Chapter 4: Evaluating A Company's Resources and Competitive Position
Chapter 4: Evaluating A Company's Resources and Competitive Position
Chapter 4: Evaluating A Company's Resources and Competitive Position
McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Learning Objectives
1. Understand how to evaluate a company’s internal
situation and capabilities and identify the resource
strengths capable of becoming the cornerstone of
the company’s strategic approach.
2. Grasp how and why activities performed internally
by a company and those performed externally by
its suppliers and forward channel allies determine a
company’s cost structure and ability to compete
successfully.
3. Learn how to evaluate a company’s competitive
strength relative to key rivals.
4. Understand the role and importance of industry and
competitive analysis and internal situation analysis
in identifying strategic issues company managers
must address.
4-2
Chapter Roadmap
Question 1: How Well Is the Company’s
Present Strategy Working?
Question 2: What Are the Company’s
Resource Strengths and Weaknesses and
Its External Opportunities and Threats?
Question 3: Are the Company’s Prices and
Costs Competitive?
Question 4: Is the Company Competitively
Stronger or Weaker than Key Rivals?
Question 5: What Strategic Issues and
Problems Merit Front-Burner Managerial
Attention?
4-3
Company Situation Analysis:
The Key Questions
1. How well is the company’s
present strategy working?
2. What are the company’s resource
strengths and weaknesses and its
external opportunities and threats?
3. Are the company’s prices and
costs competitive?
4. Is the company competitively
stronger or weaker than key rivals?
5. What strategic issues merit
front-burner managerial attention?
4-4
Figure 4.1: Identifying Components of a Single-Business Company’s Strategy
4-5
Question 1: How Well Is the Company’s
Present Strategy Working?
Key Considerations
Must begin by understanding what the strategy is
Identify competitive approach
Low-cost leadership?
Differentiation?
Best-cost provider?
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
Identify functional strategies
4-6
Key Indicators of How Well
the Strategy Is Working
Trend in sales and market share
Acquiring and/or retaining customers
Trend in profit margins
Trend in net profits, EPS, and ROE
Overall financial strength and credit rating
Efforts at continuous improvement activities
Trend in stock price
Image and reputation with customers
Leadership role(s) – Technology,
product quality, innovation, etc.
4-7
Question 2: What Are the Company’s Strengths,
Weaknesses, Opportunities and Threats ?
4-13
Determining the Competitive
Power of a Company Resource
To qualify as competitively valuable or to
be the basis for sustainable competitive
advantage, a “resource” must pass 4
tests:
1. Is the resource really competitively superior?
4-17
Identifying External Threats
Some possibilities:
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 and/or burdensome
government policies
4-18
Role of SWOT Analysis in
Crafting a Better Strategy
S W O T analysis involves more than
just developing the 4 lists of strengths,
weaknesses, opportunities, and threats
The most important part of S W O T analysis is
4-20
Question 3: Are the Company’s
Prices and Costs Competitive?
Benchmarking
4-21
Concept: Company Value Chain
A company’s business consists of all activities
undertaken in designing, producing, marketing,
delivering, and supporting its product or service
All these activities 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 of
the value for customers is created
Support activities – Facilitate
performance of primary activities
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Figure 4.3: A Representative Company Value Chain
4-23
Characteristics of Value Chain Analysis
4-27
Activity-Based Costing: A Key
Tool in Analyzing Costs
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 according
to specific activities performed and
Assigning costs to the activity
responsible for creating the cost
4-28
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 defined
versus broadly defined activities
4-32
Options to Correct
Internal Cost Disadvantages
Implement use of best practices throughout company
Eliminate some cost-producing activities
altogether by revamping value chain system
Relocate high-cost activities to
lower-cost geographic areas
See if high-cost activities can be performed
cheaper by outside vendors/suppliers
Invest in cost-saving technology
Innovate around troublesome cost components
Simplify product design
Make up difference by achieving savings in
backward or forward portions of value chain system
4-33
Options to Correct a
Supplier-Related Cost Disadvantage
Pressure suppliers for lower prices
4-37
Question 4: Is the Company Stronger
or Weaker than Key Rivals?
4-38
Assessing a Company’s
Competitive Strength vs. Key Rivals
1. List industry key success factors and other
relevant measures of competitive strength
2. Rate firm and key rivals on each factor using
rating scale of 1 to 10 (1 = very weak; 5 =
average; 10 = very strong)
3. Decide whether to use a weighted or
unweighted rating system (a weighted system
is superior because chosen strength measures
are unlikely to be equally important)
4. Sum individual ratings to get an overall
measure of competitive strength for each rival
5. Based on overall strength ratings, determine
overall competitive strength of firm
4-39
Table 4.4: Illustrations of Unweighted
and Weighted Strength Assessments
4-40
Why Do a Competitive
Strength Assessment ?
Reveals strength of firm’s competitive position
vis-à-vis key rivals
Shows how firm stacks up against rivals,
measure-by-measure – pinpoints firm’s
competitive strengths and competitive
weaknesses
Indicates whether firm is at a competitive
advantage / disadvantage against each rival
Identifies possible offensive attacks (pit
company strengths against rivals’ weaknesses)
Identifies possible defensive actions (a need to
correct competitive weaknesses)
4-41
Question 5: What Strategic Issues
Merit Managerial Attention?
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 position