain activities:different firms perform key value chain activities:

►►How inventories are managedHow inventories are managed

►►How products are assembledHow products are assembled

►►How fast it takes to get new products to marketHow fast it takes to get new products to market

►►How customer orders are filled and shippedHow customer orders are filled and shipped

and then and then making crossmaking cross--company company comparisons of the costs of these activitiescomparisons of the costs of these activities



Benchmarking is a potent tool for Benchmarking is a potent tool for learning which learning which firms firms are best at are best at performing particular performing particular activities activities

and then using and then using their techniques (“best practicestheir techniques (“best practices”) ”) to to improve the improve the cost and cost and effectiveness effectiveness of a of a firm’s firm’s

own internal own internal activitiesactivities..

Benchmarking the costs of Benchmarking the costs of a firm’s activities a firm’s activities

against against rivals provides hard evidence of rivals provides hard evidence of whether a whether a firm firm is costis cost--competitive.competitive.





How Benchmarking WorksHow Benchmarking Works

■■ Identify the Identify the best practices best practices in performing an activity.in performing an activity.

■■ Learn how other firms have achieved lower costs or Learn how other firms have achieved lower costs or

better results in performing benchmarked activities.better results in performing benchmarked activities.

■■ Figure out what actions to take to improve a firm’s cost Figure out what actions to take to improve a firm’s cost

competitiveness whenever benchmarking reveals that competitiveness whenever benchmarking reveals that

its activity costs and results are not on par with what its activity costs and results are not on par with what other firms other firms (either competitors or noncompetitors) have (either competitors or noncompetitors) have

achievedachieved..

The tough part of benchmarking is gaining access to The tough part of benchmarking is gaining access to

information about other firms’ practices and costs. information about other firms’ practices and costs.


Tip for Simulation Company CoTip for Simulation Company Co--Managers Managers

■■ Be sure to carefully Be sure to carefully review the benchmarking data review the benchmarking data provided provided in the Industry Report in the Industry Report after each decision roundafter each decision round..

■■ This benchmarking data shows how your company’s costs in This benchmarking data shows how your company’s costs in the prior year compared against the industry low value, the the prior year compared against the industry low value, the industry high value, and the industry average value for a industry high value, and the industry average value for a number of different cost components in your company’s value number of different cost components in your company’s value chain.chain.

■■ When you conclude that your company’s costs are “too high” When you conclude that your company’s costs are “too high” in one or more areas, management should immediately in one or more areas, management should immediately pursue actions to reduce these costs.pursue actions to reduce these costs.

■■ If your company is striving to achieve a cost advantage over If your company is striving to achieve a cost advantage over rivals, the benchmarking data will reveal if your costrivals, the benchmarking data will reveal if your cost--saving saving actions have actually resulted in a cost advantage or whether actions have actually resulted in a cost advantage or whether some rivals have succeeded in reducing their costs by a some rivals have succeeded in reducing their costs by a greater amount, putting your company at a cost greater amount, putting your company at a cost disadvantage.disadvantage.


Strategic Options for Creating a Cost Advantage Strategic Options for Creating a Cost Advantage or Remedying or Remedying a Cost Disadvantagea Cost Disadvantage

■■ A firm’s cost competitiveness depends on how well it A firm’s cost competitiveness depends on how well it

manages its value chain relative to how well competitors manages its value chain relative to how well competitors manage their value chainsmanage their value chains

■■ Main areas where its managers can try to create a cost Main areas where its managers can try to create a cost advantage or remedy a cost disadvantage are: advantage or remedy a cost disadvantage are:

►► A firm’s own activity segmentsA firm’s own activity segments

►► Suppliers’ part of the overall value chainSuppliers’ part of the overall value chain

►► The distribution channel portion of the value chain systemThe distribution channel portion of the value chain system

ActivitiesActivities, Costs,, Costs,and Margins and Margins ofof

Forward Channel Forward Channel AlliesAllies

Internally PerformedInternally PerformedActivitiesActivities, Costs, Costs, ,

and Marginsand Margins

ActivitiesActivities, Costs, Costs, , and Margins and Margins ofof

SuppliersSuppliers

Buyer/UserBuyer/UserValue ChainsValue Chains


Lowering the Costs of Internally Performed Lowering the Costs of Internally Performed

Value Chain ActivitiesValue Chain Activities

■■ Implement the use of best practices throughout firmImplement the use of best practices throughout firm

■■ Redesign the product to eliminate costs or for faster and Redesign the product to eliminate costs or for faster and

more economical manufacture or assemblymore economical manufacture or assembly

■■ Relocate highRelocate high--cost activities to lowercost activities to lower--cost locationscost locations

■■ Outsource highOutsource high--cost activities to cheaper outside cost activities to cheaper outside

vendors/suppliersvendors/suppliers

■■ Shift to lowerShift to lower--cost technologies and/or invest in cost technologies and/or invest in

productivityproductivity--enhancing, costenhancing, cost--saving saving technological technological improvementsimprovements

■■ Cease any activities that do not add customer valueCease any activities that do not add customer value


Lowering the Costs of SupplierLowering the Costs of Supplier--Related Related


■■ Pressure suppliers for lower pricesPressure suppliers for lower prices

■■ Switch to lowerSwitch to lower--priced substitute inputspriced substitute inputs

■■ Collaborate closely with suppliers to identify mutual Collaborate closely with suppliers to identify mutual

costcost--saving opportunitiessaving opportunities

►► JustJust--inin--time supplier deliveries can lower both the firm’s and the time supplier deliveries can lower both the firm’s and the

supplier’s inventory and internal logistics costssupplier’s inventory and internal logistics costs

■■ Integrate backward into businesses of suppliers Integrate backward into businesses of suppliers

responsible for a cost disadvantage and make the items responsible for a cost disadvantage and make the items

inin--house instead of buying them from outside suppliershouse instead of buying them from outside suppliers


Lowering the Costs of DistributionLowering the Costs of Distribution--Related Related


■■ Pressure dealers, distributors and Pressure dealers, distributors and cchannel allies hannel allies to reduce costs to make final prices to buyers to reduce costs to make final prices to buyers

more competitive with the prices of rivals.more competitive with the prices of rivals.

■■ Collaborate with forward channel allies to Collaborate with forward channel allies to

identify winidentify win--win opportunities to reduce costs.win opportunities to reduce costs.

■■ Change to a lowerChange to a lower--cost distribution strategy or cost distribution strategy or switch to cheaper distribution channels.switch to cheaper distribution channels.

■■ Integrate forward by opening firmIntegrate forward by opening firm--owned retail owned retail outlets.outlets.





Translating Translating Proficient Proficient Performance of Value Performance of Value

Chain Activities Chain Activities into Competitive Advantageinto Competitive Advantage

■■ A firm that does a A firm that does a first rate jobfirst rate job of managing its of managing its value chain value chain relative to competitors relative to competitors achieves a achieves a

sustainable competitive advantage by:sustainable competitive advantage by:

►►Performing certain value chain activities more Performing certain value chain activities more

proficiently than rivals to achieve a resourceproficiently than rivals to achieve a resource--based based

competitive advantage linked to its stronger competitive advantage linked to its stronger competencies and competitive capabilitiescompetencies and competitive capabilities

►►Performing value chain activities more efficiently and Performing value chain activities more efficiently and cost effectively to gain a lowcost effectively to gain a low--cost competitive cost competitive

advantage.advantage.


4.5 Translating Company Performance of Value Chain Activities into Competitive Advantage

Figure


RuleRuleRuleRuleIt is substantially harder for rivals to achieve “best in industry” proficiency in performing a key value chain activity than it is for them to clone the features and attributes of a hot-selling product or service.

4–78

4.5 Translating Company Performance of Value Chain Activities into Competitive Advantage

Figure


Question 4:Question 4: Is the Firm Competitively Stronger Is the Firm Competitively Stronger

or Weaker than Its Key Rivals?or Weaker than Its Key Rivals?

■■ Whether a firm is competitively stronger or Whether a firm is competitively stronger or weaker than key rivals hinges on the answers weaker than key rivals hinges on the answers to two questions:to two questions:

1.1. How does the firm rank relative to competitors on How does the firm rank relative to competitors on each important factor that determines market each important factor that determines market

success?success?

2.2. Does the firm have a net competitive advantage or Does the firm have a net competitive advantage or

disadvantage versus major competitors?disadvantage versus major competitors?


How to Do a Competitive How to Do a Competitive

Strength AssessmentStrength Assessment

Step 1Step 1: Make a list of 6 to 10 of the industry’s key success factors and its most : Make a list of 6 to 10 of the industry’s key success factors and its most relevant measures of competitive strength/weaknessrelevant measures of competitive strength/weakness

Step Step 22: : Assign Assign weights to each of the measures of competitive strength based weights to each of the measures of competitive strength based on their perceived importance (the sum of the weights must equal 1.0) on their perceived importance (the sum of the weights must equal 1.0)

Step Step 33: : Rate Rate the company and its key rivals on each strength measure using the company and its key rivals on each strength measure using rating scale of 1 to 10 (1 = very weak; 5 = average; 10 = very strong)rating scale of 1 to 10 (1 = very weak; 5 = average; 10 = very strong)

Step Step 44: : Multiply Multiply each strength rating by its importance weight to obtain each strength rating by its importance weight to obtain weighted strength scoresweighted strength scores

Step Step 55: : Sum Sum the weighted strength scores to get an overall measure of the weighted strength scores to get an overall measure of competitive strength for each rivalcompetitive strength for each rival

Step Step 66: Use : Use the the overall strength scores overall strength scores to draw conclusions about the size and to draw conclusions about the size and extent of the company’s net competitive advantage extent of the company’s net competitive advantage or disadvantage or disadvantage visvis--àà--vis vis each of its each of its rivalsrivals


4.3 A Representative Weighted Competitive Strength AssessmentTable





Interpreting the Competitive Strength ScoresInterpreting the Competitive Strength Scores

■■ The higher a firm’s overall weighted strength score, the stronger its The higher a firm’s overall weighted strength score, the stronger its

overall competitiveness versus rivals.overall competitiveness versus rivals.

■■ The lower a firm’s score, the weaker is its ability to compete The lower a firm’s score, the weaker is its ability to compete successfully. successfully.

■■ The sizes of the differences between a firm’s score and those of its The sizes of the differences between a firm’s score and those of its

rivals are indicative of the size of its net competitive advantage or rivals are indicative of the size of its net competitive advantage or disadvantage versus these rivals.disadvantage versus these rivals.

►► The bigger the difference between a company’s The bigger the difference between a company’s overall weighted overall weighted rating and the scores of rating and the scores of lowerlower--ratedrated rivals, the greater is its rivals, the greater is its

implied implied net competitive advantage net competitive advantage over these over these rivalsrivals..

►► The The bigger bigger the difference the difference between a company’s overall rating between a company’s overall rating and the scores of and the scores of higherhigher--ratedrated rivals, the rivals, the greater its greater its implied implied net net

competitive competitive disadvantagedisadvantage..


Strategic Implications of Strategic Implications of

Competitive Strength ScoresCompetitive Strength Scores

■■ A A firm’s firm’s competitive strength scores competitive strength scores pinpoint pinpoint where it is where it is

competitively stronger and competitively stronger and weaker visweaker vis--àà--vis rivalsvis rivals

■■ When When a a firm firm has high competitive strength scores in has high competitive strength scores in

areas where one or more rivals have low scores, it areas where one or more rivals have low scores, it makes sense to makes sense to consider offensive moves that pit its consider offensive moves that pit its

competitive strengths directly against rivals’ competitive competitive strengths directly against rivals’ competitive

weaknessesweaknesses. .

■■ When a When a firm firm has low scores on strength measures has low scores on strength measures

where one or more rivals have high scores, it makes where one or more rivals have high scores, it makes sense to sense to consider defensive moves to curtail its consider defensive moves to curtail its

vulnerability to rivals’ offensive attacks.vulnerability to rivals’ offensive attacks.


Questions for Simulation Company Questions for Simulation Company

CoCo--ManagersManagers

■■ Are you regularly monitoring your firm’s competitive strengths and Are you regularly monitoring your firm’s competitive strengths and

weaknesses visweaknesses vis--àà--vis rival firms in each geographic region (see the vis rival firms in each geographic region (see the

bottom section on each page of the Competitive Intelligence Report)?bottom section on each page of the Competitive Intelligence Report)?

■■ In crafting your firm’s strategy and making decision entries each year, In crafting your firm’s strategy and making decision entries each year,

should you be trying to capitalize on your firm’s competitive strengths should you be trying to capitalize on your firm’s competitive strengths

and to correct your firm’s competitive weaknesses?and to correct your firm’s competitive weaknesses?

■■ Are you aware that menus at the top of each page of the Competitive Are you aware that menus at the top of each page of the Competitive

Intelligence Reports allow you to view data for any firm in the industry Intelligence Reports allow you to view data for any firm in the industry

and thus view the competitive strengths and weaknesses of any rival and thus view the competitive strengths and weaknesses of any rival

companies that may be of interest?companies that may be of interest?

■■ Might this information be of value in crafting your firm’s strategy in the Might this information be of value in crafting your firm’s strategy in the

upcoming year? upcoming year?


Question 5:Question 5: What Strategic Issues and What Strategic Issues and Problems Merit Problems Merit FrontFront--Burner Managerial Burner Managerial Attention?Attention?

■■ Involves compiling a “Involves compiling a “worry listworry list” based on:” based on:►►Assessment of the external environment (the answers Assessment of the external environment (the answers

to the six analytical questions posed in Chapter 3)to the six analytical questions posed in Chapter 3)

►►Evaluations of the firm’s resources and ability to Evaluations of the firm’s resources and ability to compete successfully (the answers to questions 1compete successfully (the answers to questions 1--4 in 4 in this chapter)this chapter)

■■ The problems/issues on the worry list should The problems/issues on the worry list should center on such concerns ascenter on such concerns as►► “How to…?”“How to…?”

►► “Whether to…?”“Whether to…?”

►► “What should be done about …?”“What should be done about …?”


Identifying the Strategic Issues: Identifying the Strategic Issues:

Some ExamplesSome Examples

■■ How to How to stave off market challenges from new foreign competitors?stave off market challenges from new foreign competitors?

■■ How to How to combat price discounting of rivals?combat price discounting of rivals?

■■ How How to to reduce a company’s high costs?reduce a company’s high costs?

■■ How to How to sustain a company’s present growth in light of slowing sustain a company’s present growth in light of slowing

buyer demand?buyer demand?

■■ Whether to Whether to expand a company’s product line?expand a company’s product line?

■■ Whether to Whether to acquire a rival firm?acquire a rival firm?

■■ Whether toWhether to expand into foreign markets rapidly or cautiously?expand into foreign markets rapidly or cautiously?

■■ What to do about What to do about aging demographics of a firm’s customer base?aging demographics of a firm’s customer base?


Why Compile a “Worry List”?Why Compile a “Worry List”?

■■ The role of the “worry list” is to The role of the “worry list” is to pinpoint exactlypinpoint exactly

►► What strategic and competitive challenges confront the firmWhat strategic and competitive challenges confront the firm

►► Which competitive shortcomings need fixingWhich competitive shortcomings need fixing

►► What obstacles stand in the way of improving the firm’s What obstacles stand in the way of improving the firm’s

competitive position and financial performancecompetitive position and financial performance

►► Identify specific issues/problems that management must addressIdentify specific issues/problems that management must address

■■ The purpose is The purpose is NOTNOT to list what specific actions to take. to list what specific actions to take.

►► Deciding which strategic actions to take and which strategic Deciding which strategic actions to take and which strategic

moves to make comes later.moves to make comes later.

►► A worry list with minor problems/issues suggests the firm’s A worry list with minor problems/issues suggests the firm’s strategy is on track and that finestrategy is on track and that fine--tuning it will likely be adequate.tuning it will likely be adequate.

►► A worry list with major problems/issues signals the need for A worry list with major problems/issues signals the need for immediate major strategy revisions and action plans.immediate major strategy revisions and action plans.





Items on the Worry List Items on the Worry List CeateCeate anan

Agenda for Agenda for Management Management ActionAction

Zeroing in on the strategic issues a Zeroing in on the strategic issues a firm faces and firm faces and compiling a compiling a “worry list” “worry list” of of problems and problems and

roadblocks roadblocks creates a strategic agenda creates a strategic agenda that merits that merits prompt managerial attentionprompt managerial attention..

Actually deciding upon a strategy and what Actually deciding upon a strategy and what specific actions specific actions to take is what comes to take is what comes afterafterdeveloping developing the list the list of strategic issues and of strategic issues and problems that merit problems that merit frontfront--burner management burner management

attention.attention.


The Lessons of Chapters 3 and 4The Lessons of Chapters 3 and 4

Lesson 1: Lesson 1: Analysis Analysis of the of the firm’s situation should always firm’s situation should always come come beforebefore trying trying to to craft its strategy.craft its strategy.

WHY?WHY? Because the Because the first test of a winning strategy first test of a winning strategy (the (the goodness of fit test) is goodness of fit test) is that that a firm’s strategy a firm’s strategy must must be tightly matched to be tightly matched to its external its external and and internal circumstances.internal circumstances.

■■ To get a clear fix on the strategically relevant aspects of a To get a clear fix on the strategically relevant aspects of a company’s company’s external circumstancesexternal circumstances, managers must develop , managers must develop analysisanalysis--based answers to the 6 questions in Chapter 3based answers to the 6 questions in Chapter 3

■■ To get a clear fix on the strategically relevant aspects of a To get a clear fix on the strategically relevant aspects of a firm’s firm’s internal circumstances internal circumstances (its resources and ability to compete (its resources and ability to compete successfully), managers must develop analysissuccessfully), managers must develop analysis--based answers to based answers to the first four questions in Chapter 4.the first four questions in Chapter 4.


The Lessons of Chapters 3 and 4The Lessons of Chapters 3 and 4

Lesson 2:Lesson 2: Armed Armed with good understanding of the with good understanding of the firm’s firm’s external external

and internal circumstances and internal circumstances and and an accurate an accurate list of list of frontfront--burner issues that burner issues that the strategy needs to address the strategy needs to address and and resolveresolve, , managers are ready to tackle the task of managers are ready to tackle the task of crafting a sound strategy that is tightly matched to crafting a sound strategy that is tightly matched to the the firm’s firm’s situation. situation.

WHYWHY?? Absent Absent good understanding of the good understanding of the firm’s firm’s external and external and internal circumstances and absent an accurate worry internal circumstances and absent an accurate worry list, list, managers are managers are illill--equipped equipped to craft a strategy that to craft a strategy that passes passes the goodness of fit test.the goodness of fit test.


RuleRuleRuleRuleIt is foolish to leap into the task of tailoring a strategy that should tightly fit a firm’s situation without first having an accurate understanding of what the strategically relevant facets of that situation are.

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