McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter TitleChapter Title

15/e PPT15/e PPT

Evaluating a Company’s

Resources and Competitive

Position

Strategic Management

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1. How well is the company’spresent strategy working?

2. What are the company’s resourcestrengths and weaknesses and itsexternal opportunities and threats?

3. Are the company’s prices andcosts competitive?

4. Is the company competitively strongeror weaker than key rivals?

5. What strategic issues meritfront-burner managerial attention?

Company Situation Analysis:The Key Questions

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Fig. 4.1: Identifying the Components ofa Single-Business Company’s Strategy

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Question 1: How Well is the Company’sPresent Strategy Working? Must begin by understanding what the strategy is

Identify competitive approach Low-cost leadership Differentiation Focus on a particular market niche

Determine competitive scope Broad or narrow geographic market coverage?

In how many stages of industry’s production/distribution chain does the company operate?

Examine recent strategic moves to improve its C.P. Identify functional strategies

Key Considerations Key Considerations

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Qualitative assessment –Is the strategy well-conceived? Covers all the bases?

Internally consistent?

Makes sense?

Timely and in step with marketplace?

Quantitative assessment – What are the results?

Is company achieving its financial and strategic objectives?

Is company an above-average industry performer?

Approaches to Assess how Wellthe Present Strategy is Working

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Indicators of how Well a Company’s

Strategy is working Whether a firm’s sale is growing faster, slower, or about

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

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

Whether the firm’s profit margins are increasing or decreasing; how well its margins compare to the same trends for other companies in the industry

Trends in net profits and return on investment and how these compare to the same trends for other companies in the industry

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Indicators of how Well a Company’s

Strategy is Working Whether the company’s overall profits and market and credit

rating are improving or on the decline Whether the company can demonstrate continuous

improvements in such internal performance measures as days of inventory, employee productivity, unit cost etc.

How share holders view the company based on trends in the company’s stock price and share holders value

The firm’s image and reputation with its customers How well the company stacks up against rivals on

technology, product innovation, customer service, product quality, delivery, time, price, getting new products to market quickly, and other relevant factors on which buyers base their choice of brands

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S W O TS W O T represents the first letters in SS trengths WW eaknesses OO pportunities TT hreats

For a company’s strategy to be well-conceived, it must be Matched to its resources/strengths and weaknesses Aimed at capturing its best market opportunities and

erecting defenses against external threats to its well-being

S W

O T

Question 2: What Are the Company’s Strengths, Weaknesses, Opportunities and Threats ?

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A strength is something a firm does well or an attribute that enhances its competitiveness

A skill, specialized expertise or competitively important capabilities

Skills in low cost operations, Technological expertise Defect free manufacturing Proven capabilities in developing and introducing innovative products Cutting edge supply chain management capabilities Expertise in getting new products to the market quickly Expertise in providing good customer service

Resource strengths and competitivecapabilities are competitive assets!

Identifying Resource Strengthsand Competitive Capabilities

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Identifying Resource Strengthsand Competitive Capabilities

Valuable physical assets State-of-the-art plants and equipments Attractive real estate locations World wide distribution facilities

Ownership of valuable natural resource deposits Valuable human assets and intellectual capital An experienced and capable workforce Cutting edge knowledge in technology or other important

business areas

Proven managerial knowledge

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Identifying Resource Strengthsand Competitive Capabilities Valuable organizational assets Proven quality control systems Propriety technology, key patents State-of-the-art systems for doing business via internet A strong network of distributors or retail dealers Sizeable amounts of cash or marketable securities

A strong balance sheet Valuable intangible assets Powerful or well known brand name A reputation for technological leadership

Strong buyer loyalty and goodwill

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Identifying Resource Strengthsand Competitive Capabilities An achievement or attribute that puts a company in a position

of market advantage Low overall cost relative to competitors Market share leadership A superior product A wider product line than rivals Wide geographic coverage Competitively valuable alliances or cooperative ventures Fruitful partnership with supplier that reduces cost and enhances

product quality and performance Joint ventures that provide access to valuable technologies,

specialized know-how and/or geographic markets

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Competencies vs. Core Competencies vs. Distinctive Competencies A competency is the product of organizational learning and

experience and represents real proficiency in performing an internal activity

Some competencies relate to specific skills and expertise They spring from proficiency in a single discipline or function and

may be performed in single department or unit e.g. Just in time inventory control Low cost manufacturing efficiency• Other competencies are inherently multi-disciplinary and cross

functional• They are a result of effective collaboration among people with

different expertise working in different departments e.g. Continuous product innovation comes from teaming the efforts of

people or groups with expertise in market research, R&D, design, engineering, and market testing

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Competencies vs. Core Competencies vs. Distinctive Competencies A core competency is a well-performed

internal activity central (not peripheral or incidental) to a company’s competitivenessand profitability

A company may have more than one core competency in its resource portfolio

Rarely a company can legitimately claim more than two or three core competencies

More often a core competency is knowledge based residing in people and in a company’s intellectual capital and not in its assets on the balance sheet

A core competency is likely to be grounded in cross-department combination of knowledge and expertise rather than being a product of a single department

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Competencies vs. Core Competencies vs. Distinctive Competencies A distinctive competency is a competitively valuable

activity a company performs better than its rivals Signifies greater proficiency than a core competency The conceptual difference between a competency, core

competency, and a distinctive competency draw attention to the fact that a company’s resource strengths and competitive capabilities are not always equal

Core competencies are competitively more important resource strengths than competencies because they add power to the company’s strategy and have a bigger positive impact on its market position and profitability

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Competencies vs. Core Competencies vs. Distinctive Competencies A distinctive competency is a competitively

potent resource strength for three reasons:

1. It gives a company competitively valuable capability that is unmatched by rivals

2. It has a potential for being the cornerstone of the company’s strategy

3. It can produce a competitive edge in the market place since it represents a level of proficiency that is superior to rivals

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What is the Competitive Power of a Resource Strength? 1. Is the resource strength hard to copy?

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

3. Is the resource really competitively superior?

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

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Identifying Resource Weaknessesand 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 areasResource weaknesses and deficienciesare competitive liabilities!

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Prentice Hall, 2000 Chapter 4 20

Internal Factor Analysis Summary (IFAS)

Internal Factors Weight RatingWeighted Score Comments

1 2 3 4 5

1.00

Strengths

Weaknesses

Total Weighted Score

Notes: 1. List strengths and weaknesses (5–10 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factor’s probable impact on the company’s 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 company’s response to that factor. 4. Multiply each factor’s weight times its rating to obtain each factor’s 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.

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Identifying a Company’sMarket Opportunities Opportunities most relevant to a

company are those offering:

Good match with its financial andorganizational resource capabilities

Best prospects for profitable long-term growth

Potential for competitive advantage

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Identifying External Threats 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 in a country

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Prentice Hall, 2000 Chapter 3 24

External Factor Analysis Summary (EFAS)

ExternalStrategic Factors Weight Rating

Weighted Score Comments

1 2 3 4 5

1.00

Opportunities

Threats

Total Weighted Score

Notes: 1. List opportunities and threats (5–10 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factor’s probable impact on the company’s 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 company’s response to that factor. 4. Multiply each factor’s weight times its rating to obtain each factor’s 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.

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Fig. 4.2: The Three Steps of SWOT Analysis

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Prentice Hall, 2000 Chapter 5 26

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

ST Strategies Generate strategies here that use strengths to avoid threats

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

WT Strategies Generate strategies here that minimize weaknesses and avoid threats

INTERNAL FACTORS

(IFAS)EXTERNAL FACTORS (EFAS)

Strengths (S) List 5 – 10 internal strengths here

Weaknesses (W) List 5 – 10 internal weaknesses here

Opportunities (O) List 5 – 10 external opportunities here

Threats (T) List 5 – 10 external threats here

TOWS Matrix5.4 TOWS Matrix (Fig. 5.2)

Source: Adapted from Long-Range Planning, April 1982, H. Weihrich, “The TOWS Matrix—A 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.

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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

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Y axis X axis

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

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 ChangesRate of InflationDemand VariabilityPrice range of competitive productsBarriers to entryCompetitive pressurePrice elasticity of demand

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

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Hypothetical example of SPACE Matrix (Y axis)Hypothetical example of SPACE Matrix (Y axis)

Financial Strength (FS)Financial Strength (FS)

Return on Investment = + 6Return on Investment = + 6

Leverage = + 5Leverage = + 5

Liquidity = + 5Liquidity = + 5

Working capital = + 5Working capital = + 5

Cash Flow = + 4Cash Flow = + 4

Ease of exit = +1Ease of exit = +1

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

Environmental Stability ( ES)Environmental Stability ( ES)

Technological change = - 4Technological change = - 4

Rate of Inflation = - 3Rate of Inflation = - 3

Demand variability = - 3Demand variability = - 3

Price range of competitive Price range of competitive products = -5products = -5

Barriers to entry = - 1Barriers to entry = - 1

Competitive pressure = - 4Competitive pressure = - 4

Price elasticity of demand = - 3 Price elasticity of demand = - 3

Total score = -23 Total score = -23

Average Score = -23/7= - 3.28 Average Score = -23/7= - 3.28

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SPACE Matrix Calculation X axisSPACE Matrix Calculation X axisIndustry Strength ( IS)Industry Strength ( IS)

Growth Potential = + 5Growth Potential = + 5

Profit Potential = +5Profit Potential = +5

Technological Know how = + Technological Know how = + 33

Resource utilization = +4Resource utilization = +4

Capital Requirement = +6Capital Requirement = +6

Ease of Entry = +6Ease of Entry = +6

Productivity, capacity Productivity, capacity

utilization = +4 utilization = +4

Total Score = +31Total Score = +31

Average IS Score = +4.42 Average IS Score = +4.42

Competitive Advantage (CA)Competitive Advantage (CA)

Market Share = - 2Market Share = - 2

Product Quality = - 3Product Quality = - 3

Product life cycle = -2Product life cycle = -2

Customer Loyalty = -1Customer Loyalty = -1

Competition’s capacity utilization = -3Competition’s capacity utilization = -3

Technological Know how = -3Technological Know how = -3

Control over suppliers andControl over suppliers and

Distributors = -1Distributors = -1

Total Score = 15Total Score = 15

Average CA Score = - 2.14Average CA Score = - 2.14

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SPACE Matrix CalculationsSPACE Matrix Calculations

ES Average Score = -3.28 + Average FS Score( + 4.28) = + 1ES Average Score = -3.28 + Average FS Score( + 4.28) = + 1

Average CA Score = -2.14 + Average IS Score ( 4.42) = + 2.28 Average CA Score = -2.14 + Average IS Score ( 4.42) = + 2.28

CACA ISIS

FSFS

ESES

xxxx

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Examples of strategic profilesExamples of strategic profiles

Aggressive profilesAggressive profiles

Competitive ProfileCompetitive Profile

Defensive ProfileDefensive Profile

Conservative ProfileConservative Profile

Conservative profileConservative profile

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An aggressive profile suggests and Innovator Strategy; the company is in a position to invest further and introduce new market offerings; product development and market development are real options here.

A conservative profile is suggestive of an Analyzer Strategy; the company will staunchly defend its domain while cautiously looking for new opportunities of diversification

A Competitive Profile may augur well for a flanker’s role, as the company may not have the resource strengths to meet the competitors head-on

A Defensive Profile is self-explanatory where the company is only looking to doggedly defend its domain and innovates only on the periphery.

Interpreting the Profiles

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Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company situation analysis

Key analytical tools

Value chain analysis

Benchmarking

Question 3: Are the Company’sPrices and Costs Competitive?

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A company’s business consists of all activities undertaken in designing, producing, marketing, delivering, and supporting its product or service

All these activities that a company performs internally combine to form a value chain —so-called because the underlying intent of a company’s activities is to do things that ultimately create value for buyers

The value chain contains two types of activities

Primary activities (where most ofthe value for customers is created)

Support activities that facilitateperformance of the primary activities

Concept: Company Value Chain

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Fig. 4.3: A Representative Company Value Chain

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Value Chain Activities in Service Firms Wholesalers:

Primary Activities:(a) merchandize selection and purchasing, (b) Inbound shipping and warehousing(c) outbound distribution to retailers

Department Store RetailerPrimary Activities(a) merchandize selection and buying(b) store layout and product display(c) advertising and customer service

A Hotel ChainPrimary Activities(a) site selection and construction(b) reservations(c) hotel operations(d) managing lineup of hotel locations

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Steps in Corporate Value Chain Analysis1. Examine each product line’s value chain in terms of

various activities involved in producing that product or service.

Which activities can be considered core competency or weakness

Can any core competency be labeled as distinctive competency

2. Examine the “linkages” within each product’s value chain Linkages are the connections between the way one value

activity is performed and the cost of performance of another activity

3. Examine the potential synergies among the value chain of different product lines/ businesses

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Why Value Chains of Rival Companies Often Differ?

A company’s value chain depends on: the manner in which it performs its own business

and internal operations, its strategy, the approaches it is using to execute

this strategy, underlying economics of the activities themselves• Because these activities differ from company to

company the value chain of rival companies differ and thus their cost positions

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Why 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 who buy the needed parts and components from outside suppliers and only perform assembly line operations

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Why Value Chains of Rival Companies Often Differ?

b. 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 would be different

c. Cost and price differences among rival firms can have their origin in activities performed by suppliers and distributors or by distribution channel allies involved in getting these product to end users

- Suppliers or wholesale dealers may have excessively high cost or profit structures that jeopardize a company’s cost competitiveness even though its cost for internally performed activities are competitive

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The Value Chain System for Entire Industry Accurately assessing a company’s competitiveness in end use

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

2. The costs, performance features and quality of these inputs influence a company’s 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

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The Value Chain System for Entire Industry

Forward channel and customer value chain are relevant because:

1. The costs and margins of a company’s distribution allies are part of the price paid by end users

2. The activities that distribution allies perform affect end users’ satisfaction

For these reasons companies normally work closely with forward channel allies to perform these value chain activities in a mutually beneficial way

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Representative Value Chain for an Entire Industry

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Developing Data to Measure a Company’s Cost Competitiveness After identifying key value chain activities, the next step

involves determining costs of performing specific value chain activities using activity-based costing

Appropriate degree of disaggregation depends on

Economics of activities

Value of comparing narrowly definedversus broadly defined activities

Guideline – Develop separate costestimates for activities

Having different economics

Representing a significant or growing proportion of costs

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Determining whether a company’s costs are in line with those of rivals requires: Measuring how a company’s costs compare with those

of rivals activity-by-activity Requires having accounting data to measure cost

of each value chain activity Activity-based costing entails:

Defining expense categories accordingto specific activities performed and

Assigning costs to the activityresponsible for creating the cost

Activity-Based Costing: A KeyTool in Analyzing Costs

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Focuses on cross-company comparisons of how certain activities are performed and what costs are associated with these activities: Purchase of materials Payment of suppliers Management of inventories Getting new products to market Performance of quality control Filling and shipping of customer orders Training of employees Processing of payrolls

Benchmarking Costs ofKey Value Chain Activities

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Strategic Options for Remedying a Cost Disadvantage Company’s competitiveness on cost depends on

how efficiently it manages the value chain activities relative to how well competitors manage theirs

There are three main areas in a company’s value chain where important differences in the cost of competing firms can occur

1. A company’s own activity segment

2. Supplier’s part of the industry value chain

3. The forward channel portion of the industry chain

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Remedying an Internal Cost Disadvantage 1. Implement the use of the best practices throughout the company

particularly for high cost activities2. Try to eliminate cost-producing activities altogether by revamping the value

chain- cutting out low value added activities- bypassing the value chains and associated costs of distribution by marketing directly to end users

3. Relocate high cost manufacturing activities to other geographic areas4. Whether certain internally performed activities can be outsourced more

cheaply than they could be done in-house5. Invest in productivity enhancing, cost saving technological improvements6. Find ways to detour around the activities or items where costs are high7. Redesign the product and/or some components to facilitate speedier and

more economical manufacture or assembly8. Try to make up the internal cost disadvantage by reducing the costs in

supplier or forward channel portions of the industry value chain – usually the last resort

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Remedying a Supplier-Related Cost Disadvantage Pressurizing suppliers for lower prices Switching to lower-priced substitute inputs Collaborating closely with suppliers to identify

mutual cost saving opportunities Just in time deliveries from supplier can lower:

- company’s inventory and logistic costs- supplier can economize on their warehousing, shipping, and production scheduling costs

Companies may find it cheaper to integrate backward

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Remedying a Cost Disadvantage Associated with Activities Performed by Forward Channel Allies 1. Pressurize dealer distributors and other

forward channel allies to reduce their costs and markups

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

3. Change to a more economical distribution strategy, including switching distribution channels or integrating forward into company-owned retail outlets

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

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Overall competitive position involvesanswering two questions:

How does a company rank relativeto competitors on each importantfactor that determines market success?

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

Question 4: Is the Company Strongeror Weaker than Key Rivals?

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Based on results of both industry and competitive analysis and an evaluation of a company’s competitiveness, what items should be on a company’s “worry list”?

Requires thinking strategically about Pluses and minuses in the industry

and competitive situation Company’s resource strengths and weaknesses

and attractiveness of its competitive positionA “good” strategy must address “what to do”about each and every strategic issue!

Question 5: What Strategic IssuesMerit Managerial Attention?