1. EVALUATING COMPANY RESOURCES AND COMPETITIVE CAPABILITIES
The Value Chain Analysis

2. 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?

3. 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

4. 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.

5. 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.

6. 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.

7. 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.

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

9. 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

10. 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

11. 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

12. 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?

13. 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

14. 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

15. 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.

16. 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

17. 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