Download Value Chain Activities

Thinking Strategically about
the Company’s internal
environment: Resources and
Competitive position
By: Prof R.K. Verma
Dean, SBS, Sharda University
4-1
The Components of a Company’s
Macro-Environment
4-2
Company’ industry&
competitive environment
 The Strategically Relevant Components of a Company’s External Environment
 Thinking Strategically About a Company’s Industry and Competitive
Environment
 Question 1: What Are the Industry’s Dominant Economic Features?
 Question 2: What Kinds of Competitive Forces Are Industry Members
Facing?
 Question 3: What Factors Are Driving Industry Change and What Impacts
Will They Have?
 Question 4: What Market Positions Do Rivals Occupy—Who Is Strongly
Positioned and Who Is Not?
 Question 5: What Strategic Moves Are Rivals Likely to Make Next?
 Question 6: What Are the Key Factors for Future Competitive Success?
 Question 7: Does the Outlook for the Industry Present an Attractive
Opportunity?
4-3
Strategic Implications of the
Five Competitive Forces
Sr. No.
Competitive
Forces
Type of pressure
Strong
Moderate
Weak
1
Rivalry among
competing sellers
vigorous
Weak /
moderate
2
Buyers
Bargaining
leverage
Weak
3
Supplirs
Bargaining
leverage
Weak
4
New Entrants
Low entry
barrirs
High barriars
5
Substitute products
Intense
No good
6
Implication
Unattractive
Superior profit
4-4
Common Types of
Driving Forces
 Internet and e-commerce opportunities
 Increasing globalization of industry
 Changes in long-term industry growth rate
 Changes in who buys the product and
how they use it
 Product innovation
 Technological change/process innovation
 Marketing innovation
4-5
Common Types of
Driving Forces
 Entry or exit of major firms
 Diffusion of technical knowledge
 Changes in cost and efficiency
 Consumer preferences shift from standardized to differentiated
products (or vice versa)
 Changes in degree of uncertainty and risk
 Regulatory policies / government legislation
 Changing societal concerns, attitudes, and lifestyles
4-6
What Market Positions Do Rivals
Occupy?
 One technique to reveal
different competitive positions
of industry rivals is
strategic group mapping
 A strategic group is a
cluster of firms in an industry
with similar competitive
approaches and market positions
4-7
What strategic moves are rivals
likely to make a next?
 Which
rival has the best strategy? Which rivals
appear to have weak strategies?
 Which
firms are poised to gain
market share, and which ones
seen destined to lose ground?
 Which
rivals are likely to rank among the industry leaders five
years from now? Do any up-and-coming rivals have strategies
and the resources to overtake the current industry leader?
4-8
Key Success Factor
 Technology-Product & Production technology, patent, trademark
 Manufacturing- Scale of economy & experience curve
 Distribution – supply chain, wholesaler & retailer network
 Marketing – Brand, Product line, technical assistance & CRM
 Skill & capabilities – talented workforce, product innovation, motivation,
design
 Other types – overall low cost, convenient location, agility
4-9
Does the Outlook for the Industry
Present an Attractive Opportunity?
 Involves assessing whether the industry
and competitive environment is attractive
or unattractive for earning good profits
 Under certain circumstances, a firm uniquely
well-situated in an otherwise unattractive industry
can still earn unusually good profits
 Attractiveness
 Conclusions
is relative, not absolute
have to be drawn from the
perspective of a particular company
4-10
Core Concept: Assessing
Industry Attractiveness
The degree to which an industry is
attractive or unattractive is often not the
same for all industry participants
or potential entrants.
The opportunities an industry
presents depend partly on a
company’s ability to capture them.
4-11
“Before executives can
chart a new strategy, they
must reach common
understanding of the
company’s current position.”
W. Chan Kim and Renee Mauborgne
Evaluating a company’s
resources-Questions
 Question 1: How Well Is the Company’s Present Strategy



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Working?
Question 2: What Are the Company’s Resource Strengths and
Weaknesses and Its External Opportunities and Threats?
Question 3: Are the Company’s Prices and Costs Competitive?
Question 4: Is the Company Competitively Stronger or Weaker
than Key Rivals?
Question 5: What Strategic Issues and Problems Merit FrontBurner Managerial Attention?
(Tools: SWOT analysis, Value chain analysis, benchmarking &
competitive strength assessment)
Company Situation Analysis:
The Key Questions
1. How well is the company’s
present strategy working?
2. What are the company’s resource
strengths and weaknesses and its
external opportunities and threats?
3. Are the company’s prices and
costs competitive?
4. Is the company competitively stronger
or weaker than key rivals?
5. What strategic issues merit
front-burner managerial attention?
4-14
Q #1: How Well Is the Company’s
Present Strategy Working?
Key Issues
 Identify competitive approach
 Low-cost
leadership
 Differentiation
 Focus
on a particular market niche
 Determine competitive scope
 Geographic
 Operating
market coverage
stages in industry’s production/distribution chain
 Examine recent strategic moves
 Identify functional strategies
4-15
Identifying the Components of a SingleBusiness Company’s Strategy
4-16
Approaches to Assess How Well
the Present Strategy Is Working
 Qualitative assessment –
What is the strategy?
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
Completeness

Internal consistency

Rationale

Relevance
 Quantitative assessment – What
are the results?

Is company achieving its
financial and strategic
objectives?

Is company an above-average
industry performer?
Qualitative Assessment
1)
Profitability ratios
3)





Gross Profit Margin
Operating profit margin
Net Profit margin
Return on total assets
Return on stockholders
equity
 Earning per share
2)



Debt-to-assets ratio
Debt-to-equity ratio
Long-term debt-to-equity
ratio
 Times-interest-earned ratio
4)
Current ratio
Quick ratio
Working capital
Activity ratios



Liquidity ratios



Leverage ratios
5)
Days of inventory
Inventory turnover
Average collection period
Other Important




4-18
Dividend yield on common
stock
Price/earnings ratio
Dividend payout ratio
Internal Cash flow
Key Indicators of How Well
the Strategy Is Working
 Trend in sales and market share
 Acquiring and/or retaining customers
 Trend in profit margins
 Trend in net profits, ROI, and EVA
 Overall financial strength and credit ranking
 Efforts at continuous improvement activities
 Trend in stock price and stockholder value
 Image and reputation with customers
 Leadership role(s) – Technology, quality,
e-commerce, etc.
4-19
innovation,
Q #2: What Are the Company’s Strengths,
Weaknesses, Opportunities and Threats ?
 S W O T represents the first letter in
S
trengths
W
eaknesses
O
pportunities
T
hreats
S
O
W
T
 For a company’s strategy to be well-conceived, it must be
 Matched
 Aimed
to its resource strengths and weaknesses
at capturing its best market opportunities and erecting
defenses against external threats to its well-being
4-20
Identifying Resource Strengths
and Competitive Capabilities
 A strength is something a firm does well or an attribute that
enhances its competitiveness

Valuable competencies or know-how
 Valuable physical assets
 Valuable human assets
 Valuable organizational assets
 Valuable intangible assets
 Important competitive capabilities
 An attribute that places a company in a position of market advantage
 Alliances or cooperative ventures with partners
Resource strengths and competitive
capabilities are competitive assets!
4-21
Competencies vs. Core Competencies
vs. Distinctive Competencies
 A competence is the product of organizational learning and
experience and represents real proficiency in performing an
internal activity
 A core competence is a well-performed
internal activity central (not peripheral or incidental)
to a company’s competitiveness and profitability
 A distinctive competence is a competitively valuable activity a
company performs better than its rivals
4-22
Company Competencies
and Capabilities
 Stem from skills, expertise, and
experience usually representing an
 Accumulation
of learning over time and
 Gradual buildup of real proficiency in
performing an activity
 Involve deliberate efforts to develop the ability to do
something, often entailing
 Selecting
people with requisite knowledge and skills
 Upgrading or expanding individual abilities
 Molding work products of individuals into a cooperative effort to
create organizational ability
 A conscious effort to create intellectual capital
4-23
Core Competencies -- A
Valuable Company Resource
 A competence becomes a core competence when the well-
performed activity is central to a company’s
competitiveness and profitability
 Often, a core competence results from collaboration
among different parts of a company
 Typically, core competencies reside in a company’s
people, not in assets on a balance sheet
 A core competence gives a company a
potentially valuable competitive capability
and represents a definite competitive asset
4-24
Examples: Core Competencies
 Expertise in integrating multiple technologies
to create families of new products
 Know-how in creating operating systems
for cost efficient supply chain management
 Speeding new/next-generation products to market
 Better after-sale service capability
 Skills in manufacturing a high quality product
 System to fill customer orders accurately and swiftly
4-25
Distinctive Competence -- A
Competitively Superior Resource
 A distinctive competence is a competitively significant activity
that a company performs better than its competitors
 A distinctive competence
 Represents
a competitively valuable
capability rivals do not have
#1
 Presents
attractive potential for
being a cornerstone of strategy
provide a competitive edge in the marketplace —because it
represents a competitively superior resource strength
 Can
4-26
Examples: Distinctive
Competencies
 Sharp Corporation
 Expertise
in flat-panel display technology
 Toyota and Honda
 Low-cost,
high-quality manufacturing
capability and short design-to-market cycles
 Intel
 Ability
to design and manufacture
ever more powerful microprocessors for PCs
 Wal-Mart
 Low-cost
distribution and use of
state-of-the-art retail technology
4-27
Determining the Competitive
Value of a Company Resource
 To qualify as competitively valuable or to be the basis for
sustainable competitive advantage, a “resource” must
pass 4 tests:
1. Is the resource hard to copy?
2. Does the resource have staying power –
is it durable?
3. Is the resource really competitively superior?
4. Can the resource be trumped by
the different capabilities of rivals?
4-28
Identifying Resource Weaknesses
and Competitive Deficiencies
 A weakness is something a firm lacks, does poorly, or a
condition placing it at a disadvantage
 Resource weaknesses relate to

Inferior or unproven skills,
expertise, or intellectual capital

Lack of important physical,
organizational, or intangible assets

Missing capabilities in key areas
Resource weaknesses and deficiencies
are competitive liabilities!
4-29
Identifying a Company’s
Market Opportunities
 Opportunities most relevant to a
company are those offering
 Good
match with its financial and
organizational resource capabilities
 Best
prospects for profitable
long-term growth
 Potential
4-30
for competitive advantage
Identifying External Threats
 Emergence of cheaper/better technologies
 Introduction of better products by rivals
 Entry of lower-cost foreign competitors
 Onerous regulations
 Rise in interest rates
 Potential of a hostile takeover
 Unfavorable demographic shifts
 Adverse shifts in foreign exchange rates
 Political upheaval in a country
4-31
SWOT
4-32
4-33
4-34
4-35
Role of SWOT Analysis in
Crafting a Better Strategy
 The most important part of S W O T analysis is not
developing the 4 lists of strengths, weaknesses, opportunities,
and threats, but rather
 Using
the 4 lists to draw conclusions
about a company’s overall situation and
 Acting
on the conclusions to
 Better match a company’s strategy to its
resource strengths and market opportunities,
 Correct the important weaknesses, and
 Defend against external threats
4-36
The Three Steps
of SWOT Analysis
4-37
Q #3: Are the Company’s
Prices and Costs Competitive?
 Assessing whether a firm’s costs are competitive with
those of rivals is a crucial part of company analysis
 Key analytical tools
 Value
chain analysis-Activity
based costing
4-38
 Benchmarking
–Best practice ; cost and effectiveness
The Concept of a
Company Value Chain
 A company’s business consists of all activities undertaken in
designing, producing, marketing, delivering, and supporting its
product or service
 A company’s value chain consists of a linked set of value-
creating activities performed internally
 The value chain contains two types of activities
activities – where most of
the value for customers is created
 Primary
activities – facilitate
performance of the primary activities
 Support
4-39
Representative Company Value Chain
4-40
The Value Chain: Primary and
Support Activities
The Value Chain
General administration
Human resource management
Technology development
Procurement
Inbound
logistics
Operations
Outboun
d
logistics
Marketing
and sales
Service
Primary Activities
Source: Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage: Creating and
Sustaining Superior Performance by Michael E. Porter. Copyright © 1998 by Michael E. Porter.
4-41
The Value Chain: Some Factors to Consider in
Assessing a Firm’s Primary Activities
• Location of
distribution
facilities to
minimize shipping
times
• Excellent material
and inventory
control systems
• Systems to reduce
time to send
“returns” to
suppliers
• Warehouse layout
and designs to
increase
efficiency of
operations for
incoming
materials
Inbound
Logistics
4-42
• Efficient plant
operations to
minimize costs
• Appropriate level
of automation in
manufacturing
• Quality
production control
systems to reduce
costs and enhance
quality
• Efficient plant
layout and
workflow design
Operations
• Effective shipping
processes to
provide quick
delivery and
minimize
damages
• Efficient finished
goods
warehousing
processes
• Shipping of goods
in large lot sizes
to minimize
transportation
costs
• Quality material
handling
equipment to
increase order
picking
Outbound
Logistics
• Highly motivated
and competent
sales force
• Innovative
approaches to
promotion and
advertising
• Selection of most
appropriate
distribution
channels
• Proper
identification of
customer
segments and
needs
• Effective pricing
strategies
Marketing
and Sales
• Effective use of
procedures to solicit
customer feedback
and to act on
information
• Quick response to
customer needs and
emergencies
• Ability to furnish
replacement parts as
required
• Effective
management of parts
and equipment
inventory
• Quality of service
personnel and
ongoing training
• Appropriate
warranty and
guarantee
policies
Service
The Value Chain: Some Factors to Consider
in Assessing Firm’s Support Activities
• Effective planning systems to attain overall goals and objectives
• Ability of top management to anticipate and act on key environmental trends and events
• Ability to obtain low cost funds for capital expenditures and working capital
• Excellent relationships with diverse stakeholder groups
• Ability to coordinate and integrate activities across the “value system”
• Highly visible to inculcate organizational culture, reputation, and values
General Administration
• Effective recruiting, development, and retention mechanisms for employees
• Quality relations with trade unions
• Quality work environment to maximize overall employee performance and minimize
absenteeism
Human Resource Management
• Reward and incentive programs to motivate all employees
• Effective research and development activities for process and product initiatives
• Positive collaborative relationships between R&D and other departments
• State-of-the art facilities and equipment
• Culture to enhance creativity and innovation
• Excellent professional qualifications of personnel
• Ability to meet critical deadlines
Technology
Development
• Procurement of raw material inputs to optimize quality, speed and minimize the associated
costs
• Development of collaborative “win-win” relationships with suppliers
• Effective procedures to purchase advertising and media services
Procurement
• Analysis and selection of alternate sources of inputs to minimize dependence on one supplier
4-43
• Ability to make proper lease versus buy decisions
Characteristics of
Value Chain Analysis
 Combined costs of all activities in a company’s value chain
define the company’s internal cost structure
 Compares a firm’s costs activity
by activity against costs of key rivals
 From
raw materials purchase to
 Price
paid by ultimate customer
 Pinpoints which internal activities are a
source of cost advantage or disadvantage
4-44
Why Do Value
Chains of Rivals Differ?
 Several factors can cause differences
in value chains of rival companies
 Internal
operations
 Strategy
 Approaches
used in execution of the strategy
 Underlying
economics of the activities
 Differences complicate task of assessing
rivals’ relative cost positions
4-45
The Value Chain System
for an Entire Industry
 Assessing a company’s cost competitiveness involves
comparing costs all along the industry’s value chain
 Suppliers’ value chains are relevant because
 Costs,
performance features, and quality of inputs
provided by suppliers influence a firm’s own costs
and product performance
 Forward channel allies’ value chains are relevant because
 Costs
and margins are part of price paid
by ultimate end-user
 Activities performed affect end-user satisfaction
4-46
Representative Value Chain for an
Entire Industry
4-47
Example: Value Chain Activities
Pulp & Paper Industry
Timber farming
Logging
Pulp mills
Papermaking
Distribution
4-48
Example: Value Chain Activities
Home Appliance Industry
Parts and components manufacture
Assembly
Wholesale distribution
Retail sales
4-49
Example: Value Chain Activities
Soft Drink Industry
Processing of basic ingredients
Syrup manufacture
Bottling and can filling
Wholesale distribution
Advertising
Retailing
4-50
Albertson’s
Example: Value Chain Activities
Software Computer Industry
Programming
Disk loading
Marketing
Distribution
4-51
Developing Data to Measure a
Company’s Cost Competitiveness
 After identifying key value chain activities, the next step
involves breaking down departmental cost accounting data into
costs of performing specific activities
 Appropriate degree of disaggregation depends on
 Economics
of activities
 Value
of comparing narrowly defined
versus broadly defined activities
 Guideline – Develop separate cost estimates for activities
 Having
different economics
 Representing
4-52
a significant or growing proportion of costs
Activity-Based Costing: A Key
Tool in Analyzing Costs
 Determining whether a company’s costs are in line with those
of rivals requires
 Measuring
how a company’s costs compare with those of rivals
activity-by-activity
 Requires having accounting data to measure cost
of each value chain activity
 Activity-based costing entails
 Defining
expense categories according
to specific activities performed and
 Assigning costs to the activity
responsible for creating the cost
4-53
4-54
Benchmarking Costs of
Key Value Chain Activities
 Focuses on cross-company comparisons of how certain
activities are performed and costs associated with these
activities
 Purchase
of materials
 Payment of suppliers
 Management of inventories
 Getting new products to market
 Performance of quality control
 Filling and shipping of customer orders
 Training of employees
 Processing of payrolls
4-55
Objectives of Benchmarking
 Identify best practices in performing an activity
 Understand the best practices in performing
an activity – learn what is the “best” way
to do a particular activity from those
demonstrating they are “best-in-world”
 Learn how other firms achieve lower costs
 Take action to improve company’s cost competitiveness
4-56
Ethical Standards in
Benchmarking: Do’s and Don’ts
 Avoid talk about pricing or
competitively
sensitive costs
 Don’t ask rivals for sensitive data
 Don’t share proprietary data without clearance
 Have impartial third party assemble and present competitively
sensitive cost data with no names attached
 Don’t disparage a rival’s business to outsiders based on data
obtained
4-57
What Determines if a
Company Is Cost Competitive?
 Cost competitiveness depends on how well a company
manages its value chain relative to how well competitors
manage their value chains
 When costs are out-of-line, high-cost activities can exist in any
of three areas in the industry value chain
1. Suppliers’ activities
2. Company’s own internal activities
3. Forward channel activities
Activities,
Costs, &
Margins of
Suppliers
4-58
Internally
Performed
Activities,
Costs, &
Margins
Activities,
Costs, &
Margins of
Forward
Channel Allies
Buyer/User
Value
Chains
Options to Correct
Internal Cost Disadvantages
 Implement use of best practices throughout company
 Eliminate some cost-producing activities altogether by revamping
value chain system
 Relocate high-cost activities to lower-cost geographic areas
 See if high-cost activities can be performed
cheaper by outside vendors/suppliers
 Invest in cost-saving technology
 Innovate around troublesome cost components
 Simplify product design
 Make up difference by achieving savings in backward or forward
portions of value chain system
4-59
Remedying Supplier related
cost Disadvantage
 Negotiate Lower Prices
 Switching Lower Price Subsititude
 Collaborating with Vendors
4-60
4-61
Translating Performance of Value Chain
Activities to Competitive Advantage
 A company can create competitive advantage by managing its
value chain to
 Integrate
knowledge and skills of employees in competitively
valuable ways
 Leverage
economies of learning / experience
 Coordinate
related activities in ways
that build valuable capabilities
 Build
dominating expertise
in a value chain activity critical
to customer satisfaction or market success
4-62
Translating Performance of Value Chain
Activities into Competitive Advantage
4-63
Q. #4: Is the Company Stronger
or Weaker than Key Rivals?
 Overall competitive position involves
answering two questions
 How
does a company rank relative
to competitors on each important
factor that determines market success?
 Does
a company have a net
competitive advantage or disadvantage
vis-à-vis major competitors?
4-64
Assessing a Company’s
Competitive Strength vs. Key Rivals
1. List industry key success factors and other relevant measures
of competitive strength
2. Rate firm and key rivals on each factor using rating scale of 1
to 10 (1 = very weak; 5 = average; 10 = very strong)
3. Decide whether to use a weighted or unweighted rating system
(a weighted system is superior because chosen strength measures
are unlikely to be equally important)
4. Sum individual ratings to get an overall measure of
competitive strength for each rival
5. Based on overall strength ratings, determine overall
competitive position of firm
4-65
ECI’s Balanced Business Scorecard
Financial Perspective
Internal Business Perspective
GOALS
GOALS
MEASURES
• Manufacturing excellence
• Cycle time
• Unit cost
• Yield
• Design productivity
• Silicon efficiency
• Engineering efficiency
• New product introduction
• Actual introduction schedule
versus plan
• Survive
• Cash Flow
• Succeed
• Quarterly sales growth and
operating income by division
• Prosper
• Increased market share and ROE
Customer Perspective
Innovation and Learning Perspective
GOALS
MEASURES
GOALS
MEASURES
• Technology leadership
• New products
• Percent of sales from new
products
• Time to develop next
generation
• Manufacturing learning
• Process time to maturity
• Product focus
• Percent of products that equal
80% sales
• Time to market
• New product introduction
versus competition
• Responsive supply
• Customer
partnership
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MEASURES
• On-time delivery (defined by
customer)
• Number of cooperative
engineering efforts
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Why Do a Competitive
Strength Assessment ?
 Reveals strength of firm’s competitive position
vis-à-vis key rivals
 Shows how firm stacks up against rivals, measure-by-measure
– pinpoints firm’s competitive strengths and competitive
weaknesses
 Indicates whether firm is at a competitive advantage /
disadvantage against each rival
 Identifies possible offensive attacks (pit company strengths
against rivals’ weaknesses)
 Identifies possible defensive actions (a need to correct
competitive weaknesses)
4-69
What Strategic Issues
Merit Managerial Attention?
 Based on results of both industry and competitive analysis and
an evaluation of a company’s competitiveness, what items
should be
on a company’s “worry list”?
 Requires thinking strategically about
 Pluses
and minuses in the industry
and competitive situation
 Company’s resource strengths and weaknesses and attractiveness
of its competitive position
A “good” strategy must address “what to do”
about each and every strategic issue!
4-70
Identifying the Strategic Issues
 How to stave off market challenges from new foreign competitors?
 How to combat price discounting of rivals?
 How to reduce a company’s high costs?
 How to sustain a company’s present growth
in light of slowing buyer demand?
 Whether to expand a company’s product line?
 Whether to acquire a rival firm?
 Whether to expand into foreign markets rapidly or cautiously?
 What to do about aging demographics of a company’s customer
base?
4-71
Stating the Issues
Clearly and Precisely
 A well-stated issue involves such phrases as
 “How
to . . . ?”
 “Whether
 “What
to . . . ?”
should be done about . . . ?”
 Issues need to be precise, specific,
and “cut straight to the chase”
 Issues on the “the worry list”
raise questions about
4-72
 What
actions need to be considered
 What
to think about doing
After studying this chapter, you should have
a good understanding of:
 The benefits and limitations of SWOT analysis in conducting an internal







4-73
analysis of the firm.
The primary and support activities of a firm's value chain.
How value-chain analysis can help managers create value by investigating
relationships among activities within the firm and among the firm and its
customers and suppliers.
The different types of tangible and intangible resources, as well as
organizational capabilities.
The four criteria that a firm's resources must possess to maintain a
sustainable advantage.
The usefulness of financial ratio analysis as well as its inherent limitations.
How to make meaningful comparisons of performance across firms.
The value of recognizing how the interests of a variety of stakeholders can
be interrelated.