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Lecture: 4
Evaluating Company Resources & Competitive Capabilities

COMPANY SITUATION ANALYSIS

INTRODUCTION
A company situation analysis is essential for evaluating the company resources and
capabilities. It prepares the groundwork for matching the company’s strategy both to be
external market circumstances and its internal resources and competitive capabilities.
Insightful situation analysis is a precondition for identifying the strategic issues that
management needs to address and for tailoring strategy to company resources and
competitive capabilities as well as to industry and competitive conditions.

Analytical Techniques of Situation Analysis

o SWOT Analysis
o Value Chain Analysis
o Strategic cost Analysis
o Competitive Strength Assessment

SWOT ANALYSIS
It provides a good overview of whether a company’s condition is healthy or unhealthy. It
reveals the company’s actual situation regarding resources, capabilities, external
opportunities and external threats. It helps to draw conclusions about:
(a) How strategy can be matched to both its resources and market opportunities; and
(b) How urgent it is for the company to correct which particular resource weaknesses and
guard against which particular external threats.

Strength:
 Strength is something a companies good at doing. Strength can be a skill, a
competence, a valuable organizational resource or competitive capability or an
achievement that gives a company a market advantage.
Examples:
• Superior technology
• Excellent customer service
• High quality product

Weaknesses:
Weakness in something a company lacks or does poorly or a condition that puts the company
at a disadvantage. A company’s internal weaknesses can relate to:
a. Deficiencies in competitively important skills
b. A lack of competitively important physical, organizational or intangible assets, or
c. Weak/missing competitive capabilities in key areas.

Once the weaknesses (also strengths) have been identified, they need to be evaluated for their
strategy-making implications. Some resource strengths are competitively more important than
others because they add greater power to the company’s strategy. Likewise, some weaknesses
can prove fatal it not remedied. Some weakness can be easily corrected or offset by strengths.
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Opportunities :
Market opportunity is a big factor in shaping a company’s strategy. Opportunities may be
plentiful or scarce. They may range from widely attractive (an absolute must to pursue) to
marginally interesting (low on the company’s list of strategic priorities). A company is well
advised to pass on a particular market opportunity unless it has (or can build) the resource
capabilities most relevant to a company are:
(a) Those that offer important avenues for profitable growth;
(b) Those where a company has the most potential for competitive advantage; and
(c) Those that match up well with the company’s financial and organizational resource
capabilities.

Threats:
Certain factors in a company’s external environment may pose threats to its profitability and
competitive well-being. Threats can stem from-
(a) Emergence of cheaper/better technologies
(b) Rivals introduction of new or imported products
(c) Entry of low cost foreign competitors
(d) New government regulations that is more burdensome to a company than its
competitors.
(e) Vulnerability to a rise in interest rates
(f) Adverse changes in foreign exchange rates
(g) Political upheaval and the like.

It is management’s job to identify the threats to the company’s future well-being and to
evaluate what strategic actions can be taken to neutralize or lessen their impact. Opportunities
and threats point to the need for strategic action. Managers need to-
(a) Pursue market opportunities, well suited to the company’s resource capabilities, and
(b) Take actions to defend against external threats to the company’s business.

WHY SWOT ANALYSIS?

 It involves evaluating the strengths, weaknesses, opportunities and threats, and
drawing conclusions about the attractiveness of the company’s situation and the need
for strategic action.
 From a strategy-making perspective, strengths are significant because they can be
used as the cornerstones of strategy and the basis on which to build competitive
advantage.
 Management should build its strategy around what the company does best on the basis
of the strengths, and should avoid strategies whose success depends heavily on areas
where the company is weak.
 A strategy also needs to aim at correcting competitive weaknesses that make the
company vulnerable, hurt its importance, or disqualify it from pursuing an attractive
opportunity.
 Strategy must be aimed at pursuing opportunities well-suited to the company’s
capabilities, and provide a defense against external threats.
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NEXT TO SWOT - WHAT?
o Once, the SWOT analysis has been completed, organizational objectives (long-range
and short-range) can then be formulated.
o Long-range objectives specify the results desired in the organization’s mission and
normally extend beyond current fisca1 year. Short-range objectives (one year or less)
should follow logically from long-range objectives.

Potential resource strengths and Potential Resource Weakness and

capabilities. Competitive Deficiencies.
• A powerful strategy supported by good skills
and expertise in key areas.
• A strong financial condition; ample financial
resource to grow the business.
• Strong brand name image/company
reputation.
• A widely recognized market leader and an
attractive customer base.
• Ability to make advantage of economies of
scale and/or learning and experience curve
effects.
• Proprietary technology/superior technology
skills/important patents.
• Cost advantages.
• Strong advertising and promotion.
• Product innovation skills.
• Proven skill in improving production
processes.
• A reputation for good customer service.
• Better product quality relative to rivals.
• Wide geographic coverage and distribution
capability.
• Alliances/joint ventures with other firms.
Potential Company opportunities:
• Serving additional customer groups or
expending into new geographic markets or
product segments.
• Expending the company’s product line to
meet a broader range of customer needs.
• Transferring company skills or technological
know how to new products or business.
• Integrating forward or backward.
• Falling trade barriers in attractive foreign
markets.
• Openings to take market share away from
rival firms.
• Ability to grow rapidly because of strong
increases in market demand.
• Acquisition of rival form.
• Alliances or joint ventures that expand the
firm’s market coverage and competitive
capability.
• Opening to exploit emerging new
technologies.
• Market openings to extend the company’s
brand name or reputation to new geographic
areas.
• No clear strategic direction.
• Obsolete facilities.
• A week balance sheet, burdened with too
much debt.
• Higher over all unit costs relative to key
competitors.
• Missing some key skills or competencies/lack
of management depth.
• Sub per profitability.
• Plagued with internal operating problems.
• Falling behind in R & D.
• Too narrow a product line relative to rivals.
• Weak brand image & reputation.
• Weaker dealer or distribution network than
key rivals.
• Sub per marketing skills relative rivals.
• Short on financial resource to fund promising
strategic initiatives.
• Lots of undersized plant capacity.
• Behind on product quality.
Potential External Threats to a
company’s Well being:
• Likely entry of potent new competitors.
• Loss of sales to substitute products.
• Slow down in market growth.
• Adverse shifts in exchange rates and trade
policies of foreign governments.
• Costly new regulatory requirements.
• Vulnerability to recession and business cycle.
• Growing bargaining power of customers or
suppliers.
• A shift in buyer needs and tastes away from
the industry’s product.
• Adverse demographic changes.
• Vulnerability to industry driving forces.
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Value Chain:
The primary analytical tool of strategic cost analysis is a value chain identifying the separate
activities, functions and business process performed in designing, producing, and marketing,
delivering, and supporting a product or service.
The chain starts with raw material supply and continues through parts and components
production, manufacturing and assembly, whole sale, distribution and retailing to the ultimate
end product or service. A company’s value chain identifies the primary activities that create
value for the customers and the related support activities.

The Value Chain System

Up stream value Company value Down stream

Chain Chain Value Chain

Activities Costs Internally Activities, costs & Buyer/End user

& margins of performed margins of forward value chains.
suppliers activities, costs channel &
& margins strategic partners

Representative company Value Chain:

Primary activities:

O Distribution Sales & After Profit

Purchased P & outbound marketing sales margin
supplies E logistics Services
and R
inbound A
logistics. T
I
O
N
S

Support Activities and Costs:

Product R & D, Technology and system development
Human Resource Management
General Administration
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STRATEGIC COST ANALYSIS

Strategic cost analysis (SCA) focuses on a firm’s cost position relative to its rivals. SCA
involves comparing a company’s cost position relative to key competitors, activity by
activity, from raw materials purchase to the price paid by ultimate consumers.

A company must be aware to how its costs compare with the costs of rivals. Usually
disparities in cost among rival producers stem from differences in-
o Prices of raw materials etc
o Basic technology
o Internal operating costs due to economics of scale
o Marketing costs, sales, promotion expenses and ad expenses
o Inbound transportation costs and outbound shipping costs.
o Cost and markups of intermediaries.

The primary analytical tool of SCA is a value chain. It shows values from raw materials;
supply to the price paid by ultimate customer. The chain goes beyond company’s own
internal cost structure to cover all the stages in the industry-chain: raw materials supply,
manufacturing, wholesale distribution, and retailing.

Value chain/activity-cost chain reveals a great deal about a firm’s cost competitiveness.
Examining the firm’s chain and comparing it to that of the rivals indicate who has how much
of a cost advantage/disadvantage and which cost components are responsible. Such
information is vital in crafting strategies to eliminate a cost disadvantage or create a cost
advantage.

Are the company’s prices and costs competitive?

Assessing whether a company's costs are competitive with those of its close rivals is a
necessary and crucial part of company situation analysis. The cost disparities can range from
tiny to competitively significant and can stem from any of the following factors:
 Differences in the prices paid for the raw materials and other items purchased from
suppliers.
 Differences in basic technology and the age of the plants and equipment.
 Differences in production costs due to different plant efficiency, different learning and
experience curve effects, different wage rates, different productivity levels, and the
like.
 Differences in marketing costs, sales and promotion expenditures.
 Differences in inbound transportations costs and out bound shipping costs.
 Differences in channel distribution costs
The higher a company’s costs are above those of close rivals, the more competitively
vulnerable it becomes.
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Strategic Options for Achieving Cost Competitiveness:

When a firm’s cost disadvantage stems from the costs of items purchased from suppliers, the
company managers can take any of the several strategic steps:

 Negotiate more favorable prices with suppliers.

 Work with suppliers to help them achieve lower cost.
 Integrate backward to gain control over the costs of purchased items.
 Try to use lower price substitute inputs.
 Does a better job of managing the linkage between suppliers’ value chains and the
company’s own value chain?
 Try to make up the differences by cutting the cost else where else in the chain.
 Pushing distributors and other forward channel to reduce their markups.
 Working closely with forward channel/customers to identify win opportunities to reduce
costs.
 Changing to a more economical distribution strategy, including forward integration.

Competitive strength assessment (CSA)

Systematic assessment of whether a company’s competitive position is strong or weak
relative to close rivals is an essential step in company situation analysis. Through CSA, a
broad-based assessment is made of a company’s competitive position and strength. This step
looks at how a company matches rivals on the chief determinants of competitive success. The
competitive strength rankings indicate where a company is strong and weak. As a rule, a
company’s competitive strategy should be built on its competitive strengths. A company has
the best potential for offensive attack in areas where it is strong and rivals are weak.

Steps in Competitive Strength Assessments

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

Step- 2: Rate the firm and its rivals on each factor. Numerical scales (e.g., from 1 to10) are
best to use, although ratings of stronger (+), weaker (-), and about equal (=) may be
appropriate when assigning numerical scores coveys false precision.

Step- 3: Sum the individual strength ratings to get an overall measure of competitive strength
for each competitor.

Step-4: Draw conclusions about the size and extent of the company’s net competitive
advantage or disadvantage based on the strength assessments and to take specific note of
areas where the company’s competitive position is strongest and weakest.

Questions:
• What are the analytical tools of situation analysis? State the significance of SWOT
analysis.
• Describe the Value chain system.
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• How will you assess the extent of companys’ prices and costs are competitive?
• What are the steps in competitive strength assessment?

Evaluating Company Resource and Competitive Capabilities

Company situation analysis prepares the groundwork for matching the company’s strategy
both to its external market circumstances and to its internal resources and competitive
capabilities. To spotlight of company situation analysis is trained on five questions:
1. How will is the company’s present strategy working?
2. What are the company’s resource strategy and weakness and its external opportunities
and threats?
3. Are the company’s prices and costs competitive?
4. How strong is the company’s competitive position relative to its rivals?
5. What strategic issue does the company face?

How is the present strategy working?

The stronger a company’s financial performance and market position, the more likely it has a
well conceived, well executed strategy. It is always feasible to evaluate the performance of a
company’s strategy by looking at:

• Whether the firm’s market share ranking in the industry is rising, stable or declining.
• Whether the firm’s profit margins are increasing or decreasing and how large they are
to rival firm’s margins.
• Trends in the firm’s net profits, returns on investment, and economic value added and
how these compare to the same trends in profitability for other companies in the
industry.
• Whether the company’s overall financial strength and credit rating is improving or on
the decline.
• Trends in the company’s stock price and whether the company’s strategy is resulting
in satisfactory gains in shareholder value.
• Whether the firm’s sales are growing faster or slower than the market as a whole.
• The firm’s image and reputation with its customers.
• Whether the is regarded as a leader in technology, product innovation, product
quality, customer service or other relevant factor on which buyers base their choice or
brands.
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The stronger a company’s current overall performance, the less likely the need for radical
changes in strategy. The weaker a company’s financial performance and market standing, the
more its current strategy must be questioned. Weak performance is almost always a sign of
weak strategy or weak execution or both.

Question-2: What are the company’s resource strengths and weakness and its
external opportunities and threats?
Sizing up a firm’s resource strengths and weaknesses and its external opportunities and
threats, commonly known as SWOT analysis, provides a good overview of whether a firm’s
business position is fundamentally healthy. SWOT analysis is grounded in the basic principle
that strategy making efforts must aim at producing a good fit between a company’s resource
capabilities and deficiencies, its market opportunities, and external threats to the company’s
future well being is essential.

When a source of a firm’s cost disadvantage is internal, manager can use any of nine strategic
approaches to restore cost parity:

1. Stream line the operations of high-cost activities.

2. Reengineering business process and work practice.
3. Eliminate some cost producing activities altogether by revamping the value chain
system.
4. Relocate high cost activities to geographic areas where they can be performed more
cheaply.
5. See if certain activities can be outsourced from vendors or performed by contractors
more cheaply than they can be done internally.
6. Invest in cost saving technological improvements.
7. Innovate around the trouble some cost components as new investments are made in
plant and equipment.
8. Simplify the product design so that it can be manufactured more economically.
9. Make up the internal cost disadvantage through savings in the backward and forward
portion of the value chain system.
Assesment of company’s competitive Position
Systemic assessment of whether a company’s overall competitive position is strong or weak
relative to its close rivals is an essential step in company situation analysis. A broader assessment
needs to be made of a company’s competitive position and competitive strength. The signs of
strength and weakness in a company’s competitive position.
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Strategic Issues faced by company.

The purpose of this analytical step is to develop a complete strategy making agenda using the
results of both company situation analysis and the industry and competitive analysis.
Identifying and thoroughly understanding the strategic issues a company faces is a
prerequisite to effective strategy making. To pinpoint issues for the company's strategic
action agenda the managers should consider the following:

 Whether the present strategy offer attractive defenses against the five competitive
forces particularly those that are expected to intensify in strength.
 Whether the present strategy should be adjusted to better respond to the driving forces
at work in the industry.
 Whether the present strategy is closely matched to the industry’s future key success
factors.
 Whether the present strategy adequately capitalizes on the company’s resource
strength.
 To find out the company’s opportunities merit to priority and lowest priority and
which are best suited to the company’s resource strengths and capabilities.
 What the company needs to do to correct its resource weakness and to protect against
external threats.
 To what extent the company is vulnerable to the competitive efforts or more rivals
and what can be done to reduce this vulnerability.
 Whether the company possesses competitive advantage or must it work to offset
competitive disadvantage.
 What are the strong spots and weak spots in the present strategy?
 Whether additional actions are needed to improve the company’s cost position,
capitalize on emerging opportunities and strengthen the company’s competitive
position.
Considering the above mentioned points whether the company can continue the same basic
strategy with minor adjustments or whether major overhaul is called for. When the present
strategy is not well suited for the road ahead, managers need to give top priority to the task of
crafting a. better strategy.

THE STRATEGIC MANAGEMENT PROGRESS

Objective to guide their organizations may be more helpful on a day-today basis. According
to these suggestions:
 Manager should use organizational objectives as a guide in decision making. A
significant portion of any job involves making decisions. The manager who knows
what objectives have been established for the organization finds it easier to make
decisions that will ensure that organizational objectives are reached.
 Manager should use organizational objectives as a guide for increasing
organizational efficiency. An efficient organization is one that wastes little
organizational recourses in attaining organizational objectives. To develop and
maintain an efficient organization, therefore, managers must have organizational
objectives clearly in mind.
 Managers should use organizational objectives as a guide for performance appraisal.
Human effort or work is of critical importance in reaching organizational objectives.
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Managers should both evaluate and reward worker performance in terms of how
instrumental the performance is in helping organization attain its objectives. By the same
token, worker performance that does not help the organization achieve its objectives is
discouraged by virtue of its not being rewarded and perhaps even punished.

Developing the Data for Strategic Cost Analysis

Once the major elements of the value chain are identified the next sleep in SCA involves
breaking down a firm’s departmental cost accounting data into the costs of performing
specific activities. A good guideline is to develop separate cost estimates for activities having
different economics and for activities representing a significant proportion of cost.
Unlike traditional accounting, activity-based costing entails defining expense categories
based on the specific activities being performed and then assigning cost to the appropriate
activity responsible for creating the cost.
To benchmark the firm’s cost position against competitors, costs for the same activities for
each rival must be estimated an advanced art in competitive intelligence.
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