IPPTChap004

Copyright © 2014 by The McGraw-Hill Education All rights reserved.

19e Global EditionTHOMPSON | PETERAF | GAMBLE | STRICKLAND

CHAPTER 4CHAPTER 4

EVALUATING A COMPANY’S RESOURCES, EVALUATING A COMPANY’S RESOURCES, CAPABILITIES, AND COMPETITIVENESSCAPABILITIES, AND COMPETITIVENESSEVALUATING A COMPANY’S RESOURCES, EVALUATING A COMPANY’S RESOURCES, CAPABILITIES, AND COMPETITIVENESSCAPABILITIES, AND COMPETITIVENESS

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1. Learn how to assess how well a company’s strategy is working.

2. Understand why a company’s resources and capabilities are central to its strategic approach and how to evaluate their potential for giving the company a competitive edge over rivals.

3. Discover how to assess the company’s strengths and weaknesses in light of market opportunities and external threats.

4. Grasp how a company’s value chain activities can affect the company’s cost structure and customer value proposition.

5. Understand how a comprehensive evaluation of a company’s competitive situation can assist managers in making critical decisions about their next strategic moves.

EVALUATING A FIRM’S EVALUATING A FIRM’S INTERNAL SITUATIONINTERNAL SITUATION

1.1. How well is the firm’s present strategy working?How well is the firm’s present strategy working?

2.2. What are the firm’s competitively important resources and What are the firm’s competitively important resources and capabilities?capabilities?

3.3. Is the firm able to take advantage of market opportunities and Is the firm able to take advantage of market opportunities and overcome external threats to its external well-being?overcome external threats to its external well-being?

4.4. Are the firm’s prices and costs competitive with those of key Are the firm’s prices and costs competitive with those of key rivals, and does it have an appealing customer value rivals, and does it have an appealing customer value proposition?proposition?

5.5. Is the firm competitively stronger or weaker than key rivals?Is the firm competitively stronger or weaker than key rivals?

6.6. What strategic issues and problems merit front-burner What strategic issues and problems merit front-burner managerial attention?managerial attention?

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QUESTION 1: HOW WELL IS THE FIRM’S QUESTION 1: HOW WELL IS THE FIRM’S PRESENT STRATEGY WORKING?PRESENT STRATEGY WORKING?

Best indicators of a well-conceived, Best indicators of a well-conceived, well-executed strategy:well-executed strategy:● The firm is achieving its stated financial and The firm is achieving its stated financial and

strategic objectives.strategic objectives.

● The firm is an above-average industry performer.The firm is an above-average industry performer.

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FIGURE 4.1 Identifying the Components of a Single-Business Company’s Strategy

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SPECIFIC INDICATORS OF SPECIFIC INDICATORS OF STRATEGIC SUCCESSSTRATEGIC SUCCESS

Growth in firm’s sales and market shareGrowth in firm’s sales and market share

Acquisition and retention of customersAcquisition and retention of customers

Strengthening image and reputation with customersStrengthening image and reputation with customers

Increasing profit margins, net profits and ROIIncreasing profit margins, net profits and ROI

Growing financial strength and credit ratingGrowing financial strength and credit rating

Leadership in factors relevant to market\industry Leadership in factors relevant to market\industry successsuccess

Continuing improvement in key measures of operating Continuing improvement in key measures of operating performanceperformance

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STRATEGIC MANAGEMENT PRINCIPLESTRATEGIC MANAGEMENT PRINCIPLESTRATEGIC MANAGEMENT PRINCIPLESTRATEGIC MANAGEMENT PRINCIPLE

♦ Sluggish financial performance and second-Sluggish financial performance and second-rate market accomplishments almost always rate market accomplishments almost always signal weak strategy, weak execution, or both.signal weak strategy, weak execution, or both.

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Key Financial Ratios

TABLE 4.1

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TABLE 4.1

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TABLE 4.1

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TABLE 4.1

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QUESTION 2: WHAT ARE THE FIRM’S QUESTION 2: WHAT ARE THE FIRM’S COMPETITIVELY IMPORTANT COMPETITIVELY IMPORTANT

RESOURCES AND CAPABILITIES?RESOURCES AND CAPABILITIES?

Competitive AssetsCompetitive Assets● Are the firm’s resources and capabilities.Are the firm’s resources and capabilities.

● Are the determinants of its competitiveness and Are the determinants of its competitiveness and ability to succeed in the marketplace.ability to succeed in the marketplace.

● Are what a firm’s strategy depends on to develop Are what a firm’s strategy depends on to develop sustainable competitive advantage over its rivals.sustainable competitive advantage over its rivals.

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CORE CONCEPTSCORE CONCEPTSCORE CONCEPTSCORE CONCEPTS

♦ A A resourceresource is a competitive asset that is owned is a competitive asset that is owned or controlled by a firmor controlled by a firm

♦ A A capabilitycapability or or competencecompetence is the capacity of a is the capacity of a firm to perform and internal activity competently firm to perform and internal activity competently through deployment of a firm’s resources.through deployment of a firm’s resources.

♦ A firm’s resources and capabilities represent its A firm’s resources and capabilities represent its competitive assets competitive assets and are big determinants of and are big determinants of its competitiveness and ability its competitiveness and ability to succeed in the marketplace.to succeed in the marketplace.

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IDENTIFYING THE COMPANY’S IDENTIFYING THE COMPANY’S RESOURCES AND CAPABILITIESRESOURCES AND CAPABILITIES

A ResourceA Resource● Is a productive input or competitive asset that is Is a productive input or competitive asset that is

owned or controlled by a firm (e.g., a fleet of oil owned or controlled by a firm (e.g., a fleet of oil tankers).tankers).

A CapabilityA Capability● Is the capacity of a firm to perform some activity Is the capacity of a firm to perform some activity

proficiently (e.g., superior skills in marketing).proficiently (e.g., superior skills in marketing).

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♦ Resource and capability analysis is a powerful Resource and capability analysis is a powerful tool for sizing up a company’s competitive tool for sizing up a company’s competitive assets and determining if they can support a assets and determining if they can support a sustainable competitive advantage over market sustainable competitive advantage over market rivals.rivals.

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Types of Company ResourcesTABLE 4.2

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IDENTIFYING CAPABILITIESIDENTIFYING CAPABILITIES

An Organizational CapabilityAn Organizational Capability● Is the intangible but observable capacity of a firm to Is the intangible but observable capacity of a firm to

perform a critical activity proficiently using a related perform a critical activity proficiently using a related combination (cross-functional bundle) of its combination (cross-functional bundle) of its resources.resources.

● Is knowledge-based, residing in people and in a firm’s Is knowledge-based, residing in people and in a firm’s intellectual capital or in its organizational processes intellectual capital or in its organizational processes and functional systems, which embody tacit and functional systems, which embody tacit knowledge.knowledge.

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CORE CONCEPTCORE CONCEPTCORE CONCEPTCORE CONCEPT

♦ A A resource bundle resource bundle is a linked and closely is a linked and closely integrated set of competitive assets centered integrated set of competitive assets centered around one or more cross-functional around one or more cross-functional capabilities.capabilities.

♦ The The VRIN tests for sustainable competitive VRIN tests for sustainable competitive advantage advantage ask if a resource is ask if a resource is VValuable, aluable, RRare, are, IInimitable, and nimitable, and NNon-substitutable.on-substitutable.

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VRIN TESTING: VRIN TESTING: RESOURCES AND CAPABILITIESRESOURCES AND CAPABILITIES

Identifying the firm’s resources and capabilities Identifying the firm’s resources and capabilities by testing the competitive power of its by testing the competitive power of its resources and capabilities:resources and capabilities:● Is the resource (or capability) competitively Is the resource (or capability) competitively ValuableValuable??

● Is the resource Is the resource RareRare—is it something rivals lack?—is it something rivals lack?

● Is the resource hard to copy (Is the resource hard to copy (InimitableInimitable)?)?

● Is the resource invulnerable to the threat of Is the resource invulnerable to the threat of substitution from different types of resources and substitution from different types of resources and capabilities (capabilities (Non-substitutableNon-substitutable)?)?

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♦ Social complexity Social complexity (company culture, (company culture, interpersonal relationships among managers or interpersonal relationships among managers or R&D teams, trust-based relations with customers R&D teams, trust-based relations with customers or suppliers) and or suppliers) and causal ambiguitycausal ambiguity are two are two factors that inhibit the ability of rivals to imitate a factors that inhibit the ability of rivals to imitate a firm’s most valuable resources and capabilities.firm’s most valuable resources and capabilities.

♦ Causal ambiguity makes it very hard to figure out Causal ambiguity makes it very hard to figure out how a complex resource contributes to how a complex resource contributes to competitive advantage and therefore competitive advantage and therefore exactly what to imitate.exactly what to imitate.

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♦ A company requires a dynamically evolving A company requires a dynamically evolving portfolio of resources and capabilities to portfolio of resources and capabilities to sustain its competitiveness and help drive sustain its competitiveness and help drive improvements in its performance.improvements in its performance.

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♦ A A dynamic capability dynamic capability is the ongoing capacity is the ongoing capacity of a firm to modify its existing resources and of a firm to modify its existing resources and capabilities or create new ones by:capabilities or create new ones by:● Improving existing resources and capabilities Improving existing resources and capabilities

incrementallyincrementally● Adding new resources and capabilities Adding new resources and capabilities

to the firm’s competitive asset portfolioto the firm’s competitive asset portfolio

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MANAGING RESOURCES AND MANAGING RESOURCES AND CAPABILITIES DYNAMICALLYCAPABILITIES DYNAMICALLY

Threats to Resources and Capabilities:Threats to Resources and Capabilities:● Rivals providing better substitutes over timeRivals providing better substitutes over time

● Capabilities decaying from benign neglectCapabilities decaying from benign neglect

● Disruptive competitive environment changeDisruptive competitive environment change

Managing Capabilities DynamicallyManaging Capabilities Dynamically

1.1.Attending to the ongoing modification Attending to the ongoing modification of existing competitive assets.of existing competitive assets.

2.2.Taking advantage of any opportunities to Taking advantage of any opportunities to develop totally new kinds of capabilities.develop totally new kinds of capabilities.

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QUESTION 3: IS THE COMPANY ABLE QUESTION 3: IS THE COMPANY ABLE TO SEIZE MARKET OPPORTUNITIES TO SEIZE MARKET OPPORTUNITIES AND NULLIFY EXTERNAL THREATS?AND NULLIFY EXTERNAL THREATS?

SWOT AnalysisSWOT Analysis● Is a powerful tool for sizing up a firm’s:Is a powerful tool for sizing up a firm’s:

Internal strengths (the basis for strategy)Internal strengths (the basis for strategy)

Internal weaknesses (deficient capabilities)Internal weaknesses (deficient capabilities)

Market opportunities (strategic objectives)Market opportunities (strategic objectives)

External threats (strategic defenses)External threats (strategic defenses)

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♦ SWOT analysis SWOT analysis is a simple but powerful tool is a simple but powerful tool for sizing up a company’s strengths and for sizing up a company’s strengths and weaknesses, its market opportunities, and weaknesses, its market opportunities, and the external threats to its future well-being.the external threats to its future well-being.

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♦ Basing a company’s strategy on its most Basing a company’s strategy on its most competitively valuable strengths gives the competitively valuable strengths gives the company its best chance for market success.company its best chance for market success.

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IDENTIFYING A COMPANY’S IDENTIFYING A COMPANY’S INTERNAL STRENGTHSINTERNAL STRENGTHS

A CompetenceA Competence● Is an activity that a firm has learned to perform with Is an activity that a firm has learned to perform with

proficiency—a capability.proficiency—a capability.

A Core CompetenceA Core Competence● Is a proficiently performed internal activity that is Is a proficiently performed internal activity that is

central to a firm’s strategy and competitiveness.central to a firm’s strategy and competitiveness.

A Distinctive CompetenceA Distinctive Competence● Is a competitively valuable activity that a firm Is a competitively valuable activity that a firm

performs better than its rivals.performs better than its rivals.

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♦ A A competencecompetence is an activity that a firm has is an activity that a firm has learned to perform with proficiency—a learned to perform with proficiency—a capability, in other words.capability, in other words.

♦ A A core competence core competence is an activity that a firm is an activity that a firm performs proficiently that is also central to its performs proficiently that is also central to its strategy and competitive success.strategy and competitive success.

♦ A A distinctive competence distinctive competence is a competitively is a competitively important activity that a firm performs important activity that a firm performs better than its rivals—it thus represents better than its rivals—it thus represents a competitively superior internal a competitively superior internal strength.strength.

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IDENTIFYING A FIRM’S WEAKNESSES IDENTIFYING A FIRM’S WEAKNESSES AND COMPETITIVE DEFICIENCIESAND COMPETITIVE DEFICIENCIES

A Weakness (Competitive Deficiency)A Weakness (Competitive Deficiency)● Is something a firm lacks or does poorly (in Is something a firm lacks or does poorly (in

comparison to others) or a condition that puts it comparison to others) or a condition that puts it at a competitive disadvantage in the marketplace.at a competitive disadvantage in the marketplace.

Types of Weaknesses:Types of Weaknesses:● Inferior skills, expertise, or intellectual capitalInferior skills, expertise, or intellectual capital

● Deficiencies in physical, organizational, or Deficiencies in physical, organizational, or intangible assetsintangible assets

● Missing or competitively inferior capabilities Missing or competitively inferior capabilities in key areasin key areas

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♦ A firm’s A firm’s strengthsstrengths represent its competitive represent its competitive assets.assets.

♦ A firm’s A firm’s weaknessesweaknesses are shortcomings that are shortcomings that constitute competitive liabilities.constitute competitive liabilities.

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IDENTIFYING A COMPANY’S IDENTIFYING A COMPANY’S MARKET OPPORTUNITIESMARKET OPPORTUNITIES

Characteristics of Market Opportunities:Characteristics of Market Opportunities:● An absolute “must pursue” marketAn absolute “must pursue” market

Represents much potential but is hidden Represents much potential but is hidden in “fog of the future.”in “fog of the future.”

● A marginally interesting marketA marginally interesting market

Presents high risk and questionable profit Presents high risk and questionable profit potential.potential.

● An unsuitable\mismatched marketAn unsuitable\mismatched market

Is best avoided as the firm’s strengths are Is best avoided as the firm’s strengths are not matched to market factors.not matched to market factors.

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♦ A company is well advised to pass on a A company is well advised to pass on a particular market opportunity unless it has or particular market opportunity unless it has or can acquire the competencies needed to can acquire the competencies needed to capture it.capture it.

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IDENTIFYING THE THREATS TO A IDENTIFYING THE THREATS TO A FIRM’S FUTURE PROFITABILITYFIRM’S FUTURE PROFITABILITY

Types of Threats:Types of Threats:● Normal course-of-business threatsNormal course-of-business threats

● Sudden-death (survival) threatsSudden-death (survival) threats

Considering Threats:Considering Threats:● Identify the threats to the firm’s future prospects.Identify the threats to the firm’s future prospects.

● Evaluate what strategic actions can be taken to Evaluate what strategic actions can be taken to neutralize or lessen their impact.neutralize or lessen their impact.

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TABLE 4.3 What to Look for in Identifying a Firm’s Strengths, Weaknesses, Opportunities, and Threats

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TABLE 4.3 What to Look for in Identifying a Firm’s Strengths, Weaknesses, Opportunities, and Threats (cont’d)

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♦ Simply making lists of a company’s strengths, Simply making lists of a company’s strengths, weaknesses, opportunities, and threats is not weaknesses, opportunities, and threats is not enough; the payoff from SWOT analysis comes enough; the payoff from SWOT analysis comes from the conclusions about a company’s from the conclusions about a company’s situation and the implications for strategy situation and the implications for strategy improvement that flow from the four lists.improvement that flow from the four lists.

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WHAT DO SWOT LISTINGS REVEAL?WHAT DO SWOT LISTINGS REVEAL?

SWOT Analysis Involves:SWOT Analysis Involves:● Drawing conclusions from the SWOT listings Drawing conclusions from the SWOT listings

about the firm’s overall situation.about the firm’s overall situation.

● Translating these conclusions into Translating these conclusions into strategic actions by the firm that:strategic actions by the firm that: Match its strategy to its internal strengths and Match its strategy to its internal strengths and

to market opportunities.to market opportunities.

Correct important weaknesses and defend it Correct important weaknesses and defend it against external threats.against external threats.

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The Steps Involved in SWOT Analysis: Identify the Four Components of SWOT, Draw Conclusions, Translate Implications into Strategic Actions

FIGURE 4.2

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USING SWOT ANALYSIS USING SWOT ANALYSIS What are the attractive aspects of the firm’s situation?What are the attractive aspects of the firm’s situation? What aspects are of the most concern?What aspects are of the most concern? Are the firm’s internal strengths and competitive assets Are the firm’s internal strengths and competitive assets

sufficiently strong to enable it to compete successfully?sufficiently strong to enable it to compete successfully? Are the firm’s weaknesses and competitive deficiencies Are the firm’s weaknesses and competitive deficiencies

correctable, or could they be fatal if not remedied soon?correctable, or could they be fatal if not remedied soon? Do the firm’s strengths outweigh its weaknesses by an Do the firm’s strengths outweigh its weaknesses by an

attractive margin?attractive margin? Does the firm have attractive market opportunities Does the firm have attractive market opportunities

that are well suited to its internal strengths? that are well suited to its internal strengths? Does the firm lack the competitive assets (internal strengths) Does the firm lack the competitive assets (internal strengths)

to pursue the most attractive opportunities? to pursue the most attractive opportunities? Where on a scale of 1 to 10 (1 = weak and 10 = strong) Where on a scale of 1 to 10 (1 = weak and 10 = strong)

do the firm’s overall situation and future prospects rank?do the firm’s overall situation and future prospects rank?

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QUESTION 4: ARE THE COMPANY’S COSTQUESTION 4: ARE THE COMPANY’S COSTSTRUCTURE AND CUSTOMER VALUESTRUCTURE AND CUSTOMER VALUE

PROPOSITION COMPETITIVE?PROPOSITION COMPETITIVE?

Signs of A Firm’s Competitive Strength:Signs of A Firm’s Competitive Strength:● Its prices and costs are in line with rivals.Its prices and costs are in line with rivals.

● Its customer-value proposition is competitive Its customer-value proposition is competitive and cost effective.and cost effective.

● Its bundled capabilities are yielding Its bundled capabilities are yielding a sustainable competitive advantage.a sustainable competitive advantage.

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♦ The higher a company’s costs are above those The higher a company’s costs are above those of close rivals, the more competitively of close rivals, the more competitively vulnerable it becomes.vulnerable it becomes.

♦ Conversely, the greater the amount of Conversely, the greater the amount of customer value that a company can offer customer value that a company can offer profitably relative to close rivals, the less profitably relative to close rivals, the less competitively vulnerable it becomes.competitively vulnerable it becomes.

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THE CONCEPT OF A COMPANY THE CONCEPT OF A COMPANY VALUE CHAINVALUE CHAIN

The Value ChainThe Value Chain● Identifies the primary internal activities that create Identifies the primary internal activities that create

and deliver customer value and the requisite related and deliver customer value and the requisite related support activities.support activities.

● Permits a deep look at the firm’s cost structure and Permits a deep look at the firm’s cost structure and ability to offer low prices.ability to offer low prices.

● Reveals the emphasis that a firm places on activities Reveals the emphasis that a firm places on activities that enhance differentiation and support higher prices.that enhance differentiation and support higher prices.

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♦ A company’s A company’s value chain value chain identifies the primary identifies the primary activities and related support activities that activities and related support activities that create customer value.create customer value.

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A Representative Company Value ChainFIGURE 4.3

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COMPARING THE VALUE CHAINS COMPARING THE VALUE CHAINS OF RIVAL FIRMSOF RIVAL FIRMS

Value Chain AnalysisValue Chain Analysis● Facilitates a comparison, activity-by-activity, of how Facilitates a comparison, activity-by-activity, of how

effectively and efficiently a firm delivers value to its effectively and efficiently a firm delivers value to its customers, relative to its competitors.customers, relative to its competitors.

The Value Chain Analysis Process:The Value Chain Analysis Process:● Segregate the firm’s operations into different types of Segregate the firm’s operations into different types of

primary and secondary activities to identify the major primary and secondary activities to identify the major components of its internal cost structure.components of its internal cost structure.

● Use Use activity-based costing activity-based costing to evaluate the activities.to evaluate the activities.

● Do the same for significant competitors.Do the same for significant competitors.

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♦ A company’s cost competitiveness depends not A company’s cost competitiveness depends not only on the costs of internally performed only on the costs of internally performed activities (its own value chain) but also on costs activities (its own value chain) but also on costs in the value chains of its suppliers and in the value chains of its suppliers and distribution channel allies.distribution channel allies.

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VALUE CHAIN SYSTEM FOR VALUE CHAIN SYSTEM FOR AN ENTIRE INDUSTRYAN ENTIRE INDUSTRY

Industry Value Chain:Industry Value Chain:● The firm’s internal value chainThe firm’s internal value chain

● The value chains of industry suppliersThe value chains of industry suppliers

● The value chains of channel intermediariesThe value chains of channel intermediaries

Effects of the Industry Value Chain:Effects of the Industry Value Chain:● Costs and margins of suppliers and channel partners Costs and margins of suppliers and channel partners

can affect prices to end consumers.can affect prices to end consumers.

● Activities of channel partners can affect industry sales Activities of channel partners can affect industry sales volumes and customer satisfaction.volumes and customer satisfaction.

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A Representative Value Chain SystemFIGURE 4.4

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ILLUSTRATION CAPSULE 4.1ILLUSTRATION CAPSULE 4.1

The Value Chain for KP The Value Chain for KP MacLane,MacLane,a producer of Polo Shirtsa producer of Polo Shirts

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♦ Which activities in the value chain are primary Which activities in the value chain are primary activities? Which are secondary activities?activities? Which are secondary activities?

♦ Which activities are linked to the value chain Which activities are linked to the value chain for the entire industry? for the entire industry?

♦ How could activity cost(s) could be reduced How could activity cost(s) could be reduced without harming the competitive strength of without harming the competitive strength of KP MacLane?KP MacLane?


The Value Chain for KP The Value Chain for KP MacLane,MacLane,a producer of Polo Shirtsa producer of Polo Shirts

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♦ A company’s cost competitiveness depends not A company’s cost competitiveness depends not only on the costs of internally performed only on the costs of internally performed activities (its own value chain) but also on costs activities (its own value chain) but also on costs in the value chains of its suppliers and in the value chains of its suppliers and distribution channel allies.distribution channel allies.

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♦ Benchmarking is a potent tool for improving a Benchmarking is a potent tool for improving a company’s own internal activities that is based company’s own internal activities that is based on learning how other companies perform them on learning how other companies perform them and borrowing their “best practices.”and borrowing their “best practices.”

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BENCHMARKING AND BENCHMARKING AND VALUE CHAIN ACTIVITIESVALUE CHAIN ACTIVITIES

Benchmarking:Benchmarking:● Involves improving a firm’s internal activities based Involves improving a firm’s internal activities based

on learning other companies’ “best practices.”on learning other companies’ “best practices.”

● Assesses whether the cost competitiveness and Assesses whether the cost competitiveness and effectiveness of a firm’s value chain activities are effectiveness of a firm’s value chain activities are in line with its competitors’ activities.in line with its competitors’ activities.

Sources of Benchmarking InformationSources of Benchmarking Information● Reports, trade groups, analysts and customersReports, trade groups, analysts and customers

● Visits to benchmark companiesVisits to benchmark companies

● Data from consulting firmsData from consulting firms

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♦ Benchmarking the costs of company activities Benchmarking the costs of company activities against rivals provides hard evidence of against rivals provides hard evidence of whether a company is cost-competitive.whether a company is cost-competitive.

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Benchmarking and Ethical Benchmarking and Ethical ConductConduct

• Avoid discussions or actions that could lead to or imply an interest in restraint of trade, market and/or customer allocation schemes, price fixing, dealing arrangements, bid rigging, or bribery. Don’t discuss costs with competitors if costs are an element of pricing.

• Refrain from the acquisition of trade secrets from another by any means that could be interpreted as improper, including the breach of any duty to maintain secrecy. Do not disclose or use any trade secret that may have been obtained through improper means or that was disclosed by another in violation of duty to maintain its secrecy or limit its use.

• Be willing to provide to your benchmarking partner the same type and level of information that you request from that partner.

• Communicate fully and early in the relationship to clarify expectations, avoid misunderstanding, and establish mutual interest in the benchmarking exchange.

• Be honest and complete with the information submitted.

• The use or communication of a benchmarking partner’s name with the data obtained or practices observed requires the prior permission of the benchmarking partner.

• Honor the wishes of benchmarking partners regarding how the information that is provided will be handled and used.

• In benchmarking with competitors, establish specific ground rules up-front. For example, “We don’t want to talk about things that will give either of us a competitive advantage, but rather we want to see where we both can mutually improve or gain benefit.”

• Check with legal counsel if any information-gathering procedure is in doubt. If uncomfortable, do not proceed. Alternatively, negotiate and sign a specific nondisclosure agreement that will satisfy the attorneys representing each partner.

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STRATEGIC OPTIONS FOR REMEDYING STRATEGIC OPTIONS FOR REMEDYING A COST OR VALUE DISADVANTAGEA COST OR VALUE DISADVANTAGE

Places in the total value chain system for a firm Places in the total value chain system for a firm to look for ways to improve its efficiency and to look for ways to improve its efficiency and effectiveness:effectiveness:

1.1. The firm’s own internal activity segmentsThe firm’s own internal activity segments

2.2. The suppliers’ part of the overall value chain systemThe suppliers’ part of the overall value chain system

3.3. The forward channel portion of the value chain The forward channel portion of the value chain system.system.

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IMPROVING INTERNALLY PERFORMED IMPROVING INTERNALLY PERFORMED VALUE CHAIN ACTIVITIESVALUE CHAIN ACTIVITIES

Implement best practices throughout the firm, particularly for high-Implement best practices throughout the firm, particularly for high-cost activities.cost activities.

Eliminate some cost-producing activities altogether by revamping Eliminate some cost-producing activities altogether by revamping the value chain.the value chain.

Relocate high-cost activities to areas where they can be performed Relocate high-cost activities to areas where they can be performed more cheaply.more cheaply.

Outsource activities that can be performed by vendors or Outsource activities that can be performed by vendors or contractors more cheaply than if done in-house.contractors more cheaply than if done in-house.

Invest in productivity enhancing, cost-saving technological Invest in productivity enhancing, cost-saving technological improvements.improvements.

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

Redesign products and/or components to facilitate speedier and Redesign products and/or components to facilitate speedier and more economical manufacture or assembly.more economical manufacture or assembly.

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IMPROVING THE EFFECTIVENESS OF THE IMPROVING THE EFFECTIVENESS OF THE CUSTOMER VALUE PROPOSITION AND CUSTOMER VALUE PROPOSITION AND

ENHANCING DIFFERENTIATIONENHANCING DIFFERENTIATION

Implement best practices for quality for high-value activities.Implement best practices for quality for high-value activities.

Adopt best practices and technologies that spur innovation, Adopt best practices and technologies that spur innovation, improve design, and enhance creativity.improve design, and enhance creativity.

Implement the best practices in providing customer service.Implement the best practices in providing customer service.

Reallocate resources to activities having the most impact on value Reallocate resources to activities having the most impact on value for the customer and their most important purchase criteria.for the customer and their most important purchase criteria.

For intermediate buyers, gain an understanding of how the For intermediate buyers, gain an understanding of how the activities the firm performs impact the buyer’s value chain.activities the firm performs impact the buyer’s value chain.

Adopt best practices for marketing, brand management, and Adopt best practices for marketing, brand management, and enhancing customer perceptions.enhancing customer perceptions.

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IMPROVING SUPPLIER-RELATED IMPROVING SUPPLIER-RELATED VALUE CHAIN ACTIVITIESVALUE CHAIN ACTIVITIES

Pressure suppliers for lower prices.Pressure suppliers for lower prices.

Switch to lower-priced substitute inputs.Switch to lower-priced substitute inputs.

Collaborate closely with suppliers to identify mutual cost-saving Collaborate closely with suppliers to identify mutual cost-saving opportunities.opportunities.

Work with suppliers to enhance the firm’s differentiation.Work with suppliers to enhance the firm’s differentiation.

Select and retain suppliers who meet higher-quality standards.Select and retain suppliers who meet higher-quality standards.

Coordinate with suppliers to enhance design or other features Coordinate with suppliers to enhance design or other features desired by customers.desired by customers.

Provide incentives to suppliers to meet higher-quality standards, Provide incentives to suppliers to meet higher-quality standards, and assist suppliers in their efforts to improve.and assist suppliers in their efforts to improve.

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IMPROVING VALUE CHAIN ACTIVITIES IMPROVING VALUE CHAIN ACTIVITIES OF FORWARD CHANNEL ALLIESOF FORWARD CHANNEL ALLIES

Achieving Cost-Based Competitiveness:Achieving Cost-Based Competitiveness:● Pressure forward channel allies to reduce their costs Pressure forward channel allies to reduce their costs

and markups so as to make the final price to buyers and markups so as to make the final price to buyers more competitive. more competitive.

● Collaborate with forward channel allies to identify win-Collaborate with forward channel allies to identify win-win opportunities to reduce costs.win opportunities to reduce costs.

● Change to a more economical distribution strategy, Change to a more economical distribution strategy, including switching to cheaper distribution channels.including switching to cheaper distribution channels.

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ENHANCING DIFFERENTIATION THROUGH ENHANCING DIFFERENTIATION THROUGH ACTIVITIES AT THE FORWARD END OF THE ACTIVITIES AT THE FORWARD END OF THE

VALUE CHAIN SYSTEMVALUE CHAIN SYSTEM

Enhancing Differentiation:Enhancing Differentiation:● Engage in cooperative advertising and Engage in cooperative advertising and

promotions with forward channel allies.promotions with forward channel allies.

● Use exclusive arrangements with downstream Use exclusive arrangements with downstream sellers or other mechanisms that increase their sellers or other mechanisms that increase their incentives to enhance delivered customer value.incentives to enhance delivered customer value.

● Create and enforce standards for downstream Create and enforce standards for downstream activities and assist in training channel partners activities and assist in training channel partners in business practices.in business practices.

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♦ Performing value chain activities with Performing value chain activities with capabilities that permit the company to either capabilities that permit the company to either outmatch rivals on differentiation or beat them outmatch rivals on differentiation or beat them on costs will give the company a competitive on costs will give the company a competitive advantage.advantage.

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Translating Company Performance of Value Chain Activities into Competitive Advantage

FIGURE 4.5

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Translating Company Performance of Value Chain Activities into Competitive Advantage (cont’d)

FIGURE 4.5

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QUESTION 5: IS THE FIRM QUESTION 5: IS THE FIRM COMPETITIVELY STRONGER OR COMPETITIVELY STRONGER OR

WEAKER THAN KEY RIVALS?WEAKER THAN KEY RIVALS?

Assessing the firm’s overall competitive Assessing the firm’s overall competitive strength:strength:● How does the firm rank relative to competitors How does the firm rank relative to competitors

on each of the important factors that determine on each of the important factors that determine market success?market success?

● Does the firm have a net competitive advantage Does the firm have a net competitive advantage or disadvantage versus major competitors?or disadvantage versus major competitors?

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♦ High-weighted competitive strength ratings High-weighted competitive strength ratings signal a strong competitive position and signal a strong competitive position and possession of competitive advantage; low possession of competitive advantage; low ratings signal a weak position and competitive ratings signal a weak position and competitive disadvantage.disadvantage.

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THE COMPETITIVE STRENGTH THE COMPETITIVE STRENGTH ASSESSMENT PROCESSASSESSMENT PROCESS

Step 1Make a list of the industry’s key success factors and measures of competitive strength or weakness (6 to 10 measures usually suffice).

Step 2Assign a weight to each competitive strength measure based on its perceived importance.

Step 3Rate the firm and its rivals on each competitive strength measure and multiply by each measure by its corresponding weight.

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A Representative Weighted Competitive Strength AssessmentTABLE 4.4

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♦ A company’s competitive strength scores A company’s competitive strength scores pinpoint its strengths and weaknesses against pinpoint its strengths and weaknesses against rivals and point directly to the kinds of rivals and point directly to the kinds of offensive/defensive actions it can use to exploit offensive/defensive actions it can use to exploit its competitive strengths and reduce its its competitive strengths and reduce its competitive vulnerabilities.competitive vulnerabilities.

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STRATEGIC IMPLICATIONS OF STRATEGIC IMPLICATIONS OF COMPETITIVE STRENGTH ASSESSMENTCOMPETITIVE STRENGTH ASSESSMENT

The higher a firm’s overall weighted strength rating, the The higher a firm’s overall weighted strength rating, the stronger its overall competitiveness versus rivals.stronger its overall competitiveness versus rivals.

The rating score indicates the total net competitive The rating score indicates the total net competitive advantage for a firm relative to other firms.advantage for a firm relative to other firms.

Firms with high competitive strength scores are targets Firms with high competitive strength scores are targets for benchmarking.for benchmarking.

The ratings show how a firm compares against rivals, The ratings show how a firm compares against rivals, factor by factor (or capability by capability).factor by factor (or capability by capability).

Strength scores can be useful in deciding what strategic Strength scores can be useful in deciding what strategic moves to make.moves to make.

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♦ A good strategy must contain ways to deal with A good strategy must contain ways to deal with all the strategic issues and obstacles that stand all the strategic issues and obstacles that stand in the way of the company’s financial and in the way of the company’s financial and competitive success in the years ahead.competitive success in the years ahead.

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QUESTION 6: WHAT STRATEGIC ISSUESQUESTION 6: WHAT STRATEGIC ISSUESAND PROBLEMS MERIT FRONT-AND PROBLEMS MERIT FRONT-

BURNER MANAGERIAL ATTENTION?BURNER MANAGERIAL ATTENTION?

Strategic “How To” Issues:Strategic “How To” Issues:● How to meet challenges of new foreign competitors.How to meet challenges of new foreign competitors.

● How to combat the price discounting of rivals.How to combat the price discounting of rivals.

● How to both reduce high costs and prepare for price How to both reduce high costs and prepare for price reductions.reductions.

● How to sustain growth as buyer demand slows.How to sustain growth as buyer demand slows.

● How to adapt to the changing demographics of the How to adapt to the changing demographics of the firm’s customer base.firm’s customer base.

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QUESTION 6: WHAT STRATEGIC ISSUESQUESTION 6: WHAT STRATEGIC ISSUESAND PROBLEMS MERIT FRONT-AND PROBLEMS MERIT FRONT-

BURNER MANAGERIAL ATTENTION?BURNER MANAGERIAL ATTENTION?

Strategic “Should We” Issues:Strategic “Should We” Issues:● Expand rapidly or cautiously into foreign markets.Expand rapidly or cautiously into foreign markets.

● Reposition the firm to move to a different strategic Reposition the firm to move to a different strategic group.group.

● Counter increasing buyer interest in substitute Counter increasing buyer interest in substitute products.products.

● Expand of the firm’s product line.Expand of the firm’s product line.

● Correct the firm’s competitive deficiencies by Correct the firm’s competitive deficiencies by acquiring a rival firm with the missing strengths.acquiring a rival firm with the missing strengths.

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♦ Zeroing in on the strategic issues a company Zeroing in on the strategic issues a company faces and compiling a list of problems and faces and compiling a list of problems and roadblocks creates a strategic agenda of roadblocks creates a strategic agenda of problems that merit prompt managerial problems that merit prompt managerial attention.attention.

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