Thinking Strategically about the Companys internal environment: Resources and Competitive position

By: Prof R.K. Verma Dean, SBS, Sharda University

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The Components of a Companys Macro-Environment

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Company industry& competitive environment

The Strategically Relevant Components of a Companys External Environment Thinking Strategically About a Companys Industry and Competitive

Environment Question 1: What Are the Industrys Dominant Economic Features? Question 2: What Kinds of Competitive Forces Are Industry Members Facing? Question 3: What Factors Are Driving Industry Change and What Impacts Will They Have? Question 4: What Market Positions Do Rivals OccupyWho Is Strongly Positioned and Who Is Not? Question 5: What Strategic Moves Are Rivals Likely to Make Next? Question 6: What Are the Key Factors for Future Competitive Success? Question 7: Does the Outlook for the Industry Present an Attractive Opportunity?

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Strategic Implications of the Five Competitive Forces

Sr. No. Competitive Forces Strong 1 2 3 4 5 6 Rivalry among competing sellers Buyers Supplirs New Entrants Substitute products Implication vigorous Bargaining leverage Bargaining leverage Low entry barrirs Intense Unattractive Type of pressure Moderate Weak Weak / moderate Weak Weak High barriars No good Superior profit

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Common Types of Driving Forces

Internet and e-commerce opportunities Increasing globalization of industry Changes in long-term industry growth rate Changes in who buys the product and

how they use it

Product innovation

Technological change/process innovation

Marketing innovation
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Common Types of Driving Forces

Entry or exit of major firms Diffusion of technical knowledge Changes in cost and efficiency Consumer preferences shift from standardized to differentiated

products (or vice versa)

Changes in degree of uncertainty and risk

Regulatory policies / government legislation

Changing societal concerns, attitudes, and lifestyles
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What Market Positions Do Rivals Occupy?

One technique to reveal

different competitive positions of industry rivals is strategic group mapping

A strategic group is a

cluster of firms in an industry with similar competitive approaches and market positions

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What strategic moves are rivals likely to make a next?

Which

rival has the best strategy? Which rivals appear to have weak strategies? firms are poised to gain market share, and which ones seen destined to lose ground? rivals are likely to rank among the industry leaders five years from now? Do any up-and-coming rivals have strategies and the resources to overtake the current industry leader?

Which

Which

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Key Success Factor

Technology-Product & Production technology, patent, trademark Manufacturing- Scale of economy & experience curve

Distribution supply chain, wholesaler & retailer network

Marketing Brand, Product line, technical assistance & CRM Skill & capabilities talented workforce, product innovation, motivation,

design
Other types overall low cost, convenient location, agility

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Does the Outlook for the Industry Present an Attractive Opportunity?

Involves assessing whether the industry

and competitive environment is attractive or unattractive for earning good profits

Under certain circumstances, a firm uniquely

well-situated in an otherwise unattractive industry can still earn unusually good profits
Attractiveness Conclusions

is relative, not absolute

have to be drawn from the perspective of a particular company

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Core Concept: Assessing Industry Attractiveness

The degree to which an industry is attractive or unattractive is often not the same for all industry participants or potential entrants. The opportunities an industry presents depend partly on a companys ability to capture them.
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Before executives can

chart a new strategy, they

must reach common

understanding of the

companys current position.

W. Chan Kim and Renee Mauborgne

Evaluating a companys resources-Questions

Question 1: How Well Is the Companys Present Strategy

Working? Question 2: What Are the Companys Resource Strengths and Weaknesses and Its External Opportunities and Threats? Question 3: Are the Companys Prices and Costs Competitive? Question 4: Is the Company Competitively Stronger or Weaker than Key Rivals? Question 5: What Strategic Issues and Problems Merit FrontBurner Managerial Attention? (Tools: SWOT analysis, Value chain analysis, benchmarking & competitive strength assessment)

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Company Situation Analysis: The Key Questions

1. How well is the companys present strategy working? 2. What are the companys resource strengths and weaknesses and its external opportunities and threats? 3. Are the companys prices and costs competitive? 4. Is the company competitively stronger or weaker than key rivals? 5. What strategic issues merit front-burner managerial attention?
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Q #1: How Well Is the Companys Present Strategy Working?

Key Issues
Identify competitive approach
Low-cost

leadership

Differentiation Focus

on a particular market niche market coverage

Determine competitive scope

Geographic Operating

stages in industrys production/distribution chain

Examine recent strategic moves Identify functional strategies

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Identifying the Components of a SingleBusiness Companys Strategy

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Approaches to Assess How Well the Present Strategy Is Working

Qualitative assessment Quantitative assessment What

What is the strategy?

are the results?

Completeness Internal consistency Rationale Relevance

Is company achieving its financial and strategic objectives? Is company an above-average industry performer?

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Qualitative Assessment
1)

Profitability ratios

3)

Leverage ratios

Gross Profit Margin Operating profit margin Net Profit margin Return on total assets Return on stockholders equity Earning per share
2)

Debt-to-assets ratio Debt-to-equity ratio Long-term debt-to-equity ratio Times-interest-earned ratio

4)

Activity ratios
Days of inventory Inventory turnover Average collection period Other Important

Liquidity ratios

Current ratio Quick ratio Working capital

5)

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Dividend yield on common stock Price/earnings ratio Dividend payout ratio Internal Cash flow

Key Indicators of How Well the Strategy Is Working

Trend in sales and market share Acquiring and/or retaining customers Trend in profit margins Trend in net profits, ROI, and EVA Overall financial strength and credit ranking Efforts at continuous improvement activities Trend in stock price and stockholder value

Image and reputation with customers

Leadership role(s) Technology, quality,

innovation,

e-commerce, etc.
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Q #2: What Are the Companys Strengths, Weaknesses, Opportunities and Threats ?
S W O T represents the first letter in
S

trengths eaknesses pportunities hreats

W O T

S O

W T

For a companys strategy to be well-conceived, it must be

Matched

to its resource strengths and weaknesses

Aimed

at capturing its best market opportunities and erecting defenses against external threats to its well-being

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Identifying Resource Strengths and Competitive Capabilities

A strength is something a firm does well or an attribute that

enhances its competitiveness

Valuable competencies or know-how Valuable physical assets Valuable human assets Valuable organizational assets Valuable intangible assets Important competitive capabilities An attribute that places a company in a position of market advantage Alliances or cooperative ventures with partners

Resource strengths and competitive capabilities are competitive assets!

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Competencies vs. Core Competencies vs. Distinctive Competencies

A competence is the product of organizational learning and

experience and represents real proficiency in performing an internal activity

A core competence is a well-performed

internal activity central (not peripheral or incidental) to a companys competitiveness and profitability
A distinctive competence is a competitively valuable activity a

company performs better than its rivals

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Company Competencies and Capabilities

Stem from skills, expertise, and

experience usually representing an

Accumulation

of learning over time and Gradual buildup of real proficiency in performing an activity
Involve deliberate efforts to develop the ability to do

something, often entailing

Selecting

people with requisite knowledge and skills Upgrading or expanding individual abilities Molding work products of individuals into a cooperative effort to create organizational ability A conscious effort to create intellectual capital
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Core Competencies -- A Valuable Company Resource

A competence becomes a core competence when the well-

performed activity is central to a companys competitiveness and profitability

Often, a core competence results from collaboration

among different parts of a company

Typically, core competencies reside in a companys

people, not in assets on a balance sheet

A core competence gives a company a

potentially valuable competitive capability and represents a definite competitive asset

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Examples: Core Competencies

Expertise in integrating multiple technologies

to create families of new products

Know-how in creating operating systems

for cost efficient supply chain management

Speeding new/next-generation products to market
Better after-sale service capability Skills in manufacturing a high quality product System to fill customer orders accurately and swiftly
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Distinctive Competence -- A Competitively Superior Resource

A distinctive competence is a competitively significant activity

that a company performs better than its competitors

A distinctive competence
Represents

a competitively valuable capability rivals do not have

#1

Presents
Can

attractive potential for being a cornerstone of strategy

provide a competitive edge in the marketplace because it represents a competitively superior resource strength

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Examples: Distinctive Competencies

Sharp Corporation
Expertise

in flat-panel display technology

Toyota and Honda

Low-cost,

high-quality manufacturing capability and short design-to-market cycles to design and manufacture ever more powerful microprocessors for PCs distribution and use of state-of-the-art retail technology

Intel
Ability

Wal-Mart
Low-cost

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Determining the Competitive Value of a Company Resource

To qualify as competitively valuable or to be the basis for

sustainable competitive advantage, a resource must pass 4 tests:

1. Is the resource hard to copy?

2. Does the resource have staying power is it durable?

3. Is the resource really competitively superior? 4. Can the resource be trumped by the different capabilities of rivals?
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Identifying Resource Weaknesses and Competitive Deficiencies

A weakness is something a firm lacks, does poorly, or a

condition placing it at a disadvantage

Resource weaknesses relate to

Inferior or unproven skills, expertise, or intellectual capital Lack of important physical, organizational, or intangible assets Missing capabilities in key areas

Resource weaknesses and deficiencies are competitive liabilities!

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Identifying a Companys Market Opportunities

Opportunities most relevant to a

company are those offering

Good

match with its financial and organizational resource capabilities prospects for profitable long-term growth

Best

Potential

for competitive advantage

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Identifying External Threats

Emergence of cheaper/better technologies Introduction of better products by rivals Entry of lower-cost foreign competitors Onerous regulations

Rise in interest rates

Potential of a hostile takeover Unfavorable demographic shifts

Adverse shifts in foreign exchange rates

Political upheaval in a country
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SWOT

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Role of SWOT Analysis in Crafting a Better Strategy

The most important part of S W O T analysis is not

developing the 4 lists of strengths, weaknesses, opportunities, and threats, but rather
Using

the 4 lists to draw conclusions about a companys overall situation and

Acting

on the conclusions to

Better match a companys strategy to its

resource strengths and market opportunities,

Correct the important weaknesses, and
Defend against external threats
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The Three Steps of SWOT Analysis

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Q #3: Are the Companys Prices and Costs Competitive?

Assessing whether a firms costs are competitive with

those of rivals is a crucial part of company analysis

Key analytical tools

Value

chain analysis-Activity

based costing
Benchmarking

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Best practice ; cost and effectiveness

The Concept of a Company Value Chain

A companys business consists of all activities undertaken in

designing, producing, marketing, delivering, and supporting its product or service

A companys value chain consists of a linked set of value-

creating activities performed internally

The value chain contains two types of activities
Primary Support

activities where most of the value for customers is created activities facilitate performance of the primary activities

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Representative Company Value Chain

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The Value Chain: Primary and Support Activities

The Value Chain
General administration Human resource management Technology development

Procurement Inbound logistics

Operations

Outboun d logistics

Marketing and sales

Service

Primary Activities

Source: Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright 1998 by Michael E. Porter.

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The Value Chain: Some Factors to Consider in Assessing a Firms Primary Activities
Location of distribution facilities to minimize shipping times Excellent material and inventory control systems Systems to reduce time to send returns to suppliers Warehouse layout and designs to increase efficiency of operations for incoming materials Efficient plant operations to minimize costs Appropriate level of automation in manufacturing Quality production control systems to reduce costs and enhance quality Efficient plant layout and workflow design Effective shipping processes to provide quick delivery and minimize damages Efficient finished goods warehousing processes Shipping of goods in large lot sizes to minimize transportation costs Quality material handling equipment to increase order picking Highly motivated and competent sales force Innovative approaches to promotion and advertising Selection of most appropriate distribution channels Proper identification of customer segments and needs Effective pricing strategies Effective use of procedures to solicit customer feedback and to act on information Quick response to customer needs and emergencies Ability to furnish replacement parts as required Effective management of parts and equipment inventory Quality of service personnel and ongoing training Appropriate warranty and guarantee policies

Inbound Logistics
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Operations

Outbound Logistics

Marketing and Sales

Service

The Value Chain: Some Factors to Consider in Assessing Firms Support Activities
Effective planning systems to attain overall goals and objectives Ability of top management to anticipate and act on key environmental trends and events Ability to obtain low cost funds for capital expenditures and working capital Excellent relationships with diverse stakeholder groups Ability to coordinate and integrate activities across the value system Highly visible to inculcate organizational culture, reputation, and values

General Administration
Effective recruiting, development, and retention mechanisms for employees

Quality relations with trade unions

Quality work environment to maximize overall employee performance and minimize absenteeism Reward and incentive programs to motivate all employees

Human Resource Management

Effective research and development activities for process and product initiatives Positive collaborative relationships between R&D and other departments State-of-the art facilities and equipment Culture to enhance creativity and innovation Excellent professional qualifications of personnel Ability to meet critical deadlines

Technology Development

Procurement of raw material inputs to optimize quality, speed and minimize the associated costs Development of collaborative win-win relationships with suppliers Effective procedures to purchase advertising and media services Ability to make proper lease versus buy decisions

Procurement

Analysis and selection of alternate sources of inputs to minimize dependence on one supplier

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Characteristics of Value Chain Analysis

Combined costs of all activities in a companys value chain

define the companys internal cost structure

Compares a firms costs activity

by activity against costs of key rivals

From
Price

raw materials purchase to

paid by ultimate customer

Pinpoints which internal activities are a

source of cost advantage or disadvantage

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Why Do Value Chains of Rivals Differ?

Several factors can cause differences

in value chains of rival companies

Internal Strategy

operations

Approaches
Underlying

used in execution of the strategy

economics of the activities

Differences complicate task of assessing

rivals relative cost positions

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The Value Chain System for an Entire Industry

Assessing a companys cost competitiveness involves

comparing costs all along the industrys value chain Suppliers value chains are relevant because
Costs,

performance features, and quality of inputs provided by suppliers influence a firms own costs and product performance

Forward channel allies value chains are relevant because

Costs

and margins are part of price paid by ultimate end-user Activities performed affect end-user satisfaction

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Representative Value Chain for an Entire Industry

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Example: Value Chain Activities

Pulp & Paper Industry Timber farming Logging Pulp mills Papermaking Distribution
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Example: Value Chain Activities

Home Appliance Industry Parts and components manufacture

Assembly
Wholesale distribution Retail sales
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Example: Value Chain Activities

Soft Drink Industry Processing of basic ingredients

Syrup manufacture
Bottling and can filling Wholesale distribution Advertising Retailing
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Albertsons

Example: Value Chain Activities

Software Computer Industry Programming Disk loading

Marketing
Distribution
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Developing Data to Measure a Companys Cost Competitiveness

After identifying key value chain activities, the next step

involves breaking down departmental cost accounting data into costs of performing specific activities
Appropriate degree of disaggregation depends on
Economics Value

of activities

of comparing narrowly defined versus broadly defined activities different economics a significant or growing proportion of costs

Guideline Develop separate cost estimates for activities

Having

Representing
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Activity-Based Costing: A Key Tool in Analyzing Costs

Determining whether a companys costs are in line with those

of rivals requires
Measuring

how a companys costs compare with those of rivals activity-by-activity

Requires having accounting data to measure cost

of each value chain activity Activity-based costing entails

Defining

expense categories according to specific activities performed and Assigning costs to the activity responsible for creating the cost
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Benchmarking Costs of Key Value Chain Activities

Focuses on cross-company comparisons of how certain

activities are performed and costs associated with these activities

Purchase

of materials Payment of suppliers Management of inventories Getting new products to market Performance of quality control Filling and shipping of customer orders Training of employees Processing of payrolls
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Objectives of Benchmarking
Identify best practices in performing an activity

Understand the best practices in performing

an activity learn what is the best way to do a particular activity from those demonstrating they are best-in-world
Learn how other firms achieve lower costs Take action to improve companys cost competitiveness
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Ethical Standards in Benchmarking: Dos and Donts

Avoid talk about pricing or

competitively

sensitive costs
Dont ask rivals for sensitive data Dont share proprietary data without clearance Have impartial third party assemble and present competitively

sensitive cost data with no names attached

Dont disparage a rivals business to outsiders based on data

obtained
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What Determines if a Company Is Cost Competitive?

Cost competitiveness depends on how well a company

manages its value chain relative to how well competitors manage their value chains When costs are out-of-line, high-cost activities can exist in any of three areas in the industry value chain
1. Suppliers activities 2. Companys own internal activities 3. Forward channel activities
Activities, Costs, & Margins of Suppliers Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Forward Channel Allies

Buyer/User Value Chains

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Options to Correct Internal Cost Disadvantages

Implement use of best practices throughout company Eliminate some cost-producing activities altogether by revamping

value chain system

Relocate high-cost activities to lower-cost geographic areas See if high-cost activities can be performed

cheaper by outside vendors/suppliers

Invest in cost-saving technology Innovate around troublesome cost components

Simplify product design

Make up difference by achieving savings in backward or forward

portions of value chain system

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Remedying Supplier related cost Disadvantage

Negotiate Lower Prices Switching Lower Price Subsititude Collaborating with Vendors

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Translating Performance of Value Chain Activities to Competitive Advantage

A company can create competitive advantage by managing its

value chain to
Integrate

knowledge and skills of employees in competitively valuable ways economies of learning / experience

Leverage

Coordinate

related activities in ways that build valuable capabilities dominating expertise in a value chain activity critical to customer satisfaction or market success

Build

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Translating Performance of Value Chain Activities into Competitive Advantage

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Q. #4: Is the Company Stronger or Weaker than Key Rivals?

Overall competitive position involves

answering two questions

How

does a company rank relative to competitors on each important factor that determines market success? a company have a net competitive advantage or disadvantage vis--vis major competitors?

Does

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Assessing a Companys Competitive Strength vs. Key Rivals

1. List industry key success factors and other relevant measures of competitive strength 2. Rate firm and key rivals on each factor using rating scale of 1 to 10 (1 = very weak; 5 = average; 10 = very strong) 3. Decide whether to use a weighted or unweighted rating system
(a weighted system is superior because chosen strength measures are unlikely to be equally important)

4. Sum individual ratings to get an overall measure of competitive strength for each rival 5. Based on overall strength ratings, determine overall competitive position of firm
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ECIs Balanced Business Scorecard

Financial Perspective
GOALS MEASURES

Internal Business Perspective

GOALS
Manufacturing excellence

MEASURES
Cycle time Unit cost Yield Silicon efficiency Engineering efficiency Actual introduction schedule versus plan

Survive Succeed Prosper

Cash Flow Quarterly sales growth and operating income by division Increased market share and ROE Design productivity New product introduction

Customer Perspective
GOALS
New products

Innovation and Learning Perspective

GOALS
Technology leadership

MEASURES
Percent of sales from new products On-time delivery (defined by customer) Number of cooperative engineering efforts

MEASURES
Time to develop next generation Process time to maturity

Manufacturing learning

Product focus
Responsive supply Time to market

Percent of products that equal 80% sales

New product introduction versus competition

Customer partnership

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Why Do a Competitive Strength Assessment ?

Reveals strength of firms competitive position

vis--vis key rivals Shows how firm stacks up against rivals, measure-by-measure pinpoints firms competitive strengths and competitive weaknesses Indicates whether firm is at a competitive advantage / disadvantage against each rival Identifies possible offensive attacks (pit company strengths against rivals weaknesses) Identifies possible defensive actions (a need to correct competitive weaknesses)
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What Strategic Issues Merit Managerial Attention?

Based on results of both industry and competitive analysis and

an evaluation of a companys competitiveness, what items should be on a companys worry list? Requires thinking strategically about
Pluses

and minuses in the industry and competitive situation Companys resource strengths and weaknesses and attractiveness of its competitive position

A good strategy must address what to do about each and every strategic issue!
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Identifying the Strategic Issues

How to stave off market challenges from new foreign competitors? How to combat price discounting of rivals? How to reduce a companys high costs? How to sustain a companys present growth

in light of slowing buyer demand?

Whether to expand a companys 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 companys customer

base?
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Stating the Issues Clearly and Precisely

A well-stated issue involves such phrases as
How

to . . . ? to . . . ? should be done about . . . ?

Whether What

Issues need to be precise, specific,

and cut straight to the chase

Issues on the the worry list

raise questions about

What What
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actions need to be considered to think about doing

After studying this chapter, you should have a good understanding of:
The benefits and limitations of SWOT analysis in conducting an internal
analysis of the firm. The primary and support activities of a firm's value chain. How value-chain analysis can help managers create value by investigating relationships among activities within the firm and among the firm and its customers and suppliers. The different types of tangible and intangible resources, as well as organizational capabilities. The four criteria that a firm's resources must possess to maintain a sustainable advantage. The usefulness of financial ratio analysis as well as its inherent limitations. How to make meaningful comparisons of performance across firms. The value of recognizing how the interests of a variety of stakeholders can be interrelated.

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