McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 3-1

Analyzing a Company’s Resources and Competitive Position Chapter 3 Screen graphics created by: Jana F. Kuzmicki, PhD Troy University - Florida and Western Region

“The real question isn’t how well you’re doing today against your own history, but how you’re doing against your competitors.” Quote... Donald Kress

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 3-4 Chapter Outline Evaluating How Well a Company’s Present Strategy Is Working Sizing Up a Company’s Resource Strengths and Weaknesses and Its External Opportunities and Threats Analyzing Whether a Company’s Prices and Costs Are Competitive Assessing a Company’s Competitive Strength Identifying the Strategic Issues that Merit Managerial Attention

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 3-5 Company Situation Analysis: The Key Questions 1. How well is the company’s present strategy working? 2. What are the company’s resource strengths and weaknesses and its external opportunities and threats? 3. Are the company’s prices and costs competitive? 4. Is the company competitively stronger or weaker than key rivals? 5. What strategic issues merit front-burner managerial attention?

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 3-6 Evaluating How Well the Company’s Present Strategy Is Working Start by identifying the company’s present strategy  What is the company’s basic competitive approach -  Low-cost leadership?  Differentiation?  Focus on a particular market niche?  Over what geographic area does the company compete?  In what stages in industry’s production/distribution chain does the company operate?  What recent strategic moves has the company made  What functional strategies is the company using

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 3-7 Fig. 3.1: Identifying the Components of a Single-Business Company’s Strategy

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 3-8 Quantitative assessment – Is the strategy producing good results?  Is company achieving its financial and strategic objectives?  Is company an above- average industry performer? Qualitative assessment –  Is the strategy complete (in the sense of covering all the bases)?  Are the various pieces of the strategy internally consistent and mutually supportive (as opposed to being in conflict with each other)?  Is there sound rationale for the strategy? Approaches to Assess How Well the Present Strategy Is Working

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 3-9 Rising/falling sales and market share Gains/losses in customers Rising/falling profit margins Rising/falling net profits and ROI Improving/eroding financial strength Rising/falling stock price Improving/eroding image and reputation Evidence of operating improvements A leader in technology, quality, innovation, e-commerce, etc.? Key Indicators of How Well the Strategy Is Working

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved S W O T S W O T represents the first letter in  S  S trengths  W  W eaknesses  O  O pportunities  T  T hreats For a company’s strategy to be well-conceived, it must be  Matched to its resource strengths and weaknesses  Aimed at (a) capturing its best market opportunities and (b) erecting defenses against external threats to its future growth and profitability SW OT What Are the Company’s Strengths, Weaknesses, Opportunities and Threats ?

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved A strength is something a firm does well or an attribute that enhances its competitiveness  Valuable competencies or know-how  Valuable physical assets  Valuable human assets/intellectual capital  Valuable organizational assets  Valuable intangible assets  Important competitive capabilities  Effective strategic alliances or cooperative partnerships Resource strengths and competitive capabilities are competitive assets! Identifying Resource Strengths and Competitive Capabilities

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Competencies vs. Core Competencies vs. Distinctive Competencies A competence is an activity that a company performs with real proficiency—it is usually the product of organizational learning and experience A core competence is a well-performed internal activity central to a company’s strategy, competitiveness, and profitability A distinctive competence is a competitively valuable activity a company performs better than its rivals

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Stem from skills, expertise, and cross-functional collaboration Are usually the product of deliberate efforts to develop expertise and competitive prowess  Selecting people with requisite skills and know-how  Upgrading or expanding individual abilities  Molding work products of individuals into a collaborative effort to create organizational ability  Building competitively valuable intellectual capital Represent the accumulation of learning over time and gradual buildup of proficiency—cannot be developed “overnight” Company Competencies and Capabilities

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Core Competencies -- A Valuable Company Resource A competence becomes a core competence when an activity that a company performs particularly well is central to its strategy, competitiveness, and profitability Typically, a core competence  Results from collaboration among different parts of a company—it grows out of cross-functional know-how and expertise rather than skills/expertise that resides within a single department or operating unit  Is intellectual capital and resides in a company’s people, not as assets on the balance sheet  Gives a company a potentially valuable competitive capability and is thus a competitive asset

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Examples of Core Competencies Skills in product innovation Expertise in cost efficient supply chain management Ability to speed new/next-generation products to market Better after-sale service capability Skills in manufacturing a reliable or durable or high quality or defect-free product Capability to fill customer orders accurately and swiftly

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved A distinctive competence is a competitively significant activity that a company performs better than its competitors A distinctive competence  Represents a competitively valuable capability rivals do not have  Presents attractive potential for being a cornerstone of strategy  Can provide a competitive edge in the marketplace — because it represents a competitively superior resource strength # 1 Distinctive Competence -- A Competitively Superior Resource

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Determining the Competitive Value of a Company Resource To be the basis for sustainable competitive advantage, a “resource” must pass 4 tests: 1. Is the resource hard for rivals to copy? 2. Does the resource have staying power – is it durable? 3. Is the resource really competitively superior? Does it actually outclass what rivals have and provide a meaningful edge in attracting and/or pleasing customers? 4. Can the resource be trumped by the different capabilities of rivals?

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Identifying Resource Weaknesses and Competitive Deficiencies A weakness is something a firm lacks, does poorly, or a condition placing it at a disadvantage Resource weaknesses relate to  Inferior or unproven skills, expertise, or intellectual capital  Lack of important physical, organizational, or intangible assets  Missing capabilities in key areas Resource weaknesses and deficiencies are competitive liabilities!

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McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Opportunities most relevant to a company are those offering  Good match with its financial and organizational resource capabilities  Best prospects for profitable long-term growth  Potential for competitive advantage Identifying a Company’s Market Opportunities

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Identifying External Threats Slowdowns in market growth Emergence of cheaper/better technologies Introduction of better products by rivals Entry of lower-cost foreign competitors Onerous regulations Intensifying competition Potential of a hostile takeover Unfavorable demographic shifts Adverse shifts in foreign exchange rates Loss of sales to attractive substitute products

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Role of SWOT Analysis in Crafting a Better Strategy The most important part of S W O T analysis is using the 4 lists of strengths, weaknesses, opportunities, and threats  To draw conclusions about a company’s overall situation and  Acting on the conclusions to  Better match a company’s strategy to its resource strengths and market opportunities  Correct the important weaknesses  Defend against external threats

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Fig. 3.2: The Three Steps of SWOT Analysis

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of sizing up a company’s situation Key analytical tools  Value chain analysis  Benchmarking Analyzing Whether a Company’s Prices and Costs Are Competitive

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved A company’s business consists of all activities undertaken in designing, producing, marketing, delivering, and supporting its product or service This linked set of activities that are performed internally create value for the customer (the “value” of all the activities is reflected in the price that buyers pay for the product or service— hence the term value chain) A company’s value chain consists of two types of activities  Primary activities – where most of the value for customers is created  Support activities – facilitate performance of the primary activities Concept of a Company Value Chain

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Fig. 3.3: A Representative Company Value Chain

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved A company’s costs are the sum total of the costs of all the primary and support activities comprising its value chain Whether a company’s costs are competitive with the costs of key rivals hinges on how the costs of its value chain activities compare against the costs of the value chain activities performed by key rivals Understanding the activities and costs comprising a company’s value chains thus helps pinpoint which internal activities are a source of cost advantage or disadvantage The Costs of a Company’s Value Chain Activities Determine Its Cost Competitiveness

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved The value chains of rivals are often somewhat different due to  Use of different technologies and operating practices  Differing strategies and business models  Differing degrees of vertical integration across the whole industry chain of activities starting with raw materials and going all the way to retail distribution Differences in the nature of primary and support activities comprising their respective value chains complicates the task of assessing whether a company’s costs are higher or lower than the costs of its rivals Why Do Value Chains of Rivals Differ?

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Accurately determining a company’s cost competitiveness involves comparing costs all along the industry’s entire value chain Suppliers’ value chains are relevant because  Costs, performance features, and quality of inputs provided by suppliers influence a firm’s own costs and product performance Forward channel allies’ value chains are relevant because  Costs and margins are part of price paid by ultimate end-user  Activities performed affect end-user satisfaction The Value Chain System for an Entire Industry

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Fig. 3.4: A Representative Value Chain for an Entire Industry

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Example of Industry Value Chain Timber farming Logging Pulp mills Papermaking Distribution Pulp & Paper Industry

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Home Appliance Industry Parts and components manufacture Assembly Wholesale distribution Retail sales Example of Industry Value Chain

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Processing of basic ingredients Syrup manufacture Bottling and can filling Wholesale distribution Advertising Retailing Albertson’s Example of Industry Value Chain Soft Drink Industry

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Programming Disk loading Marketing Distribution Example of Industry Value Chain Software Computer Industry

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved After identifying key value chain activities, the next step involves breaking down departmental cost accounting data into costs of performing specific activities Appropriate degree of disaggregation depends on  Economics of activities  Value of comparing narrowly defined versus broadly defined activities Guideline – Develop separate cost estimates for activities  Having different economics  Representing a significant or growing proportion of costs Developing Data to Measure a Company’s Cost Competitiveness

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Determining whether a company’s costs are in line with those of rivals requires  Measuring how a company’s costs compare with those of rivals activity-by-activity Requires having accounting data to measure cost of each value chain activity Activity-based costing entails  Defining expense categories according to specific activities performed and  Assigning costs to the activity responsible for creating the cost Activity-Based Costing: Key Tool in Analyzing Costs

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McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Benchmarking involves gathering the data needed to make cross-company comparisons of  how certain activities are performed  costs associated with these activities Benchmarking can involve cross-company comparisons of  Supply chain activities  Materials purchasing and materials costs  Systems for paying suppliers  Management of inventories  Getting new products to market  Quality control  Filling and shipping of customer orders  Training of employees  Processing of payrolls Benchmarking: A Tool for Comparing Costs of Key Value Chain Activities

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Identify “best practices” in performing each activity in the value chain  Learn the methods, techniques, and approaches used by other firms to  Lower costs  Achieve better results  Discover which company employs the “best practice” Take action to improve company’s cost competitiveness and methods of operation by implementing best practices Objectives of Benchmarking

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Avoid talk about pricing or competitively sensitive costs Don’t ask rivals for sensitive data Don’t share proprietary data without clearance Have impartial third party assemble and present competitively sensitive cost data with no names attached Don’t disparage a rival’s business to outsiders based on data obtained Ethical Standards in Benchmarking: Do’s and Don’ts

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved A company’s cost competitiveness depends on how well the company manages its value chain relative to how well its competitors manage their value chains When a company discovers its costs are out-of-line, the high- cost activities can exist in any of three areas in the industry value chain 1. Suppliers’ activities 2. Company’s own internal activities 3. Forward channel activities Activities, Costs, & Margins of Forward Channel Allies Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Suppliers Buyer/User Value Chains Good Value Chain Management Is the Key to Being Cost Competitive

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Implement use of best practices throughout company Eliminate some cost-producing activities altogether by revamping value chain system Relocate high-cost activities to lower-cost geographic areas See if high-cost activities can be performed cheaper by outside vendors/suppliers Invest in cost-saving technology Innovate around troublesome cost components Simplify product design Make up difference by achieving savings in backward or forward portions of value chain system Options to Correct Internal Cost Disadvantages

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McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved A company can create competitive advantage by doing a much better job than rivals of managing the activities comprising its value chain  Find ways to perform value chain activities at lower costs than rivals  Integrate knowledge and skills of employees in competitively valuable ways  Coordinate related activities in ways that build valuable capabilities  Build dominating expertise in a value chain activity critical to customer satisfaction or market success Superior Value Chain Management Can Equate to Competitive Advantage

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Fig. 3.5: Translating Company Performance of Value Chain Activities into Competitive Advantage

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Evaluating the strength of a company’s overall competitive position involves answering two questions  How does a company rank relative to its key rivals on each important factor that determines market success?  Does the company have a net competitive advantage or disadvantage vis-à-vis its major competitors? Determining Whether a Company Is Competitively Stronger or Weaker than Key Rivals

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved List industry key success factors and other relevant measures of competitive strength 2. Rate the firm and its key rivals on each factor using a scale of 1 to 10 (1 = very weak; 5 = average; 10 = very strong) 3. Decide whether to use a weighted or unweighted rating system (a weighted system is superior because chosen strength measures are unlikely to be equally important) 4. Sum individual ratings to get an overall measure of competitive strength for each rival 5. Based on overall strength ratings, determine the firm’s overall competitive strength and whether it has a competitive advantage or disadvantage Assessing a Company’s Competitive Strength vs. Key Rivals

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McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Reveals strength of firm’s competitive position versus key rivals  Indicates whether it has a net competitive advantage or disadvantage vis-à-vis each key rival Shows how firm stacks up against rivals, measure-by- measure – pinpoints firm’s competitive strengths and competitive weaknesses Identifies possible offensive attacks (pit company strengths against rivals’ weaknesses) Identifies possible defensive actions (a need to correct competitive weaknesses) What Do We Learn from a Competitive Strength Assessment?

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved Based on results of both industry and competitive analysis and an evaluation of a company’s competitiveness, what items should be on a company’s “worry list”? Requires thinking strategically about  Pluses and minuses in the industry and competitive situation  Company’s resource strengths and weaknesses and attractiveness of its competitive position A “good” strategy must address “what to do” about each and every strategic issue! Identifying the Strategic Issues That Merit Managerial Attention

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved How to stave off market challenges from new foreign competitors? How to combat price discounting of rivals? How to reduce a company’s high costs? How to sustain a company’s present growth in light of slowing buyer demand? Whether to expand a company’s product line? Whether to acquire a rival firm? Whether to expand into foreign markets rapidly or cautiously? What to do about aging demographics of a company’s customer base? A Sampling of Possible Strategic Issues

McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved A well-stated issue involves such phrases as  “How to... ?”  “Whether to... ?”  “What should be done about... ?” Issues need to be precise, specific, and “cut straight to the chase” Issues on the “the worry list” raise questions about  What actions need to be considered  What to think about doing Stating the Issues Clearly and Precisely