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

2. Strategic Management Process

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

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

5. Question 1: How Well Is the Company’s Strategy Working?
The two best indicators of how well a firm’s strategy is working are:
Whether the firm is recording gains in financial strength and profitability
Whether the firm’s competitive strength and market standing is improving

6. Performance Indicators
Easier to measure (financial measures)
Trends in the firm’s sales and earnings growth
E.g., sales growth, COGS, net earnings, etc.
Trends in the firm’s stock price
E.g., stock price, P/E ratio, volatility, etc.
The firm’s overall financial strength
E.g., current/quick ratios, DuPont ratios, debt-to-equity/assets, cash flow ratio, etc.
Harder to measure (strategic measures)
The firm’s customer retention rate
The rate at which new customers are acquired
Changes in the firm’s image and reputation with customers
Evidence of improvement in internal processes such as defect rate, order fulfillment, delivery times, days of inventory, and employee productivity

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

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

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

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

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

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

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

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

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

16. But what makes a resource or capability competitive?
Question 2: What Are the Company’s Competitively Important Resources and Capabilities?
A company’s strategy and business model:
Must be well-matched to its collection of resources and capabilities
Is strengthened when exploiting resources that are competitive
But what makes a resource or capability competitive?

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

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

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

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

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

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

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

24. Let’s take a 5 minute break

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

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

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

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

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

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

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

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

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

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

35. A Representative Company Value Chain

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

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

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

39. Benchmarking
Benchmarking is a tool for learning which firms are best at performing particular activities and then using their techniques (or “best practices”) to improve the cost and effectiveness of a firm’s own internal activities
Entails making cross-company comparisons of how certain activities are performed and the costs associated with:
How materials are purchased
How inventories are managed
How products are assembled
How customer orders are filled and shipped
How maintenance is performed
Combined with value chain analysis, these two tools can help a firm identify what parts of the value chain can and to what extent should be improved

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

41. Representative Value Chain for an Entire Industry

42. Remedying a Supplier-Related Cost Disadvantage
Pressure suppliers for lower prices
Switch to lower-priced substitutes
Collaborate closely with suppliers to identify mutual cost-saving opportunities
Integrate backward into business of high-cost suppliers

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

44. Remedying a Cost Disadvantage Associated with Activities Performed by Forward Channel Allies
Pressure dealer-distributors and other forward channel allies to reduce their costs and markups
Work with forward channel allies to identify win-win opportunities to reduce costs (synergize)
Change to a more economical distribution strategy:
Switch to cheaper distribution channels
Integrate forward into company-owned retail outlets

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

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