Evaluating A Company’s Resources, Capabilities, And Competitiveness
Chapter 4 discusses the techniques of evaluating a company’s internal circumstances—its resource capabilities, relative cost position, and competitive strength versus rivals. The analytical spotlight will be trained on five questions:
How well is the company’s present strategy working?
What are the company’s competitively important resources and capabilities?
Is the company able to take advantage of market opportunities and overcome external threats to its external well-being?
Are the company’s prices and costs competitive with those of key rivals, and does it have an appealing customer value proposition?
What strategic issues and problems merit front-burner managerial attention?
In probing for answers to these questions, four analytical tools—SWOT analysis, value chain analysis, benchmarking, and competitive strength assessment will be used. All four are valuable techniques for revealing a company’s competitiveness and for helping company managers match their strategy to the company’s own particular circumstances.
I. Question 1: How Well is the Company’s Present Strategy Working?
1. In evaluating how well a company’s present strategy is working, a manager has to start with what the strategy is.
2. See Figure 4.1 – Identifying the Components of a Single-Business Company’s Strategy
3. The first thing to pin down is the company’s competitive approach.
4. Another strategy-defining consideration is the firm’s competitive scope within the industry
5. Another good indication of the company’s strategy is whether the company has made moves recently to improve its competitive position and performance.
6. While there is merit in evaluating the strategy from a qualitative standpoint (its completeness, internal consistency, rationale, and relevance), the best quantitative evidence of how well a company’s strategy is working comes from its results.
7. The two best empirical indicators are:
a. Whether the company is achieving its stated financial and strategic objectives
b. Whether the company is an above-average industry performer
8. Other indicators of how well a company’s strategy is working include:
a. Whether the firm’s sales are growing faster, slower, or about the same pace as the market as a whole.
b. Whether the company is acquiring new customers at an attractive rate as well as retaining existing customers.
c. Whether the firm’s profit margins are increasing or decreasing and how well its margins compare to rival firms’ margins
d. Trends in the firm’s net profits and returns on investment and how these compare to the same trends for other companies in the industry.
e. Whether the company’s overall financial strength and credit rating are improving or declining.
f. How shareholders view the company based on trends in the company’s stock price and shareholder value.
g. Whether the firm’s image and reputation with its customers are growing stronger or weaker.
h. How well the company stacks up against rivals on technology, product innovation, customer service, product quality, delivery time, getting newly developed products to market quickly, and other relevant factors on which buyers base their choices.
i. Whether key measures of operating performance are improving, remaining steady, or deteriorating.
9. The stronger a company’s current overall performance, the less likely the need for radical changes in strategy. The weaker a company’s financial performance and market standing, the more its current strategy must be questioned. Weak performance is almost always a sign of weak strategy, weak execution, or both.
II. Question 2: What are the Company’s Competitively Important Resources and Capabilities?
1. See Table 4.1 – Key Financial Ratios: How to Calculate Them and What They Mean
2. Core Concept: A resource is a productive input or competitive asset that is owned or controlled by the firm while a capability is the capacity of a firm to perform some activity proficiently.
3. It is essential that managers be able to identify the company’s resources and capabilities in order to craft strategy. 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.
4. Core Concept: A company’s resources and capabilities represent its competitive assets and are big determinants of its competitiveness and ability to succeed in the marketplace.
5. See Table 4.2 – Types of Company Resources
6. Identifying Capabilities – Organizational capabilities are more complex than resources and are harder to categorize and search out. Two methods for identifying capabilities are available:
a. Start with a list of resources since capabilities are built from resources and look for clues about the types of capabilities the firm is likely to have accumulated
b. Start with a list of functions within the organization as capabilities are largely derived from key functional components of the organization.
7. Core Concept: A resource bundle is a linked and closely integrated set of competitive assets centered around one or more cross-functional capabilities.
8. Determining if a company’s resources and capabilities are potent enough to produce a sustainable competitive advantage is based upon four tests of competitive power:
a. Core Concept: A sustainable competitive advantage is an advantage over market rivals that persists despite efforts of the rivals to overcome it.
b. Is the resource or capability competitively valuable? Is it directly relevant to the company’s strategy?
c. Is the resource or capability rare? Is it something rivals lack?
d. Is the resource or capability hard to copy? Is it built over time or unique?
e. Can the resource or capability be trumped by different types of resources or capabilities? Are good substitutes available for the resource or capability?
f. Core Concept: Social complexity and casual ambiguity are two factors that inhibit the ability of rivals to imitate a firm’s most valuable resources and capabilities. Casual ambiguity makes it very hard to figure out how a complex resource or capability contributes to competitive advantage and therefore exactly what to imitate.
g. A company’s resources and capabilities must be managed dynamically. This requires a constantly evolving portfolio to sustain its competitiveness and help drive improvements in its performance.
h. CORE CONCEPT: A dynamic capability is the capacity of a company to modify its existing resources and capabilities to create new ones.
III. Question 3: Is the Company Able to Seize Market Opportunities and Nullify External Threats?
1. Appraising a company’s resource strengths and weaknesses and its external opportunities and threats, commonly known as SWOT analysis, provides a good overview of whether its overall situation is fundamentally healthy or unhealthy. A first-rate SWOT analysis provides the basis for crafting a strategy that capitalizes on the company’s resources, aims squarely at a capturing the company’s best opportunities, and defends against the threats to its well-being.
2. Core Concept: SWOT analysis is a simple but powerful tool for sizing up a company’s resource capabilities and deficiencies, its market opportunities, and the external threats to its future well-being.
3. Identifying a Company’s Internal Strengths – Assessing a company’s competencies involved looking for activities it perms well. One of the most important aspects of appraising a company’s resource strengths has to do with its competence level in performing key pieces of its business. Company competencies can range from merely a competence in performing an activity to a core competence to a distinctive competence.
a. Core Concept: A competence is something an organization is good at doing. It is nearly always the product of experience, representing an accumulation of learning and the buildup of proficiency in performing an internal activity. A core competence is a proficiently performed internal activity that is central to a company’s strategy and competitiveness. A core competence is a more valuable resource strength than a competence because of the well-performed activity’s core role in the company’s strategy and the contributions it makes to the company’s success in the marketplace.
b. CORE CONCEPT: A distinctive competence is a competitively important activity that a company performs better than its rivals – it thus represents a competitively superior internal strength.
c. The conceptual differences between a competence, a core competence, and a distinctive competence draw attention to the fact that competitive capabilities
d. Core competencies are competitively more important than simple competencies because they add power to the company’s strategy and have a bigger positive impact on its market position and profitability.
e. The importance of a distinctive competence to strategy-making rests with:
i. the competitively valuable capability it gives a company,
ii. its potential for being the cornerstone of strategy, and
iii. the competitive edge it can produce in the marketplace
4. Identifying a Company’s Weaknesses and Competitive Deficiencies - A weakness or competitive deficiency is something a company lacks or does poorly in comparison to others or a condition that puts it at a disadvantage in the marketplace.
a. Core Concept: A company’s strengths represent its competitive assets; its weaknesses are shortcomings that constitute competitive liabilities.
b. See Table 4.3 – What to Look for in Identifying a Company’s Strengths, Weaknesses, Opportunities, and Threats
5. Identifying a Company’s Market Opportunities - Seeking out attractive opportunities is a critical management function. However, a company is well advised to pass on a particular market opportunity unless it has or can acquire the resources to capture it.
a. Market opportunity is a big factor in shaping a company’s strategy.
b. Managers cannot properly tailor strategy to the company’s situation without first identifying its opportunities and appraising the growth and profit potential each one holds.
c. In evaluating a company’s market opportunities and ranking their attractiveness, managers have to guard against viewing every industry opportunity as a company opportunity.
d. The market opportunities most relevant to a company are those that match up well with the company’s financial and organizational resource capabilities, offer the best growth and profitability, and present the most potential for competitive advantage.
6. Identifying the External Threats to Profitability - Certain factors in a company’s external environment pose threats to its profitability and competitive well-being.
a. Examples of threats include: the emergence of cheaper or better technologies, rivals’ introduction of new or improved products, lower-cost foreign competitors’ entry into a company’s market stronghold, new regulations, and so on.
b. It is management’s job to identify the threats to the company’s future profitability and to evaluate what strategic actions can be taken to neutralize or lessen their impact.
7. What do the SWOT listings Reveal? SWOT analysis involves more than making four lists. The two most important parts of SWOT analysis are:
a. Drawing conclusions from the SWOT listings about the company’s overall situation
b. Acting on those conclusions to better match the company’s strategy to its resource strengths and market opportunities, to correct important weaknesses, and to defend against external threats
c. See Figure 4.2 – The Three Steps of SWOT Analysis: Identify, Draw Conclusions, Translate into Strategic Action
d. Just what story the SWOT analysis tells about the company’s overall situation can be summarized in a series of questions relating strengths to weakness, strengths to opportunities, and strengths to threats.
8. Implications for SWOT analysis for strategic action - A company’s internal strengths should always serve as the basis of its strategy. This places a heavy reliance on a company’s best competitive assets and is the soundest route to attracting customers and competing successfully against rivals.
IV. Question 4: Are the Company’s Prices and Costs Competitive with Those of Key Rivals, and Does it Have an Appealing Customer Value Proposition?
1. One of the most telling signs of whether a company’s business position is strong or precarious is whether its prices and costs are competitive with industry rivals.
2. Price-cost comparisons are especially critical in a commodity-product industry where the value provided to buyers is the same from seller to seller, price competition is typically the ruling force and lower-cost companies have the upper hand. The higher a company’s costs are above those of close rivals, the more competitively vulnerable it becomes.
3. Two analytical tools are particularly useful in determining whether a company’s prices and costs are competitive and thus conducive to winning in the marketplace: value chain analysis and benchmarking.
4. The Concept of a Company’s Value Chain
a. Core Concept: A company’s value chain identifies the primary activities that create customer value and the related support activities.
b. See Figure 4.3 – A Representative Company Value Chain
c. The value chain consists of two broad categories of activities:
i. Primary activities: foremost in creating value for customers
ii. Support activities: facilitate and enhance the performance of primary activities
d. See Illustration Capsule 4.1 – Estimated Value Chain Costs for Just Coffee, a Producer of Fair- Trade Organic Coffee
i. Discussion Question: What are the total costs associated with production and packaging of a pound of Fair-Trade Organic Coffee? Why is having this knowledge important to such a company?
ii. Answer: According to the information provided in the table, Just Coffee’s costs are $7.40l. With an average markup of $2.59, the average price to the consumer is $9.99. This information is important because a company most know its actual and correct costs of production in order to establish fair product pricing in the marketplace.
5. Why the Value Chains of Rival Companies Often Differ
a. A company’s value chain and the manner in which it performs each activity reflect the evolution of its own particular business and internal operations, its strategy, the approaches it is using to execute its strategy, and the underlying economics of the activities themselves.
b. Because these factors differ from company to company, the value chain of rival companies sometimes differ substantially—a condition that complicates the task of assessing rivals’ relative cost positions.
6. The Value Chain System for an Entire Industry
a. Accurately assessing a company’s competitiveness in end-use markets requires that company managers understand the entire value chain system for delivering a product or service to end-users, not just the company’s own value chain.
b. See Figure 4.4 – A Representative Value Chain for an Entire Industry
c. Suppliers’ value chains are relevant because suppliers perform activities and incur costs in creating and delivering the purchased inputs used in a company’s own value chain.
d. Forward channel and customer value chains are relevant because:
i. The costs and margins of a company’s distribution allies are part of the price the end user pays
ii. The activities that distribution allies perform affect the end user’s satisfaction
7. Activity-Based Costing: A Tool for Assessing a Company’s Cost Competitiveness
a. The next step in evaluating a company’s cost competitiveness involves disaggregating or breaking down departmental cost accounting data into the costs of performing specific activities.
b. Traditional accounting identifies costs according to broad categories of expense. A newer method, activity-based costing, entails defining expense categories according to the specific activities being performed and then assigning costs to the activity responsible for creating the cost.
c. See Table 4.3 – The Differences between Traditional Cost Accounting and Activity-Based Cost Accounting: A Supply Chain Activity Example
d. 4. Perhaps 25% of the companies that have explored the feasibility of activity-based costing have adopted this accounting approach.
8. Benchmarking: A Tool for Assessing Whether a Company’s Value Chain Costs are in Line
a. Benchmarking is a tool that allows a company to determine whether the manner in which it performs particular functions and activities represent industry “best practices” when both cost and effectiveness are taken into account.
b. CORE CONCEPT: Benchmarking is a potent tool for learning which companies are best at performing particular activities and then using their techniques or “best practices” to improve the cost and effectiveness of a company’s own internal activities.
c. Benchmarking entails comparing how different companies perform various value chain activities.
d. The objectives of benchmarking are:
i. To identify the best practices in performing an activity
ii. To learn how other companies have actually achieved lower costs or better results in performing benchmarked activities
iii. To take action to improve a company’s competitiveness whenever benchmarking reveals that its costs and results of performing an activity do not match those of other companies
e. The tough part of benchmarking is not whether to do it but rather how to gain access to information about other companies’ practices and costs.
f. Core Concept: Benchmarking the costs of company activities against rivals provides hard evidence of a company’s cost-competitiveness.
g. Sometimes benchmarking can be accomplished by collecting information from published reports, trade groups, and industry research firms and by talking to knowledgeable industry analysts, customers, and suppliers.
h. Making reliable cost comparisons is complicated by the fact that participants often use different cost accounting systems.
i. The explosive interest of companies in benchmarking costs and identifying best practices has prompted consulting organizations to gather benchmarking data, do benchmarking studies, and distribute information about best practices without identifying sources. Having an independent group gather the information and report it in a manner that disguises the names of individual companies’ permits participating companies to avoid disclosing competitively sensitive data to rivals and reduces the risk of ethical problems.
j. See Illustration Capsule 4.2 – Benchmarking and Ethical Conduct
9. Strategic Options for Remedying a Cost Disadvantage
a. Value chain analysis and benchmarking can reveal a great deal about a firm’s cost competitiveness.
b. There are three main areas in a company’s overall value chain where important differences in the costs of competing firms can occur: a company’s own activity segments, suppliers’ part of the industry value chain, and the forward channel portion of the industry chain.
10. Improving the Efficiency and Effectiveness of Internally Performed Value Chain Activities
a. When the source of a firm’s cost disadvantage is internal, managers can use any of the following eight strategic approaches to restore cost parity:
i. Implement the use of best practices throughout the company, particularly for high-cost activities
ii. Try to eliminate some cost-producing activities altogether by revamping the value chain
iii. Redesign the product and/or some of its components to eliminate high cost components so that it can be manufactured or assembled quickly and more economically
iv. See if certain internally performed activities can be outsourced from vendors or performed by contractors more cheaply than they can be done internally
v. Shift to lower-cost technologies and/or invest in productivity enhancing cost saving technological improvements.
vi. Stop performing activities that add little or no customer value.
b. To improve the effectiveness of the company’s value proposition there are several steps the company may take:
i. Implement the use of best practices for quality throughout the company.
ii. Adopt best practices and technologies that spur innovation, improve design, and enhance creativity.
iii. Implement the use of best practices in customer service.
iv. Reallocate resources towards activities that have the biggest impact of value delivered to the customer.
v. Gain a deep understanding of how company activities impact the buyer’s value chain and improve those that have the most significant impact.
vi. Adopt best practices for signaling value to the customer.
11. Improving the Efficiency and Effectiveness of Suppler Related Value Chain Activities: Supplier-related cost disadvantages can be attacked by pressuring suppliers for lower prices, switching to lower-priced substitute inputs, and collaborating closely with suppliers to identify mutual cost-saving opportunities. There are three main ways to combat a cost disadvantage in the forward portion of the industry value chain:
a. Pressure dealer-distributors and other forward channel allies to reduce their costs and markups so as to make the final price to buyers more competitive with the prices of rivals.
b. Collaborate with forward channel allies to identify win-win opportunities to reduce costs.
c. Change to a more economical distribution strategy, including switching to cheaper distribution channels or perhaps integrating forward into company-owned retail outlets.
12. Translating Proficient Performance of Value Chain Activities into Competitive Advantage
a. A company that does a first-rate job of managing its value chain activities relative to competitors stands a good chance of leveraging its competitively valuable competencies and capabilities into sustainable competitive advantage.
b. Performing value chain activities in ways that give a company the capabilities to either outmatch the competencies and capabilities of rivals or else beat them on costs are two good ways to secure competitive advantage.
c. See Figure 4.5 – Translating Company Performance of Value Chain Activities into Competitive Advantage
13. Competitive Strength Assessments
a. Using value chain analysis and benchmarking to determine a company’s competitiveness on price and cost is necessary but not sufficient.
b. The answers to two questions are of particular interest:
i. How does the company rank relative to competitors on each of the important factors that determine market success?
ii. Does the company have a net competitive advantage or disadvantage to major competitors?
c. An easy method for answering the questions posed above involves developing quantitative strength ratings for the company and its key competitors on each industry key success factor and each competitively decisive resource capability.
d. The followings are steps for compiling a competitive strength assessment:
i. Step 1: make a list of the industry’s key success factors and most telling measures of competitive strength or weakness
ii. Step 2: assign weights to each of the measures based upon perceived importance
iii. Step 3: rate the firm and its rivals on each factor
iv. Step 4: multiply the rating by the weight to obtain the score for each measure
v. Step 5: sum the weighted scores for measure to get an overall measure of competitive strength for each company being rated
vi. Step 6: use the overall strength ratings to draw conclusions about the size and extent of the company’s net competitive advantage or disadvantage and to take specific note of areas of strengths and weaknesses
e. See Table 4.4 – A Representative Weighted Competitive Strength Assessment
f. Using a weighted rating system is more effective because the different measures of competitive strength are unlikely to be equally important.
g. No matter whether the differences between the important weights are big or little, the sum of the weights must equal 1.0.
i. Summing a company’s weighted strength ratings for all the measures yields an overall strength rating. Comparisons of the weighted overall strength scores indicate which competitors are in the strongest and weakest competitive positions and who has how big a net competitive advantage over whom.
14. Strategic Implications of Competitive Strength Assessments
a. Competitive strength assessments provide useful conclusions about a company’s competitive situation.
b. The competitive strength ratings point to which rival companies may be vulnerable to competitive attack and the areas where they are weakest.
c. High competitive strength ratings signal a strong competitive position and possession of competitive advantage; low ratings signal a weak position and competitive disadvantage.
VI. Question 6: What Strategic Issues and Problems Merit Front-Burner Managerial Attention?
1. The final and most important analytical step is to zero in on exactly what strategic issues that company managers need to address and resolve for the company to be more financially and competitively successful in the years ahead.
2. This step involves drawing on the results of both industry and competitive analysis and the evaluations of the company’s own competitiveness.
3. Pinpointing the precise problems that management needs to worry about sets the agenda for deciding what actions to take next to improve the company’s performance and business outlook.
4. Zeroing in on the strategic issues a company faces and compiling a “worry list” of problems and roadblocks creates a strategic agenda of problems that merit prompt managerial attention.
5. The “worry list” of issues and problems can include such things as:
a. How to stave off market challenges from new foreign competitors
b. How to combat rivals’ price discounting
c. How to reduce the company’s high costs to pave the way for price reductions
d. How to sustain the company’s present growth rate in light of slowing buyer demand
e. Whether to expand the company’s product line
f. Whether to acquire a rival company to correct the company’s competitive deficiencies
g. Whether to expand into foreign markets rapidly or cautiously
h. Whether to reposition the company and move to a different strategic group
i. What to do about the aging demographics of the company’s customer base
6. 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.