CHAPTER 4

EVALUATING A
COMPANY’S RESOURCES,
CAPABILITIES, AND
COMPETITIVENESS

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 Six Major Questions to Assess Company’s
Internal Capabilities

Question 1: HOW WELL IS THE FIRM’S PRESENT

STRATEGY WORKING?
• Best indicators of a well-conceived,
well-executed strategy:
– The firm is achieving its stated financial and
strategic objectives.
– The firm is an above-average industry performer.
– Whether it is gaining customers & increasing its
market share

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IDENTIFYING THE COMPONENTS OF A
SINGLE-BUSINESS COMPANY’S
STRATEGY

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 SPECIFIC INDICATORS OF HOW WELL
COMPANY'S STRATEGY IS WORKING
ARE-
• Growth in firm’s sales and market share
• Acquisition and retention of customers
• Strengthening image and reputation with customers
• Increasing profit margins, net profits and ROI
• Growing financial strength and credit rating
• Leadership in factors relevant to market\industry
success
• Continuing improvement in key measures of operating
performance

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Key
Financial
Ratios

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Key
Financial
Ratios

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Key
Financial
Ratios

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Key
Financial
Ratios

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 QUESTION 2: WHAT ARE THE FIRM’S
COMPETITIVELY IMPORTANT RESOURCES AND
CAPABILITIES?

• Competitive Assets
– Are the firm’s resources and capabilities.
– Are the determinants of its competitiveness
and ability to succeed in the marketplace.
– Are what a firm’s strategy depends on to
develop sustainable competitive advantage
over its rivals.

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 CORE CONCEPT

• A resource is a competitive asset that is owned or

controlled by a firm
• A firm’s resources and capabilities represent its
competitive assets and are big determinants of its
competitiveness and ability to succeed in the
marketplace.

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 IDENTIFYING THE COMPANY’S
RESOURCES AND CAPABILITIES

• A Resource
– Is a productive input or competitive asset that is
owned or controlled by a firm (e.g., a fleet of oil
tankers).

• A Capability
– Is the capacity of a firm to perform some activity
proficiently (e.g., superior skills in marketing).

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 STRATEGIC
MANAGEMENT
PRINCIPLE
Resource and capability analysis is a powerful
tool for sizing up a company’s competitive assets
and determining if they can support a sustainable
competitive advantage over market rivals.

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 TYPES OF COMPANY RESOURCES
Tangible Resources
Physical resources
Financial resources
Technological assets
Organizational resources
Intangible Resources
Human assets and intellectual capital
Brands, company image, and reputational assets
Relationships: alliances, joint ventures, or partnerships
Company culture and incentive system

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 CORE CONCEPTS

• A resource bundle is a linked and closely integrated

set of competitive assets centered around one or more
cross-functional capabilities.

• The VRIN tests for sustainable competitive

advantage ask if a resource is Valuable, Rare,
Inimitable, and Non-substitutable.

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 VRIN TESTING: RESOURCES AND
CAPABILITIES
• Identifying the firm’s resources and capabilities by
testing the competitive power of its resources and
capabilities:
– Is the resource (or capability) competitively
Valuable?
– Is the resource Rare—is it something rivals lack?
– Is the resource hard to copy (Inimitable)?
– Is the resource invulnerable to the threat of
substitution from different types of resources and
capabilities (Non-substitutable)?
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 CORE CONCEPTS

• Social complexity (company culture, interpersonal

relationships among managers or R&D teams, trust-based
relations with customers or suppliers) and causal
ambiguity are two factors that inhibit the ability of rivals
to imitate a firm’s most valuable resources and capabilities.

• Causal ambiguity makes it very hard to figure out how a

complex resource contributes to competitive advantage
and therefore exactly what to imitate.

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 STRATEGIC
MANAGEMENT
PRINCIPLE
A company requires a dynamically evolving
portfolio of resources and capabilities to sustain
its competitiveness and help drive improvements
in its performance.

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 CORE CONCEPT

• A dynamic capability is the ongoing capacity of

a firm to modify its existing resources and
capabilities or create new ones by:
– Improving existing resources and capabilities
incrementally
– Adding new resources and capabilities
to the firm’s competitive asset portfolio

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 MANAGING RESOURCES AND
CAPABILITIES DYNAMICALLY
• Threats to Resources and Capabilities:
– Rivals providing better substitutes over time.
– Capabilities decaying from benign neglect.
– Disruptive competitive environment change.

• Managing Capabilities Dynamically

– Attending to the ongoing modification
of existing competitive assets.
– Taking advantage of any opportunities to develop totally
new kinds of capabilities.
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 QUESTION 3: IS THE COMPANY ABLE TO SEIZE
MARKET OPPORTUNITIES AND NULLIFY EXTERNAL
THREATS?

• SWOT Analysis
– Is a powerful tool for sizing up a firm’s:
• Internal strengths (the basis for strategy)
• Internal weaknesses (deficient capabilities)
• Market opportunities (strategic objectives)
• External threats (strategic defenses)

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 CORE CONCEPT

SWOT analysis is a simple but powerful

tool for sizing up a company’s strengths and
weaknesses, its market opportunities, and
the external threats to its future well-being.

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 STRATEGIC
MANAGEMENT
PRINCIPLE
Basing a company’s strategy on its most
competitively valuable strengths gives the
company its best chance for market
success.

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 IDENTIFYING A COMPANY’S
INTERNAL STRENGTHS
• A Competence
– Is an activity that a firm has learned to perform
with proficiency—a capability.
• A Core Competence
– Is a proficiently performed internal activity that is
central to a firm’s strategy and competitiveness.
• A Distinctive Competence
– Is a competitively valuable activity that a firm
performs better than its rivals.

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 IDENTIFYING A FIRM’S
WEAKNESSES AND COMPETITIVE
DEFICIENCIES
• A Weakness (Competitive Deficiency)
– Is something a firm lacks or does poorly (in comparison
to others) or a condition that puts it
at a competitive disadvantage in the marketplace.

• Types of Weaknesses:
– Inferior skills, expertise, or intellectual capital
– Deficiencies in physical, organizational, or intangible assets
– Missing or competitively inferior capabilities in key areas

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 CORE CONCEPTS

• A firm’s strengths represent its

competitive assets.

• A firm’s weaknesses are shortcomings that

constitute competitive liabilities.

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 IDENTIFYING A COMPANY’S
MARKET OPPORTUNITIES
• Characteristics of Market Opportunities:
– An absolute “must pursue” market
• Represents much potential but is hidden in “fog of
the future.”
– A marginally interesting market
• Presents high risk and questionable profit potential.
– An unsuitable/mismatched market
• Is best avoided as the firm’s strengths are not
matched to market factors.
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 STRATEGIC
MANAGEMENT
PRINCIPLE
A company is well advised to pass on a
particular market opportunity unless it has
or can acquire the competencies needed to
capture it.

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IDENTIFYING THE THREATS TO A
FIRM’S FUTURE PROFITABILITY
• Types of Threats:
– Normal course-of-business threats
– Sudden-death (survival) threats

• Considering Threats:
– Identify the threats to the firm’s future prospects.
– Evaluate what strategic actions can be taken to
neutralize or lessen their impact.

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 WHAT TO LOOK FOR IN IDENTIFYING A FIRM’S
STRENGTHS, WEAKNESSES, OPPORTUNITIES, AND
THREATS

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 WHAT TO LOOK FOR IN IDENTIFYING A FIRM’S
STRENGTHS, WEAKNESSES, OPPORTUNITIES, AND
THREATS

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 STRATEGIC
MANAGEMENT
PRINCIPLE
Simply making lists of a company’s strengths,
weaknesses, opportunities, and threats is not
enough; the payoff from SWOT analysis comes
from the conclusions about a company’s
situation and the implications for strategy
improvement that flow from the four lists.

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 WHAT DO SWOT LISTINGS REVEAL?
• SWOT Analysis Involves:
– Drawing conclusions from the SWOT listings
about the firm’s overall situation.
– Translating these conclusions into
strategic actions by the firm that:
• Match its strategy to its internal strengths and to
market opportunities.
• Correct important weaknesses and defend it
against external threats.

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THE STEPS INVOLVED IN SWOT ANALYSIS: IDENTIFY
THE FOUR COMPONENTS OF SWOT, DRAW
CONCLUSIONS, TRANSLATE IMPLICATIONS INTO
STRATEGIC ACTIONS

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 USING SWOT ANALYSIS
• What are the attractive aspects of the firm’s situation?
• What aspects are of the most concern?
• Are the firm’s internal strengths and competitive assets sufficiently strong
to enable it to compete successfully?
• Are the firm’s weaknesses and competitive deficiencies correctable, or
could they be fatal if not remedied soon?
• Do the firm’s strengths outweigh its weaknesses by an attractive margin?
• Does the firm have attractive market opportunities
that are well suited to its internal strengths?
• Does the firm lack the competitive assets (internal strengths) to pursue
the most attractive opportunities?
• Where on a scale of 1 to 10 (1 = weak and 10 = strong)
do the firm’s overall situation and future prospects rank?
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 QUESTION 4: ARE THE COMPANY’S
COST
STRUCTURE AND CUSTOMER VALUE
PROPOSITION COMPETITIVE?

• Signs of A Firm’s Competitive Strength:

– Its prices and costs are in line with rivals.
– Its customer-value proposition is competitive and
cost effective.
– Its bundled capabilities are yielding
a sustainable competitive advantage.

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 STRATEGIC
MANAGEMENT
•
PRINCIPLE
The higher a company’s costs are above those
of close rivals, the more competitively
vulnerable it becomes.

• Conversely, the greater the amount of

customer value that a company can offer
profitably relative to close rivals, the less
competitively vulnerable it becomes.

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 THE CONCEPT OF A COMPANY
VALUE CHAIN

• The Value Chain

– Identifies the primary internal activities that create
and deliver customer value and the requisite
related support activities.
– Permits a deep look at the firm’s cost structure and
ability to offer low prices.
– Reveals the emphasis that a firm places on
activities that enhance differentiation and support
higher prices.

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 CORE CONCEPT

A company’s value chain identifies the

primary activities and related support
activities that create customer value.

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A REPRESENTATIVE COMPANY
VALUE CHAIN

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 COMPARING THE VALUE CHAINS
OF RIVAL FIRMS

• Value Chain Analysis

– Facilitates a comparison, activity-by-activity, of how effectively
and efficiently a firm delivers value to its customers, relative to
its competitors.

• The Value Chain Analysis Process:

– Segregate the firm’s operations into different types of primary
and secondary activities to identify the major components of its
internal cost structure.
– Use activity-based costing to evaluate the activities.
– Do the same for significant competitors.
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 STRATEGIC
MANAGEMENT
PRINCIPLE
A company’s cost competitiveness depends
not only on the costs of internally
performed activities (its own value chain)
but also on costs in the value chains of its
suppliers and distribution channel allies.

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 VALUE CHAIN SYSTEM FOR
AN ENTIRE INDUSTRY
• Industry Value Chain:
– The firm’s internal value chain
– The value chains of industry suppliers
– The value chains of channel intermediaries

• Effects of the Industry Value Chain:

– Costs and margins of suppliers and channel partners
can affect prices to end consumers.
– Activities of channel partners can affect industry
sales volumes and customer satisfaction.
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A REPRESENTATIVE VALUE
CHAIN SYSTEM

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 ILLUSTRATION CAPSULE 4.1
THE VALUE CHAIN FOR KP MACLANE, A
PRODUCER OF POLO SHIRTS

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 ILLUSTRATION CAPSULE 4.1
THE VALUE CHAIN FOR KP MACLANE, A
PRODUCER OF POLO SHIRTS
• Which activities in the value chain are primary
activities? Which are secondary activities?
• Which activities are linked to the value chain
for the entire industry?
• How could activity cost(s) could be reduced
without harming the competitive strength of
KP MacLane?

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 CORE CONCEPT

Benchmarking is a potent tool for

improving a company’s own internal
activities that is based on learning how
other companies perform them and
borrowing their “best practices.”

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 BENCHMARKING AND
VALUE CHAIN ACTIVITIES

• Benchmarking:
– Involves improving a firm’s internal activities based on
learning other companies’ “best practices.”
– Assesses whether the cost competitiveness and
effectiveness of a firm’s value chain activities are
in line with its competitors’ activities.
• Sources of Benchmarking Information
– Reports, trade groups, analysts and customers
– Visits to benchmark companies
– Data from consulting firms
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 STRATEGIC
MANAGEMENT
PRINCIPLE

Benchmarking the costs of company

activities against rivals provides hard
evidence of whether a company is cost-
competitive.

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 ILLUSTRATION CAPSULE 4.2
BENCHMARKING AND ETHICAL
CONDUCT
• Avoid discussions or actions that could lead to or imply an interest in restraint
of trade, market and/or customer allocation schemes, price fixing, dealing
arrangements, bid rigging, or bribery. Don’t discuss costs with competitors if
costs are an element of pricing.
• Refrain from the acquisition of trade secrets from another by any means that
could be interpreted as improper, including the breach of any duty to maintain
secrecy. Do not disclose or use any trade secret that may have been obtained
through improper means or that was disclosed by another in violation of duty to
maintain its secrecy or limit its use.
• Be willing to provide to your benchmarking partner the same type and level of
information that you request from that partner.
• Communicate fully and early in the relationship to clarify expectations, avoid
misunderstanding, and establish mutual interest in the benchmarking exchange.
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 ILLUSTRATION CAPSULE 4.2
BENCHMARKING AND ETHICAL
CONDUCT
• Be honest and complete with the information submitted.
• The use or communication of a benchmarking partner’s name with the data
obtained or practices observed requires the prior permission of the benchmarking
partner.
• Honor the wishes of benchmarking partners regarding how the information that is
provided will be handled and used.
• In benchmarking with competitors, establish specific ground rules up-front. For
example, “We don’t want to talk about things that will give either of us a
competitive advantage, but rather we want to see where we both can mutually
improve or gain benefit.”
• Check with legal counsel if any information-gathering procedure is in doubt. If
uncomfortable, do not proceed. Alternatively, negotiate and sign a specific
nondisclosure agreement that will satisfy the attorneys representing each partner.

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 STRATEGIC OPTIONS FOR
REMEDYING
A COST OR VALUE DISADVANTAGE

• Places in the total value chain system for a

firm to look for ways to improve its efficiency
and effectiveness:
– The firm’s own internal activity segments
– The suppliers’ part of the overall value chain
system
– The forward channel portion of the value chain
system

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 IMPROVING INTERNALLY
PERFORMED VALUE CHAIN
ACTIVITIES
• Implement best practices throughout the firm, particularly for high-cost
activities.
• Eliminate some cost-producing activities altogether by revamping the
value chain.
• Relocate high-cost activities to areas where they can be performed more
cheaply.
• Outsource activities that can be performed by vendors or contractors more
cheaply than if done in-house.
• Invest in productivity enhancing, cost-saving technological improvements.
• Find ways to detour around activities or items where costs are high.
• Redesign products and/or components to facilitate speedier and more
economical manufacture or assembly.

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 IMPROVING THE EFFECTIVENESS OF
THE CUSTOMER VALUE PROPOSITION
AND ENHANCING DIFFERENTIATION
• Implement best practices for quality for high-value activities.
• Adopt best practices and technologies that spur innovation, improve
design, and enhance creativity.
• Implement the best practices in providing customer service.
• Reallocate resources to activities having the most impact on value for
the customer and their most important purchase criteria.
• For intermediate buyers, gain an understanding of how the activities
the firm performs impact the buyer’s value chain.
• Adopt best practices for marketing, brand management, and
enhancing customer perceptions.

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 IMPROVING SUPPLIER-RELATED
VALUE CHAIN ACTIVITIES
• Pressure suppliers for lower prices.
• Switch to lower-priced substitute inputs.
• Collaborate closely with suppliers to identify mutual cost-
saving opportunities.
• Work with suppliers to enhance the firm’s differentiation.
• Select and retain suppliers who meet higher-quality standards.
• Coordinate with suppliers to enhance design or other features
desired by customers.
• Provide incentives to suppliers to meet higher-quality
standards, and assist suppliers in their efforts to improve.

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 IMPROVING VALUE CHAIN
ACTIVITIES OF FORWARD CHANNEL
ALLIES
• Achieving Cost-Based Competitiveness:
– Pressure forward channel allies to reduce their costs
and markups so as to make the final price to buyers
more competitive.
– Collaborate with forward channel allies to identify
win-win opportunities to reduce costs.
– Change to a more economical distribution strategy,
including switching to cheaper distribution channels.

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 ENHANCING DIFFERENTIATION
THROUGH ACTIVITIES AT THE FORWARD
END OF THE VALUE CHAIN SYSTEM

• Enhancing Differentiation:
• Engage in cooperative advertising and promotions
with forward channel allies.
• Use exclusive arrangements with downstream sellers
or other mechanisms that increase their incentives to
enhance delivered customer value.
• Create and enforce standards for downstream
activities and assist in training channel partners in
business practices.

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 STRATEGIC
MANAGEMENT
PRINCIPLE
Performing value chain activities with
capabilities that permit the company to
either outmatch rivals on differentiation or
beat them on costs will give the company a
competitive advantage.

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TRANSLATING COMPANY PERFORMANCE
OF VALUE CHAIN ACTIVITIES INTO
COMPETITIVE ADVANTAGE

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TRANSLATING COMPANY PERFORMANCE
OF VALUE CHAIN ACTIVITIES INTO
COMPETITIVE ADVANTAGE

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 QUESTION 5: IS THE FIRM
COMPETITIVELY STRONGER OR WEAKER
THAN KEY RIVALS?

• Assessing the firm’s overall competitive

strength:
– How does the firm rank relative to competitors on
each of the important factors that determine market
success?
– Does the firm have a net competitive advantage or
disadvantage versus major competitors?

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 STRATEGIC
MANAGEMENT
PRINCIPLE
High-weighted competitive strength ratings
signal a strong competitive position and
possession of competitive advantage; low
ratings signal a weak position and
competitive disadvantage.

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THE COMPETITIVE STRENGTH
ASSESSMENT PROCESS
Make a list of the industry’s key success factors and
Step 1 measures of competitive strength or weakness (6 to 10
measures usually suffice).

Assign a weight to each competitive strength measure

Step 2
based on its perceived importance.

Rate the firm and its rivals on each competitive strength

Step 3 measure and multiply by each measure by its
corresponding weight.

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A REPRESENTATIVE WEIGHTED COMPETITIVE
STRENGTH ASSESSMENT

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 STRATEGIC
MANAGEMENT
PRINCIPLE
A company’s competitive strength scores
pinpoint its strengths and weaknesses against
rivals and point directly to the kinds of
offensive/defensive actions it can use to exploit
its competitive strengths and reduce its
competitive vulnerabilities.

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 STRATEGIC IMPLICATIONS OF
COMPETITIVE STRENGTH
ASSESSMENT
• The higher a firm’s overall weighted strength rating, the
stronger its overall competitiveness versus rivals.
• The rating score indicates the total net competitive
advantage for a firm relative to other firms.
• Firms with high competitive strength scores are targets for
benchmarking.
• The ratings show how a firm compares against rivals,
factor by factor (or capability by capability).
• Strength scores can be useful in deciding what strategic
moves to make.

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 STRATEGIC
MANAGEMENT
PRINCIPLE
A good strategy must contain ways to deal
with all the strategic issues and obstacles
that stand in the way of the company’s
financial and competitive success in the
years ahead.

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QUESTION 6: WHAT STRATEGIC ISSUES
AND PROBLEMS MERIT FRONT-BURNER
MANAGERIAL ATTENTION?
• Strategic “How To” Issues:
– How to meet challenges of new foreign
competitors.
– How to combat the price discounting of rivals.
– How to both reduce high costs and prepare for
price reductions.
– How to sustain growth as buyer demand slows.
– How to adapt to the changing demographics of the
firm’s customer base.

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QUESTION 6: WHAT STRATEGIC ISSUES
AND PROBLEMS MERIT FRONT-BURNER
MANAGERIAL ATTENTION?

• Strategic “Should We” Issues:

– Expand rapidly or cautiously into foreign markets.
– Reposition the firm to move to a different strategic
group.
– Counter increasing buyer interest in substitute
products.
– Expand of the firm’s product line.
– Correct the firm’s competitive deficiencies by
acquiring a rival firm with the missing strengths.

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 STRATEGIC
MANAGEMENT
PRINCIPLE
Zeroing in on the strategic issues a
company faces and compiling a list of
problems and roadblocks creates a strategic
agenda of problems that merit prompt
managerial attention.

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