Strategic Management

Chapter – 04
Evaluating Company Resources and Competitive Capabilities

Company situation analysis is trained on five questions: Four tools/ analytical techniques for
(Spot light of company situation analysis) exploring these questions:
 How well is the company’s present strategy working?
 What are the company’s resource strengths and weaknesses and its 1. SWOT analysis
external opportunities and threats? 2. Value chain analysis
 Are the company’s prices and costs competitive? 3. Strategic cost analysis
 How strong is the company’s competitive position relative to its rivals? 4. Competitive strength assessment
 What strategic issues does the company face?

Question 1: How Well Is the Present Strategy Working?

In evaluating how well a company’s present strategy is working, a manager has to start with what the strategy is.
 The first thing to pin down is the company’s competitive approach – whether it is
i. striving to be a low-cost leader
ii. stressing ways to differentiate its product offering and
iii. concentrating its efforts on serving a broad spectrum of customers or a narrow market niche.
 Another strategy defining consideration is the firm’s competitive scope within the industry –
 how many stages of the industry’s production-distribution chain it operates in (one, several, or all),
what its geographic market coverage is, and the size and makeup of its customer base.
 The company’s functional strategies in production, marketing, finance, human resources, information
technology, new product innovation, and so on further characterize company strategy.
 Qualitative evidence of how well a company’s strategy is working comes from studying internal consistency,
completeness
 The best quantitative evidence of how well a company’s strategy is working comes from studying the
company’s recent strategic and financial performance and seeing what story the numbers tell about the results
the strategy is producing.
 The two best empirical indicators of whether a company’s strategy is working well are
(1) whether the company is achieving its stated financial and strategic objectives and
(2) whether it is an above-average industry performer.

It is nearly always feasible to evaluate the performance of a company’s strategy by looking at: (Features)
 Whether the firm’s market share ranking in the industry is rising, stable, or declining
 Trends in the company’s stock price and whether the company’s strategy is resulting in satisfactory gains in
shareholder value (relative to the MVA gains of other companies in the industry)
 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

Question 2: What Are the Company’s Resource Strengths and Weaknesses and Its External Opportunities and
Threats?
 SWOT analysis is grounded in the basic principle that strategy-making efforts must aim at producing a good
fit between a company’s resource capability and its external situation.

Identifying Company Strengths and Resource Capabilities

A strength is something a company is good at doing or a characteristic that gives it enhanced competitiveness. A
strength can take any of several forms:
 A skill or important expertise –
 low-cost manufacturing know-how,
 technological know-how,
 a proven track record in defect-free manufacture,
 expertise in providing consistently good customer service, skills
 Valuable physical assets –
 state of the art plants and equipment,
 attractive real estate locations,
 worldwide distribution facilities,
 natural resource deposits, or cash on hand.
  Valuable human assets –
 an experienced and capable workforce,
 talented employees in key areas,
 motivated employees, managerial know-how, or
 the collective learning and know-how embedded in the organization and built up over time.
 Valuable organizational assets –
 proven quality control systems,
 proprietary technology, key patents,
 mineral rights, a base of loyal customers,
 a strong balance sheet and credit rating,
 a company intranet for accessing and exchanging information both internally and with suppliers and key
customers,
 computer-assisted design and manufacturing systems, systems for conducting business on the World Wide
Web, or e-mail addresses for many or most of the company’s customers.
 Valuable intangible assets –
 brand name image,
 company reputation,
 buyer goodwill,
 a high degree of employee loyalty, or
 a positive work climate and organizational culture

Identifying Company Weaknesses and Resource Deficiencies

A weakness is something a company lacks or does poorly (in comparison to others) or a condition that puts it at a
disadvantage. A company’s internal weaknesses can relate to
(a) deficiencies in competitively important skills or expertise,
(b) a lack of competitively important physical, human, organizational, or intangible assets, or
(c) missing or weak competitive capabilities in key areas. Internal weaknesses are thus shortcomings in a
company’s complements of resources.

 BASIC CONCEPT: A company’s resource strengths represent competitive assets; its resource weaknesses
represent competitive liabilities.
 Once managers identify a company’s resource strengths and weaknesses, the two compilations need to be
carefully evaluated for their competitive and strategy-making implications.

Identifying Company Competencies and Capabilities

Core Competencies: A Valuable Company Resource
 A competitively important internal activity that a company performs better than other competitively important
internal activities is termed a core competence.
 What distinguishes a core competence from a competence is that a core competence is central to a company’s
competitiveness and profitability rather than peripheral.
 Frequently a core competence is the product of effective collaboration among different parts of the organization,
of individual resources teaming together.
 Typically, core competencies reside in a company’s people, not in its assets on the balance sheet. They tend to be
grounded in skills, knowledge and capabilities.
 Plainly, a core competence gives a company competitive capability and thus qualifies as a genuine company
strength and resource.

Distinctive Competence: A Competitively Superior Company Resource

 A distinctive competence is a competitively important activity that a company performs well in comparison to its
competitors.
 Consequently, a core competence becomes a basis for competitive advantage only when it is a distinctive
competence.
 The importance of a distinctive competence to strategy making rests with
i. the competitively valuable capability it gives a company,
ii. its potential for being a cornerstone of strategy, and
iii. the competitive edge it can potentially product in the marketplace.

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

One of the most telling signs of whether a company’s business position is strong or precarious is whether its prices
and costs are competitive with industry rivals.
Cost disparities can range from tiny to competitively significant and can stem from any of several factors:
 Differences in prices paid for raw materials, component parts, energy and other items purchased from suppliers
 Differences in basic technology and the age of plants and equipment.
 Differences in production costs from rival to rival due to different plant efficiencies, different learning and
experience curve effects, different wage rates, different productivity levels, and the like.
 Differences in marketing costs, sales and promotion expenditures, advertising expenses, warehouse distribution
costs, and administrative costs.
 Differences in inbound transportation costs and outbound shipping costs.
 Differences in forward channel distribution costs.
 Differences in rival firms’ exposure to the effects of inflation, changes in foreign exchange rates, and tax rates.
For a company to be competitively successful, its costs must be in line with those of close rivals.

Strategic Cost Analysis and Value Chains

 Strategic cost analysis focuses on a firm’s cost position relative to its rivals.
 The task of strategic cost analysis is to compare a company’s costs activity by activity against the costs of key
rivals and to learn which internal activities are the source of cost advantage or disadvantage.

The Concept of a Value Chain

A company’s value chain identifies the primary activities that create value for customers and the related support
activities.
Primary Activities:
 Inbound Logistics: Activities, costs, and assets associated with purchasing fuel, energy, raw materials, parts
components, merchandise; and inventory management.
 Operations: Activities, costs, and assets dealing with converting inputs into final product form (production,
packaging, equipment maintenance, quality assurance, etc.).
 Distribution and Outbound Logistics: Activities, costs, and assets dealing with physically distributing the product
to buyers.
 Sales and Marketing: Activities, costs, and assets related to sales force efforts, advertising and promotion, market
research and planning.
 Service: Activities, costs, and assets associated with providing assistance to buyers, such as installation,
maintenance and repair, technological assistance etc.
Representative Company Value Chain

Primary Activities and Costs Example:

Key Value Chain
Inbound Operation Outbound Sales and Profit Activities
Logistics Logistics Marketing Service Margin Soft Drink Industry
s
Processing of basic
Product R&D, Technology, System Support ingredients
Development Activitie Syrup manufacture
Human Resources Management s Bottling & can filling
General Administration And Wholesale distribution
Costs
Support Activities:
 Research, Technology, and Systems Development: Activities, costs, and assets relating to product R&D,
processes R&D, process design improvement, equipment design, computer software development,
telecommunication systems etc.
 Human Resource Management: Activities, costs, and assets associated with the recruitment, hiring, training,
development, and compensation of all types of personnel, labor relation activities.
 General Administration: Activities, costs, and assets relating to general management, accounting and finance,
legal and regulatory affairs, safety and security, management information system.

Developing the Data for Strategic Cost Analysis

The next step in strategic cost analysis 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 or growing proportion of cost.
 Traditional accounting identifies costs according to broad categories of expenses – wages and salaries, employee
benefits, supplies, travel, depreciation, R&D, and other fixed charges.
 Activity-based costing entails defining expense categories based on the specific activities being performed and
then assigning costs to the appropriate activity responsible for creating the cost.
Benchmarking the Costs of Key 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 focuses on cross-company comparison of how well basic functions and processes in the value
chain are performed.
 The objectives of benchmarking are to understand the best practices in performing an activity, to learn how lower
costs are actually achieved, and to take action to improve a company’s cost competitiveness .
 Sometimes cost benchmarking can be accomplished by collecting information from published reports, trade
groups, and industry research firms and by talking to knowledgeable industry analysts, customer and suppliers
(customers, suppliers, and joint venture partners often make willing benchmarking allies).
 Usually, though, benchmarking requires field trips to the facilities of competing or non-competing companies to
observe how things are done, ask questions, compare practices and processes, and perhaps exchange data on
productivity, staffing levels, time requirements, and other cost components.
 Several newly formed councils and association (The International Benchmarking Clearinghouse and the Strategic
Planning Institute’s Council on Benchmarking) to gather benchmarking data, do benchmarking studies, and
distribute information about best practices and the costs of performing activities to client/members without
identifying the sources.

Strategic Options for Achieving Cost Competitiveness (Three areas)

Attacking the High Costs of Items Purchased from Suppliers:
When a firm’s cost disadvantage stems from the costs of items purchased from suppliers (the upstream end of the
industry chain), company managers can take any of several strategic steps:
 Negotiate more favorable prices with suppliers
 Work with suppliers to help them achieve lower costs
 Try to use lower-priced substitute inputs
 Integrate backward to gain control over the costs of purchased items
 Do a better job of managing the linkages between suppliers’ value chains and the company’s own chain
 Try to make up the difference by cutting costs elsewhere in the chain

Attacking Cost Disadvantages in the Forward Portion of the Industry Value Chain
A company’s strategic options for eliminating cost disadvantages in the forward end of the value chain system
include:
 Pushing distributors and other forward channel allies to reduce their markups
 Working closely with forward channel allies/customers to identify win-win opportunities to reduce costs.
 Changing to a more economical distribution strategy, including forward integration
 Trying to make up the difference by cutting costs earlier in the cost chain

Attacking the High Costs of Internally Performed Activities:

When the source of a firm’s cost disadvantage is internal, managers can use any of nine strategic approaches to restore
cost parity:
 Streamline the operation of high cost activities
 Reengineer business processes and work practices
 Eliminate some cost producing activities altogether by revamping the value chain system
 Relocate high cost activities to geographic areas where they can be performed more cheaply
 See if certain activities can be outsourced from vendors or performed by contractors more cheaply than they can
be done internally
 Invest in cost saving technological improvements
 Innovate around the troublesome cost components as new investments are made in plant and equipment
 Simplify the product design so that it can be manufactured more economically
 Make up the internal cost disadvantage though savings in the backward and forward portions of the value chain
system

Question 4: How Strong Is the Company’s Competitive Position?

A broader assessment needs to be made of a company’s competitive position and competitive strength. Particular
issues that merit examination include
(1) whether the firm’s market position can be expected to improve or deteriorate if the present strategy is continued,
(2) how the firm ranks relative to key rivals on each industry key success factor and each relevant measure of
competitive strength and resource capability,
(3) whether the firm enjoys a competitive advantage over key rivals or is currently at a disadvantage, and
(4) the forces, competitive pressures, and the anticipated moves of rivals.
The Signs of Strength and Weakness in a Company’s Competitive Position
Signs of Competitive Strength Signs of Competitive Weakness
- Important resource strengths, core competencies, and - Confronted with competitive disadvantages
competitive capabilities - Losing ground to rival firms
- A distinctive competence in a competitively - Below average growth in revenues
important value chain activity - Short on financial resources
- Strong market share - A slipping reputation with customers
- A pace setting or distinctive strategy - Trailing in product development and product innovation
- Growing customer base and customer loyalty capability
- Above average market visibility - In a strategic group destined to lose ground
- In a favorably situated strategic group - Weak in areas where there is the most market potential
- Well positioned in attractive market segments - A higher cost producer
- Strongly differentiated products - Too small to be a major factor in the marketplace
- Cost advantages - Not in good position to deal with emerging threats
- Above average profit margins - Weak product quality
- Above average technological and innovational capability - Lacking skills, resources, and competitive capabilities
- A creative, entrepreneurially alert management in key areas
Competitive Strength Assessments
The most telling way to determine how strongly a company holds its competitive position is to quantitatively assess
whether the company is stronger or weaker than close rivals on each of the industry’s key success factors and on each
pertinent indicator of competitive capability and potential competitive advantage.
 Step 1 is to make a list of the industry’s key success factors and most telling determinants of competitive
advantage and disadvantage (6-10 usually)
 Step 2 is to rate the firm and its key rivals on each strength indicator. Rating scales from 1 to 10 are best to use,
although ratings of stronger (+), weaker (-), and about equal (=) may be appropriate when information is scanty
and assigning numerical scores conveys false precision.
 Step 3 is to sum the individual strength overall rating to get an measure of competitive strength of each competitor.
 Step 4 is to draw conclusions about the size and extent of the company’s net competitive advantage or
disadvantage and to take specific note of those strength measures where the company is weakest or strongest.
Key Success Factor Weight Company Rival 1 Rival 2 Rival 3
KSF 1 30% Score Score Score Score
KSF 1 20% Score Score Score Score
KSF 1 10% Score Score Score Score
KSF 1 10% Score Score Score Score
KSF 1 10% Score Score Score Score
KSF 1 10% Score Score Score Score
KSF 1 10% Score Score Score Score
Total 100% Total Total Total Total
Knowing where a company is competitively strong and where it is weak is essential in crafting a strategy to strengthen
its long-term competitive position. As a general rule, a company should try to convert its competitive strengths into
sustainable competitive advantage and take strategic actions to protect against its competitive weaknesses. At the same
time, competitive strength ratings point to which rival companies may be vulnerable to competitive attack and the
areas where they are weakest.

Question 5: What Strategic Issues Does the Company Face?

The final analytical task is to zero in on the issues management needs to address in forming an effective strategic action plan. To
pinpoint issues for the company’s strategic action agenda, managers ought to consider the following strategic issues:
 Does the present strategy offer attractive defenses against the five competitive forces – particularly those that are
expected to intensify in strength?
 Should the present strategy be adjusted to better respond to the driving forces at work in the industry?
 Is the present strategy closely matched to the industry’s future key success factors?
 Does the present strategy adequately capitalize on the company’s resource strengths?
 Which of the company’s opportunities merit top priority? Which should be given lowest priority? Which are best
suited to the company’s resource strengths and capabilities?
 What does the company need to do to correct its resource weaknesses and to protect against external threats?
 To what extent is the company vulnerable to the competitive efforts of one or more rivals and what can be done
to reduce this vulnerability?
 Does the company possess competitive advantage or must it work to offset competitive disadvantage?
 Where are the strong spots and weak spots in the present strategy?
 Are additional actions needed to improve the company’s cost position, capitalize on emerging opportunities, and
strengthen the company’s competitive position?