Chapter 4: Evaluating a

Company’s Resources and

Competitive Position

Screen graphics created by:

Jana F. Kuzmicki, Ph.D.
Troy University

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 ?
 S W O T represents the first
letter in
 S trengths
S W
 W eaknesses
 O pportunities
 T hreats O T
 For a company’s strategy to
be well-conceived, it must be
 Matched to its resource
strengths and weaknesses
 Aimed at capturing its best
market opportunities and
erecting defenses against
external threats to its well-
being

4-8
 Identifying Resource Strengths
and Competitive Capabilities
 A strength is something a firm does well
or an attribute that enhances its
competitiveness
 Valuable skills, competencies, or
capabilities
 Valuable physical assets
 Valuable human assets
 Valuable organizational assets
 Valuable intangible assets
 Important competitive capabilities
 An attribute placing a company in a position
of market advantage
 Alliances or cooperative ventures with
partners

Resource strengths and competitive

capabilities are competitive assets!
4-9
Competencies vs. Core Competencies
vs. Distinctive Competencies
 A competence is the product of
organizational learning and
experience and represents real
proficiency in performing an
internal activity
 A core competence is a well-
performed
internal activity central (not
peripheral or incidental) to a
company’s competitiveness
and profitability
 A distinctive competence is a
competitively valuable activity a
company performs better than its
rivals

4-10
Company Competencies and Capabilities
 Stem from skills, expertise, and
experience usually representing
an
 Accumulation of learning over
time and
 Gradual buildup of real
proficiency in
performing an activity
 Involve deliberate efforts to
develop the ability to do something,
often entailing
 Selecting people with requisite
knowledge and skills
 Upgrading or expanding individual
abilities
 Molding work products of
individuals into a cooperative
effort to create organizational
ability
 A conscious effort to create
intellectual capital 4-11
 Core Competencies –
A Valuable Company Resource
 A competence becomes a core
competence when the well-
performed activity is central to a
company’s competitiveness and
profitability
 Often, a core competence is
knowledge-based, residing in
people,
not in assets on a balance sheet
 A core competence is typically the
result of cross-department
collaboration
 A core competence gives a
company a
potentially valuable competitive
capability
and represents a definite
competitive asset 4-12
 Distinctive Competence –
A Competitively Superior Resource
 A distinctive competence is
a competitively valuable
activity that a company
performs better than its
competitors
 A distinctive competence is
#1
a competitively potent
resource
source because it
 Gives a company a
competitively valuable
capability unmatched by
rivals
 Can underpin and add real
punch
to a company’s strategy
 Is a basis for sustainable
competitive advantage
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?

2. Is the resource rare – is it

something rivals lack?

3. Is the resource hard to

copy?

4. Can the resource be

trumped by
the different capabilities
of rivals?

4-14
What Is a Resource-Based Strategy?
 Companies with competitively
valuable resource strengths and
competencies
often deploy these capabilities to
 Boost the competitive power
of their overall strategy
 Bolster their position in the
marketplace
 Resource-based strategies
 Attempt to exploit company
resources to offer value to
customers in ways rival cannot
match
 Can focus on eroding the
competitive potency of a rival
by developing different
resources that effectively
substitute for the strengths of
the rival

4-15
 Identifying Resource Weaknesses
and 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
areas

Resource weaknesses and deficiencies

are competitive liabilities!
4-16
 Identifying a Company’s
Market Opportunities
 Opportunities most relevant to a
company are those offering

 Good match with its financial and

organizational resource capabilities

 Best prospects for profitable

long-term growth

 Potential for competitive advantage

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
 Using the 4 lists to draw
conclusions
about a company’s overall
situation
 Acting on the conclusions to
 Better match a company’s
strategy to its
resource strengths and market
opportunities
 Correct the important
weaknesses
 Defend against external threats

4-19
Figure 4.2: The Three Steps of SWOT Analysis

4-20
Question 3: Are the Company’s
Prices and Costs Competitive?

 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

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

4-22
Figure 4.3: A Representative Company Value Chain

4-23
Characteristics of Value Chain Analysis

 Combined costs of all activities in a

company’s value chain define a
company’s internal cost structure
 Compares a firm’s costs activity
by activity against costs of key rivals
 From raw materials purchase to

 Price paid by ultimate customer

 Pinpoints which internal activities

are a source of cost advantage or
disadvantage

4-24
Why Do Value Chains of Rivals Differ?
 Several factors give rise to
differences
in value chains of rival companies
 Different strategies
 Different operating practices
 Different technologies
 Different degrees of vertical
integration
 Some companies may perform
particular activities internally while
others outsource them
 Differences among the value
chains of competing companies
complicate task of assessing rivals’
relative cost positions

4-25
 The Value Chain System
for an Entire Industry
 Assessing a company’s cost
competitiveness involves comparing
costs all along an industry’s value
chain
 Suppliers’ value chains are relevant
because
 Costs, performance features, and
quality of inputs provided by suppliers
influence a firm’s own costs and
product performance
 Value chains of distributors and
retailers are relevant because
 Their costs and profit margins
represent “value added” and are part
of the price paid by ultimate end-user
 Activities they perform affect
end-user satisfaction

4-26
Figure 4.4: Representative Value Chain for an Entire Industry

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
 Guideline – Develop separate cost
estimates for activities
 Having different economics
 Representing a significant or growing
proportion of costs

4-29
 Benchmarking Costs of
Key Value Chain Activities
 Focuses on cross-company
comparisons of how certain
activities are performed and costs
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

4-30
Objectives of Benchmarking
 Identify best and most efficient
means of performing various
value chain activities
 Learn what is the “best” way to
perform a particular activity from
those companies who have
demonstrated that they are “best-
in-industry” or “best-in-world” at
performing the activity
 Learn what other firms do to
perform an activity at lower cost
 Figure out what actions to take
to improve a company’s own cost
competitiveness

4-31
 What Determines If a
Company Is Cost Competitive?
 Cost competitiveness depends on how
well a company manages its value chain
relative to how well competitors manage
their value chains
 When a company’s costs are out-of-line, the
activities responsible for the higher costs
may be due to any of three parts of industry
value chain
1. Activities performed by suppliers
2. A company’s own internal activities
3. Activities performed by forward channel
allies

Internally Activities,
Activities,
Performed Costs, & Buyer/User
Costs, &
Activities, Margins of Value
Margins of
Costs, & Forward Chains
Suppliers
Margins Channel Allies

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
 Switch to lower-priced
substitutes
 Collaborate closely with
suppliers to identify mutual
cost-saving opportunities
 Arrange for just-in-time
deliveries from suppliers to
lower inventory and internal
logistics costs
 Integrate backward into
business
of high-cost suppliers

4-34
Options to Correct a Cost Disadvantage Associated
With Activities of Forward Channel Allies
 Pressure dealer-distributors
and other forward channel
allies to reduce their costs to
make the final price to buyers
more competitive with prices of
rivals
 Work closely with forward
channel allies to identify win-
win opportunities to reduce
costs
 Change to a more economical
distribution strategy
 Switch to cheaper distribution
channels
 Integrate forward into
company-owned retail outlets

4-35
Translating Performance of Value Chain
Activities into Competitive Advantage
 A company can create competitive
advantage by out-managing rivals
in performing value chain activities
in either/both of two ways

Option 1: Develop competencies and

capabilities
that rivals don’t have or
can’t match and thereby
create a resource or
capability-based
competitive advantage

Option 2: Perform value chain activities

at a lower overall cost
than rivals and thereby
create a cost-based
competitive advantage

4-36
 Figure 4.5: Translating Company Performance of
Value Chain Activities into Competitive Advantage

4-37
Question 4: Is the Company Stronger
or Weaker than Key Rivals?

 Whether a company is
competitively stronger or weaker
than key rivals hinges on the
answers to two questions
 How does the company rank
relative to competitors on
each
important factor that determines

market success?

 Does the company have a net

competitive advantage or
disadvantage
vis-à-vis major competitors?

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

A “good” strategy must address “what to do”

about each and every strategic issue!
4-42
A Clear Grasp of the Issues Is a
Prerequisite to Effective Action
 Issues are best couched in such
phrases as
 “How to . . . ?”
 “Whether to . . . ?”
 “What should be done about . .
. ?”
 Issues need to be precisely stated

and “cut straight to the chase”

 The issues on management’s
“worry list” represent an agenda
for action

Sharp, clear understanding of the issues is a

big assist in figuring out what to do to
address and resolve them !

4-43
Identifying the Strategic Issues:
Some Possibilities
 How to stave off market challenges
from new foreign competitors?
 How to combat price discounting of
rivals?
 How to reduce a company’s high
costs?
 How to sustain a company’s present
growth
in light of slowing buyer demand?
 Whether to expand a company’s
product line?
 Whether to acquire a rival firm?
 Whether to expand into foreign
markets rapidly or cautiously?
 What to do about aging demographics
of a company’s customer base?

4-44