3 Where are we now? Two facets of the company’s situation The industry and competitive environments in which the company operates—its external environmentThe company’s resources and organizational capabilities—its internal environmentResource strengths and weaknessesCost positionCulture 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 3Are the firm’s cost structure and customer value proposition competitive?Question 4Is the firm competitively stronger or weaker than key rivals?Question 5What 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 profitabilityWhether 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 growthE.g., sales growth, COGS, net earnings, etc.Trends in the firm’s stock priceE.g., stock price, P/E ratio, volatility, etc.The firm’s overall financial strengthE.g., current/quick ratios, DuPont ratios, debt-to-equity/assets, cash flow ratio, etc.Harder to measure (strategic measures)The firm’s customer retention rateThe rate at which new customers are acquiredChanges in the firm’s image and reputation with customersEvidence of improvement in internal processes such as defect rate, order fulfillment, delivery times, days of inventory, and employee productivity
7 Performance Indicators Financial Measures ExerciseUsing Nike, Inc.’s K report, calculate the following performance indicators:Net Profit MarginAsset TurnoverCurrent RatioQuick Ratio (Acid Test)P/E Ratio
8 Performance Indicators Financial Measures ExerciseUsing Nike, Inc.’s K report, calculate the following performance indicators:Net Profit Margin = $2,485 / $25,313 = or 9.82%Asset TurnoverCurrent RatioQuick Ratio (Acid Test)P/E Ratio
9 Performance Indicators Financial Measures ExerciseUsing 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 = 1.44Current RatioQuick Ratio (Acid Test)P/E Ratio
10 Performance Indicators Financial Measures ExerciseUsing 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 = 1.44Current Ratio = $13,626 / $ 3,926 = 3.47Quick Ratio (Acid Test)P/E Ratio
11 Performance Indicators Financial Measures ExerciseUsing 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 = 1.44Current Ratio = $13,626 / $ 3,926 = 3.47Quick Ratio (Acid Test) = ($3,337 + $3,434) / $3,926 = 1.73P/E Ratio
12 Performance Indicators Financial Measures ExerciseUsing 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 = 1.44Current Ratio = $13,626 / $ 3,926 = 3.47Quick Ratio (Acid Test) = ($3,337 + $3,434) / $3,926 = 1.73P/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 firmTangible resources—physical resources that can be readily seen, touched, and/or quantifiedPlant, property, and equipment, cash, etc.Intangible resources—non-physical resources that can be difficult to quantify or be seenPatents, trademarks, “secret family recipes”, etc.Capabilities—what organizations can do based on what resources they possessNew 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 resourcesState-of-the-art manufacturing plants and equipment, efficient distribution facilities, attractive real estate locations, or ownership of valuable natural resource depositsFinancial resourcesCash and cash equivalents, marketable securities, and other financial assets such as a company’s credit rating and borrowing capacityTechnological assetsPatents, copyrights, superior production technology, and technologies that enable activitiesOrganizational resourcesInformation 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 capitalAn experienced and capable workforce, talented employees in key areas, collective learning embedded in the organization, or proven managerial know-howBrand, image, and reputational assetsBrand names, trademarks, product or company image, buyer loyalty, and reputation for quality, superior serviceRelationshipsAlliances or joint ventures that provide access to technologies, specialized know-how, or geographic markets, and trust established with various partnersCompany cultureThe 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 capabilitiesIs strengthened when exploiting resources that are competitiveBut 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:ValueRarityInimitabilityNon-substitutability
19 Resource-Based View (RBV) ValueValuable resources are resources that consumers desire or resources that give a firm an ability to produce products and services that consumers wantA good location for a retail outletA good credit ratingA key technologyValuable resources can be both tangible and intangible
20 Resource-Based View (RBV) RarityHow common is the resource or capability in question?Rare resources are those that are relatively uncommon among competitorsRareness adds to value
21 Resource-Based View (RBV) InimitabilityAdvantage from valuable and rare resources will diminish if imitated by competitorsDiffusion of key capabilities can undermine competitive advantageOutsourcing can yield benefits. However, while the savings from outsourcing are appealing, it is important to consider the long term implications for imitability and rarityUnderstanding what is or is not an effective imitation means understanding the nature of the value that the product or service providesIs Dr. Thunder a good imitation of Dr. Pepper?
22 Resource-Based View (RBV) Non-SubstitutabilityImitation can be difficult (or even illegal)Thus, it can makes sense to substitute it with some equivalent resourceThe 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 resourcesCasting a watchful eye for opportunities to develop totally new capabilities for delivering better customer value and/or outcompeting rivalsA 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.
25 SWOT Analysis Strengths Weaknesses Opportunities Threats SWOT represents the first letter in:Strengths Weaknesses Opportunities ThreatsA well-conceived strategy is:Matched to the firm’s resource strengths and weaknessesAimed 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 weakA 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 assetsMissing 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 capabilitiesThe best prospects for growth and profitabilityThe 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 criticalOccur 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 situationTranslating these conclusions into strategic actions to:Better match the firm’s strategy to its strengths and market opportunitiesCorrecting problematic weaknessesDefending against worrisome external threats
31 Constraints AnalysisA constraints analysis helps identify root causes of problems that restrict an ideal outcomeSimple processIdentify problems that you believe restrict the outcomeDraw causal arrows from one problem to another if you believe that they are causalIdentify 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 GCause 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 competitorsAllows for more appealing value propositionsUseful analytical tools:Value chain analysisBenchmarking
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 valuableThe 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.
36 The Value ChainPrimary Activities: actions that are directly involved in creating and distributing goods and servicesInbound Logistics—the arrival of raw materialsOperations—the actual production processOutbound Logistics—the movement of finished products to customersMarketing & Sales—work to attract customers and convince them to make purchasesService—the extent to which a firm provides assistance to their customers
37 The Value ChainSupport Activities: structures that provide underlying support primary activitiesFirm Infrastructure—how the firm is organized (structure)Human Resource Management—involves the recruitment, training, and compensation of employeesTechnology—use of computerization and telecommunications to support activitiesProcurement—process of negotiating for and purchasing raw materials
38 The Value ChainValue chain analysis can be used to systematically breakdown the costs of producing a firm’s market offeringsThis can be used to identify where adjustments are necessary
39 BenchmarkingBenchmarking 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 activitiesEntails making cross-company comparisons of how certain activities are performed and the costs associated with:How materials are purchasedHow inventories are managedHow products are assembledHow customer orders are filled and shippedHow maintenance is performedCombined 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 alliesManagers 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 chainThere are three main areas of a firm’s overall value chain where cost differences occur:Activities performed by suppliersA firm’s own internal activitiesActivities performed by forward channel allies
41 Representative Value Chain for an Entire Industry
42 Remedying a Supplier-Related Cost Disadvantage Pressure suppliers for lower pricesSwitch to lower-priced substitutesCollaborate closely with suppliers to identify mutual cost-saving opportunitiesIntegrate backward into business of high-cost suppliers
43 Remedying an Internal Cost or Value Disadvantage Implement the use of best practices throughout the firmEliminate some cost-producing activities by revamping value chainRelocate high-cost activities to lower-cost geographic areasSee if certain internally performed activities can be outsourced to vendors or contractorsInvest in productivity-enhancing, cost-saving technologyFind ways around activities or items where costs are highRedesign the product and/or its components to reduce manufacturing or assembly costsMake 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 markupsWork with forward channel allies to identify win-win opportunities to reduce costs (synergize)Change to a more economical distribution strategy:Switch to cheaper distribution channelsIntegrate 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 addressThis helps to set an agenda for working to improve a firm’s performance and competitive positionResults of such analyses combine with external analyses and inform the other steps in the strategic management process