Strategic Management week 3 Discussion

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chapter 4 Evaluating a Company’s Resources and Ability to Compete Successfully

Arthur A. Thompson The University of Alabama

An e-book published and distributed by McGraw Hill Education

Sixth Edition of Strategy: Core Concepts and Analytical Approaches (2020-2021). Arthur A. Thompson, The University of Alabama. Published and distributed by McGraw Hill Education. Image of globe comprised of puzzle pieces with several pieces dislodged and scattered below the globe. Chapter 4 Evaluating a Company’s Resources and Ability to Compete Successfully

“Before executives can chart a new strategy, they must reach a common understanding of the company’s current position.”

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W. Chan Kim and Rene Mauborgne

“Organizations succeed in a competitive marketplace over the long run because they can do certain things their customers value better than can their competitors.”

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Robert Hayes, Gary Pisano, and David Upton

“A new strategy nearly always involves acquiring new resources and capabilities.”

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Laurence Capron and Will Mitchell

Learning Objectives

Learn how to determine whether a firm’s strategy is working well and to evaluate the competitive power of a firm’s resources and capabilities.

Understand the meaning and significance of company and industry value chains.

Gain proficiency in using four analytical tools to evaluate a firm’s ability to compete successfully: SWOT analysis, value chain analysis, benchmarking, and competitive strength assessment.

Learn what to look for in identifying the strategic issues company managers must address.

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Chapter 4 Roadmap

Evaluating a Firm’s Resources and Ability to Compete Successfully: The Six Questions to Answer

Question 1: How well is the firm’s present strategy working?

Question 2: What are the firm’s important resources and capabilities and do they have the competitive power to enable the company to build and/or sustain a competitive advantage over rivals?

Question 3: Are the firm’s resources and capabilities attractive and well-matched to its market opportunities and external threats?

Question 4: Are the firm’s prices and costs competitive with those of key rivals and does it have an attractive customer value proposition?

Question 5: Is the firm competitively stronger or weaker than key rivals?

Question 6: What strategic issues and problems merit front-burner managerial attention?

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Evaluating a Firm’s Ability to Compete Successfully: Six Key Questions

The analytical spotlight in evaluating a firm’s resources and ability to compete successfully is trained on six questions:

How well is the company’s present strategy working?

What are the company’s important resources and capabilities, and do they have the competitive power to enable the company to build and/or sustain a competitive advantage over rival companies?

Does the company have attractively strong resource capabilities and how well do they match its market opportunities and the external threats to its future well-being?

Are the company’s prices and costs competitive with those of key rivals, and does it have an appealing customer value proposition?

Is the company competitively stronger or weaker than key rivals?

What strategic issues and problems merit front-burner managerial attention?

Begin by understanding what its strategy is:

Identify the firm’s competitive approach

Lower-costs relative to rivals?

A different or better product/service?

Superior ability to serve a particular market niche or group of buyers?

Determine its competitive scope

Broad or narrow geographic market coverage?

Wide or narrow product line?

Examine recent strategic moves

Identify functional strategies

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Question 1: How Well Is the Firm’s Present Strategy Working?

Figure 4.1 Identifying the Components of a Single-Business Company’s Strategy

Access alternative text for slide image.

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Key Indicators of How Well a Company’s Strategy Is Working

The three best indicators:

Whether the firm is meeting or beating its financial and strategic performance targets

Whether the firm is an above-average industry performer

Whether the firm is gaining customers and outcompeting one or more of its close rivals

Persistent shortfalls in meeting performance targets and weak performance relative to rivals are warning signs that the firm has a weak strategy or suffers from poor strategy execution or both.

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Other Good Indicators of How Well a Company’s Strategy Is Working

Whether the firm’s sales are growing faster, slower, or at about the same pace as the market as a whole, thus resulting in a rising, eroding, or stable market share.

How well the firm stacks up against rivals on product innovation, customer service, product quality, delivery time, price, getting newly developed products to market quickly, and other relevant factors affecting buyers’ choice of brands.

Whether the firm’s image and reputation with its customers is growing stronger or weaker.

Whether the firm’s profit margins are increasing or decreasing.

Trends in the firm’s net profits and return on investment and how these compare to the same trends for rival companies.

Whether the firm’s overall financial strength, credit rating, key financial and operating ratios, and cash flows from operations are improving, holding steady, or deteriorating.

Strategic Insight

Sluggish financial performance and second-rate market accomplishments almost always signal weak strategy, weak execution, or both.

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Evaluating a Company’s Financial Performance

Accurate diagnosis of a company’s financial performance and financial statements requires some number-crunching.

The financial ratios in Table 4.1 provide guidance and direction in what numbers need to be calculated and how to interpret them.

TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean

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TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean

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TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean

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TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean

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A firm’s resources and capabilities are competitive assets and determine whether its competitive power in the marketplace will be impressively strong or disappointingly weak.

Firms with second-rate competitive assets nearly always are relegated to a trailing position in the industry

Resource and capability analysis is a two-step process for determining whether a firm’s competitive assets can provide the foundation necessary for competitive success in the marketplace.

Identify the firm’s competitively important resources and capabilities.

Evaluate the competitive power of these resources and capabilities—whether they are potent enough for the firm to be competitively successful and perhaps achieve a sustainable competitive advantage over rival firms

Question 2: What Are the Firm’s Resources and Capabilities and Do They Have the Competitive Power to Enable the Firm to Build and/or Sustain a Competitive Advantage Over Rivals?

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Any asset or productive input that a firm owns or controls qualifies as a resource.

Firms typically have many kinds and types of resources

More importantly, resources tend to vary widely in quality, competitive relevance, and competitive value from company to company in the same industry

Our interest here is not in cataloging every resource a company has but rather in identifying those resources that have competitive value and can underpin its strategy.

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Identifying a Company’s Valuable Resources

Competitively relevant and potentially valuable resources can relate to:

Physical resources—valuable land and real estate, state-of-the-art manufacturing plants and/or equipment and/or distribution facilities, the locations of retail stores, plants, and distribution centers (including the overall pattern of their physical locations), and ownership of or access rights to valuable natural resource deposits.

Human assets and intellectual capital—an educated, well-trained, and experienced workforce, the cumulative learning and know-how of key personnel and work groups regarding important business functions and/or technologies; proven managerial and leadership skills, the creativity and innovativeness of certain personnel, proven skills in operating key parts of the business efficiently and effectively, the work ethic and motivational drive of the company’s workforce

Organizational and technological resources—proprietary technology and production capabilities, patents, proven R&D capabilities, strong e-commerce capabilities, proven quality control systems, state-of-the-art information and data management systems (systems for monitoring various operating activities in real-time, just-in-time inventory management systems, and business analytics capabilities), and proven software development capabilities

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Types of Competitively Relevant and Valuable Company Resources

Competitively relevant and potentially valuable resources can relate to:

Financial resources: cash and marketable securities, a strong balance sheet and credit rating (thus giving the company added borrowing capacity and access to additional financial capital).

Intangible assets: brand names, trademarks, copyrights, company image, reputational assets (for technological leadership or excellent product quality or customer service or honesty and fair dealing), buyer loyalty and goodwill, and the trust established with various partners.

Relationships: alliances, joint ventures or partnerships that provide access to valuable technologies, specialized know-how, or attractive geographic markets; fruitful partnerships with suppliers that reduce costs and/or enhance product quality and performance; a strong network of distributors and/or retail dealers

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Types of Competitively Relevant and Valuable Company Resources (cont.)

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Identifying Valuable Company Capabilities

A capability concerns the proficiency with which a company can perform an activity.

In general, the competitive value of a company’s capability to perform an activity depends on two factors:

The proficiency a company has achieved in performing the activity

The role of the activity in the company’s strategy and its importance to the company’s competitive success and performance

There are four competitively relevant levels of capability:

Minimal capability—achieved when a company has demonstrated only minimal ability to perform an internal activity

A competence—achieved when a company has learned to perform an internal activity consistently well and at acceptable cost

A core competence—a demonstrated competence in performing a competitively relevant activity that is central to the company’s strategy and competitiveness

A distinctive competence—the capability to perform a competitively valuable activity better than any other company in the industry

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A Proven Competence

A firm’s proficiency in performing an activity rises from that of minimal capability to the level of a proven competence when it demonstrates enough proficiency to perform the activity consistently well and at acceptable cost

Usually, competence in performing an activity begins with a deliberate effort to develop the capability to do it the first time and then a second time. Then, as experience builds consistent proficiency in performing the activity at an acceptable cost, its performance of the activity evolves into a true competence and capability.

The competitive value of a competence is directly related to a whether the competence has an important positive impact on the firm’s competitive success or whether it has little, if any, impact on the firm’s competitive success (like the competence with which it performs routine maintenance or administers employee benefit programs).

Core Concept

A firm has a competence in performing an activity when, over time, it gains the experience, know-how, and proficiency to perform that activity consistently well and at acceptable cost.

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Examples of Company Competencies

Specific skills and expertise (like proficiencies in low-cost manufacturing, picking locations for new stores, or designing an unusually appealing and functional social media website)

Proficiency in a single discipline or function that is performed in a single department or organizational unit

Inherently multidisciplinary and cross-functional activities that are the result of effective collaboration among people with different expertise working in different organizational units

A competence in continuous product innovation, for example, comes from teaming the efforts of people and groups with expertise in market research, new product R&D, design and engineering, cost-effective manufacturing, and market testing

Virtually all organizational capabilities and proven competencies are knowledge based, residing in people and in a company’s intellectual capital.

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A Core Competence—A Competitively Valuable Capability

A proven competence takes on a higher level of competitive value and becomes a core competence when a company achieves a high level of proficiency in performing an activity that is central to its strategy and competitiveness.

A core competence is a more competitively valuable capability than a competence because

It adds power to a company’s strategy by positively impacting

The company’s efforts to compete successfully against rivals

The company’s ability to achieve its financial and strategic objectives

The company’s overall performance

Core Concept

A core competence is an activity that a firm performs not only consistently well and at acceptable cost, but that is also central to its strategy and that positively impacts its competitiveness and performance.

A core competence is a more competitively valuable capability than a competence because it adds power to a firm’s strategy and enhances its competitive strength and profitability.

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Examples of Core Competencies

A core competence can relate to any of several aspects of a company’s business and strategy:

Expertise in product innovation

Expertise in developing new and more efficient production technologies

Expertise in marketing

Skills in manufacturing a high-quality product at a low cost

Strong capability to fill customer orders accurately and swiftly

Often, the most valuable core competencies are grounded in cross-department combinations of knowledge and expertise rather than being the product of a single department or work group

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A Distinctive Competence—A Very Competitively Valuable Capability

A core competence rises to an even higher level of competitive importance and becomes a distinctive competence when a company is able to achieve sufficiently high proficiency to perform a competitively important activity better than its rivals

A distinctive competence thus represents a greater proficiency (and a stronger capability) than a core competence

Because a distinctive competence represents a level of proficiency that rivals do not have, it qualifies as a competitively superior capability with the potential to produce competitive advantage

Core Concept

A distinctive competence is a competitively important activity that a company performs better than its rivals—it thus represents a competitively superior capability.

Because a distinctive competence represents a competitively valuable capability that rivals do not have, it can be a basis for sustainable competitive advantage.

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Why a Distinctive Competence Matters

A distinctive competence adds real power to a firm’s strategy and provides a pathway to competitive advantage when:

It relates to an activity important to competitive success

Rival companies do not have offsetting competencies or capabilities

It is costly and time-consuming for rivals to match the caliber of the competence the firm has developed

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.

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A particular resource or capability which may not seem to have much competitive value by itself can prove to be much more valuable when bundled with certain other company resources and/or capabilities (that also, taken singly, appear to lack “high” competitive value).

For example, Nike’s resource bundle of styling expertise, professional endorsements, well-regarded brand name and image, marketing and brand-building skills, network of distributors/retailers, and managerial know-how has provided sufficient competitive power for Nike to remain the dominant global leader in athletic footwear and sports apparel for over 20 years.

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Astute Bundling of a Company’s Resources and Capabilities Can Result in Added Competitive Power

Core Concept

A resource/capability bundle is a group of resources and capabilities that, when linked and integrated into a functioning whole, has greater competitive value than the summed value of the individual resource/capability components—in other words, combining individual resources and capabilities into an integrated bundle can produce a 1 +1 = 3 gain in competitive power versus just a 1 + 1 = 2 gain when the same resources and capabilities are unbundled.

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The competitive power of a resource or capability is measured by how many of the following four tests it can pass:

Does the resource or capability have competitive value?

Do many or most rivals have much the same resource or capability?

Is the resource or capability hard to copy?

Can the value of a resource or capability be trumped by substitute resources and capabilities of rivals?

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Ways to Test the Competitive Power of a Resource or Capability

Core Concept

The degree of success a company enjoys in the marketplace is governed by the combined competitive power of its resources and capabilities.

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Some things to consider in evaluating the attractiveness of a company’s set of resources, competencies, and capabilities

Both core competencies and distinctive competencies are valuable because they enhance a company’s competitiveness

However, some competencies merely enable market survival because most rivals also possess them

Not having an important competence or competitive capability that rivals have can result in competitive disadvantage

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Does a Company Have a Competitively Attractive Collection of Resources and Capabilities?

Why is it important for a company to keep competencies updated and on the cutting-edge?

It often takes freshly-honed and sometimes totally refurbished or altogether new resources/capabilities

To effectively respond to ongoing changes in customer needs and expectations

To protect a company’s long-term competitiveness against the improving resources/capabilities and strategic maneuvering of rivals to steal away customers

To help maintain or improve its performance over the long-term

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A Company’s Important Resources and Capabilities Must Be Dynamic and Freshly-Honed to Sustain Its Competitiveness

Core Concept

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

Absent deliberate managerial efforts to improve and sometime recalibrate company competencies and capabilities, there’s growing risk that the power of its competitive assets will grow stale and cause company performance to erode.

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Management’s challenge in developing dynamic capabilities has two elements:

Attending to ongoing recalibration of existing competencies and capabilities

Casting a watchful eye for opportunities to develop totally new capabilities for delivering better customer value and/or outcompeting rivals

Keeping company competencies freshly honed and on the cutting edge is a strategically important top management task.

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Dynamic Capabilities—What to Do?

Strategic Insight

Executive attention to making sure a company always has competitively valuable resources and capabilities that dynamically evolve and, at a minimum, help sustain, if not actually improve, the company’s competitiveness is a strategically important top management task.

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SWOT analysis

Zeros in on a firm’s competitively important Strengths and Weaknesses, its market Opportunities, and those external Threats that can adversely impact the firm’s well-being.

Helps managers single out and focus on all the factors needed to craft a winning strategy that fits the firm’s overall internal and external situation.

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Question 3: What Are the Firm’s Strengths and Weaknesses and How Do They Relate to Its Market Opportunities and External Threats?

Core Concept

SWOT analysis is a simple but powerful tool for sizing up a company’s competitively relevant strengths and weaknesses, its market opportunities, and the external threats to its future well-being.

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Figure 4.2 The Three Steps of SWOT Analysis: Identify, Draw Conclusions, Translate into Strategic Action

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Identifying a Company’s Competitively Important Strengths

Tying strategy to the company’s most competitively potent resources and capabilities is a no-risk proposition. There’s nothing to lose and much to gain.

If the firm’s resource strengths and capabilities turn out to be competitively stronger than those of some or many rivals, its business performance is certain to improve

And, in the best-case outcome, effectively deploying competitively valuable resources and capabilities that are hard for rivals to copy or trump usually puts achieving a sustainable competitive advantage within reach

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Identifying a Company’s Competitively Important Strengths

A competitively important strength can be

Something a company is good at doing (a capability or a core competence that enhances its ability to compete effectively against rivals)

A competitively valuable resource (like a well-known brand name or state-of-the-art plants and/or distribution centers, proprietary technology, valuable natural resources, or large numbers of high-traffic store locations)

Certain kinds of competitively relevant achievements or attributes that contribute to a company’s competitiveness in the marketplace (like having low overall costs relative to competitors, being a market share leader, having a wider product line than rivals, and having wider geographic market coverage than rivals).

Core Concept

A company’s competitively relevant strengths are competitive assets that positively impact its competitiveness and ability to succeed in the marketplace.

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TABLE 4.2 What to Look for in Identifying a Firm’s Strengths

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Core competencies in _______

A distinctive competence in _______

A product that is strongly differentiated from those of rivals

Resources and capabilities well matched to industry key success factors

A strong financial condition; ample financial resources to grow the business

Strong brand name/company reputation

Strong customer loyalty

Proven technological capabilities, proprietary technology/important patents

Strong bargaining power over suppliers or buyers

Cost advantages over rivals

Skills in advertising and promotion

Product innovation capabilities

Proven capabilities in improving production processes

Good supply chain management capabilities

Strong customer service capabilities

Better product quality relative to rivals

Wide geographic coverage and/or strong global distribution capability

Alliances/joint ventures with firms that provide access to valuable technology, expertise and/or attractive geographic markets

A firm’s strategy should be anchored on and seek to fully exploit its most competitively powerful resources and capabilities (and also competitively valuable bundles of resources/capabilities) WHY?

Because using its most potent resources and capabilities to power strategic initiatives to deliver value to customers and win business away from rivals gives a company its best chances for competitive success and better performance.

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A Firm’s Strategy Should Rely Upon Its Most Competitively Powerful Resources and Capabilities

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Identifying a Firm’s Important Weaknesses and Competitive Deficiencies

A weakness, or competitive deficiency, is something a firm lacks, does poorly, or that puts it at a disadvantage in the marketplace

Resource/capability weaknesses relate to:

Inferior or unproven skills, capabilities, expertise, or intellectual capital in important areas of the business

Deficiencies in competitively important physical, organizational, or intangible assets

Missing or competitively weak capabilities in key areas

Core Concept

A firm’s competitively important weaknesses are internal shortcomings or resource/capability deficiencies that constitute competitive liabilities.

The degree to which a firm’s weaknesses make it competitively vulnerable depends on how much they matter in the marketplace and the extent to which they can be offset by the firm’s competitively valuable resources and capabilities.

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Table 4.2 What to Look for in Identifying a Firm’s Weaknesses

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No well-developed or proven core competencies

Resources and capabilities that are not well matched to an industry’s key success factors

Too much debt; a weak credit rating

Short on financial resources to grow the business and pursue promising initiatives

Higher overall unit costs relative to key rivals

Weaker product innovation capabilities than key rivals

A product/service with attributes or features inferior to those of rivals

Too narrow a product line relative to rivals

Weaker brand name/reputation than rivals

Weaker dealer network than key rivals

Weak global distribution capability

Weaker product quality, R&D, and/or technological know-how than key rivals

In an overcrowded strategic group

Losing market share because _________

Competitive disadvantages in ________

Inferior intellectual capital relative to rivals

Subpar profitability because _________

Plagued with internal operating problems or obsolete facilities

Too much underutilized plant capacity

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Identifying a Firm’s Market Opportunities

To tailor the firm’s strategy to its situation, managers must first identify and appraise its market opportunities and the growth and profit potential each one holds.

A firm’s market opportunities can be:

Plentiful or scarce, fleeting or lasting

Very attractive (an absolute “must” to pursue)

Marginally interesting (because of the high risks or large capital requirements or unappealing revenue growth and profit potentials)

Unsuitable (because its resource strengths and capabilities are ill-suited to capturing particular opportunities)

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Identifying a Firm’s Market Opportunities

The market opportunities most relevant to a firm are those that:

Match up well with the firm’s competitively valuable resources and capabilities

Offer the best prospects for growth and profitability

Present the most potential for achieving competitive advantage

Sound Advice

A firm should pass on a particular market opportunity unless it has or can acquire the resources and capabilities to capture it.

Table 4.2 What to Look for in Identifying Market Opportunities

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Openings to win market share from rivals

Sharply rising buyer demand for the industry’s product

Serving additional customer groups or market segments

Expanding into new geographic markets

Expanding the company’s product line to meet a broader range of customer needs

Utilizing existing company skills or technological knowhow to enter new product lines or new businesses

Online sales via the Internet

Integrating forward or backward

Falling trade barriers in attractive foreign markets

Acquiring rival firms or companies with attractive capabilities

Entering into alliances or joint ventures to expand the firm’s market coverage or boost its competitiveness

Openings to exploit emerging new technologies

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Identifying External Threats to a Firm’s Future Profitability

Factors in a firm’s external environment can pose threats to its profitability and competitive well-being

External threats vary in importance

Some pose only a moderate degree of adversity (most all companies confront some threatening outside elements in the course of conducting their business)

Some may be formidable enough to make a firm’s situation and outlook quite tenuous

On rare occasions, a market shock can give birth to a sudden-death threat that throws a firm into an immediate crisis and battle to survive

Table 4.2 What to Look for in Identifying External Threats

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More intense competitive pressures from industry rivals and/or sellers of substitute products—may squeeze profit margins

The entry (or likely entry) of new competitors into the company’s market stronghold (especially lower-cost foreign competitors)

Growing bargaining power of buyers or suppliers

Slowing or declining market demand for the industry’s product

A shift in buyer needs and tastes away from the industry’s product

Adverse demographic changes that threaten to curtail demand for the industry’s product

Vulnerability to unfavorable industry driving forces

Unfavorable trade policies and tariffs; a threat of trade wars

Costly new regulatory requirements

Tight credit conditions

Rising prices for energy or other key inputs

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What Do the Four SWOT Lists Reveal?

Two most important parts of SWOT analysis are

Drawing conclusions from the SWOT listings about the company’s overall situation, and

Translating these conclusions into strategic actions and an overall strategy that is well-matched to the company’s overall situation—as indicated by its strengths and weaknesses, its market opportunities, and its external threats.

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What Story Do the SWOT Listings Tell?

The answers to the following questions often reveal the story in the 4 lists:

What are the attractive aspects of the firm’s situation?

What aspects are of the most concern?

Does the firm have sufficient resource strengths/competitive capabilities to compete successfully?

Are the company’s weaknesses/deficiencies of major or minor consequence? Must remedial action be taken immediately? Or, are the weaknesses/deficiencies sufficiently offset by the company’s strengths and competitive assets that corrective action is probably not the best use of company resources?

Does the company have resources and capabilities that are especially well-suited to successfully pursuing and capturing its most attractive market opportunities?

Is the firm lacking certain resources and/or capabilities that make it inadvisable to pursue any of the market opportunities (especially those that are most attractive)?

Are the external threats alarming, or are they something the firm appears able to withstand and/or deal with and/or defend against?

All things considered, where on a scale of 1 to 10 (where 1 is alarmingly weak and 10 is exceptionally strong) does the firm’s overall situation and future prospects rank?

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Translating the SWOT Analysis Results into Effective Strategic Action

Managers can use SWOT results to craft a winning strategy (or to improve an existing strategy) that:

Best fits the company’s internal and external situation

Helps build and strengthen its competitive advantage

Boosts its strategic and financial performance

thus enabling the chosen strategy to pass all three tests of a winning strategy

The payoff from SWOT analysis comes from the conclusions about a company’s situation that flow from the four lists and then translating these conclusions into actions for improving the company’s strategy and business prospects.

Core Concept

Relying on a company’s strongest resources and capabilities to power its strategy produces the best fit with the company’s internal and external situation, thereby making such an approach to crafting strategy the surest route to market success and good business results.

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Translating the SWOT Analysis Results into Effective Strategic Action (continued)

Four conditions necessary for a firm’s strategy to be a good to excellent fit with its overall situation:

The foundation and centerpiece of a company’s strategy to profitably compete against rivals must be its most competitively powerful resources and capabilities.

The strategy must include actions to correct those weaknesses that make it vulnerable to attack from rivals, depress profitability, or disqualify it from pursuing a particularly attractive opportunity.

The strategy must include strategic initiatives to capture those market opportunities best suited to its strengths and competitive assets. The company’s most competitively potent resources and capabilities should usually spearhead such initiatives.

The strategy should include efforts to defend against external threats that can adversely impact the company’s long-term business prospects or put its survival at risk.

Two telling signs of whether a firm’s business position is strong or precarious:

Whether its prices are justified by the value it delivers to customers

Whether its costs are competitive with industry rivals delivering similar customer value at a similar price

Two analytical tools useful in determining whether its customer value proposition, prices, and costs are competitive:

Value chain analysis

Benchmarking

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Question 4: Are the Firm’s Prices and Costs Competitive with Those of Key Rivals, and Does It Have an Appealing Customer Value Proposition?

A firm’s value chain

Concerns the functions, tasks, and activities that a firm performs internally to create value for customers

Consists of two broad categories of activities

Primary activities that are foremost in the firm’s scheme for creating and delivering value to customers

Support activities that facilitate and enhance the performance of primary activities.

A firm has no sound business justification for performing an activity that does not result in greater value for customers

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The Concept of a Firm’s Value Chain

Core Concept

A organization’s value chain identifies the primary activities it performs that create customer value and the related support activities.

The “outputs” of an organization’s value chain activities are the value delivered to customers and the resulting revenues it collects.

The “inputs” are all of the resources required to conduct the various value chain activities; use of these resources creates costs.

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Figure 4.3 A Representative Company Value Chain

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Figure 4.3 Illustrative Primary Activities

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Supply Chain Management—Activities, costs, and assets associated with purchasing fuel, energy, raw materials, parts and components, merchandise, and consumable items from vendors; receiving, storing and disseminating inputs from suppliers; inspection; and inventory management.

Operations—Activities, costs, and assets associated with converting inputs into final product (producing, assembly, packaging, equipment maintenance, facilities, operations, quality assurance, environmental protection).

Distribution—Activities, costs, and assets dealing with physically distributing the product to buyers (finished goods warehousing, order processing, order picking and packing, shipping, delivery vehicle operations, establishing and maintaining a network of dealers and distributors).

Sales and Marketing—Activities, costs, and assets related to sales force efforts, advertising and promotion, market research and planning, and dealer/distributor support.

Service—Activities, costs, and assets associated with providing assistance to buyers, such as installations, spare parts delivery, maintenance and repair, technical assistance, buyer inquiries, and complaints.

Figure 4.3 Illustrative Support Activities

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Product R&D, Technology, and Systems Development—Activities, costs, and assets relating to product R&D, process R&D, process design improvement, equipment design, computer software development, telecommunications systems, computer-assisted design and engineering, database capabilities, and development of computerized support systems.

Human Resource Management—Activities, costs, and assets associated with the recruitment, hiring, training, development, and compensation of all types of personnel; labor relations activities; and development of knowledge-based skills and core competencies.

General Administration—Activities, costs, and assets relating to general management, accounting and finance, legal regulatory affairs, safety and security, management information systems, forming strategic alliances and collaborating with strategic partners, and other overhead functions.

Primary Activities

Supply chain management

Recipe development and testing

Mixing and baking

Packaging

Sales and marketing

Distribution

Support Activities

Quality control

Human resource management

Administration

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Example: Value Chain Activities for a Bakery Goods Maker

Primary Activities

Merchandise selection and purchasing

Store layout and product display

Advertising

Customer service

Support Activities

Site selection

Hiring and training

Store maintenance

Administrative activities

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Example: Value Chain Activities for a Department Store Retailer

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Rivals’ Value Chains Are Often Different

Several factors cause the value chains of rival firms to be different:

Different strategies

Different operating practices

Use of different technologies

Different degrees of vertical integration

Some firms perform certain activities internally while others outsource them

Differences in the value chains of competing firms complicate assessment of their relative cost positions.

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Comparing the Value Chains of Rival Firms

Differences in the value chains of competing firms raise two important questions:

Whose value chain delivers the best customer value relative to the prices being charged?

When a competitor’s value chain approach delivers greater value to customers relative to its prices, it gains competitive advantage even if its costs are equivalent to (or perhaps higher) than its close rivals.

Which firm has the lowest cost value chain?

When close competitors deliver much the same value, charge comparable prices, and have very similar value chains, then competitive advantage accrues to the firm with the most cost-efficient value chain operations.

Core Concept

The greater the value a firm can profitably deliver to its customers relative to the value delivered by close rivals, the less competitively vulnerable it becomes.

The higher a firm’s costs relative to those of rivals delivering comparable customer value at a comparable price, the more competitively vulnerable it becomes.

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The combined costs of primary and support value chain activities comprise a firm’s internal cost structure

The cost of each activity contributes to whether firm’s overall cost position relative to rivals is favorable or unfavorable

Activity-based accounting cost estimates are needed for each broad category of primary and support activities in a firm’s value chain

Accurate cost assessments for specific activities within each category are required to identify the source or activity causing the cost disadvantage vis-à-vis rivalsJ

However, just knowing the costs of a firm’s internal value chain activities is insufficient to assess whether its product offering and customer value proposition are competitive with those of rivals.

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A Firm’s Primary and Support Activities Identify the Major Components of Its Internal Cost Structure

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Value Chain System for an Entire Industry

A firm’s value chain is embedded in a larger system of activities that includes value chains of its suppliers and value chains of wholesale distributors and retailers it utilizes in getting its product or service to end users

Supplier value chains are relevant because suppliers perform activities and incur costs in creating and delivering the purchased inputs for a firm’s own value-creating activities

The value chains of distribution channel partners are relevant because the costs and margins of distributors and retail dealers represent “value added” and are part of the price the ultimate consumer pays for the company’s good or service

Core Concept

A firm’s cost-competitiveness depends not

only on costs of internally performed activities

(its own value chain) but also on costs in the value

chains of its suppliers and distribution channel allies.

Accurately assessing a firm’s competitiveness entails scrutinizing how the costs of its entire value chain system for delivering a product or service to end-use customers compares against the costs of its rivals’ entire value chain systems.

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Figure 4.4 A Representative Value Chain for an Entire Industry

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Example: Components of the Industry Value Chain System in the Pulp and Paper Industry

Pulp mills Papermaking

Distribution

Timber farming Logging

Example: Components of the Industry Value Chain System in the Home Appliance Industry

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Assembly

Wholesale distribution

Retail sales

Parts and components manufacture

Example: Components of the Industry Value Chain System in the Soft Drink Industry

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Advertising

Today’s Special 15% Off All Diet Colas

Retailing

Bottling and can filling

Wholesale distribution

Processing of basic ingredients

Syrup manufacturing

Whether a company’s costs are competitive with the costs of close rivals is a function of

Whether the costs and profit margins embedded in its own value chain system (its own value chain plus the value chains of its suppliers and distribution allies) are lower than OR roughly equal to OR higher than the costs and profit margins embedded in the value chain systems of its close rivals (their respective value chains plus the respective value chains of their suppliers and distribution allies)

Knowledge of a firm’s own internal costs is insufficient to assess whether its product offering and customer value proposition are competitive with those of rivals—the value chains of suppliers and distribution allies also matter.

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Why the Values Chains of Suppliers and Distribution Allies Matter

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How to Determine a Firm’s Cost Competitiveness

STEP 1: Determine the costs/margins of activities across the firm’s own entire value chain system:

The costs/profit margin of activities comprising a firm’s own value chain PLUS

The costs/margins of activities comprising the value chains of its suppliers PLUS

The costs/margins of activities comprising the value chains of its distribution allies

STEP 2: Compare the sum of the costs/margins of the firm’s entire value chain system to the sum of the costs/margins of the entire value chain systems of close rivals to determine if the overall costs of a firm’s value chain system is higher or lower or roughly equal to the overall costs comprising the value chain systems of key rivals.

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Benchmarking: A Tool for Assessing Whether a Firm’s Value Chain Costs Are in Line

Benchmarking entails

Comparing how well different firms perform key value chain activities. Examples include:

How inventories are managed

How products are assembled

How fast it takes to get new products to market

How customer orders are filled and shipped

Making cross-company comparisons of the costs of these activities

Core Concept

Benchmarking is a potent tool for learning which firms are best at performing particular activities and then adapting their techniques (“best practices”) to improve the cost and effectiveness of a firm’s own internal activities.

Benchmarking the costs of a firm’s value chain activities against rivals provides hard evidence of whether a firm is cost-competitive.

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How Benchmarking Works

Identify the best practices in performing particular activities

Learn how other firms have achieved lower costs or better results in performing benchmarked activities

Adapt their approaches to fit the firm’s own circumstances

Take actions to improve cost competitiveness whenever benchmarking indicates that a firm’s own costs and results of performing an activity are nor on a par with what other firms (competitors or non-competitors) have achieved

The tough part of benchmarking is gaining access to information about other firms’ practices and costs.

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Tip for Simulation Company Co-Managers

Carefully review the benchmarking data provided in the Industry Report after each decision round.

There are 1-2 pages of data showing how your company’s costs and profit margins in the prior year compared against the industry’s low, high, and average values for a big variety of the cost components and selected profit margin components in your company’s value chain.

If your company’s costs are deemed “too high” in one or more areas, consider undertaking actions to reduce these costs.

If your company’s profit margins are deemed “too low” in one or more regions, consider undertaking actions to improve these margins.

If you have already taken actions to be more cost efficient, check (1) whether your company’s cost-cutting efforts have been more/less successful than the cost-cutting actions likely undertaken by rivals and (2) whether your company has a cost advantage or disadvantage.

Failure to monitor the benchmarking data is perilous because it means you really have no idea whether your company’s costs are competitive with those of rivals or not.

Areas in which to create a cost advantage or remedy a cost disadvantage are:

The value chain activities a company performs internally

Suppliers’ part of the company’s value chain system

The distribution-related portion of the company’s value chain system The Value Chain System for a Company

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Strategic Options for Creating an Advantage or Remedying a Disadvantage as Concerns Cost or the Value Delivered to Customers

Activities, Costs, and Margins of

Distribution-Related Allies

Internally Performed

Activities, Costs, and Margins

Activities, Costs, and Margins of

Suppliers

Implement the use of best practices throughout firm

Redesign the product to eliminate costs or enable faster and more economical manufacture or assembly

Relocate high-cost activities to lower-cost locations

Outsource high-cost activities to outside vendors/ suppliers who can perform these activities cheaper

Shift to lower-cost technologies and/or invest in productivity-enhancing, cost-saving technological improvements

Cease performing any activities that add little or no customer value

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Options for Improving the Performance of Internally Performed Activities

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Options for Improving the Performance of 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

Just-in-time supplier deliveries can lower both the firm’s and the supplier’s inventory and internal logistics costs

Integrate backward into the businesses of suppliers responsible for cost disadvantages and make the items in-house instead of buying them from outside suppliers

Pressure dealers, distributors and channel allies to reduce costs to make final prices to buyers more competitive with the prices of rivals

Collaborate with forward channel allies to identify win-win opportunities to reduce costs

Change to a lower-cost distribution strategy or switch to cheaper distribution channels

Integrate forward by opening company-owned retail outlets

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Options for Improving the Performance of Distribution-Related Value Chain Activities

Doing a first rate job of managing value chain activities can often translate into competitive advantage.

Competitive advantage can be achieved by out-managing rivals in either of two ways:

By performing value chain activities more efficiently and cost effectively, thereby gaining a low-cost advantage over rivals

By performing certain value chain activities in ways that drive value-creating improvements in quality, features, performance, and other aspects, thereby gaining a differentiation-based competitive advantage keyed to what customers perceive as a superior product offering

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Translating Proficient Performance of Value Chain Activities into Competitive Advantage

FIGURE 4.5 Translating Company Performance of Value Chain Activities into Competitive Advantage

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Access alternative text for slide image.

Strategic Insight

Performing value chain activities in ways that give a company either a lower-cost advantage or a value-creating differentiation advantage over rivals are two surefire ways to secure competitive advantage.

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Whether a firm is competitively stronger or weaker than key rivals hinges on:

How the firm ranks relative to competitors on each important factor that determines market success

The firm’s net competitive advantage or disadvantage versus major competitors

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Question 5: Is the Firm Competitively Stronger or Weaker than Its Key Rivals?

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How to Do a Competitive Strength Assessment

Step 1: Make a list of 6 to 10 of (a) the industry’s key success factors and (b) other highly relevant measures of competitive strength/weakness

Step 2: Assign weights to each of the measures of competitive strength based on their perceived importance (the sum of the weights must equal 1.0)

Step 3: Rate the firm and its key rivals on each strength measure using rating scale of 1 to 10 (1 = very weak; 5 = average; 10 = very strong)

Step 4: Multiply each strength rating by its importance weight to obtain weighted strength scores

Step 5: Sum the weighted strength scores to get an overall weighted measure of competitive strength for each rival

Step 6: Use the overall weighted strength scores to draw conclusions about the firm’s net competitive advantage or disadvantage vis-à-vis each of its rivals

Table 4.3 A Representative Weighted Competitive Strength Assessment

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The higher a firm’s overall weighted strength score, the stronger its overall competitiveness versus rivals

The lower a firm’s score, the weaker is its ability to compete successfully

The sizes of the differences between a firm’s score and those of its rivals are indicative of the size of its net competitive advantage or disadvantage versus its rivals

The bigger the difference between a firm’s overall weighted rating and the ratings of lower-rated rivals, the greater is its implied net competitive advantage over these rivals

The bigger the difference between a firm’s overall weighted rating and the overall weighted ratings of higher-rated rivals, the greater is its implied net competitive disadvantage vis-à-vis these rivals

Interpreting the Competitive Strength Scores

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Strategic Implications of Competitive Strength Scores

A firm’s competitive strength scores pinpoint where it is competitively stronger and weaker vis-à-vis rivals

When a firm has high competitive strength scores in areas where one or more rivals have low scores, it should consider offensive moves that pit its competitive strengths directly against rivals’ competitive weaknesses

When a firm has low scores on strength measures where one or more rivals have high scores, it should consider defensive moves to curtail its vulnerability to rivals’ offensive attacks

Strategic Insight

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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Questions for Simulation Company Co-Managers

Are you regularly monitoring your firm’s competitive strengths and weaknesses vis-à-vis rival firms in each geographic region (see the last column on the right side of each page of the Comparative Competitive Efforts of Rivals section of the Competitive Intelligence Report)?

In crafting your firm’s strategy and making decision entries for each geographic region each year, are you trying to capitalize on your firm’s regional competitive strengths/advantages and to correct your firm’s regional competitive weaknesses/disadvantages?

Have you used the menus at the top of each page of the Comparative Competitive Efforts of Rivals reports to view the regional competitive strengths and weaknesses of rival industry firms?

Might this information be of value in crafting strategic actions in the upcoming year to compete more effectively and improve the buyer appeal of your company’s product offering vis-à-vis the offerings of rivals?

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Two Final Questions

If you fail to make use of the data for each of the four geographic regions comprising the Comparative Competitive Effects of Rival Firms section of the Competitive Intelligence Report, are you “flying blind” into competitive battle in the upcoming year without any fact-based evidence regarding what actions it will likely take to improve your company’s competitiveness vis-à-vis rivals companies?

If your answer is “yes,” does it really make any good business sense to continue to do this?

Involves compiling a “worry list” based on:

Assessment of the external environment (answers to the six analytical questions posed in Chapter 3)

Evaluations of the firm’s resources and ability to compete successfully (answers to questions 1-5 in this chapter)

All of the strategic issues and problems that managers need to address (the “worry list”) always centers on such concerns as

“How to…?”

“Whether to…?”

“What should be done about …?”

The purpose of compiling a worry list is to create an agenda of items that managers need to consider before attempting to craft a refurbished strategy that is better suited to the particulars of the company’s external and internal situation.

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Question 6: What Strategic Issues and Problems Does Top Management Need to Address?

Strategic Insight

Compiling a “worry list” that zeros in on the strategic issues and problems a company faces always centers on such concerns as “how to…,” “what to do about…,” and “whether to….”

The purpose of compiling a worry list is to create an agenda of items that managers need to consider and resolve as they craft a refurbished strategy that is suited to all of the various aspects of the company’s external and internal situation.

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How to stave off market challenges from new foreign competitors?

How to combat price discounting of rivals?

How to reduce the firm’s high costs?

How to sustain the firm’s growth in light of slowing buyer demand?

Whether to expand the firm’s product line?

What to do about growing buyer interest in substitute products?

Whether to acquire a rival firm?

Whether to expand into foreign markets rapidly or cautiously?

Whether to reposition the company and move to a different strategic group?

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A Representative Sample of Questions to Answer in Identifying Strategic Issues

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Why Compile a “Worry List”?

The role of the “worry list” is to pinpoint

The strategic and competitive challenges confronting the firm

Competitive shortcomings that must be addressed

Obstacles to improving the firm’s competitive position and financial performance

that managers need to focus on as they pick and choose among the ways to craft a refurbished strategy

The purpose is NOT to list what specific actions to take

Deciding which strategic actions to take and which strategic moves to make comes later.

A worry list with minor problems/issues suggests the firm’s strategy is on track and fine-tuning it will be adequate

A worry list with major problems/issues signals the need for immediate major strategy revisions and action plans

Why create a strategic agenda?

Compiling a “worry list” draws managerial attention to the strategic issues a firm faces

What comes after developing the list of strategic issues and problems?

Actually deciding upon a strategy, including what specific actions to take to address each and every item on the “worry list”

A strategy is neither complete nor well matched to the firm’s situation unless it contains actions and initiatives to address each issue and problem on the “worry list.”

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Items on the Worry List Represent an Agenda for Management Action

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The Lessons of Chapters 3 and 4

Lesson 1: An analysis of the firm’s external situation must always come before crafting a company’s strategy

Managers are unprepared to craft a strategy that is well-matched to the macro-environment, competitive forces, industry driving forces, industry key success factors, and the likely actions of rivals unless they first have done careful and thorough analysis of the firm’s external situation and have strong understanding of all the strategically relevant external factors.

Analysis is the critical starting point for crafting a strategy capable of producing good business results.

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The Lessons of Chapters 3 and 4

Lesson 2: An analysis of the firm’s internal situation must always come before crafting a company’s strategy.

A competently done evaluation of a company’s resources, competencies, and competitive strengths and weaknesses exposes strong and weak points in the present strategy and how attractive or unattractive the company’s competitive position is and why.

Absent such knowledge, company managers are unlikely to craft a strategy that is well suited to the company’s competitive capabilities and best market opportunities.

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The Lessons of Chapters 3 and 4

Lesson 3: Accurate diagnosis of the firm’s external and internal circumstances and an accurate list of the strategic issues and problems that the strategy needs to address and resolve arms managers with the knowledge they need to craft a sound strategy that is tightly matched to the firm’s overall situation and thus passes “the goodness of test” for a winning strategy.

Beware

Managers are flying blind and operating by the seat-of-their-pants if they leap into the task of tailoring a strategy that should tightly fit a firm’s situation without first having an accurate understanding of what all of the strategically relevant facets of that situation are and what issues and problems the strategy needs to address.

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Questions for Company Co-Managers

After each decision round, do you take into account your company’s competitive strengths and weaknesses (listed on each page of the Comparative Competitive Efforts of Rival Firms report) in crafting a strategy for each geographic region for the upcoming decision round?

Before proceeding to enter decisions for each upcoming decision round, do your regularly make a list of the strategic issues and problems your company needs to address and make sure that you enter decisions intended to resolve each and every one of these issues/problems?

If not, then is the failure to craft a strategy matched to your company’s internal situation and to dealing with “worry list” likely to be a reason why your company’s performance is not as good as it could be (or as good as you would like it to be)?

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Figure 4.1 Identifying the Components of a Single-Business Company’s Strategy, Alternate Text

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Business strategy: The actions and approaches crafted to compete successfully in a particular business.

Key functional strategies:

Research and development, technology, product design, strategy.

Supply chain management strategy.

Production strategy.

Sales, marketing, and distribution strategies.

Information technology strategy.

Human resources strategy.

Finance strategy.

Actions to compete successfully:

Planned, proactive moves to attract customers and out-compete rivals via improved product design, better features, higher quality, wider selection, lower prices, and so on.

Actions to respond to changing conditions in the macroenvironment or in industry and competitive conditions.

Initiatives to build competitive advantage based on:

Lower costs relative to rivals?

A different or better product offering?

Superior ability to serve a market niche or specific group of buyers?

Efforts to expand or narrow geographic coverage.

Efforts to build competitively valuable partnerships and strategic alliances with other enterprises.

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Figure 4.2 The Three Steps of SWOT Analysis: Identify, Draw Conclusions, Translate into Strategic Action, Alternate Text

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What can be gleaned from the SWOT listings?

The first two steps of SWOT analysis are:

Identify company strengths and competitive assets.

Identify company weaknesses and competitive deficiencies.

These two steps lead to conclusions concerning the company’s overall business situation. This includes determining what are the underlying reasons for the success (or lack of success) of the company’s strategy. It also includes what the attractive and unattractive aspects of the company’s situation are.

The last two steps of SWOT analysis are:

Identify market opportunities.

Identify external threats.

These two steps reveal implications for improving company strategy. This includes using company strengths as the foundation for the company’s strategy; shoring up weaknesses that are interfering with the success of the strategy; pursuing those market opportunities best suited to company strengths; correcting weaknesses that impair pursuit of important market opportunities; repair weaknesses that heighten vulnerability of external threats; and using company strengths to lessen the impact of important external threats.

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Figure 4.3 A Representative Company Value Chain , Alternate Text

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Primary activities:

Supply chain management.

Operations.

Distribution.

Sales and Marketing.

Service.

Profit Margin.

Support activities:

Product research and development, technology, and systems development.

Human resource management.

General administration.

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FIGURE 4.5 Translating Company Performance of Value Chain Activities into Competitive Advantage, Alternate Text

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Option 1: Beat rivals by creating more customer value from value chain activities, for a differentiation-based competitive advantage

1. Managers decide to perform value chain activities in ways that drive improvements in quality, features, performance, and other differentiation-enhancing aspects.

2. Competencies gradually emerge in performing value chain activities that drive improvements in quality, features, and performance.

3. Company proficiency in performing some of these differentiation-enhancing activities rises to the level of a core competence.

4. Company proficiency in performing the core competence continues to build and evolves into a distinctive competence.

Company gains a competitive advantage based on superior differentiation capabilities.

Option 2: Beat rivals by conducting value chain activities more efficiently, for a cost-based competitive advantage

1. Company managers decide to perform value chain activities in the most cost-efficient manner.

2. Competencies gradually emerge in driving down the cost of value chain activities (such as production, inventory management, etc.).

3. Company capabilities in performing certain value chain activities more efficiently rise to the level of a core competence.

4. Company proficiency in performing the core competence continues to build and evolves into a distinctive competence.

5. Company gains a competitive advantage based on superior differentiation capabilities.

Strategic Management week 3 Discussion

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