4-1 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter

4
Analyzing a
Company’s Resources
and Competitive Position

Screen graphics created by:

Jana F. Kuzmicki, Ph.D.
Troy State University-Florida and Western Region

4-2 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 “Before executives can
chart a new strategy, they
must reach common
understanding of the
company’s current position.”
W. Chan Kim and Renee Mauborgne
 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?
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 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?
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 Fig. 4.1: Identifying the Components of
a Single-Business Company’s Strategy

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 Q #1: How Well Is the Company’s
Present Strategy Working?
Key Issues
◆ Identify competitive approach
➔ Low-cost leadership
➔ Differentiation
➔ Focus on a particular market niche
◆ Determine competitive scope
➔ Geographic market coverage
➔ Operating stages in industry’s production/distribution chain
◆ Examine recent strategic moves
◆ Identify functional strategies
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 Approaches to Assess How Well
the Present Strategy Is Working
◆ Qualitative assessment – ◆ Quantitative assessment –
What is the strategy? What are the results?
➔ Completeness ➔ Is company achieving its
financial and strategic
➔ Internal consistency objectives?
➔ Rationale ➔ Is company an above-
average industry
➔ Relevance performer?

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 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, ROI, and EVA
◆ Overall financial strength and credit ranking
◆ Efforts at continuous improvement activities
◆ Trend in stock price and stockholder value
◆ Image and reputation with customers
◆ Leadership role(s) – Technology, quality,
innovation, e-commerce, etc.
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 Q #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

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 Identifying Resource Strengths
and Competitive Capabilities
◆ A strength is something a firm does well or an attribute that
enhances its competitiveness
➔ Valuable competencies or know-how
➔ Valuable physical assets
➔ Valuable human assets
➔ Valuable organizational assets
➔ Valuable intangible assets
➔ Important competitive capabilities
➔ An attribute that places a company in a position of market
advantage
➔ Alliances or cooperative ventures with partners

Resource strengths and competitive

capabilities are competitive assets!
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 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

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 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
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 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 results from collaboration
among different parts of a company
◆ Typically, core competencies reside in a company’s
people, not in assets on a balance sheet
◆ A core competence gives a company a
potentially valuable competitive capability
and represents a definite competitive asset
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 Examples: Core Competencies
◆ Expertise in integrating multiple technologies
to create families of new products
◆ Know-how in creating operating systems
for cost efficient supply chain management
◆ Speeding new/next-generation products to market

◆ Better after-sale service capability

◆ Skills in manufacturing a high quality product

◆ System to fill customer orders accurately and swiftly

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 Distinctive Competence -- A
Competitively Superior Resource
◆ A distinctive competence is a competitively significant
activity that a company performs better than its
competitors
◆ A distinctive competence
➔ Represents a competitively valuable #1
capability rivals do not have
➔ Presents attractive potential for
being a cornerstone of strategy
➔ Can provide a competitive edge in the marketplace —
because it represents a competitively superior resource
strength
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 Examples: Distinctive
Competencies
◆ Sharp Corporation
➔ Expertise in flat-panel display technology
◆ Toyota and Honda
➔ Low-cost, high-quality manufacturing
capability and short design-to-market cycles
◆ Intel
➔ Ability to design and manufacture
ever more powerful microprocessors for PCs
◆ Wal-Mart
➔ Low-cost distribution and use of
state-of-the-art retail technology
4-17 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 Determining the Competitive
Value 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 hard to copy?

2. Does the resource have staying power –

is it durable?

3. Is the resource really competitively superior?

4. Can the resource be trumped by

the different capabilities of rivals?

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 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!
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4-21 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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

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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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 Role of SWOT Analysis in
Crafting a Better Strategy
◆ The most important part of S W O T analysis is not
developing the 4 lists of strengths, weaknesses,
opportunities, and threats, but rather
➔ Using the 4 lists to draw conclusions
about a company’s overall situation and
➔ Acting on the conclusions to
◼ Better match a company’s strategy to its
resource strengths and market opportunities,
◼ Correct the important weaknesses, and

◼ Defend against external threats

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 Fig. 4.2: The Three Steps
of SWOT Analysis

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 Q #4: 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 analysis

◆ Key analytical tools

➔ Value chain analysis

➔ Benchmarking

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 The Concept of a
Company Value Chain
◆ A company’s business consists of all activities
undertaken in designing, producing, marketing,
delivering, and supporting its product or service
◆ A company’s value chain consists of a linked set of
value-creating activities performed internally
◆ The value chain contains two types of activities
➔ Primary activities – where most of
the value for customers is created
➔ Support activities – facilitate
performance of the primary activities
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 Fig. 4.3: Representative
Company Value Chain

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 Characteristics of
Value Chain Analysis
◆ Combined costs of all activities in a company’s value
chain define the 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
4-29 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 Why Do Value
Chains of Rivals Differ?
◆ Several factors can cause differences
in value chains of rival companies
➔ Internal operations

➔ Strategy

➔ Approaches used in execution of the strategy

➔ Underlying economics of the activities

◆ Differences complicate task of assessing

rivals’ relative cost positions
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 The Value Chain System
for an Entire Industry
◆ Assessing a company’s cost competitiveness involves
comparing costs all along the 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
◆ Forward channel allies’ value chains are relevant
because
➔ Costs and margins are part of price paid
by ultimate end-user
➔ Activities performed affect end-user satisfaction

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 Fig. 4.4: Representative Value
Chain for an Entire Industry

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 Example: Value Chain Activities
Pulp & Paper Industry

Timber farming

Logging

Pulp mills

Papermaking

Distribution
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 Example: Value Chain Activities
Home Appliance Industry

Parts and components manufacture

Assembly

Wholesale distribution

Retail sales

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 Example: Value Chain Activities
Soft Drink Industry
Processing of basic ingredients
Syrup manufacture
Bottling and can filling
Wholesale distribution
Advertising Albertson’s

Retailing
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 Example: Value Chain Activities
Software Computer Industry

Programming

Disk loading

Marketing

Distribution

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 Developing Data to Measure a
Company’s Cost Competitiveness
◆ After identifying key value chain activities, the next step
involves breaking down departmental cost accounting
data into costs of performing specific activities
◆ 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
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 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
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4-39 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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
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 Objectives of Benchmarking
◆ Identify best practices in performing an activity

◆ Understand the best practices in performing

an activity – learn what is the “best” way
to do a particular activity from those
demonstrating they are “best-in-world”

◆ Learn how other firms achieve lower costs

◆ Take action to improve company’s cost competitiveness

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 Ethical Standards in
Benchmarking: Do’s and Don’ts
◆ Avoid talk about pricing or
competitively sensitive costs

◆ Don’t ask rivals for sensitive data

◆ Don’t share proprietary data without clearance

◆ Have impartial third party assemble and present

competitively sensitive cost data with no names attached

◆ Don’t disparage a rival’s business to outsiders based on

data obtained
4-42 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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 costs are out-of-line, high-cost activities can exist
in any of three areas in the industry value chain
1. Suppliers’ activities
2. Company’s own internal activities
3. Forward channel activities

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

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 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
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4-45 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 Translating Performance of Value Chain
Activities to Competitive Advantage
◆ A company can create competitive advantage by
managing its value chain to
➔ Integrate knowledge and skills of employees in
competitively valuable ways
➔ Leverage economies of learning / experience
➔ Coordinate related activities in ways
that build valuable capabilities
➔ Build dominating expertise
in a value chain activity critical
to customer satisfaction or market success

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

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 Q. #4: Is the Company Stronger
or Weaker than Key Rivals?
◆ Overall competitive position involves
answering two questions

➔ How does a company rank relative

to competitors on each important
factor that determines market success?

➔ Does a company have a net

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

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 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 position of firm
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4-51 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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)
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 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!
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 Identifying the Strategic Issues
◆ 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?
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 Stating the Issues
Clearly and Precisely
◆ A well-stated issue involves such phrases as
➔ “How to . . . ?”
➔ “Whether to . . . ?”
➔ “What should be done about . . . ?”
◆ Issues need to be precise, specific,
and “cut straight to the chase”
◆ Issues on the “the worry list”
raise questions about
➔ What actions need to be considered
➔ What to think about doing
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