Strategic advantage analysis and diagnosis

Is the process by which the strategists examine the firm's

marketing and distribution,
research and development,
production and operations,
corporate resources and personnel,
finance and accounting
factors to determine where the firm has significant competencies so it can
most effectively exploit the opportunities and meet the threats the
environment is presenting.
No firm is equally strong in all its functions. Procter & Gamble is known for its
superb marketing. Maytag is known for its outstanding production and product
design. American Telephone and Telegraph is known for its outstanding service
and personnel policies. Yet each of these firms is not strong "across the board."
Within a company, each division has varying strengths and weaknesses. So a firm
must determine what its distinctive competencies are - what makes it unique to the
competitive arena - so that it can make decisions about how to use these abilities
now and in the future.
Unless the executives are fully aware of their strategic advantages, they may not
choose the one opportunity of the many opportunities available at the time that is
likely to lead to the greatest success. Unless they regularly analyze their
weaknesses, they will be unable to face the environmental threats effectively . In
effect, these assessments must be combined with environmental analysis so that
decisions can be made about how to use or add strengths and minimize
weaknesses.
This chapter focuses on how to analyze the strategic factors realistically and
diagnose their significance. It is at this point that executives can develop a strategic
advantage profile[ SAP] and match it with an environmental threat and opportunity
profile [ETOP]

S trategic advantage analysis is the

process by which the strategists
examine the department’s resources and
capabilities in key areas to determine
where the security department has
signifi cant strengths and weaknesses
so that it can exploit the opportunities
and meet the threats in the environment.
The essential purpose of each analysis
is to take advantage of the distinctive
competencies of the department by way
of:
● Following a course of action different
from the existing one.
● Developing a strategy which
will provide different and better
outcome.
● Grasping new opportunities.
It is possible to list the factors and
attributes which should be of common
concern. The major common attributes
are:
● Security departments’ form and
structure.
● Top management’s interest and skill.
Since strategic advantage profi le
is a summary statement of department
capabilities, in summarizing the functional
competencies, a comparative
view needs to be taken in the light of
external conditions and time horizons
of projections. For example, while
comparing the level of competencies
of executive staff, one may fi nd it to be
relatively higher than that of any other
department in competing fi rms; as such it
should be regarded as a weakness. But if
the market demand shows an increasing
trend, the apparent weakness should be
considered strength.
In the preparation of strategic
advantage profi le one must also reckon
the probability of the strength or
advantage continuing in future and how
long it can be relied upon. A department
may identify its staff as high performers
and competent as a strength; however,
if the company environment is not
conducive to creative and innovative
activities or independent decision
making etc., the staff can hardly be
regarded as potential strength unless the
company removes the weaknesses. No
doubt that the company should recognize
the importance of its unique capabilities
and capitalize the distinctive advantages
rather than spreading its resources
thinly across a number of functional
departments.

STRATEGIC ADVANTAGE FACTORS

In Chapter 3, we discussed the environmental factors that the strategists analyze
and diagnosis. Now we shall examine the strategic advantage factors that
management analyzes and diagnoses to determine the internal strengths and
weaknesses with which it must face the opportunities in and threats from the
environment.
All that will be attempted here is a listing of the most crucial strategic advantage
factors and a presentation of brief illustrations of the strategic advantages [and
weaknesses] that are possible. The order of discussion does not indicate importance
- it is just a convenient ordering of line and staff factors and follows a fairly typical
budgeting format. But you should remember that each area interacts with the
others.
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MARKETING AND DISTRIBUTION FACTORS

EXHIBIT 4.3 Strategic Advantage Factors: Marketing and Distribution
1. Competitive structure and market share: To what extent has the firm established
a strong market share in the total market or its key submarkets?
2. Efficient and effective market research system.
3. The product-service mix: quality of products and services.
4. Product-service line: completeness of product-service line and product-service
mix; phase of life cycle the main products and service are in.
5. Strong new-product and new-service leadership.
6. Patent protection (or equivalent legal protection for services).
7. Positive feeling about the firm and its products and services on the part of the
ultimate consumer.
8. Efficient and effective packaging of products (or the equivalent for services).
9. Effective pricing strategy for products and services.
10. Efficient and effective sales force: close ties with key customers. How
vulnerable are we in terms of concentrating on sales to a few customers?
11. Effective advertising: Has it established the company's product or brand image
to develop loyal customers?
12. Efficient and effective marketing promotion activities other than advertising.
13. Efficient and effective service after purchase
14. Efficient and effective channels of distribution and geographic coverage,
including internal efforts.
Exhibit 4.3 is a list of the marketing and distribution factors. The strategist is
looking to see if the firm is substantially and strategically stronger in marketing
and distribution than its competitors.
Some firms are strong in the market, and this provides them with a strategic
advantage in launching new products and services and in defending and increasing
their market share on present products and services.
As you look at the factors, you will see that strength can come from a variety of
approaches. The operational marketing questions of segmentation, positioning, and
mix [product, price, promotion, distribution] are quite important to the firm`s
ability to compete effectively. Of course, firms compete on any and all of these
factors. Some firms prefer approaches involving low prices, lower quality, more
promotion, and wide distribution; others prefer orientations toward higher prices,
higher quality,and custom design.
An assessment of the weaknesses in relation to market potential also suggests areas
where improvements can be made. For instance, if there appears to be a gap in the
product line, new-product development or acquisition is called for to fill out the
existing line or create new ones. A gap in distribution might lead to efforts to build
intensity, exposure, or coverage. If usage gaps exist, price or promotion can lead to
increased frequency of purchase, or new uses or users [customers] can be found for
products.
Just as important as these questions are other areas which focus on how the
marketing organization functions. For instance, the organization may have the
ability to accumulate better knowledge about its markets than the competition has.
If properly used, this can become a major advantage with respect to assessing the
need for changes and determining their timing. Similarly, if the marketing
organization maintains good relationships with production or new-product
engineering, the translation of market-place needs into the timely creation of goods
or services can lead to a competitive edge.
Finally, the importance of marketing to the overall success of the company needs
evaluation. In some firms, such as those which supply to a few customers who
specify their precise needs [e.g defense contractors], the marketing function need
not be particularly strong. In other industries, the greatest share of internal resource
allocation may go to marketing units [e.g, consumer products producers]. As
competitive needs are assessed, the relative strength of marketing and the way it is
managed in relation to major competitors may lead to indications of strength or
weakness.
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R&D AND ENGINEERING FACTORS

EXHIBIT 4.5 Strategic Advantage Factors: R&D and Engineering
1. Basic research capabilities within the firm.
2. Development capability for product engineering
3. Excellence in product design.
4. Excellence in process design and improvements.
5. Superior packaging developments being created.
6. Improvements in the use of old or new materials.
7. Ability to meet design goals and customer requirements.
8. Well-equipped laboratories and testing facilities.
9. Trained and experienced technicians and scientists.
10. Work environment suited to creativity and innovation.
11. Managers who can explain goals to researchers and research results to higher
managers.
12. Ability of unit to perform effective technological forecasting.
The R&D [research and engineering function can be a strategic advantage for two
prime reasons [1] it can lead to new or improved products for marketing, and [2] it
can lead to the development of improved manufacturing or materials processes to
gain cost advantages through efficiency [which could help to improve pricing
policies or margins]. Exhibit 4.5 presents the list of factors which might be
analyzed in the R&D and engineering area.
In Chapter 3 we noted that major technological changes often ocurred outside the
immediate industry. Even so, research and development can provide significant
strength for the ongoing business. Tavel categorizes R&D work into five types:
exploratory research, new product or process research, improvement research, cost
reduction research, and raw material adaptation research. Each of these approaches
can be taken by a firm. But the process is more commonly viewed as proceeding
through the stages of basic research, developmental research, and
commercialization.
Exhibit 4.6 graphically represents the time savings in producing a new product,
process, or service with accelerated developmental research. One axis shows the
time lapse from a basic research breakthrough to commercialization, and the other
shows the R&D states.
The actual improvement in time will vary, but under unaccelerated conditions, the
normal gap between a research breakthrough and commercialization is about 25
years. The figure was developed by looking back from commercialization to basic
research. Accurate forecasts of the commercial applications of basic or
developmental research are rare and difficult to produce. But for the individual
firm assessing its own R&D capabilities, the key is to examine the ability to
produce product or process improvements and the timing and effectiveness of its
future efforts.

Exhibit 4.6
A firm can choose to pursue an offensive approach to R&D or pursue defensive "fast second" or
"imitator" approaches. Exhibit 4.7 describes the kinds of differences you would expect in these
approaches to R&D. The offensive approach would accelerate the applied and developmental
research efforts (B1 in Exhibit 4.6). The "fast second" approach would emphasize accelerated
developmental research (B2 in Exhibit 4.6). The "imitator" would wait for commercial
developments and follow up with minor changes of improvements (B3 in Exhibit 4.6).
As with marketing, the importance of R&D to success in business is much higher for some than
for others. For instance, computer or pharmaceutical firms generally have much larger R&D
budgets [5 or 6 percent of sales] than many other industries [which are in the 1 percent range.]
Yet even there, some firms choose to innovate with new products, while others develop new
applications or minor improvements.
It might be noted that while many U.S. firms have been lagging in long-term commitment to
investment in risky R&D with unknown time and payoff lags, Japanese companies have surged
ahead.
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PRODUCTION AND OPERATIONS MANAGEMENT FACTORS

EXHIBIT 4.9 Strategic Advantage Factors: Production and Operations
Management
1. Lower total cost of operations compared with competitors' total costs.
2. Capacity to meet market demands.
3. Efficient and effective facilities.
4. Raw materials and subassemblies costs.
5. Adequate availability of raw materials and subassemblies.
6. Efficient and effective equipment and machinery.
7. Efficient and effective offices.
8. Strategic location of facilities and offices.
9. Efficient and effective inventory control systems.
10. Efficient and effective procedures: design, scheduling, quality
control.
11. Efficient and effective maintenance policies.
12. Effective vertical integration.
Exhibit 4.9 lists the strategic advantage factors for production and operations
management.
If we were to identify one functional area were North American firms have become
less competitive in relation to overseas competitors, it would be operations. The
United States used to be cited as the leader in this area. Now it seems that
Japanese, Taiwanese, Korean, Or European firms are the leaders. In particular, the
Japanese have pushed hard on factors 1, 6, and 10 through the use of robots [five
times more in use than in the United States, even though they were invented by
Americans] and quality control circles in a national effort to improve productivity.
If we are to be able to compete, we cannot continue to yield whole businesses like
television and radio manufacturing and clothing to overseas competition. Steel may
be the next major loss. Efforts are being made now in U.S. industry to improve
quality. "Doing it right the first time" may provide more benefit to the bottom line
than any realistic boost in sales volume - and frequently for an investment that is
returned in less than a year.
Consider the U.S steel firms. Their facilities are out of date, and they haven`t been
able to raise funds to,modernize. They are at a serious disadvantage against the
Japanese on factors 1 and 2 though they are showing signs of making a turnaround.
With regard to factors 1 and 6, Eastern Airlines is trying to compete with Delta.
Delta's equipment is newer and less costly to operate. Delta has a cost advantage.
With the newer equipment there are fewer breakdowns, too, and so Delta has an
advantage on factor 11.
With regard to factor 3, consider the food chains. Safeway and Kroger have larger
and newer stores than A&P. A&P has had to spend large sums to try to catch up. It
is still losing business. A&P also has factor-8 problems. Many of its stores are
located in older neighborhoods with no parking. And A&P is inadequately
represented in the faster-growing areas.
Consider factors 4 and 5. Ashland Oil does not own its own crude oil. In the 1973-
1974 oil crisis, only government policy allowed it to continue in the gasoline
business .Exxon did not have these problems.
Your exposure to production and operations management provided you with tools
to help you decide how a firm can improve with regard to factors 9 to 12. An
example of weaknesses suggests how serious operations problems can be. Thus the
development of careful production planning and control systems, productivity
improvements, programs, and plant capacity and location decisions can lead to
important competitive advantages for a firm. If a firm can produce at a lower cost,
has the capacity to handle business when others can't, or can get raw materials at
favorable prices, it has a competitive advantage.
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CORPORATE RESOURCES AND PERSONNEL FACTORS

EXHIBIT 4.11 [STRATEGIC ADVANTAGE FACTORS:] CORPORATE
RESOURCES AND PERSONNEL
1] Corporate image and prestige.
2] Effective organization structure and climate.
3] Company size in relation to the industry [barrier to entry].
4] Strategic management system.
5] Enterprise's record for reaching objectives: How consistent has it
been? How well does it do compared with similar enterprises?
6] Influence with regulatory and governmental bodies.
7] Effective corporate-staff support systems.
8] Effective management information and computer systems.
9] High-quality employees.
10] Balanced functional experience and track record of top management:
Are replacements trained and ready to take over? Do the top managers
work well together as a team?
11] Effective relations with trade unions.
12] Efficient and effective personnel relations policies: staffing, appraisal and
promotion, training and development and compensation and benefits.
13] Lower costs of labor [as measured by compensation, turnover, and
absenteeism].
Exhibit 4.11 lists a set of corporate resources and personnel factors which can
provide strategic advantages for a firm. Each of the factors can add to the ability of
a firm to achieve its objectives. Some firms are well known for these factors.
General Electric, for example, has advantages with regard to most of them.
Some firms have attracted and held high-quality, highly productive, and loyal
employees and managers. IBM, Texas Instruments, and other firms are known for
this. Since these people make the decisions for all functions, this can be a crucial
advantage. Many firms have purchased other firms just to get their top-quality
managerial, professional, and other employees.
Other firms are at a strategic disadvantage because they are unionized by a union
with difficulties (United Mine Workers). Often, being unionized is a strategic
disadvantage because of the loss of flexibility or because of the higher direct costs
of labor. Some firms are unionized but have had good relations with efficient and
effective unions.
Many of these factors become particularly important when managers try to
determine whether a strategy can be implemented. Weaknesses in these areas could
lead to a decision to not attempt a given strategy because of the inability to carry it
out effectively. For example, an acquisition candidate whose organization structure
is incompatible with the structure of your firm could be a poor choice. Or a
strategy to close a plant could be affected by union contracts.
The "advantage" of size deserves special treatment since we think that too many
believe "bigger is better". A large size in relation to the competition is normally
viewed positively. It can give strength through greater economies of scale or by
providing barriers to entry. However, there are some potential weaknesses
associated with a large size. Diseconomies of scale can result from rapid increases
in size. The organization becomes more difficult to manage. This is typical of
young, overly aggressive companies. Further, large firms often become the targets
of regulators, legislators, consumer activists, and competitors; many equate size
with the potential for misuse of power. And small firms are often thought to have
an advantage of flexibility that allows them to change and maneuver, while large
firms find it more difficult to do this.
Another dilemma associated with size is its relationship to goals. A number of
studies suggest that size is not necessarily directly correlated with better
performance. For instance, expansion may entail internal diseconomies of scale.
And there may be limits to continued growth in a particular business. For instance,
Citicorp's president considered in 1977 that the firm's compounded earning growth
target set in 1971 was no longer possible: "We can't increase earnings 15% a year,
because we'd soon have 105% of the world's banking business." Porter suggests
that under certain circumstances, the size of the market share itself is related to
returns in a U-shaped fashion (see Exhibit 4.12). Hence each firm must determine
whether it is better to be a big fish in a little pond or a little fish in the sea. There
are advantages in both situations, and strength or weakness can go along with a
large size.
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FINANCE AND ACCOUNTING FACTORS

EXHIBIT. 4.13: [STRATEGIC ADVANTAGE FACTORS] FINANCE AND
ACCOUNTING
1] Total financial resources and strength.
2] Low cost of capital in relation to the industry and competitors because of stock
price and dividend policy.
3] Effective capital structure, allowing flexibility in raising additional capital as
needed; financial leverage.
4] Amicable relations with owners and stockholders.
5] Advantageous tax conditions.
6] Efficient and effective financial planning, working capital, and capital budgeting
procedures.
7] Efficient and effective accounting systems for cost, budget and profit planning,
and auditing procedures.
8] Inventory valuation policies.
Exhibit 4.13 lists some of the major strategic advantage factors in finance and
accounting. The appendix to this chapter provides a summary of financial analyses
which can be done to help you assess this area.
One objective of the analysis is to determine if the focal firm is stronger financially
than its competitors (Exhibit 4.13, factor 1). Can it hold out longer or compete
more effectively because it has the financial strength to do so?.
Another purpose of financial analysis is to help pinpoint strengths or weaknesses in
other functional areas, from operational and strategic perspectives. The other
factors listed add efficiency [factors 2,5, and 6] or a strategic value [factors 3 and
4] to a firm. The accounting staff function [factor 7] is a necessary one for legal
and management information purposes. Accounting policies for inventory
valuation [factor 8] can have strategic value when changed in response to inflation
and other external changes.
This last point suggests two other important ideas to keep in mind as the financial
position of the firm is analyzed. First, the financial value of a firm needs to be
carefully considered in terms of the basis upon which the valuation is made. Stock
market prices may reflect short-term judgments of analysts. And these judgments
may be based on changes in the accounting treatment of assets for tax purposes,
which may make returns appear better than they are. The book value may be
ridiculously out of date based on long-term historical costs or the method of
depreciation used. In either case, if a firm or subunit is being valued for acquisition
[or for divestiture or liquidation], the financial valuation process itself needs to be
assessed in addition to other factors affecting such decisions. So the assessment of
strength or weakness depends on the analytical approach and the interpretation of
"hard" numbers.
A second major issue is the working capital needs for strategic versus ongoing
operations during periods of inflation. Due to past strategic choices, firms may
have tied up so much cash that future options are limited. This happened to Ford
and Seagrams. On the other hand, cash-rich firms must determine how long
existing strengths will provide a continuous flow of funds and decide how to invest
this wisely. Sohio has this dilemma, thus timing questions are important to
financial analysis.
The final issue we wish to raise concerns the process of financial management.
Earlier we suggested that the way valuations are made influences the content of the
financial analysis. Also, other corporate resources factors were seen to be
important, including the quality of management. Factors 4,6 and 7 in Exhibit 4.13
hint at the important role of the policies and procedures established for performing
financial analysis. Thus the role of the financial executive in providing support for
planning can lead to a strategic advantage for the firm. Too often, the chief
financial manager is seen as important only at budget preparation stages or for
providing "number crunching" as input for decisions. These roles are important,
but frequently the financial executives are excluded from real involvement in
strategic planning because it is believed that they have short-term orientations,
focus on selective components rather than on comprehensive pictures, and value
precision over less tangible issues.[These remarks often apply to executives in
other functional areas as well]. As a result, decision processes can suffer from what
has been called a "paralysis of analysis." It is suggested that the chief financial
officer's tasks of forecasting capital structure, determining resource allocation and
cash flows, and raising external funds are critical functions in determining the
competitive advantage of the firm.
Thus a firm at a particular time can be strong [or weak] financially, and this
condition allows it to make [or prevents it from making] strategic changes.
Financial ratio and accounting analyses help measure this strategic advantage. But
an analysis should also be made of the process of financial management, since it,
too, can provide advantages for the firm. Of course, as suggested in the section on
corporate resources, the quality of management in any of the functional areas can
provide advantages for the firm.
Strengths usually lead to greater "slack" - a cushion of resources which allows an
organization to be flexible and adapt internally or externally. Slack enhances the
ability of a firm to choose from a greater number of alternative strategies.
Weaknesses or disadvantages limit the strategic options of a firm. The list of
resources and factors also serves as a checklist of items to analyze about a firm [or
a case] with a view to improving its operations and identifying its distinctive
competencies. It is not an exhaustive list. But it does provide a useful beginning.
TECHNIQUES OF STRATEGIC ADVANTAGE ANALYSIS
For instance, a partial but far from comprehensive list of tools might include break-
even analysis, economic order quantity formulas, economies of scale studies, linear
programming simulations, price elasticity of demand, ratio analysis, sampling and
auditing, and sensitivity analyses.
Data for analysis and diagnosis of the factors come from several sources. One
source is the data gathered in the environmental analysis and diagnosis stage of
strategic management. The other source is the internal data generated in doing
business and available from the management information system and the
functional departments [such as marketing]. One writer has suggested that the
annual report, with all its faults, is another valuable source of information. So as
before, verbal sources, documents, formal studies, or a management information
system can provide data inputs for analysis.
Then the strategist prepares the functional-area resource-deployment matrix [Exhibit 4.16]. The
firm records where it is spending its dollars and currently exerting its efforts. This information
should be recorded each year so that the firm can determine the relative importance of each
functional area [compared with competitors' functional areas] over time. This approach allows
the firm to analyze the strategic deployment of funds and its strengths and weaknesses over time
as compared with those of competitors.
We also wish to make some suggestions about how you can apply some of these techniques for
strategic analysis. First, each area needs to be considered as to what its policies and approaches
were, are, and will be. That is, how do current conditions relate to the past attainment of
objectives, future expectations, or internal requirements ? This question is critical to the overall
gap analysis, and the answer will help you determine which areas are most important for the
future. As we noted before, what is viewed as a strength now may become a weakness later.
Looking at each area over time allows you to see if advantages are being developed or are
deteriorating. For instance, a decline in the number of patents being generated may be a sign of
potential problems in R&D or new-product development. Increasing grievances may suggest
labor problems. An increase in the cost of goods sold could indicate production difficulties. A
host of indicators in each area can be examined over time. In finance, the ratios noted in the
appendix can be examined over several years, and pro formas can be prepared for the future.
Each indicator also needs to be analyzed in relation to goals or requirements. For instance, are
sales quotas being met? Does the trend in debt to equity suggest problems in meeting any
conditions of loan agreements with bankers? Are our hiring procedures meeting the requirements
of the Equal Opportunity Employment Commission so that we can continue to secure
government contracts? Any of these areas could be sources of weaknesses or strengths. For
example, your firm may be a favored employer if its hiring practices are "better" than those of
competitors.
Second, the analysis can be done on a piecemeal basis, with each area viewed independently of
the others. However, the strengths and weaknesses must be compared in relation to one another.
Trade-offs will inevitably result,but it is better to consider the needs and desires of each area
together rather than let each suboptimize. Consider Exhibit 4.17 as a case in point.
Manufacturing may see strength through a policy of long, steady mass production runs of a
limited product line. Finance may set policies which value a low finished-goods inventory and
high turnover for cash flow improvement. It may suggest capital budgeting and investment
policies which minimize the number of factories and warehouses, freight costs, etc. So far so
good; these policies could be seen as ways to improve efficiency and gain a competitive
advantage. But suppose marketing and sales efforts are directed toward the exclusive distribution
of high-quality, high-priced, customs-designed outputs. The company has developed promotion
policies to tap a market opportunity in this area. Its goal is better customer service through well-
stocked warehouses and a wider product line. Suddenly, the assessment of production and
finance strengths takes on a different meaning. And the types and numbers of personnel to
manufacture custom-designed products, staff warehouses, process and ship orders, etc., become
quite different. Clearly this is an extreme example. But the point should be clear that what may
be a strength in each area can result in overall weakness if the company is "pushing the cogs" in
opposite directions.
In a similar view, weaknesses must be compared with strengths. Weaknesses may prevent us
from taking advantage of an opportunity. They can prevent us from readily shifting strategies.
Thus instead of allowing weaknesses to dominate, it is often more fruitful to take advantage of
an opportunity by capitalizing on strengths. However, this must be done within the legitimate,
real constraints which may exist because of the firm`s weaknesses.
In addition to being compared over time in relation to goals and to one another, strengths and
weaknesses are compared in relation to environmental conditions. Usually, the comparison is
based on competitors, but it could include the firm's position relative to technological changes,
suppliers, or the product life cycle.
Most strategists are concerned with how their firms are placed strategically relative to
competitors in similar businesses. It is vital that the proper comparisons be made. For example,
as the PIMS data have shown, companies with a high degree of investment intensity are often
less profitable than those with lower investment-sales ratios. Similar differences exist if the firm
being compared is substantially different on characteristics other than investment intensity. Thus
a statement about the mission of the business as discussed in Chapter 2 becomes important as a
basis for determining the relevant comparison groups. Further, aside from the group itself, the
company within the group that you compare your firm with makes a difference with regard to the
interpretation of strengths and weaknesses. Consider ratio analysis, for example. Besides
studying changes of your organization over time, should you compare these with industry
averages or with the changes experienced by leaders? If low performers on ROI in the industry
have high liquidity, for example, is the high liquidity of your firm a strength or weakness? That
may depend on other factors unique to your firm's own situation. So caution in the interpretation
of data is required.
It is also important to compare firms which are in the same or similar phases of the product-
service life cycle. If our firm's main products or services are in the maturity stage of the life
cycle, improper comparisons would be made with a firm whose main products are in the growth
phase of the cycle.

Finally, it is important to compare strengths and weaknesses relative to their

overall significance to the strategy of the firm. Crisis managers can get bogged
down in analyzing fine details and "lose sight of the forest for the trees." Daily
operational fluctuations and problems may drive attention away from areas of
strength or weakness that are far more important to overall success. Of course,
clinical judgment is required for determining which areas and indicators these are,
and we have more to say about this in the section on diagnosis. The key is to
identify areas and indicators which top management should focus on. Four key
questions can be asked as you examine the five areas: What does this firm do
particularly well ? Do these competencies count, and if so, when? What does the
firm do poorly? Does it matter?
DESCRIPTIONS OF STRATEGIC ADVANTAGE ANALYSIS
The discussion of analysis so far has been prescriptive. There is little descriptive research on
whether and how strategists actually perform strategic advantage analysis. Details of several
studies of internal analysis are provided in the supplementary module.
On the basis of these studies two things are clear. One is that the research indicates that the
process of internal analysis is subject to internal bias by level and type of executive. There is
often disagreement among executives about the distinctive competence of their firm. Second, it
does not appear that clear patterns of strengths or weaknesses emerge. Each firm seems to be
unique in how it develops and uses its advantages.

Ohmae suggests that managers should use their analysis of strengths and
weaknesses in ways which lead to competitive advantage.
1] The first approach is to readjust resource allocation to strengthen certain areas of
the business. If management allocates resources exactly the same way competitors
do, there will be no change in competitive position. So this approach suggests that
resources should be concentrated in areas where there are
key success factors [KFS] so the firm can gain a strategic
advantage. Even though a firm may have no more total resources than
competitors, it can achieve distinction if it focuses those resources on one crucial
point.

2] It may be that the KFS

struggle is being waged, but a firm may
exploit differences between itself and a competitor. Here the
strategist either [a] makes use of the technology, sales network,
and so on, of those of its products which are not directly competing with the
products of competitors or [b] makes use of other differences in the
composition of assets. Thus relative superiority is used to avoid head-on
competition.
3] A competitor in a well-established, stagnant industry may be hard to dislodge.
Here an unconventional approach may be needed to upset the
key factors for success that the competitor has used to build
an advantage. The starting point is to challenge accepted assumptions about
the way business is done and gain a novel advantage by creating new success
factors.

innovations
4] Finally,a competitive advantage may be obtained by means of
which open new markets or result in new products. Innovation
often involves market segmentation and finding new ways of satisfying the
customer's utility function.

In each of these approaches the

principal point is to avoid doing the
same thing as the competition on the same battleground. So
the analyst needs to decide which of these approaches might be pursued to develop
a sustainable distinctive competence.
DIAGNOSIS OF THE STRATEGIC ADVANTAGES
As indicated ealier, the diagnostic process for strategic advantages parallels that
process for environmental factors. Similar factors such as the strategist's
characteristics, the strategist's job, and the strategist's environment affect the
decision. Focusing the diagnosis of strategic advantages is similar to focusing the
environmental diagnosis as described in Chapter 3. However, we will add some
other factors, since we are discussing the importance of subunits to the
organization and its strategy.
Organization theorists suggest that the most critical units are those in the "technical
core". Essentially, these are the units which perform the basic transformation of
inputs into outputs called for by the mission definition. Note that this need not
necessarily include mass production [though it could] because other types of
missions do not call for this kind of transformation. Hence banks, wholesalers,
retailers, and real estate and travel agents have a technical core that is somewhat
different from the technical core of cigarette manufacturers. The core units for the
organization in question are the primary areas for the initial diagnosis of strengths
and weaknesses.
However, other units not in the technical core attempt to build their power and
become important to the organization so that they may increase their share of
resource allocation. Identifying these units is also important for narrowing the
diagnosis of strengths and weaknesses. These units can be identified by
determining how many other units they are interconnected with, whether they have
a direct impact on the technical core units, and whether they are specialized in such
a way that they can help reduce uncertainty. Let's consider an example. Suppose
that a data processing unit builds a management information system which
provides useful data for estimates of sales and production scheduling as well as for
tracking the performance of warehouse operations. It has positioned itself to deal
with important uncertainties, and its work flow is important input for decisions by
several core units. We can expect that its potential power in the organization may
lead it to become an important unit for the diagnosis of strengths and weaknesses.
To the extent that other subunits are dependent on a given unit, it is more powerful
and requires analysis by top management.
Of course, this discussion relates essentially to functions within SBUs. At the
corporate level of analysis in a multiple-SBU firm, similar suggestions are made,
but here one is analyzing the importance of entire strategic business units to overall
corporate performance and strategy. That is, how dependent is the corporation on a
given SBU ? At this level, more global assessments of SBU strengths and
weaknesses are often made and are based on relative competitive position and
environmental opportunity. Chapter 6 examines how these factors can be combined
to assist in strategic decision making.
Once the key areas for diagnosis have been analyzed, it is useful to prepare a
strategic advantage profile [SAP] for the firm being analyzed. Similar to the ETOP,
this is a tool for providing a picture of the more critical areas,which can have a
relationship to the strategic posture of the firm in the future.
As in the preparation of an ETOP, several stages may be required before the final
SAP is displayed. That is, each of the subfactors identified in Exhibit 4.3, 4.5, 4.9,
4.11, and 4.13 should be subjected to the comparative analysis discussed in our
section on techniques for analysis. For example, a set of financial ratios (see the
apppendix) can be exhibited as a supplement to the SAP. Then a diagnosis of the
most important ones for the organization is summarized in the final SAP.
This latter stage is probably the most crucial and most difficult. In effect, the
comparative analyses are requiring you to consider the environmental factors and
time simultaneously. Let's clarify that.
Suppose that your analysis shows a high quick ratio for the firm compared with the
ratio of your major competitor. One assessment could be that there is a potential
cash management weakness. But suppose you also identified in the ETOP a
"threat" of insufficient capital available to the industry for needed investment. Now
your perception of the cash position of this firm may turn out to indicate
"strengths." Similarly, a "high" inventory position which might otherwise be
viewed as a weakness could be considered a strength if demand conditions appear
to be growing or if a strike apears likely.
By the same token, assessments of environmental opportunities and threats can be
altered depending on your diagnosis of the internal factors. Let's say that your
environmental analysis indicated a "threat" of the exit of sources of supplies of raw
materials for your industry. Your internal analysis, however, shows that your
purchasing agent has developed close contacts with the remaining suppliers; your
firm is assured of a steady stream of needed inputs. Now the perception of the
supplier threat is one of an opportunity to gain a competitive advantage due to your
firm's particular strength in this area. This may be one area where you can apply
the KFS approach implied in Exhibit 4.19.
In these examples note that diagnosis involves the perception of threats and
strengths or weaknesses in relation to one another. The analysis of data and
information can be done independently. But diagnosis requires that you consider
integrating the relative information to draw conclusions. One further step is
needed, however.
We have discussed this as a static process. You should recognize that events can
change. Thus diagnosis also involves estimating scenarios of likely future
conditions to reflect dynamic realities.
Consider the example where your firm's strength of supply contacts offsets a threat
of the exit of suppliers. How long will that strength exist? Will the suppliers remain
loyal or bend to pressure to supply your firm's competitors? Will the competitors
alter their strategy? For instance, some may leave the business. Some may
integrate backward to make their own raw materials. Others may try new methods
or materials to reduce their dependence on the remaining suppliers. Each of these
alternatives might be considered by your competitors. They, too, are looking to
build a competitive advantage.
Another issue related to time is the question of how long a strength will remain if it
is relied on extensively or overused. For instance, the KFS approach prescribes
building a unique strength by concentrating resources in a single area or in a few
areas. For instance, a football team may rely on a single superstar to carry the ball.
Several conditions may result over time. First, competitors may start to "key on"
the factor - they may try to attack it, steal, or copy your firm's strength. If the
strength happens to be technological, it can become obsolete. If the strength lies in
personnel, key people may resign, retire, or die. Finally, if one area receives the
bulk of the resources, other areas where new competitive advantages might be
generated will not develop their potential. Suppose, for example, that you have
analyzed your firm's work force and found that it is made up of highly skilled and
trained personnel. This could be a competitive advantage, but you observe that the
facilities, machines, tools, and materials that they need to do their work effectively
are out of date or lead to inefficiencies. Thus your firm cannot use its potential
competitive advantage unless resources are allocated to correct the weakness.
Some of the other approaches suggested earlier may be necessary.
Of course, the obverse problem should be recognized. If resources are spread too
thinly across many areas, there is a danger that the firm will not develop a
distinctive competence. Firms [and individuals] have been known to seize an
opportunity without commensurate ability. As Christensen et al. suggest,
"Opportunism without competence is a path to fairyland". This is particularly a
danger when managers believe that they have superior ability and can succeed at
almost anything on the basis of past success. And as we mentioned before, if the
strengths of interdependent units are actually working against one another (Exhibit
4.17), the resulting suboptimization may lead to a competitive disadvantage.
In effect, a firm should develop a strategy over time which revolves around an area
of distinctive competence. With this approach the firm can develop slack resources,
and these can evolve into new areas of strength when old ones falter [and they
inevitably do].
As you may have noticed, the discussion has begun to address the pros and cons of
alternative strategies [in this case, the question of diversification]. Indeed,
diagnosis combining the ETOP and the SAP should lead you to examine the
advantages and disadvantages of pursuing various alternatives. And that is the
subject of chapter 5.
TOP

SUMMARY
Strategic advantage analysis and diagnosis is the process by which the strategists
examine the firm's marketing and distribution, R&D and engineering, production
and operations, corporate resources and personnel, and finance and accounting
factors to determine where the firm has significant competencies so it can most
effectively exploit the opportunities and meet the threats the environment is
presenting.
The areas covered in the chapter include strategic advantage factors to be analyzed
and diagnosed, techniques of strategic advantage analysis, the reality of strategic
advantage analysis, the role of strategists in strategic advantage analysis and
diagnosis, and the diagnosis of the strategic advantages.
The strategic advantage factors that management analyzes and diagnoses to
determine the firm's internal strengths and weaknesses are marketing and
distribution factors, R&D and engineering factors, production and operations
management factors, corporate resources and personnel factors, and finance and
accounting factors. Each of these factors was broken down and each subcategory
illustrated to help you digest the strategic advantage analysis and diagnosis
process. It was suggested that strengths are needed to build slack to give firms
greater strategic options.
Techniques of strategic advantage analysis were described. Data and indicators of
various subfactors should be gathered so that relative comparisons can be made.
Comparisons are necessary in the following areas to get a clearer picture of
strengths and weaknesses: past, present, and future conditions, internal goals and
external requirements; how each functional area relates to other functional areas;
and environmental factors: competitors, technology, suppliers, and the product life
cycle. Two analytical tools were suggested as useful guides for the analysis, and
four key questions were suggested to help identify distinctive competencies - What
does the firm do well ? Do these competencies count ? What does the firm do
poorly ? Does it matter ?
Research on strategic advantage analysis indicates that this process is not
scientific. But very little research has been done on this subject. The studies which
exist indicate that executives perceive strengths and weaknesses differently and
that firms seem to be unique in their particular pattern of strategic advantages. That
uniqueness can be developed into competitive advantages in a variety of ways, as
shown in Exhibit 4.19.
A brief section on the role of strategists in the strategic advantage analysis and
diagnosis process suggests the need to formalize the process of internal analysis for
better strategic management.
The chapter concludes with our suggestions for performing strategic advantage
diagnosis. Focusing the diagnosis is affected by factors outlined in Chapter 3. But
in addition, the analyst should determine the areas of greatest importance to
strategic performance: technical core units and units which are pervasive and can
reduce uncertainty. Once the diagnosis is focused, the strategic advantage profile
[SAP] is defined and its development outlined.
The strategic advantage profile is a tool for making a systematic evaluation of the
enterprise`s strategic advantage factors which are significant for the company in its
environment.
What this profile does is give a visual representation of what the company is as a
result of developing from past strategic decisions and interaction with its
environment. Suggestions are offered for interpreting an internal analysis.
In sum, the chapter focused on how to analyze the strategic factors realistically and
how to diagnose their significance. Then the executive can develop an SAP and
match it with the ETOP to create conditions for adjusting or changing strategies or
policies.