McGraw-Hill/Irwin Copyright © 2011 The McGraw-Hill Companies, All Rights Reserved.

Chapter 4Chapter 4Internal Situation Internal Situation

Analysis:Analysis:Evaluating a Company’s Evaluating a Company’s

Resources, Cost Resources, Cost Position, and Position, and

Competitive StrengthCompetitive Strength

4-2

Key Questions in Situation AnalysisKey Questions in Situation Analysis

Question 1: How well is the company’s strategy working?

Question 2: What are the company’s competitively important resources and capabilities?

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?

4-3

Situation Analysis Question 1: How Situation Analysis Question 1: How Well is the Company’s Strategy Well is the Company’s Strategy Working?Working?

1. Is the company achieving its financial and strategic objectives?

2. Is the company an above-average industry performer?

4-4

Performance IndicatorsPerformance Indicators

Trends in sales and earnings growth Trends in the company’s stock price The company’s overall financial strength The rate at which new customers are acquired Image and reputation with customers Evidence of improvement in internal processes

such as defect rate, order fulfillment, and days of inventory

4-5

Situation Analysis Question 2: The Situation Analysis Question 2: The Company’s Competitively Important Company’s Competitively Important Resources and CapabilitiesResources and Capabilities

A company’s strategy and business model Must be well-matched to its collection

of resources and capabilitiesIs strengthened when exploiting

resources that are competitively valuable, rare, hard to copy, and not easily trumped to rivals’ equivalent substitute resources

4-6

Resource-Based Strategies Resource-Based Strategies

Resource-based strategies attempt to exploit a company’s valuable and rare resources and competitive capabilities to deliver value to customers in ways rivals find it difficult to match

4-7

Identifying Competitively Important Identifying Competitively Important Resources and CapabilitiesResources and Capabilities

Common types of valuable resources and competitive capabilities includeSkills or specialized expertise in a

competitively important capabilityValuable physical assetsValuable human assets or intellectual capitalValuable organizational assetsValuable intangible assetsCompetitively valuable alliances or

cooperative ventures

4-8

Determining the Competitive Determining the Competitive Power of a Company ResourcePower of a Company Resource

Is the resource really competitively valuable?

Is the resource rare and something rivals lack?

Is the resource hard to copy or imitate?

Can the resource be trumped by the substitute resource strengths and competitive capabilities of rivals?

4-9

Strategies for Addressing Resource Strategies for Addressing Resource Deficiencies Deficiencies

Companies lacking a competitively powerful stand-alone resource may be able to support its strategy with a bundle of resources.

Companies may be able to neutralize the power of rivals’ resources and capabilities by developing substitute resources to accomplish the same purpose.

4-10

Resources and Capabilities as the Resources and Capabilities as the Foundation of Competitive Foundation of Competitive AdvantageAdvantage

A competence represents real proficiency in performing an internal activity

A core competence is a well-performedinternal activity central to a company’s competitiveness and profitability

A distinctive competence is a competitively valuable activity a company performs better than its rivals

4-11

Taking Inventory of a Company’s Taking Inventory of a Company’s Strengths, Weaknesses, Strengths, Weaknesses, Opportunities and ThreatsOpportunities and Threats S W O T represents the first letter in

S trengthsW eaknessesO pportunitiesT 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 defending against external threats to its well-being

4-12

Identifying Resource WeaknessesIdentifying Resource Weaknessesand Competitive Deficienciesand Competitive Deficiencies

A weakness is something a firm lacks, does poorly, or a condition placing it at a disadvantage in the marketplace

Resource weaknesses relate to Inferior or unproven skills,

expertise, or intellectual capitalDeficiencies in competitively important

physical, organizational, or intangible assetsMissing or competitive inferior capabilities in

key areas

4-13

Identifying a Company’sIdentifying a Company’sMarket OpportunitiesMarket Opportunities

Opportunities most relevant to a company are those offering

Good match with its financial andorganizational resource capabilities

Best prospects for growth and profitability

Most potential for competitive advantage

4-14

Identifying External Threats to Identifying External Threats to Profitability and CompetitivenessProfitability and Competitiveness

Entry of lower-cost foreign competitors Burdensome regulations Rise in interest rates Potential of a hostile takeover Unfavorable demographic shifts Adverse shifts in foreign exchange rates

4-15

Overall Value of a SWOT AnalysisOverall Value of a SWOT Analysis

Ability to draw conclusions about the company’s overall situation.

Ability to translate into strategic actions:Better match the company’s strategy to its

resource strengths and market opportunities, Correcting problematic weaknesses, and Defending against worrisome external

threats. 

4-16

Situation Analysis Question 3: How Situation Analysis Question 3: How Competitive Are the Company’s Competitive Are the Company’s Prices and Costs?Prices and Costs? 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

4-17

Company Value ChainCompany Value Chain

4-18

Benchmarking Costs ofBenchmarking Costs ofKey Value Chain ActivitiesKey Value Chain Activities

Focuses on cross-company comparisons of how certain activities are performed and costs associated with these activitiesPurchase of materialsPayment of suppliersGetting new products to marketPerformance of quality controlFilling and shipping of customer orders

4-19

Industry Value ChainIndustry Value Chain

4-20

Strategic Options for Remedying a Strategic Options for Remedying a Cost DisadvantageCost Disadvantage

There are three main areas of a company’s overall value chain where cost differences occur

1. Activities performed by suppliers

2. A company’s own internal activities

3. Activities performed by forward channel allies

4-21

Correcting Internal Cost Correcting Internal Cost DisadvantagesDisadvantages

Implement best practices throughout the company

Try to eliminate some cost-producing activities altogether by revamping value chain

Relocate high-cost activities to lower-cost geographic areas

See if high-cost activities can be outsourced

4-22

Correcting Internal Cost Correcting Internal Cost DisadvantagesDisadvantages

Invest in productivity enhancing, cost-saving technology

Find ways to detour around activities or items where costs are high

Redesign the product or its components to reduce manufacturing costs

Make up difference by achieving savings in backward or forward portions of value chain system

4-23

Correcting Supplier-Related Cost Correcting Supplier-Related Cost DisadvantagesDisadvantages

Pressure suppliers for lower prices Switch to lower-priced substitutes Collaborate closely with suppliers to

identify mutual cost-saving opportunities

Integrate backward into business of high-cost suppliers

4-24

Correcting Cost Disadvantages Correcting Cost Disadvantages Associated With Forward Channel Associated With Forward Channel AlliesAllies

Pressure dealer-distributors to reduce their costs

Work closely with forward channel allies to identify win-win opportunities to reduce costs

Change to a more economical distribution strategySwitch to cheaper distribution channels Integrate forward into company-owned retail

outlets

4-25

Situation Analysis Question 4: What Situation Analysis Question 4: What Is the Company’s Competitive Is the Company’s Competitive Strength?Strength?

Overall competitive position involve answering two questions

How does a company rank relativeto competitors on each industry key success factor?

Does a company have a netcompetitive advantage or disadvantagevis-à-vis major competitors?

4-26

Competitive Strength AssessmentsCompetitive Strength Assessments

4-27

Interpreting the Competitive Interpreting the Competitive Strength AssessmentsStrength Assessments

Shows how firm stacks up against rivals, measure-by-measure

Indicates whether firm is at a competitive advantage or disadvantage against each rival

Identifies possible offensive strategies that can be waged against rivals’ weaknesses

Identifies the need for defensive actions to correct competitive weaknesses

4-28

Situation Analysis Question 5: Situation Analysis Question 5: What Strategic Issues Must be What Strategic Issues Must be Addressed by Management?Addressed by Management?

Final and most important analytical step in assessing “Where are we now?”

Based on results of both industry and competitive analysis

Pinpointing the precise things that should be on management’s “worry list”?