Evaluating a Company’s Resources

and Competitive Position

Chapter 4:
 Company Situation Analysis:
The Key Questions
• Question 1: How Well Is the Company’s Present Strategy
Working
• Question 2: Are the Company’s Prices and Costs
Competitive?
• Question 3: What Are the Company’s Resource Strengths
and Weaknesses and Its External Opportunities and Threats?
• Question 4: Is the Company Competitively Stronger or
Weaker than Key Rivals?
• Question 5: What Strategic Issues and Problems Merit
Front-Burner Managerial Attention?
 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
Figure 4.1: Identifying Components of a Single-Business Company’s Strategy

4-4
 Question 1: How Well Is the Company’s
Present Strategy Working?
Key Considerations
• The two best indicators of how well a company’s strategy is working
are
(1)whether the company is achieving its stated financial and strategic
objectives and
(2) whether the company is an above-average industry performer.
• Other indicators of how well a company’s strategy is working include:
 Whether the firm’s sales are growing faster than, slower than, or
about the same pace as the market as a whole, thus resulting in a
rising, eroding, or stable market share.
 Whether the company is acquiring new customers at an attractive
rate as well as retaining existing customers
 Question 1: How Well Is the Company’s
Present Strategy Working?
Key Considerations
 Whether the firm’s profit margins are increasing or decreasing
and how well its margins compare to rival firms’ margins.
 Trends in the firm’s net profits and return on investment and
how they compare to the same trends for other companies in
the industry.
 Whether the company’s overall financial strength and credit
rating are improving or declining.
 How shareholders view the company on the basis of trends in
the company’s stock price and shareholder value (relative to
the stock price trends at other companies in the industry).
 Question 1: How Well Is the Company’s
Present Strategy Working?
Key Considerations
 Whether the firm’s image and reputation with its customers are
growing stronger or weaker.
 How well the company stacks up against rivals on technology,
product innovation, customer service, product quality, delivery
time, price, getting newly developed products to market quickly,
and other relevant factors on which buyers base their choices.
 Whether key measures of operating performance (such as days
of inventory, employee productivity, unit cost, defect rate, scrap
rate, order-filling accuracy, delivery times, and warranty costs)
are improving, remaining steady, or deteriorating.
 Question 2: 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
 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
Figure 4.3: A Representative Company Value Chain

4-10
 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
 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
 Why the value chains of Rival Companies
often differ
a. Competing companies may differ on the degree of
vertical integration
- Comparing the value chain of a fully integrated and
partially integrated rivals require adjusting the
differences in scope of activities
- The costs of internally performed activities for a
manufacturer will be greater than the cost of
internally performed activities of producers that
buys the needed parts and components from
outside suppliers and only performs assembly line
operations
 Why the value chains of Rival Companies
often differ
There is legitimate reason to expect that value chain and
cost differences between companies pursuing a low cost/
low price strategy and a rival that is positioned on high
end of the market
c. Cost and price differences among rival firms can have
their origin in activities performed by suppliers and
distributors or by distribution channels allies involved in
getting thee product to end users
- Suppliers or wholesale dealers may have excessively high
cost or profit structures that jeopardize a company’s cost
competitiveness even though its cost for internally
performed activities are competitive
 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
 The value chain system for
entire
• Accurately assessing industry
a company’s competitiveness in end use
markets require that a company managers must understand the
entire value chain system for delivering a product or service to end
users, not just company’s value chain
• At the very least it means considering the value chain of suppliers
and forward channel allies
• Suppliers value chains are relevant because;
1.suppliers perform activities and incur costs in creating and
delivering the purchased inputs used in company’s own value chain
2.The costs, performance features and quality of these inputs
influence a company’s own cost and product differentiation
capabilities
• Any thing a company can do to help its suppliers take cost out of
their value chain activities or improve the quality and
performance of the item being supplied can enhance its own
competitiveness
Figure 4.4: Representative Value Chain for an Entire Industry

4-17
 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
 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
 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
 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
 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
 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
 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
 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
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
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
 Figure 4.5: Translating Company Performance of
Value Chain Activities into Competitive Advantage

4-29
 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
 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!
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
 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
 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 a competitively
potent resource
source because it
 Gives a company a competitively valuable #1
capability unmatched by rivals
 Can underpin and add real punch
to a company’s strategy
 Is a basis for sustainable competitive advantage
 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
 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

 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
 External Factor Analysis Summary (EFAS)
External Weighted
Strategic Factors Weight Rating Score Comments
1 2 3 4 5
Opportunities

Threats

Total Weighted Score 1.00

Prentice Hall, 2000 Chapter 3 39

5.4 TOWS Matrix (Fig. 5.2)

TOWS Matrix
INTERNAL Strengths (S) Weaknesses (W)
FACTORS
(IFAS) List 5 – 10 internal List 5 – 10 internal
EXTERNAL strengths here weaknesses here
FACTORS
(EFAS)

Opportunities (O) SO Strategies WO Strategies

List 5 – 10 external Generate strategies here Generate strategies here
opportunities here that use strengths to take that take advantage of
advantage of opportunities opportunities by
overcoming weaknesses

Threats (T) ST Strategies WT Strategies

List 5 – 10 external Generate strategies here Generate strategies here
threats here that use strengths to that minimize weaknesses
avoid threats and avoid threats

Source: Adapted from Long-Range Planning, April 1982, H. Weihrich, “The TOWS Matrix—A Tool for Situational Analysis”
p. 60. Copyright 1982, with kind permission from H. Weihrich and Elsevier Science Ltd. The Boulevard, Langford Lane,
Kidlington OX5 1GB, UK.
Prentice Hall, 2000 Chapter 5 40
 Example Of TOWS Matrix
• Strengths • Opportunities
1. Quality Maytag Culture 1. Economic integration of European
2. Experienced top management community
3. Vertical integration 2. Demographics favor quality
4. Employee relations 3. Economic development of Asia
5. Hoover’s international 4. Opening of Eastern Europe
orientation 5. Trend to “Super Store”
• Weaknesses • Threats
1. Process oriented R&D 1. Increasing government
2. Distribution Channels regulations
3. Financial position 2. Strong US competition
4. Global positioning 3. Whirlpool and Electrolux strong
globally
5. Manufacturing facilities
4. New product advances
5. Japanese appliance companies
 Example Of TOWS Matrix
• SO strategies
1. Use worldwide Hoover distribution to sell both Hoover and Maytag major
appliances (S5, O 1,2)
2. Find Joint venture partners in Eastern Europe and Asia (S1,2, O1,2, 3)
• WO Strategies
1. Expand Hoover’s presence in continental Europe by reducing manufacturing and
distribution cost (O1, W2,5)
2. Emphasize superstore channels for all non Maytag brands ( O5, W2)
• ST Strategies
1. Merge with a Japanese major home appliance company (S1,2, T5)
2. Sell out non Maytag brands and strongly defend Maytag’s U.S niche (S1,2,3, T3)
• WT Strategies
1. Sell out non profit divisions to reduce debt (W3, T1,2)
2. Emphasize cost reduction to reduce breakeven point ( W1,3, T2, 5)
 The Strategic Position and Action Evaluation Matrix (SPACE)

• Select a set of variables to define financial strength (FS), Competitive

advantage (CA), Environmental stability (ES), and industry strength (IS)
• Assign numerical value ranging from +1( worst) to +6 (best) to reach
variable that make up FS and IS dimension.
• Assign numerical value ranging from -1 ( best) to -6 ( worst) for ES and
CA
• Compute the average score for FS, IS, CA, and ES
• Plot the average for FS, IS, CA, and ES on the appropriate axis
• Add the two scores on the x axis and plot the resultant point on X. Add
the two scores on the y-axis and plot the resultant point on Y. Plot the
intersection of the new xy point
• Draw a directional vector from the origin of the SPACE Matrix through
the new intersection point. The vector reveals the type of strategies
recommended for the organization: aggressive, competitive, defensive,
or conservative
Y axis
1. Financial Strength (FS
 Return on Investment
 Leverage
 Liquidity
 Working capital
 Cash Flow
 Ease of Exit
 Risk involved in business
2. Environmental Stability (ES)
Technological Changes
Rate of Inflation
Demand Variability
Price range of competitive products
Barriers to entry
Competitive pressure
Price elasticity of demand
X axis
1. Industry Strength ( IS)
 Growth Potential
 Profit potential
 Financial stability
 Technological Know-how
 Resource utilization
 Capital intensity
 Ease of entry
 Productivity, capacity utilization
2. Competitive Advantage (CA)
 Market Share
 Product Quality
 Product life cycle
 Customer loyalty
 Competition’s capacity utilization
 Technological know-how
 Control over suppliers and distributors
 Hypothetical example of SPACE Matrix (Y axis)
Environmental Stability ( ES)
Financial Strength (FS)
Technological change = - 4
Return on Investment = + 6
Rate of Inflation =-3
Leverage =+5
Demand variability =-3
Liquidity =+5
Price range of competitive
Working capital =+5
products = -5
Cash Flow =+4
Barriers to entry =-1
Ease of exit = +1
Competitive pressure = - 4
Risk Involved =+4
Price elasticity of demand = - 3
Total Score = + 30
Average Score = 30/7 = 4.28 Total score = -23
Average Score = -23/7= - 3.28
 SPACE Matrix Calculation X axis
Industry Strength ( IS) Competitive Advantage (CA)
Market Share =-2
Growth Potential =+5
Product Quality =-3
Profit Potential = +5
Product life cycle = -2
Technological Know how = +
3 Customer Loyalty = -1

Resource utilization = +4 Competition’s capacity utilization = -3

Capital Requirement = +6 Technological Know how = -3

Ease of Entry = +6 Control over suppliers and

Productivity, capacity Distributors = -1

utilization = +4 Total Score = 15

Average CA Score = - 2.14
Total Score = +31
 SPACE Matrix Calculations
ES Average Score = -3.28 + Average FS Score( + 4.28) = + 1
Average CA Score = -2.14 + Average IS Score ( 4.42) = + 2.28
FS

x
CA x IS

ES
Examples of strategic profiles

Aggressive profiles
Conservative Profile

Competitive Profile
Conservative profile

Defensive Profile
 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?
 Industry Matrix/ Competitive Profile Matrix
( CPM)

Company A Company A Company B Company B

Strategic Factors Weight Rating Weighted Score Rating Weighted Score

1 2 3 4 5 6

Total 1.00

Prentice Hall, 2000 Chapter 3 50

 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)
 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 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 !
 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?