Evaluating a Companys Resources and Competitive Position

Chapter 4:

Chapter Roadmap
1.
Understand how to evaluate a companys internal situation and capabilities and identify the resource strengths capable of becoming the cornerstone of the companys strategic approach. Grasp how and why activities performed internally by a company and those performed externally by its suppliers and forward channel allies determine a companys cost structure and ability to compete successfully. Learn how to evaluate a companys competitive strength relative to key rivals. Understand the role and importance of industry and competitive analysis and internal situation analysis in identifying strategic issues company managers must address.

2.

3. 4.

Company Situation Analysis: The Key Questions

Question 1: How Well Is the Companys Present Strategy Working? Question 2: What Are the Companys Resource Strengths and Weaknesses and Its External Opportunities and Threats? Question 3: Are the Companys 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?

Figure 4.1: Identifying Components of a Single-Business Companys Strategy

4-4

Question 1: How Well Is the Companys Present Strategy Working?

Key Considerations
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 industrys production/distribution chain
does the company operate?

Examine recent strategic moves Identify functional strategies

Key Indicators of How Well the Strategy Is Working

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.

Question 2: What Are the Companys Strengths, Weaknesses, Opportunities and Threats ?
S W O T represents the first letter in S S trengths W eaknesses O pportunities O T hreats

W T

For a companys 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 wellbeing

Identifying Resource Strengths and Competitive Capabilities

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

Resource strengths and competitive capabilities are competitive assets!

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 companys competitiveness and profitability
A distinctive competence is a competitively

valuable activity a company performs better than its rivals

Core Competencies A Valuable Company Resource

A competence becomes a core competence when the well-performed activity is central to a companys 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 crossdepartment collaboration A core competence gives a company a potentially valuable competitive capability and represents a definite competitive asset

Distinctive Competence A Competitively Superior Resource

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 companys strategy22 Is a basis for sustainable competitive advantage

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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

Three-Stage Process of Developing Competencies and Capabilities

First develop ability to do something 2. Build experience and gradually transform the ability into a core competence and proven capability 3. Continue to refine and polish the competence/capability, striving to perform the activity better than rivals, thereby turning the core competence into a distinctive competence and providing a path to competitive advantage!

Step 1 in Developing Competencies

Develop ability to perform an activity well and at an

acceptable cost
Select people with relevant skills/experience

Broaden or expand
individual abilities as needed

Mold efforts and work products of

individuals into a cooperative effort to create organizational ability

Step 2 in Developing Competencies

As experience builds and company learns how

to perform the activity consistently well and at acceptable cost, transform the ability into a core competence and capability Typically, a core competence or competitive capability emerges from establishing and nurturing collaborative relationships
Between individuals and groups in different
departments Between a company and its strategic allies

Step 3 in Developing Competencies

If and when a company masters the activity,

not just performing it really well but performing it better than rivals, the core competence (and now proven capability) becomes a
Distinctive competence and
Holds potential for
competitive advantage

This is the optimal outcome of the process of building competitively potent competencies and capabilities!

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

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!

Internal Factor Analysis Summary (IFAS)

Internal Factors Strengths 1 Weight 2 Rating 3

Weighted Score
4

Comments 5

Weaknesses

Total Weighted Score

1.00

Notes: 1. List strengths and weaknesses (510 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factors probable impact on the companys strategic position. The total weights must sum to 1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the companys response to that factor. 4. Multiply each factors weight times its rating to obtain each factors weighted score in Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells how well the company is responding to the strategic factors in its internal environment. Source: T. L. Wheelen and J. D. Hunger, External Strategic Factors Analysis Summary (EFAS). Copyright 1991 by Wheelen and Hunger Associates. Reprinted by permission.

Prentice Hall, 2000

Chapter 4

19

Identifying a Companys 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

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

External Factor Analysis Summary (EFAS)

External Strategic Factors
Opportunities 1 Weight 2 Rating 3

Weighted Score
4

Comments 5

Threats

Total Weighted Score

1.00

Notes: 1. List opportunities and threats (510 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factors probable impact on the companys strategic position. The total weights must sum to 1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the companys response to that factor. 4. Multiply each factors weight times its rating to obtain each factors weighted score in Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells how well the company is responding to the strategic factors in its external environment. Source: T. L. Wheelen and J. D. Hunger, External Strategic Factors Analysis Summary (EFAS). Copyright 1991 by Wheelen and Hunger Associates. Reprinted by permission.

Prentice Hall, 2000

Chapter 3

22

5.4

TOWS Matrix (Fig. 5.2)

TOWS Matrix
Strengths (S) List 5 10 internal strengths here Weaknesses (W) List 5 10 internal weaknesses here

INTERNAL FACTORS (IFAS) EXTERNAL FACTORS (EFAS)

Opportunities (O) List 5 10 external opportunities here

SO Strategies Generate strategies here that use strengths to take advantage of opportunities

WO Strategies Generate strategies here that take advantage of opportunities by overcoming weaknesses

Threats (T) List 5 10 external threats here

ST Strategies Generate strategies here that use strengths to avoid threats

WT Strategies Generate strategies here that minimize weaknesses and avoid threats

Source: Adapted from Long-Range Planning, April 1982, H. Weihrich, The TOWS MatrixA Tool for Situational Analysis p. 60. Copyright 1982, with kind permission from H. Weihrich and Elsevier Science Ltd. The Boulevard, Langford Lane, Kidlington OX5 1GB, UK.

Prentice Hall, 2000

Chapter 5

23

Example Of TOWS Matrix

Strengths 1. Quality Maytag Culture 2. Experienced top management 3. Vertical integration 4. Employee relations 5. Hoovers international orientation Weaknesses

Example Of TOWS Matrix

Strengths
1. 2. 3. 4. 5. 1. 2. 3. 4. 5. Quality Maytag Culture Experienced top management Vertical integration Employee relations Hoovers international orientation Weaknesses Process oriented R&D Distribution Channels Financial position Global positioning Manufacturing facilities

Opportunities
1. 2. 3. 4. 5. Economic integration of European community Demographics favor quality Economic development of Asia Opening of Eastern Europe Trend to Super Store

1. 2. 3. 4. 5.

Threats
Increasing government regulations Strong US competition Whirlpool and Electrolux strong globally New product advances Japanese appliance companies

Example Of TOWS Matrix

SO strategies 1. Use worldwide Hoover distribution to sell both Hoover and Maytag major appliances (S5, O 1,2) 2. Find Joint venture partners in Eastern Europe and Asia (S1,2, O1,2, 3) WO Strategies 1. Expand Hoovers presence in continental Europe by reducing manufacturing and distribution cost (O1, W2,5) 2. Emphasize superstore channels for all non Maytag brands ( O5, W2) ST Strategies 1. Merge with a Japanese major home appliance company (S1,2, T5) 2. Sell out non Maytag brands and strongly defend Maytags U.S niche (S1,2,3, T3) WT Strategies 1. Sell out non profit divisions to reduce debt (W3, T1,2) 2. Emphasize cost reduction to reduce breakeven point ( W1,3, T2, 5)

The Strategic Position and Action Evaluation Matrix (SPACE)

Select a set of variables to define financial strength (FS), Competitive advantage (CA), Environmental stability (ES), and industry strength (IS) Assign numerical value ranging from +1( worst) to +6 (best) to reach variable that make up FS and IS dimension. Assign numerical value ranging from -1 ( best) to -6 ( worst) for ES and CA Compute the average score for FS, IS, CA, and ES Plot the average for FS, IS, CA, and ES on the appropriate axis Add the two scores on the x axis and plot the resultant point on X. Add the two scores on the y-axis and plot the resultant point on Y. Plot the intersection of the new xy point Draw a directional vector from the origin of the SPACE Matrix through the new intersection point. The vector reveals the type of strategies recommended for the organization: aggressive, competitive, defensive, or conservative

Y axis
1. Financial Strength (FS Return on Investment Leverage Liquidity Working capital Cash Flow Ease of Exit Risk involved in business

X axis
1. Industry Strength ( IS) Growth Potential Profit potential Financial stability Technological Know-how Resource utilization Capital intensity Ease of entry Productivity, capacity utilization

2. Environmental Stability (ES) Technological Changes Rate of Inflation Demand Variability Price range of competitive products Barriers to entry Competitive pressure Price elasticity of demand

2.

Competitive Advantage (CA) Market Share Product Quality Product life cycle Customer loyalty Competitions capacity utilization Technological know-how Control over suppliers and distributors

Hypothetical example of SPACE Matrix (Y axis) Financial Strength (FS) Return on Investment = + 6 Leverage Liquidity Working capital Cash Flow Ease of exit =+5 =+5 =+5 =+4 = +1 Environmental Stability ( ES) Technological change = - 4 Rate of Inflation =-3

Demand variability = - 3 Price range of competitive products = -5 Barriers to entry =-1

Competitive pressure = - 4

Risk Involved =+4 Total Score = + 30 Average Score = 30/7 = 4.28

Price elasticity of demand = - 3

Total score = -23

Average Score = -23/7= - 3.28

SPACE Matrix Calculation X axis Industry Strength ( IS) Competitive Advantage (CA) Growth Potential =+5 Market Share Product Quality Product life cycle =-2 =-3 = -2

Profit Potential

= +5

Technological Know how = + 3

Customer Loyalty

= -1

Resource utilization
Capital Requirement Ease of Entry Productivity, capacity utilization Total Score Average IS Score =

= +4
= +6 = +6

Competitions capacity utilization = -3 Technological Know how = -3

Control over suppliers and

Distributors = -1 = 15 = - 2.14

+4

Total Score Average CA Score

= +31 = +4.42

SPACE Matrix Calculations ES Average Score = -3.28 + Average FS Score( + 4.28) = + 1 Average CA Score = -2.14 + Average IS Score ( 4.42) = + 2.28 FS

x CA x IS

ES

Examples of strategic profiles

Aggressive profiles

Conservative Profile

Competitive Profile Conservative profile Defensive Profile

Question 3: Are the Companys Prices and Costs Competitive?

Assessing whether a firms costs are

competitive with those of rivals is a crucial part of company situation analysis

Key analytical tools Value chain analysis Benchmarking

Concept: Company Value Chain

A companys 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 companys 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

Figure 4.3: A Representative Company Value Chain

4-35

Characteristics of Value Chain Analysis

Combined costs of all activities in a companys

value chain define a companys internal cost structure

Compares a firms 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

Why Do Value Chains of Rivals Differ?

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 the value chains of Rival Companies often differ

a. Competing companies may differ on the degree of vertical integration - Comparing the value chain of a fully integrated and partially integrated rivals require adjusting the differences in scope of activities - The costs of internally performed activities for a manufacturer will be greater than the cost of internally performed activities of producers that buys the needed parts and components from outside suppliers and only performs assembly line operations

Why the value chains of Rival Companies often differ

There is legitimate reason to expect that value chain and cost differences between companies pursuing a low cost/ low price strategy and a rival that is positioned on high end of the market c. Cost and price differences among rival firms can have their origin in activities performed by suppliers and distributors or by distribution channels allies involved in getting thee product to end users - Suppliers or wholesale dealers may have excessively high cost or profit structures that jeopardize a companys cost competitiveness even though its cost for internally performed activities are competitive

The Value Chain System for an Entire Industry

Assessing a companys cost competitiveness involves

comparing costs all along an industrys value chain Suppliers value chains are relevant because Costs, performance features, and quality of inputs
Value chains of distributors and retailers are

provided by suppliers influence a firms own costs and product performance

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 entire industry

Accurately assessing a companys competitiveness in end use markets require that a company managers must understand the entire value chain system for delivering a product or service to end users, not just companys value chain At the very least it means considering the value chain of suppliers and forward channel allies Suppliers value chains are relevant because; 1. suppliers perform activities and incur costs in creating and delivering the purchased inputs used in companys own value chain 2. The costs, performance features and quality of these inputs influence a companys own cost and product differentiation capabilities Any thing a company can do to help its suppliers take cost out of their value chain activities or improve the quality and performance of the item being supplied can enhance its own competitiveness

Figure 4.4: Representative Value Chain for an Entire Industry

4-42

Activity-Based Costing: A Key Tool in Analyzing Costs

Determining whether a companys costs are in line

with those of rivals requires

Measuring how a companys 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

Developing Data to Measure a Companys 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

Activity-Based Costing: A Key Tool in Analyzing Costs

Determining whether a companys costs are in line with those of rivals requires Measuring how a companys 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

Benchmarking Costs of Key Value Chain Activities

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

Objectives of Benchmarking
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 companys own cost competitiveness

What Determines If a Company Is Cost Competitive?

Cost competitiveness depends on how well a

company manages its value chain relative to how well competitors manage their value chains When a companys 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 companys own internal activities 3. Activities performed by forward channel allies
Activities, Costs, & Margins of Suppliers

Internally Performed Activities, Costs, & Margins

Activities, Costs, & Margins of Forward Channel Allies

Buyer/User Value Chains

Options to Correct Internal Cost Disadvantages

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 a Supplier-Related Cost Disadvantage

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 Cost Disadvantage Associated With Activities of Forward Channel Allies
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

Translating Performance of Value Chain Activities into Competitive Advantage

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 dont have or cant 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

Figure 4.5: Translating Company Performance of Value Chain Activities into Competitive Advantage

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Question 4: Is the Company Stronger or Weaker than Key Rivals?

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--vis major competitors?

Industry Matrix/ Competitive Profile Matrix ( CPM)

Strategic Factors 1 Weight 2 Company A Rating 3 Company A Weighted Score 4 Company B Rating 5 Company B Weighted Score 6

Total

1.00

Source: T. L. Wheelen and J. D. Hunger, Industry Matrix. Copyright 1997 by Wheelen and Hunger Associates. Reprinted by permission. Prentice Hall, 2000 Chapter 3 56

External Factor Analysis Summary( EFAS) / External Factor Evaluation Matrix ( EFE)
Column 1( External Factors) list 8-10 most important opportunities and threats facing the company Column 2 ( Weights) assign a weight to each factor. The higher the weight the more important is this factor to the current and future success of the company. All weights must sum to 1.0 regardless of the number of factors Column 3 (Rating) ,assign a rating to each factor from 5.0 ( outstanding) to 1.0 (poor) based on managements current response to a particular factor Column 4 ( weighted score) Multiply the weight in column 2 for each factor in column 3 to obtain each factors weighted score. Column 5 ( comments), note why a particular factor was selected and how its weight and rating were estimated Add the individual weighted score for all external factors in column 4 to determine the total weighted score for that particular company. The weighted score of 3 = average, 4 = above average, less than 2.5 as below average

Why Do a Competitive Strength Assessment ?

Reveals strength of firms competitive position vis--vis

key rivals Shows how firm stacks up against rivals, measure-bymeasure pinpoints firms 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)

Question 5: What Strategic Issues Merit Managerial Attention?

Based on results of both industry and

competitive analysis and an evaluation of a companys competitiveness, what items should be on a companys worry list? Requires thinking strategically about
Pluses and minuses in the industry and competitive situation Companys resource strengths and weaknesses and attractiveness of its competitive position

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 managements 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 !

Identifying the Strategic Issues: Some Possibilities

How to stave off market challenges from new foreign

competitors? How to combat price discounting of rivals? How to reduce a companys high costs? How to sustain a companys present growth in light of slowing buyer demand? Whether to expand a companys 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 companys customer base?