evaluating a company's resources and competitive position.ppt
- 1. McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 4: Evaluating a Company’s Resources and Competitive Position Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University
- 2. “Before executives can chart a new strategy, they must reach common understanding of the company’s current position.” W. Chan Kim and Renee Mauborgne
- 3. “Organizations succeed in a competitive marketplace over the long run because they can do certain things their customers value better than can their competitors.” Robert Hayes, Gary Pisano, and David Upton
- 4. 4-4 Chapter Learning Objectives 1. Understand how to evaluate a company’s internal situation and capabilities and identify the resource strengths capable of becoming the cornerstone of the company’s strategic approach. 2. Grasp how and why activities performed internally by a company and those performed externally by its suppliers and forward channel allies determine a company’s cost structure and ability to compete successfully. 3. Learn how to evaluate a company’s competitive strength relative to key rivals. 4. Understand the role and importance of industry and competitive analysis and internal situation analysis in identifying strategic issues company managers must address.
- 5. 4-5 Chapter Roadmap Question 1: How Well Is the Company’s Present Strategy Working? Question 2: What Are the Company’s Resource Strengths and Weaknesses and Its External Opportunities and Threats? Question 3: Are the Company’s Prices and Costs Competitive? Question 4: Is the Company Competitively Stronger or Weaker than Key Rivals? Question 5: What Strategic Issues and Problems Merit Front-Burner Managerial Attention?
- 6. 4-6 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?
- 7. Figure 4.1: Identifying Components of a Single-Business Company’s Strategy 4-7
- 8. 4-8 Question 1: How Well Is the Company’s Present Strategy Working? Must begin by understanding what the strategy is Identify competitive approach Low-cost leadership? Differentiation? Best-cost provider? Focus on a particular market niche? Determine competitive scope Broad or narrow geographic market coverage? In how many stages of industry’s production/distribution chain does the company operate? Examine recent strategic moves Identify functional strategies Key Considerations
- 9. Approaches to Assessing How Well the Present Strategy Is Working Qualitative assessment – Is the strategy well- conceived? Covers all the bases? Internally consistent? Makes sense? Timely and in step with marketplace? Quantitative assessment – What are the results? Is company achieving its financial and strategic objectives? Is company an above- average industry performer? 4-9
- 10. 4-10 Trend in sales and market share Acquiring and/or retaining customers Trend in profit margins Trend in net profits, EPS, and ROE Overall financial strength and credit rating Efforts at continuous improvement activities Trend in stock price Image and reputation with customers Leadership role(s) – Technology, product quality, innovation, etc. Key Indicators of How Well the Strategy Is Working
- 11. Table 4.1: Key Financial Ratios: How to Calculate Them and What They Mean 4-11
- 12. Table 4.1: Key Financial Ratios: How to Calculate Them and What They Mean (con’t) 4-12
- 13. 4-13 S W O T represents the first letter in S trengths W eaknesses O pportunities T hreats For a company’s strategy to be well- conceived, it must be Matched to its resource strengths and weaknesses Aimed at capturing its best market opportunities and erecting defenses against external threats to its well-being S W O T Question 2: What Are the Company’s Strengths, Weaknesses, Opportunities and Threats ?
- 14. 4-14 A strength is something a firm does well or an attribute that enhances its competitiveness Valuable skills, competencies, or capabilities Valuable physical assets Valuable human assets Valuable organizational assets Valuable intangible assets Important competitive capabilities An attribute placing a company in a position of market advantage Alliances or cooperative ventures with partners Identifying Resource Strengths and Competitive Capabilities Resource strengths and competitive capabilities are competitive assets!
- 15. 4-15 Competencies vs. Core Competencies vs. Distinctive Competencies A competence is the product of organizational learning and experience and represents real proficiency in performing an internal activity A core competence is a well-performed internal activity central (not peripheral or incidental) to a company’s competitiveness and profitability A distinctive competence is a competitively valuable activity a company performs better than its rivals
- 16. 4-16 Stem from skills, expertise, and experience usually representing an Accumulation of learning over time and Gradual buildup of real proficiency in performing an activity Involve deliberate efforts to develop the ability to do something, often entailing Selecting people with requisite knowledge and skills Upgrading or expanding individual abilities Molding work products of individuals into a cooperative effort to create organizational ability A conscious effort to create intellectual capital Company Competencies and Capabilities
- 17. 4-17 Core Competencies – A Valuable Company Resource A competence becomes a core competence when the well-performed activity is central to a company’s competitiveness and profitability Often, a core competence is knowledge-based, residing in people, not in assets on a balance sheet A core competence is typically the result of cross-department collaboration A core competence gives a company a potentially valuable competitive capability and represents a definite competitive asset
- 18. 4-18 Examples: Core Competencies Expertise in integrating multiple technologies to create families of new products Know-how in cost efficient supply chain management Speeding new/next-generation products to market Better after-sale service capability Skills in manufacturing a high quality product Capability to fill customer orders accurately and swiftly
- 19. 4-19 A distinctive competence is a competitively valuable activity that a company performs better than its competitors A distinctive competence is a competitively potent resource source because it Gives a company a competitively valuable capability unmatched by rivals Can underpin and add real punch to a company’s strategy Is a basis for sustainable competitive advantage # 1 Distinctive Competence – A Competitively Superior Resource
- 20. Examples: Distinctive Competencies Toyota Low-cost, high-quality manufacturing of motor vehicles Starbucks Innovative coffee drinks and store ambience 4-20
- 21. 4-21 Determining the Competitive Power of a Company Resource To qualify as competitively valuable or to be the basis for sustainable competitive advantage, a “resource” must pass 4 tests: 1. Is the resource really competitively superior? 2. Is the resource rare – is it something rivals lack? 3. Is the resource hard to copy? 4. Can the resource be trumped by the different capabilities of rivals?
- 22. 4-22 What Is a Resource-Based Strategy? Companies with competitively valuable resource strengths and competencies often deploy these capabilities to Boost the competitive power of their overall strategy Bolster their position in the marketplace Resource-based strategies Attempt to exploit company resources to offer value to customers in ways rival cannot match Can focus on eroding the competitive potency of a rival by developing different resources that effectively substitute for the strengths of the rival
- 23. 4-23 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!
- 24. Table 4.2: What to Look for in Identifying a Company’s Strengths, Weaknesses, Opportunities, and Threats 4-24
- 25. 4-25 Identifying a Company’s Market Opportunities 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
- 26. 4-26 Identifying External Threats Some possibilities: Emergence of cheaper/better technologies Introduction of better products by rivals Entry of lower-cost foreign competitors Onerous regulations Rise in interest rates Potential of a hostile takeover Unfavorable demographic shifts Adverse shifts in foreign exchange rates Political upheaval and/or burdensome government policies
- 27. 4-27 S W O T analysis involves more than just developing the 4 lists of strengths, weaknesses, opportunities, and threats The most important part of S W O T analysis is Using the 4 lists to draw conclusions about a company’s overall situation 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 Role of SWOT Analysis in Crafting a Better Strategy
- 28. Figure 4.2: The Three Steps of SWOT Analysis 4-28
- 29. 4-29 Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company situation analysis Key analytical tools Value chain analysis Benchmarking Question 3: Are the Company’s Prices and Costs Competitive?
- 30. 4-30 A company’s business consists of all activities undertaken in designing, producing, marketing, delivering, and supporting its product or service All these activities a company performs internally combine to form a value chain — so-called because the underlying intent of a company’s activities is to do things that ultimately create value for buyers The value chain contains two types of activities Primary activities – Where most of the value for customers is created Support activities – Facilitate performance of primary activities Concept: Company Value Chain
- 31. Figure 4.3: A Representative Company Value Chain 4-31
- 32. Example: Value Chain Activities for a Bakery Goods Maker Primary Activities Supply chain management Recipe development and testing Mixing and baking Packaging Sales and marketing Distribution Support Activities Quality control Human resource management Administration 4-32
- 33. Example: Value Chain Activities for a Department Store Retailer Primary Activities Merchandise selection and purchasing Store layout and product display Advertising Customer service Support Activities Site selection Hiring and training Store maintenance Administrative activities 4-33
- 34. Example: Value Chain Activities for a Hotel Chain Primary Activities Site selection and construction Reservations Operation of hotel properties Managing lineup of hotel locations Support Activities Accounting Hiring and training Advertising Building a brand and reputation General administration 4-34
- 35. 4-35 Combined costs of all activities in a company’s value chain define a company’s internal cost structure Compares a firm’s costs activity by activity against costs of key rivals From raw materials purchase to Price paid by ultimate customer Pinpoints which internal activities are a source of cost advantage or disadvantage Characteristics of Value Chain Analysis
- 36. 4-36 Several factors give rise to differences in value chains of rival companies Different strategies Different operating practices Different technologies Different degrees of vertical integration Some companies may perform particular activities internally while others outsource them Differences among the value chains of competing companies complicate task of assessing rivals’ relative cost positions Why Do Value Chains of Rivals Differ?
- 37. 4-37 Assessing a company’s cost competitiveness involves comparing costs all along an industry’s 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 Value chains of distributors and retailers are relevant because Their costs and profit margins represent “value added” and are part of the price paid by ultimate end-user Activities they perform affect end-user satisfaction The Value Chain System for an Entire Industry
- 38. Figure 4.4: Representative Value Chain for an Entire Industry 4-38
- 39. Example: Value Chain Activities Pulp & Paper Industry Timber farming Logging Pulp mills Papermaking Distribution 4-39
- 40. Example: Value Chain Activities Parts and components manufacture Assembly Wholesale distribution Retail sales Home Appliance Industry 4-40
- 41. Example: Value Chain Activities Processing of basic ingredients Syrup manufacture Bottling and can filling Wholesale distribution Advertising Retailing Soft Drink Industry Publix 4-41
- 42. Example: Value Chain Activities Computer Software Industry Programming Disk loading Marketing Distribution 4-42
- 43. 4-43 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: A Key Tool in Analyzing Costs
- 44. 4-44 Developing Data to Measure a Company’s Cost Competitiveness After identifying key value chain activities, the next step involves determining costs of performing specific value chain activities using activity-based costing 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
- 45. Table 4.3: The Difference between Traditional Cost Accounting and Activity- Based Cost Accounting: An Example from Air Conditioner Manufacturing 4-45
- 46. 4-46 Focuses on cross-company comparisons of how certain activities are performed and costs associated with these activities Purchase of materials Payment of suppliers Management of inventories Getting new products to market Performance of quality control Filling and shipping of customer orders Training of employees Processing of payrolls Benchmarking Costs of Key Value Chain Activities
- 47. 4-47 Identify best and most efficient means of performing various value chain activities Learn what is the “best” way to perform a particular activity from those companies who have demonstrated that they are “best-in- industry” or “best-in-world” at performing the activity Learn what other firms do to perform an activity at lower cost Figure out what actions to take to improve a company’s own cost competitiveness Objectives of Benchmarking
- 48. 4-48 Ethical Principles in Benchmarking Avoid actions implying an interest in Restraint of trade Market and/or customer allocation schemes Price fixing Bribery Refrain from acquiring trade secrets by any means viewed as improper Be willing to provide same type of information to a benchmarking partner Communicate early to clarify expectations and avoid misunderstandings Be honest and complete Obtain prior permission of benchmarking partner to use partner’s name with data Honor wishes of partners regarding use of information Establish specific ground rules up front with partners Check with legal counsel if any information gathering procedure is in doubt Do not ask partners for sensitive data Use an ethical third party to assemble competitive data Treat benchmarking interchange as confidential
- 49. 4-49 Cost competitiveness depends on how well a company manages its value chain relative to how well competitors manage their value chains When a company’s costs are out-of-line, the activities responsible for the higher costs may be due to any of three parts of industry value chain 1. Activities performed by suppliers 2. A company’s own internal activities 3. Activities performed by forward channel allies Activities, Costs, & Margins of Forward Channel Allies Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Suppliers Buyer/User Value Chains What Determines If a Company Is Cost Competitive?
- 50. 4-50 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
- 51. 4-51 Pressure suppliers for lower prices Switch to lower-priced substitutes Collaborate closely with suppliers to identify mutual cost-saving opportunities Arrange for just-in-time deliveries from suppliers to lower inventory and internal logistics costs Integrate backward into business of high-cost suppliers Options to Correct a Supplier-Related Cost Disadvantage
- 52. 4-52 Pressure dealer-distributors and other forward channel allies to reduce their costs to make the final price to buyers more competitive with prices of rivals Work closely with forward channel allies to identify win-win opportunities to reduce costs Change to a more economical distribution strategy Switch to cheaper distribution channels Integrate forward into company-owned retail outlets Options to Correct a Cost Disadvantage Associated With Activities of Forward Channel Allies
- 53. 4-53 A company can create competitive advantage by out-managing rivals in performing value chain activities in either/both of two ways Option 1: Develop competencies and capabilities that rivals don’t have or can’t match and thereby create a resource or capability- based competitive advantage Option 2: Perform value chain activities at a lower overall cost than rivals and thereby create a cost-based competitive advantage Translating Performance of Value Chain Activities into Competitive Advantage
- 54. Figure 4.5: Translating Company Performance of Value Chain Activities into Competitive Advantage 4-54
- 55. 4-55 Whether a company is competitively stronger or weaker than key rivals hinges on the answers to two questions How does the company rank relative to competitors on each important factor that determines market success? Does the company have a net competitive advantage or disadvantage vis-à-vis major competitors? Question 4: Is the Company Stronger or Weaker than Key Rivals?
- 56. 4-56 1. List industry key success factors and other relevant measures of competitive strength 2. Rate firm and key rivals on each factor using rating 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 overall competitive strength of firm Assessing a Company’s Competitive Strength vs. Key Rivals
- 57. Table 4.4: Illustrations of Unweighted and Weighted Strength Assessments 4-57
- 58. 4-58 Reveals strength of firm’s competitive position vis-à-vis key rivals Shows how firm stacks up against rivals, measure-by-measure – pinpoints firm’s competitive strengths and competitive weaknesses Indicates whether firm is at a competitive advantage / disadvantage against each rival Identifies possible offensive attacks (pit company strengths against rivals’ weaknesses) Identifies possible defensive actions (a need to correct competitive weaknesses) Why Do a Competitive Strength Assessment ?
- 59. 4-59 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 Question 5: What Strategic Issues Merit Managerial Attention? A “good” strategy must address “what to do” about each and every strategic issue!
- 60. 4-60 A Clear Grasp of the Issues Is a Prerequisite to Effective Action Issues are best couched in such phrases as “How to . . . ?” “Whether to . . . ?” “What should be done about . . . ?” Issues need to be precisely stated and “cut straight to the chase” The issues on management’s “worry list” represent an agenda for action Sharp, clear understanding of the issues is a big assist in figuring out what to do to address and resolve them !
- 61. 4-61 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? Identifying the Strategic Issues: Some Possibilities