CHAPTER - V

EVALUATING COMPANY
RESOURCES AND
COMPETITIVE
CAPABILITIES

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 “Understand what really makes a company ‘tick’.
”
- Charles R. Scott

“If a company is not ‘best in the world’ at a critical

activity, it is sacrificing competitive advantage by
performing that activity with its existing
technique.” “Quote”

- James Brian Quinn

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 Company Situation Analysis:
The Key Questions

1. How well is firm’s present strategy working?

2. What are the firm’s resource strengths and
weaknesses and its external opportunities and
threats?
3. Are firm’s prices and costs competitive?
4. How strong is firm’s competitive position
relative to rivals?
5. What strategic issues does firm face?

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 Question 1: How Well is the
Present Strategy Working?
• Two steps involved

– Determine current
strategy of company

– Examine key indicators

of strategic and
financial performance

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 What is the present Strategy?
• Identify competitive approach
– Low-cost leadership
– Differentiation
– Focus on a particular market niche
• Determine competitive scope
– Stages of industry’s production/distribution chain
– Geographic coverage
– Customer base
• Identify functional strategies
• Examine recent strategic moves

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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(Economic Value
Added)
• 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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 Question 2: What Are the Firm’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 both
– Resource strengths and weaknesses
– Best market opportunities and 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 a
characteristic 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 capable
partners
Resource strengths and competitive capabilities
are competitive assets !
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Figure : Mobilizing Company Resources to Produce
Competitive Advantage

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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
– Deficiencies in know-how or expertise or
competencies
– Lack of important physical,
organizational, or intangible assets
– Missing capabilities in key areas
Resource weaknesses and deficiencies are
competitive liabilities !
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 Core Competencies: A
Valuable Company Resource
• A competence becomes a core competence when the
well-performed activity is central to the company’s
competitiveness and profitability
• Often, a core competence results from collaboration
among different parts of an organization
• Typically, core competencies reside in a company’s
people, not in assets on the balance sheet
• A core competence gives a potentially valuable
competitive capability to a company and represents a
definite competitive asset

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 Contd…

 A distinctive competence
 Represents a competitively valuable
capability rivals do not have
 Presents attractive potential for
being a cornerstone of strategy
 Can provide a competitive edge in the
#1
marketplace—because it represents a
competitively superior resource strength

Note: The term core competency and distinctive competency are used interchangeably. 12
 Types of Distinctive Competencies
• Expertise in building networks and systems to enable e-
commerce
• Speeding new/next-generation products to market
• Better after-sale service capability
• Skills in manufacturing a high quality product
• Innovativeness in developing popular product features
• Speed/agility in responding to new market trends
• System to fill customer orders accurately and swiftly
• Expertise in integrating multiple technologies to create
families of new products

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 Examples: Distinctive Competencies
• Sharp Corporation
– Expertise in flat-panel display technology
• Toyota, Honda, Nissan
– Low-cost, high-quality manufacturing capability and short
design-to-market cycles
• Intel
– Ability to design and manufacture ever more powerful
microprocessors for PCs
• Motorola
– Defect-free manufacture (six-sigma quality) of cell phones

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Strategic Management Principle

A distinctive competence
empowers a company to build
competitive advantage!

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 Determining the Competitive
Value of a Company Resource
• To qualify as 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 ?

Meaning of Trump : To beat someone or something by doing or producing something better

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Strategic Management Principle

Successful strategists seek to capitalize on

and leverage a company’s resource
strengths—its expertise, core
competencies, and strongest competitive
capabilities—by shaping the strategy
around the resource!

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 Identifying a Company’s
Market Opportunities
• Opportunities- most relevant to a
company are those offering
– Best prospects for profitable
long-term growth

– Potential for competitive advantage

– Good match with its financial and

organizational resource capabilities

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Strategic Management Principle

A company is well-advised to pass

on a particular market opportunity
unless it has or can build the
resource capabilities to capture it!

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 Identifying External Threats
• Emergence of cheaper/better technologies
• Introduction of better products by rivals
• Intensifying competitive pressures
• Burdensome 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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Strategic Management Principle

Successful strategists aim at capturing a

company’s best growth opportunities
and creating defenses against external
threats to its competitive position and
future performance!

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 Role of SWOT Analysis in
Crafting a Better Strategy
• Developing a clear understanding of a company’s
– Resource strengths
– Resource weaknesses
– Best opportunities
– External threats
• Drawing conclusions about
how
– Company’s strategy can be matched to both its resource
capabilities and market opportunities
– Urgent it is for company to correct resource weaknesses and
guard against external threats
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 Table : SWOT Analysis - What to Look For
Potential Resource Potential Resource Potential Company Potential External
Strengths Weaknesses Opportunities Threats
• Powerful strategy • No clear strategic • Serving additional • Entry of potential
• Strong financial direction customer groups new competitors
condition • Obsolete facilities • Expanding to new • Loss of sales to
• Strong brand name • Weak balance geographic areas substitutes
image/reputation sheet; excess debt • Expanding product • Slowing market
• Widely recognized • Higher overall line growth
market leader costs than rivals • Transferring skills • Adverse shifts in
• Proprietary • Missing some key to new products exchange rates &
• Vertical integration trade policies
technology skills/competencies
• Costly new
• Cost advantages • Subpar profits • Take market share
regulations
• Strong advertising • Internal operating from rivals
• Vulnerability to
• Product innovation problems . . . • Acquisition of rivals
business cycle
skills • Falling behind in • Alliances or JVs to • Growing influence of
• Good customer R&D expand coverage customers or
service • Too narrow • Openings to exploit suppliers
• Better product product line new technologies • Reduced buyer needs
quality • Weak marketing • Openings to extend for product
• Alliances or JVs skills brand name/image • Demographic changes
 Resource based view of strategic
analysis
Numerous environmental
opportunities

Cell cellCCell3:supports a CellCell1:supports an

turnaround oriented strategy aggressive strategy
Critical internal Substantial/internal
weakness Cell4:supports a defensive Cell2:supports a strategy
strategy diversification strategy

Major environmental threats

The resource-based view of strategy selection is a “logical framework guiding a systematic
discussion of the firm’s resources and the basic strategic alternatives which emerge from
this resource-based view.”
1.Aggressive or growth-oriented strategy
2.Diversification strategy
3.Turnaround oriented strategy
4.Defensive strategy
 Question 3: Are the Company’s
Prices and Costs Competitive?

• Assessing whether a firm’s costs are competitive

with those of rivals is a crucial part of company
analysis

• Key analytical tools

– Strategic cost analysis

– Value chain analysis

– Benchmarking
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 Why Rival Companies Have Different Costs?
• Companies do not have the same costs because
of differences in
– Prices paid for raw materials, component parts,
energy, and other supplier resources
– Basic technology and age of plant & equipment
– Economies of scale and experience curve effects
– Wage rates and productivity levels
– Marketing, promotion, and administration costs
– Inbound and outbound shipping costs
– Forward channel distribution costs
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Principle of Competitive Markets

The higher a company’s costs are

above those of close rivals, the
more competitively vulnerable it
becomes!

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 What is Strategic Cost Analysis?
• Focuses on a firm’s costs relative to its rivals

• 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

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 The Concept of a Company Value Chain
• A company consists of all the activities and functions it
performs in trying to deliver value to its customers.
• A company’s value chain shows the linked set of activities,
functions, and business processes that it performs in the course
of designing, producing, marketing, delivering, and supporting
its product / service and thereby creating value for its
customers.
• A company’s value chain consists of two types of
activities
– Primary activities (where most of the value for customers
is created)
– Support activities that are undertaken to aid the
individuals and groups engaged in doing the primary
activities

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 Figure : Typical Company Value Chain

Primary Activities

Purchased
Distribution
Supplies
And Sales and
and Operations Service
Outbound Marketing
Inbound Logistics
Logistics

Profit
Margin

Product R&D, Technology, Systems Development

Human Resources Management
General Administration
Procurement

Support Activities
 Figure : The Value Chain System for an Entire Industry

A Company’s
Supplier Forward Channel
Own
Value Chains Value Chains
Value Chain

Activities,
Internally
Costs, &
Performed
Activities, Margins of Buyer or
Activities,
Costs, & Forward End User
Costs, &
Margins of Channel Value
Margins
Suppliers Allies & Chains
Strategic
Partners

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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, quality, and performance of inputs provided
by suppliers influence a firm’s own costs and
product performance
• Forward channel allies’ value chains are relevant
because
– Forward channel allies’ costs and margins are part of
price paid by ultimate end-user
– Activities performed affect end-user satisfaction
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Example: Key Value Chain Activities
PULP & PAPER INDUSTRY

Timber farming Logging(sorting)

Pulp mills

Printing & publishing 33

Papermaking
Example: Key Value Chain Activities

SOFT DRINK INDUSTRY

Processing of basic ingredients

Syrup manufacture
Bottling and can filling
Wholesale distribution
Retailing Kroger

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Example: Key Value Chain Activities
COMPUTER SOFTWARE INDUSTRY

Programming
Disk loading
Marketing
Distribution

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 Activity-Based Costing Method(ABC Method):
A Key Tool in Strategic Cost Analysis
• 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--from one end of the value chain
to the other
• Requires having accounting data that measures the
cost of each value chain activity
• Activity-based accounting systems provide the data
for determining the costs for each relevant value
chain activity
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 Benchmarking Costs of
Key Value Chain Activities
Focuses on cross-company comparisons of how
certain activities are performed and the costs
associated with these activities
– Purchase of materials
– Payment of suppliers
– Management of inventories
– Training of employees
– Processing of payrolls
– Getting new products to market
– Performance of quality control
– Filling and shipping of customer orders
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 Objectives of Benchmarking
• Determine whether a company is performing particular value
chain activities efficiently by studying the practices and
procedures used by other companies
• Understand the best practices in performing an activity—learn
what is the “best” way to do a particular activity from those
who have demonstrated they are “best-in-industry” or “best-
in-world”
• Assess if company’s costs of performing particular value chain
activities are in line with competitors
• 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 talking about pricing or

competitively sensitive costs

• Don’t ask rivals for sensitive data

• Don’t share proprietary data without permission

• Have impartial third party assemble and present

competitively sensitive cost data with no names attached

• Don’t criticize a rival’s business to outsiders based on data

obtained
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 What Determines Whether a
Company is Cost Competitive?
• A company’s cost competitiveness depends on how well it
manages its value chain relative to how well competitors
manage their value chains
• When a company’s costs are “out-of-line”, the “high- cost”
activities can exist in any of three areas in the industry value
chain
1. Suppliers’ activities
2. The company’s own internal activities
3. Forward channel activities
Internally
Activities, Activities, Costs, &
Performed
Costs, & Margins of Forward Buyer/User Value
Activities,
Margins of Channel Allies & Chains
Costs, &
Suppliers Strategic Partners
Margins
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 Correcting Supplier-Related Cost
Disadvantages: Options
• Negotiate more favorable prices with suppliers
• Work with suppliers to help them achieve lower
costs
• Use lower-priced substitute inputs
• Collaborate closely with suppliers to identify mutual
cost-saving opportunities
• Integrate backwards
• Make up difference by initiating cost savings in
other areas of value chain
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Correcting Forward Channel Cost Disadvantages:
Options
• Push for more favorable terms with distributors and
other forward channel allies

• Work closely with forward channel allies and

customers to identify win-win opportunities to
reduce costs

• Change to a more economical distribution strategy

• Make up difference by initiating cost savings earlier

in value chain

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 Correcting Internal Cost Disadvantages:
Options
• Reengineer how the high-cost activities or business
processes are performed
• 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
• Simplify product design
• Make up difference by achieving savings in backward or
forward portions of value chain system

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 From Value Chain Analysis
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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 From Value Chain Analysis
to Competitive Advantage

Strategy-Making Lesson of Value Chain Analysis

Sustainable competitive advantage can be
created by
1. Managing value chain activities better than
rivals and/or
2. Developing distinctive value chain capabilities
to serve customers!
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 Question 4: How Strong is the Company’s
Competitive Position?
• The strength of a company’s competitive position in the
marketplace hinges on
– Whether firm’s position can be expected to improve or
deteriorate if present strategy is continued
– How firm ranks relative to key rivals on each industry
KSF and relevant measure of competitive strength
– Whether firm has a sustainable competitive advantage
or finds itself at disadvantage relative to certain rivals
– Ability of firm to defend its position in light of
• Industry driving forces
• Competitive pressures
• Anticipated moves of rivals
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 Assessing a Company’s Competitive Strength
versus 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)
[Rating can be done on the 5 point scale]
3. Decide whether to use a weighted or unweighted rating system
(a weighted system is usually superior because the 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. Determine whether firm enjoys a competitive advantage or
suffers from a competitive disadvantage based on the overall
strength ratings
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 Table (A): An Unweighted
Competitive Strength Assessment
KSF/Strength Measure ABC Co. Rival 1 Rival 2 Rival 3 Rival 4

Quality/product performance 8 5 10 1 6
Reputation/image 8 7 10 1 6
Manufacturing capability 2 10 4 5 1
Technological skills 10 1 7 3 8
Dealer network/distribution 9 4 10 5 1
New product innovation 9 4 10 5 1
Financial resources 5 10 7 3 1
Relative cost position 5 10 3 1 4
Customer service capability 5 7 10 1 4
Overall strength rating 61 58 71 25 32
Rating Scale: 1 = very weak; 5 = average; 10 = very strong
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 Table (B): A Weighted
Competitive Strength Assessment
KSF/Strength Measure Weight ABC Co. Rival 1 Rival 2 Rival 3 Rival 4

Quality/product performance 0.10 8/0.80 5/0.50 10/1.00 1/0.10 6/0.60

Reputation/image 0.10 8/0.80 7/0.70 10/1.00 1/0.10 6/0.60
Manufacturing capability 0.10 2/0.20 10/1.00 4/0.40 5/0.50 1/0.10
Technological skills 0.05 10/0.50 1/0.05 7/0.35 3/0.15 8/0.40
Dealer network/distribution 0.05 9/0.45 4/0.20 10/0.50 5/0.25 1/0.05
New product innovation 0.05 9/0.45 4/0.20 10/0.50 5/0.25 1/0.05
Financial resources 0.10 5/0.50 10/1.00 7/0.70 3/0.30 1/0.10
Relative cost position 0.35 5/1.75 10/3.50 3/1.05 1/0.35 4/1.40
Customer service capability 0.15 5/0.75 7/1.05 10/1.50 1/0.15 4/1.60
Sum of weights 1.00
Overall strength rating 6.20 8.20 7.00 2.10 2.90
Rating Scale: 1 = very weak; 5 = average; 10 = very strong
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 Why is it necessary to 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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 Question 5: What Strategic Issues
Does the Company Need to Address?
• Based on the answers to the preceding 4 questions
posed in conducting industry and competitive
analysis, what items should be on the 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
• Is the present strategy adequate in light of competitive
pressures and driving forces?
• Is the strategy well-matched to the industry’s future key
success factors?
• Does the company need new or different resource
strengths and competitive capabilities?
• Does present strategy adequately protect against
external threats and resource deficiencies?
• Is firm vulnerable to competitive attack by rivals?
• Where are strong/weak spots in present strategy?
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 Stating the Issues Clearly and Precisely
• A well-stated issue involves such phrases as
– “What should be done about …….?”
– “How to …….?”
– “Whether to …….?”
– “Should we …….?”
• Issues need to be precise, specific,
and “cut straight to the chase”
• Issues on the “worry list” raise
questions about
– What actions need to be considered
– What to think about doing
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 Assignment
Don’t worry!
You have to submit it one week after your mid term exam.
1. Prepare a SWOT Analysis of an industry of your choice.
2. What do you understand by resource capabilities and resource
deficiencies of a company? Explain.
3. How can value chain be used as a strategic tool to analyze and
minimize overall cost of business? Discuss and also analyze a Value
Chain of an industry of your choice
4. “Internal competence may not be sufficient to compete in the
competitive market but distinctive competence in the industry is
what matters in this connection”. Explain.
Submission Deadline
………………………….

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Thank You