EVALUATING COMPANY RESOURCES AND COMPETITIVE CAPABILITIES The Value Chain Analysis

The Key Questions 1. How well is firm’s present strategy working? 2. What are the firm’s resource strengths and weaknesses and its external opportunities and threats? 3. Are firm’s prices and costs competitive? 4. How strong is firm’s competitive position relative to its rivals? 5. What strategic issues does firm face?

Q.3 ARE THE FIRM’S PRICES AND COSTS COMPETITIVE? The price and cost position of a firm vis-à-vis its rival is the key to know firm’s situation. High costs make a firm’s competitive position vulnerable. Role of market power Highly competitive market Monopoly

In the case of firms with products providing similar value to customers, price and cost comparison become crucial and firms with low cost have upper hand. Even in case the products are differentiated firms need to keep prices and costs in line with those of rivals and make sure that the additional costs are justified in view of the added value.

Costs differ among firms due to Prices paid for inputs Technology used Age of plants and equipment Economies of scale Marketing cost Transportation costs due to location Inflation and foreign exchange rates etc.

Strategic costs and Value Chain Strategic cost analysis focuses on firm’s cost position relative to its rivals. A firm’s business is a collection of activities that give rise to costs. The aggregate of the costs of all such activities define the firm’s internal cost structure.

Strategic cost analysis involves comparing firm’s cost activity by activity against the costs of key rivals and knowing sources of cost advantages and disadvantages. It requires to understand Activity Cost Chain which shows how the value from raw materials builds up to the price paid by ultimate customers.

Value Chain Three main areas of Value Chain: Suppliers’ part of cost chain Company’s activity section Forward Channel portion

Value Chain Value Chain shows a linked set of activities and functions a firm performs internally Primary Activities Purchases, Supplies, & Inbound logistics Distributions & Outbound logistics Sales & Marketing Operations Services Profit Margin Support Activities: Production , R&D, Technology, System Development Human Resource Management General Administration

Value Chain It goes beyond the firm’s own internal cost structure and covers all stages of industry chain. Upstream Company Downstream Value Value Value Chain Chain Chain Internally Performed Activities Costs & Margins Activities, Costs & Margins of Forward Channel Activities Costs and Margins of Suppliers Buyer/End Users Value

Value Chain It requires adequate data which are broken down from firm’s own historical data into several main cost categories and developing cost estimates for backward and forward channels

Q.4 How Strong is the Firm’s Competitive Position? Will the firm’s competitive position improve or deteriorate if the firm continues following the present strategies? How does the firm rank relatively to key rivals on each industry success factor? Does the firm enjoy competitive advantage over its rivals? Is the firm capable enough to defend its position from its rivals?

Indicators of competitive strengths Strength in value chain activities Increasing market share Company image Customers’ loyalty Cost advantage Differentiated products Innovational capabilities Creative, entrepreneurial management

Indicators of Competitive weaknesses Decreasing market share Below average growth in revenue Inadequate financial resources Loosing company image High cost producer Loss in innovative capability Inferior product quality Lacking resources and skills in key areas Weaker distribution capability

Competitive Strength Assessments List industry’s key success factors and measures of competitive strengths Assign weights to each key success factor and strength measure Rate the firm and its key rivals on each factor on a scale of 4, with 4 for major strength, 3 for minor strength, 2 for minor weakness and 1 for major weakness. Find the weighted average of the firm and its rivals Draw conclusions on the firm’s net competitive position.

Example of Competitive Strength Assessment Factors Weights Firm Rival 1 Rival 2 Technology .2 4 = .8 2 = .4 Financial Resources .15 3 = .45 4 = .6 Cost position 2 = .3 Image 2 = .24 1 = .2 Distribution .3 1 = .3 3 = .9 Sum 1 2.24 3.25 1.95

Q.5 What strategic issues does the firm face? Identify the major strategic issues the firm must face Present strategy vis-à-vis future key success factors Strengthening resource base Developing technology Improving management capability Proper prioritizing