Analyzing a company's resources and competitive position

How well is the company's present strategy working?• It is very important to study the company's competitive approach

to understand the working of the company's present strategy.• We need to study

– if the company is striving to be low-cost leader or stressing to differentiate its products.

– is it concentrating on serving a broad spectrum of customers or a narrow niche market.

– what is its geographical coverage.– is it operational in just a single stage of industry's production/distribution

system or is vertically integrated across several stages.– the latest moves to improve competitive position and performance.– what are the functional strategies in R&D, production and other

departments.

The two best quantitative indicators of the performance of present strategy are:

1. whether the company's is achieving its stated financial and strategic objectives

2. whether the company is an above-average industry performer.

• Failure on these two fronts indicate either poor strategy making or less than competent strategy execution or both.

Other indicators of how well a company's strategy is working include:1. Whether the firm's sales are growing faster, slower or about the

same pace as the market as a whole, thus resulting in a rising, eroding or stable market share.

2. Whether the company is acquiring new customers at an attractive rate as well as retaining existing customers.

3. Whether the firm's profit margins are increasing or decreasing and how well its margins compare to rival firms' margins.

4. Trends in the firm's net profits and returns on investment and how these compare to the same trends for other companies in the industry.

5. Whether the company's overall financial strength and credit rating are improving or on the decline.

6. Whether the company can demonstrate continuous improvement in such internal performance measures as days of inventory, employee productivity, unit cost, defect rate, scrap rate, delivery time, warranty costs.

7. How shareholders view the company based on trends in the company's stock price and shareholder value, relative to stock prices of other companies in the industry.

8. The firm's image and reputation with its customers.9. How well the company stacks up against rivals on technology, product

innovation, customer service, product quality, delivery time, price, getting newly developed products to market quickly and other factors on which the buyers base their choice of brands.

• A company's strong performance on these parameters indicates a sound strategy.

What are the company's resource strengths and weaknesses and its external opportunities and threats?

• A good SWOT analysis provides the basis for crafting a strategy that capitalizes on the company's resources and aims at capturing the company's best opportunities and defends against the threats.

Identifying company resources strengths and competitive capabilities

• A strength is something a company is good at doing or an attribute that enhances its competitiveness.

• It can take the following forms:1. A skill or important expertise - low cost manufacturing capability,

technological know-how, defect free manufacturing. e.g. Japanese precision manufacturing, Chinese mass manufacturing, Indian software

2. Valuable physical assets - state-of-the-art plants and equipments, real estate location, worldwide distribution facilities or ownership of valuable natural resources. e.g. Toyota, Jharkhand

3. Valuable human assets - an experienced and capable workforce, talented employees in key areas, cutting-edge knowledge and intellectual capital, collective learning embedded in the organization or proven managerial know-how. e.g. McKinsey, KPMG

4. Valuable organizational assets - proven quality control systems, proprietary technology, key patents, mineral rights, highly trained customer service representatives, sizable amounts of cash and marketable securities, a strong balance sheet and credit rating or a comprehensive list of customers' e-mail addresses.

5. Valuable intangible assets - well-known brand name, reputation for technological leadership or a strong buyer loyalty and goodwill.

6. Competitive capabilities - product innovation capabilities, short development times in bringing new products to markets, a strong dealer network, cutting-edge supply chain management capabilities, quickness in responding to changing market conditions and emerging opportunities, or state-of-the-art systems for doing business via the internet.

7. An achievement or attribute that puts the company in a position of market advantage - low overall costs relative to competitors, market share leadership, a superior product, wider product line than rivals, wide geographical coverage, well-known brand name, superior e-commerce capabilities or exceptional customer service.

8. Competitively valuable alliances or cooperative ventures - fruitful partnerships with suppliers that reduce costs and/or enhance product quality and performance; alliances and joint ventures that provide access to valuable technologies, competencies or geographical markets.

Company competencies and competitive capabilities • A company's resource strength relates to specific skills and

expertise and sometimes it is the pooled knowledge and expertise of different groups. e.g. new product innovation requires expertise of various departments like R&D, engineering and design, cost-effective manufacturing and market testing.

• Company competencies can range from merely a competence in performing an activity to a core competence to a distinctive competence.

Competence• A competence is something an organization is good at doing.• It is nearly always the product of experience.• It originates with deliberate efforts to develop the

organizational ability to do something.• It is about selecting people with the requisite knowledge and

skills, upgrading individual abilities as needed and molding the efforts and work products of individuals into a cooperative group effort to create organizational ability.

• As expertise builds and company gains proficiency in performing the activity consistently well at an acceptable cost the ability evolves into a true competence and company capability. e.g. proficiency in specific knowledge, selecting good locations for retail outlets, merchandising and product display

Core competence• A core competence is a proficiently performed internal activity

that is central to a company's strategy and competitiveness.• It is more valuable than a competence because of its role in the

company's strategy and its contribution to making the company success.

• It can relate to any of the several aspects of a company's business.

• A company may have more than one core competence, but it is difficult to have more than two or three. E.g. ITC has core competence in distribution and customization of taste

• It is usually knowledge based, residing in people and is a company intellectual capital.

• Generally it is also an cross-departmental combinations of knowledge and expertise.

Distinctive competence• A distinctive competence is a competitively valuable activity

that a company performs better than its rivals. E.g. search engine of Google, product design of Apple

• It is a competitively superior strength.• A competency translates into a distinctive competence when

the company enjoys competitive superiority when performing that activity.

• A core competence becomes real competitive advantage only when it rises to the level of a distinctive competence. e.g. Sharp corporation in LCDs, Toyota in low-cost, high quality manufacturing and short design-to-market cycles for new models

• It is important in terms of strategy-making because – it gives a competitively valuable capability– it has the potential for being the cornerstone of strategy– it produce competitive edge in the marketplace

• It is advantageous when a firm has a distinctive competence which rivals do not have and it is very costly and time consuming for rivals to acquire the skill. E.g. processor design capabilities of Intel

What is the competitive power of a resource strength?• The competitive power of a company's strength is measured

by the following four tests:1. Is the resource strength hard to copy?• The more difficult and expensive it is to imitate a company's

resource strength, the greater its potential competitive value.• Resources tend to be difficult to copy when:

– They are unique (real estate location, patent)– Must be built over time in ways that are difficult to imitate (brand

name, mastery of a technology)– When it needs big capital investment (a state-of-the-art

manufacturing plant)

• e.g. Wal-Mart's competence in super efficient distribution and store operations capabilities.

2. Is the resource strength durable - does it have staying power?

• The longer the competitive value of a resource lasts, the greater its value.

• e.g. Intel's expertise in chip design has staying power, Indian software industry's expertise in off-shoring may be nullified by other countries in the near future,

3. Is the resource really competitively superior?• e.g. Jaguar was acquired by Tatas, Nirma was able to

penetrate the low cost detergent market,

4. Can the resource strength be trumped by the different resource strengths and competitive capabilities of rivals?

• e.g. Bajaj scooters lost its market share to other two wheelers like hero Honda, HMT watches lost the market to Titan,

• Most of the firms have a mixed bag of resources - one or two valuable, some good and many satisfactory.

• Only a few market leaders have the distinctive competence.• A company can derive competitive advantage from a

collection of good-to-adequate resources that collectively have competitive power in the marketplace.

• e.g. Toshiba's laptop computers were the global market leaders through most of the 1990s, an indicator that Toshiba had competitively valuable resource strength.

• The actual facts are- they were not faster than rival's laptops- they did not have bigger screens- no more memory- no longer battery power- no superior performance features- no superior technical support services- they were not cheaper- they seldom were ranked first in various ratings in the overall

performance

• The advantages for Toshiba were a combination of good resource strengths and capabilities like – its strategic partnerships with suppliers of laptop components– efficient assembly capability– design expertise– skills in choosing quality components– a wide selection of models– an attractive mix of built-in performance features against price– better-than-average reliability of its models– good technical support services

Identifying company resource weaknesses and competitive deficiencies• A weakness or competitive deficiency is something a company lacks or

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

• It can relate to:1. inferior or unproven skills, expertise or intellectual capital in

competitively important areas of business2. deficiencies in competitively important physical, organizational or

intangible assets3. missing or competitively inferior capabilities in key areas.

• How much the resource weakness makes it competitively vulnerable depends on how much they matter in the marketplace and if can they be overcome by company's strengths.

• Sizing up a company's complement of resource capabilities and deficiencies is like a strategic balance sheet, in which resources strengths are competitive assets and resource weaknesses are competitive liabilities.

Identifying a company's market opportunities• Market opportunity plays a vital role in the strategy

formulation of a company.• It is important to indentify opportunities and appraise the

growth and profit potential of each one. • A company's opportunities can be plentiful or scarce and can

range from widely attractive (an absolute "must" to pursue) to marginally interesting (the growth and profit potential are questionable) to unsuitable (no good match with company's strength and capabilities).

• Every industry opportunity is not a company opportunity.• A opportunity is most relevant to the company when it

matches with the company's financial and organizational resource capabilities.

Identifying threats to a company's future profitability• They are factors in the company's external environment that

pose threat to its profitability and competitive well-being.• Threats include:

– emergence of cheaper or better technologies e.g. typewriters replaced by DTP

– rivals' introduction of new or improved products . E.g Nirma – lower-cost foreign competitors' entry into a company's stronghold– new regulations that may be more burdensome to a company than its

competitors– vulnerability to a rise in interest rates– the potential of a hostile takeover– unfavorable demographic shifts– adverse changes in foreign exchange rates– political upheaval in a foreign country where the company has

facilities

• External threats may pose a moderate degree of adversity or they may be imposing enough to make the company's position, situation and outlook tenuous.

• The management must identify these threats and initiate strategic changes to neutralize or lessen the threat.

What do the SWOT listings reveal?• SWOT analysis helps in drawing conclusions about the

company's overall situation and acting on those conclusions to better match the strategy to its strength and market opportunities and to correct weaknesses and defend against external threats.

The following questions help in SWOT analysis of a company:1. Does the company have an attractive set of resource strengths? Does

it have any strong core competencies or a distinctive competence? Are the company's strengths and capabilities well matched to the industry key success factors? Do they add adequate power to the company's strategy? Will the company's current strengths and capabilities matter in the future?

2. How serious are the company's weaknesses and competitive deficiencies? Are they mostly inconsequential and readily correctable or could they prove fatal if not remedied soon? Are some of the company's weaknesses in areas that relate to the industry's key success factors? Are there any weaknesses that if uncorrected would keep the company from pursuing an otherwise attractive opportunity? Does the company have important resource gaps that need to be filled for it to move up in the industry rankings and/or boost its profitability?

3. Do the company's resource strengths and competitive capabilities (its competitive assets) outweigh its resource weaknesses and competitive deficiencies (its competitive liabilities) by an attractive margin?

4. Does the company have attractive market opportunities that are well suited to its resource strengths and competitive capabilities? Does the company lack the resources and capabilities to pursue any of the most attractive opportunities?

5. Are the threats alarming, or are they something the company appears able to deal with and defend against?

6. All things considered, how strong is the company's overall situation? Where on a scale of 1 to 10 (where 1 is alarmingly weak and 10 is exceptionally strong) should the firm's position and overall situation be ranked? What aspects of the company's situation are particularly attractive? What aspects are the most concern?

The following questions help us to know the importance of SWOT listings for strategic action:1. Which competitive capabilities need to be strengthened immediately

(so as to add greater power to the company's strategy and boost sales and profitability)? Do new types of competitive capabilities need to be put in place to help the company better respond to emerging industry and competitive situations? Which resources and capabilities need to be given greater emphasis and which merit less emphasis? Should the company emphasize leveraging its existing resource strengths and capabilities or does it need to create new resource strengths and capabilities?

2. What actions should be taken to reduce the company's competitive liabilities? Which weaknesses or competitive deficiencies are in urgent need of correction?

3. Which market opportunities should be top priority in future strategic initiatives (because they are good fits with the company's resource strengths and competitive capabilities, present attractive growth and profit prospects, and/or offer the best potential for securing competitive advantages)? Which opportunities to be ignored, at least for the time being (because they offer less growth potential or are not suited to the company's resources and capabilities)?

4. What should the company be doing to guard against the threats to its well-being?

Are the company's prices and costs competitive?• Competitors have an opportunity to cut the price when their

cost of production is substantially lower than their competitors.

• One of the most important signs of a company's business position being strong or precarious is whether its prices and costs are competitive with industry rivals.

• The trend is more strong in a commodity product industry and lower-cost companies have an advantage.

• Even in industries where products are differentiated according to their attributes, it is necessary to keep the cost in line with competitors, to ensure that premium charged on the products create value to the customers.

• A small disparity in price is justified when the product or service has highly differentiated attributes than the competitor offers.

• The two analytical tools useful for determining if the company's costs and prices are competitive are:– value chain analysis– benchmarking

The concept of a company value chain• A company's value chain consists of the linked set of value-

creating activities the company performs internally.• It consists of two broad categories of activities

– primary activities that are foremost in creating value for customers – support activities that facilitate and enhance the performance of the

primary activities

• It includes a profit margin, a mark up over the cost of performing the value-creating activities.

• Assigning the company's operating costs and assets to each individual activity in the chain provides cost estimate and capital requirements.

• Manner in which one activity is done can affect the costs of performing other activities. e.g. cost of producing Japanese VCRSs was reduced from $ 1300 to $ 300 with focus on better design

• Cost of each activity contributes to whether the company's overall cost position relative to rivals is favorable or unfavorable.

• The tasks of value chain analysis and benchmarking are to develop the data for comparing a company's costs activity against the costs of key rivals and to learn which internal activities are a source of cost advantage or disadvantage.

Why the value chains of rival companies often differ• The value chain of rival companies differ because

– the manner in which it performs each activity reflect the evolution of its own particular business and internal operations

– its strategy– the approaches it is using to execute its strategy – the underlying economics of the activities themselves

• e.g. costs of internally performed activities for a fully integrated manufacturer will be greater than a partially integrated manufacturer.

• A company pursuing a low-cost/low-price strategy and a rival that is positioned on the high end differ in their value chain.

• The cost and price differences among rival companies depends on activities performed by suppliers or by distribution channel allies involved in getting the product to end users.

• If the suppliers or wholesalers/retailers have excessively high cost structure or profit margin then it jeopardizes a company's cost competitiveness even though its costs for internally performed activities are competitive.

The value chain system for an entire industry• Accurately assessing a company's competitiveness in end-use

markets require that company managers understand the entire value chain system for delivering a product or service to end users, not just the company's own value chain.

• Suppliers value chain are relevant because suppliers perform activities and incur cost in creating and delivering the purchased inputs used in a company's own value chain.

• The costs, performance features and quality of these inputs influence a company's own cost and product differentiation capabilities.

• This is a powerful reason for working collaboratively with suppliers in managing supply chain activities.

• Forward channels are relevant because– - the costs and margins of a company's distribution allies are part of

the price the end user pays– - the activities that distribution allies perform effect the end user's

satisfaction.

• Hence company' strive for mutually beneficial ways of doing business with these channels.

Developing the data to measure a company's cost competitiveness

• It involves disaggregating or breaking down of departmental cost accounting data into the costs of performing specific activities.

• The amount of disaggregation depends on the economics of the activities.

• A good guideline is to develop separate cost estimates for activities having different economics and for activities representing a significant or growing proportion of cost.

• Traditional accounting defines costs according to broad categories of expenses like wages and salaries, employee benefits. etc.

• A new method, activity based costing, entails defining expense categories according to the specific activities being performed and then assigning costs to the activity responsible for creating the cost.

• To fully understand the costs of activities all along the industry value chain, cost estimates for activities performed in the competitively relevant portions of suppliers' and customers' value chains also have to be developed.

• Despite the tediousness and imprecision the payoff in exposing the costs of a particular activity makes activity-based costing a valuable analytical tool.

• The size of a company's cost advantage or disadvantage varies from item to item, different consumer groups (if different distribution channels are used) and different geographic markets.

Benchmarking the costs of key value chain activities• Benchmarking is a tool that allows a company to determine

whether the manner in which it performs particular functions and activities represents industry "best practices" when both cost and effectiveness are taken into account.

• Benchmarking is done by companies to compare their cost against competitors' and sometimes against companies in other industries who are efficient.

• The objectives of benchmarking are to identify the best practices in performing an activity, to learn how other companies have achieved low cost or better results and to improve a company competitiveness.

• e.g. Xerox learning from Japanese manufacturers, Toyota implementing just-in-time system after studying supermarkets in USA, Southwest reduced turnaround time at stops by studying pit crews on auto racing circuits.

• The tough part of benchmarking is to gain access to information about other companies practices and costs.

• Information is collected from published reports, trade groups, industry research firms, taking to knowledgeable industry analysts, customers and suppliers.

• It is further complicated by use of different cost accounting systems.

• Consulting firms, several councils and associates and other online benchmarking organizations help in benchmarking by collecting data and distributing them without identifying the source. This helps companies to avoid disclosing competitively sensitive data to rivals and reduces risks of ethical problems.

Strategic options for remedying a cost disadvantage• Value chain analysis and benchmarking are important as

strategy tools because a company's competitiveness depends on how efficiently it manages these actives compared to competitors.

• The three main areas where costs of competing firms can differ are:– a company's own activity segments– suppliers' part of industry value chain– forward channel portion of the industry chain

When the cost disadvantage in due to internal factors any of the following strategic approaches can be used:1. Implement the use of best practices throughout the company,

particularly for high cost activities.2. Try to eliminate some cost-producing activities altogether by

revamping the value chain.3. Relocate high-cost activities to geographic areas where they can be

performed cost effectively.4. Search activities which can be outsourced to vendors or contractors.5. Invest in productivity-enhancing, cost-saving technological activities.6. Innovate around the troublesome cost components.7. Simplify the product design so that it can be manufactured or

assembled quickly and more economically.8. Try to make up the internal cost disadvantage by achieving savings in

other two parts of the value chain system.

Translating proficient performance of value chain activities to competitive advantage

• Competencies and capabilities in value chain activities can be translated into competitive advantage.

• Since attributes and features are easy to clone, the real competitive advantage comes from pleasing the buyers.

• The process of translating is:1. Management makes efforts to build competencies and capabilities

to add power to its strategy and competitiveness.2. The company invests in a couple of these competencies to take

them to the level of core competence.3. Further learning and investments can take the core competence to a

level of distinctive competence.4. This distinctive competence will become attractive competitive

advantage which will be difficult for the rivals to match.