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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 4-13 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? 4-17 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 4-66 MEASURES • On-time delivery (defined by customer) • Number of cooperative engineering efforts 4-67 4-68 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.