4

Evaluating a
Companys
Chapter
Title
Resources and
Competitive
Position
15/e PPT
McGraw-Hill/Irwin

Strategic Management
2007 The McGraw-Hill Companies, Inc. All rights reserved.

Company Situation Analysis:

The Key Questions
1.
2.

3.
4.
5.

How well is the companys

present strategy working?
What are the companys resource
strengths and weaknesses and its
external opportunities and threats?
Are the companys prices and
costs competitive?
Is the company competitively stronger
or weaker than key rivals?
What strategic issues merit
front-burner managerial attention?

4-2

Fig. 4.1: Identifying the Components of

a Single-Business Companys Strategy

4-3

Question 1: How Well is the

Companys
Key Considerations
Present Strategy
Working?

Must begin by understanding what the strategy is

Identify competitive approach

Low-cost leadership

Differentiation

Focus on a particular market niche

Determine competitive scope

Broad or narrow geographic market coverage?

In how many stages of industrys production/distribution chain does

the company operate?

Examine recent strategic moves to improve its C.P.

Identify functional strategies

4-4

Approaches to Assess how

Well
Qualitative
assessmentStrategy
Quantitative is
the
Present

assessment What are

Is the strategy wellthe results?
Working

conceived?

Covers all the bases?

Internally consistent?

Makes sense?

Timely and in step with

marketplace?

4-5

Is company achieving its

financial and strategic
objectives?

Is company an aboveaverage industry

performer?

Indicators of how Well a Companys

Strategy is working

Whether a firms sale is growing faster, slower, or about

the same pace as the market as a whole thus resulting in
a rising, eroding or stable market share
Whether the company is acquiring new customers at an
attractive rate as well retaining existing customers
Whether the firms profit margins are increasing or
decreasing; how well its margins compare to the same
trends for other companies in the industry
Trends in net profits and return on investment and how
these compare to the same trends for other companies
in the industry

4-6

Indicators of how Well a Companys

Strategy is Working

Whether the companys overall profits and market and credit

rating are improving or on the decline
Whether the company can demonstrate continuous
improvements in such internal performance measures as days
of inventory, employee productivity, unit cost etc.
How share holders view the company based on trends in the
companys stock price and share holders value
The firms image and reputation with its customers
How well the company stacks up against rivals on technology,
product innovation, customer service, product quality, delivery,
time, price, getting new products to market quickly, and other
relevant factors on which buyers base their choice of brands

4-7

Question 2: What are the Companys

Strengths, Weaknesses,
S W O T represents the first letters in
Opportunities and Threats ?

S trengths

W eaknesses

O pportunities

T hreats

S
O

W
T

For a companys strategy to be well-conceived,

it must be

Matched to its resources/strengths and weaknesses

Aimed at capturing its best market opportunities and

erecting defenses against external threats to its wellbeing
4-8

Identifying Resource Strengths

and Competitive Capabilities

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

enhances its competitiveness

Resource strengths and competitive

A skill,
specialized
or competitively
capabilities
are expertise
competitive
assets!
important capabilities
Skills in low cost operations,
Technological expertise
Defect free manufacturing
Proven capabilities in developing and introducing innovative products
Cutting edge supply chain management capabilities
Expertise in getting new products to the market quickly
Expertise in providing good customer service

4-9

Identifying Resource Strengths

and Competitive Capabilities

Valuable physical assets

State-of-the-art plants and equipments

Attractive real estate locations
World wide distribution facilities

Ownership of valuable natural resource deposits

Valuable human assets and intellectual capital

An experienced and capable workforce

Cutting edge knowledge in technology or other important
business areas

Proven managerial knowledge

4-10

Identifying Resource Strengths

and Competitive Capabilities

Valuable organizational assets

Proven quality control systems

Proprietary technology, key patents
State-of-the-art systems for doing business via internet
A strong network of distributors or retail dealers
Sizeable amounts of cash or marketable securities

A strong balance sheet

Valuable intangible assets

Powerful or well known brand name

A reputation for technological leadership

Strong buyer loyalty and goodwill

4-11

Identifying Resource Strengths

and Competitive Capabilities

An achievement or attribute that puts a company in a position

of market advantage
Low overall cost relative to competitors
Market share leadership
A superior product
A wider product line than rivals
Wide geographic coverage
Competitively valuable alliances or cooperative ventures
Fruitful partnership with supplier that reduces cost and enhances
product quality and performance
Joint ventures that provide access to valuable technologies,
specialized know-how and/or geographic markets

4-12

Competencies vs. Core

Competencies vs. Distinctive
A competency is the product of organizational learning and
Competencies
experience and represents proficiency in performing an internal

activity
Some competencies relate to specific skills and expertise
They spring from proficiency in a single discipline or function and
may be performed in single department or unit e.g.
Just in time inventory control
Low cost manufacturing efficiency
Other competencies are inherently multi-disciplinary and cross
functional
They are a result of effective collaboration among people with
different expertise working in different departments e.g.
Continuous product innovation comes from teaming the efforts of
people or groups with expertise in market research, R&D, design,
engineering, and market testing

4-13

Competencies vs. Core

Competencies vs. Distinctive

Competencies
A core competency is the best-performed

internal activity central (not peripheral or incidental) to a

companys competitiveness
and profitability
More often a core competency is knowledge based
residing in people and in a companys intellectual
capital and not in its assets on the balance sheet
A core competency is likely to be grounded in crossdepartment combination of knowledge and expertise
rather than being a product of a single department

4-14

Competencies vs. Core Competencies

vs. Distinctive Competencies

A distinctive competency is a
competitively valuable activity a
company performs better than its rivals
Signifies greater proficiency than a
core competency
A distinctive competency will ultimately
translate into a Competitive Advantage

4-15

What is the Competitive

Power of a Resource
1.
Is the resource strength hard to copy?
Strength?
2.

3.

4.

Is the resource strength durable does

it have staying power?
Is the resource competitively
superior?
Can the resource strength be trumped
by different resource strengths and
competitive capabilities of rivals?
4-16

Identifying Resource
Weaknesses
A weakness is something a firm lacks, does
and Competitive
poorly, or a condition placing it at a
Deficiencies
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!
4-17

4-18

Internal Factor Analysis Summary

(IFAS)
Internal Factors
Strengths

Weight
1

Weighted
Score

Rating
2

Comments
4

Weaknesses

Total Weighted Score

1.00

Notes: 1. List strengths and weaknesses (510 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not
Important) in Column 2 based on that factors probable impact on the companys strategic position. The total weights must sum to
1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the companys response to that factor. 4. Multiply
each factors weight times its rating to obtain each factors weighted score in Column 4. 5. Use Column 5 (comments) for rationale
used for each factor. 6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells how well
the company is responding to the strategic factors in its internal environment.
Source:T. L. Wheelen and J. D. Hunger, External Strategic Factors Analysis Summary (EFAS). Copyright 1991 by Wheelen and
Hunger Associates. Reprinted by permission.

Prentice Hall, 2000

Chapter 4
4-19

19

Identifying a Companys
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 for competitive advantage

4-20

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

4-21

4-22

External Factor Analysis Summary

(EFAS)
External
Strategic Factors
Opportunities

Weight
1

Weighted
Score

Rating
2

Comments
4

Threats

Total Weighted Score

1.00

Notes: 1. List opportunities and threats (510 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not
Important) in Column 2 based on that factors probable impact on the companys strategic position. The total weights must sum to
1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the companys response to that factor. 4. Multiply
each factors weight times its rating to obtain each factors weighted score in Column 4. 5. Use Column 5 (comments) for rationale
used for each factor. 6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells how well
the company is responding to the strategic factors in its external environment.
Source:T. L. Wheelen and J. D. Hunger, External Strategic Factors Analysis Summary (EFAS). Copyright 1991 by Wheelen and
Hunger Associates. Reprinted by permission.

Prentice Hall, 2000

Chapter 3
4-23

23

Competitive Profile Matrix

(CPM)

In the IFE matrix only internal factors are

evaluated and in EFE matrix external factors
are evaluated, but CPM includes both internal
and external factors to evaluate overall position
of the firm with respect to its major competitors.
Generally, critical or key success factors
(KSFs) are used to measure and compare the
comparative performances of two or more than
two rivals

4-24

Industry Matrix/ Competitive Profile

Matrix
(CPM)
Strategic Factors

Weight
1

Total

Company A
Rating

Company A
Weighted Score

Company B
Rating

Company B
Weighted Score

1.00

Source:T. L. Wheelen and J. D. Hunger, Industry Matrix. Copyright 1997 by Wheelen and Hunger Associates.
Reprinted by permission.
Prentice Hall, 2000

Chapter 3
4-25

25

Fig. 4.2: The Three Steps of SWOT

Analysis

4-26

5.4 TOWS Matrix (Fig. 5.2)

TOWS Matrix
Strengths (S)

Weaknesses (W)

List 5 10 internal
strengths here

List 5 10 internal
weaknesses here

Opportunities (O)

SO Strategies

WO Strategies

List 5 10 external
opportunities here

Generate strategies here

that use strengths to take
advantage of opportunities

Generate strategies here

that take advantage of
opportunities by
overcoming weaknesses

Threats (T)

ST Strategies

WT Strategies

List 5 10 external
threats here

Generate strategies here

that use strengths to
avoid threats

Generate strategies here

that minimize weaknesses
and avoid threats

EXTERNAL
FACTORS
(EFAS)

INTERNAL
FACTORS
(IFAS)

Source:Adapted from Long-Range Planning, April 1982, H. Weihrich, The TOWS MatrixA Tool for
Situational Analysis p. 60. Copyright 1982, with kind permission from H. Weihrich and Elsevier Science Ltd.
The Boulevard, Langford Lane, Kidlington OX5 1GB, UK.

Prentice Hall, 2000

Chapter 5
4-27

27

The Strategic Position and Action

Evaluation Matrix (SPACE)

Select a set of variables to define Financial Strength (FS),

Competitive Advantage (CA), Environmental Stability (ES), and
Industry Strength (IS)
Assign numerical value ranging from +1( worst) to +6 (best) to
reach variable that make up FS and IS dimension.
Assign numerical value ranging from -1 ( best) to -6 ( worst) for ES
and CA
Compute the average score for FS, IS, CA, and ES
Plot the average for FS, IS, CA, and ES on the appropriate axis
Add the two scores on the x axis and plot the resultant point on X.
Add the two scores on the y-axis and plot the resultant point on Y.
Plot the intersection of the new xy point
Draw a directional vector from the origin of the SPACE Matrix
through the new intersection point. The vector reveals the type of
strategies recommended for the organization: aggressive,
competitive, defensive, or conservative

4-28

Y axis

X axis

1.

1.

Industry Strength ( IS)

Growth Potential
Profit potential
Financial stability
Technological Know-how
Resource utilization
Capital intensity
Ease of entry
Productivity, capacity utilization

2.

Competitive Advantage (CA)

Market Share
Product Quality
Product life cycle
Customer loyalty
Competitions capacity utilization
Technological know-how
Control over suppliers and distributors

Financial Strength (FS

Return on Investment
Leverage
Liquidity
Working capital
Cash Flow
Ease of Exit
Risk involved in business

2. Environmental Stability (ES)

Technological Changes
Rate of Inflation
Demand Variability
Price range of competitive products
Barriers to entry
Competitive pressure
Price elasticity of demand

4-29

Hypothetical example of SPACE Matrix (Y axis)

Environmental Stability ( ES)
Financial Strength (FS)
Technological change = - 4
Return on Investment = + 6
Rate of Inflation
=-3
Leverage
=+5
Demand variability = - 3
Liquidity
=+5
Price range of competitive
Working capital
=+5
products
= -5
Cash Flow
=+4
Barriers to entry
=-1
Ease of exit
= +1
Competitive pressure = - 4
Risk Involved
=+4
Price elasticity of demand = - 3
Total Score
= + 30
Average Score = 30/7 = 4.28
Total score
= -23
Average Score = -23/7= - 3.28
4-30

SPACE Matrix Calculation X axis

Industry Strength ( IS)
Competitive Advantage (CA)
Growth Potential

=+5

Profit Potential

= +5

Technological Know how = +

3

=-2

Product Quality

=-3

Product life cycle

= -2

Customer Loyalty

= -1

= +4 Competitions capacity utilization = -3

= -3
= +6 Technological Know how

Resource utilization
Capital Requirement

= +6 Control over suppliers and

Distributors

Ease of Entry
Productivity, capacity
utilization

Market Share

+4

Total Score
Average CA Score

Total Score

= +31

4-31

= -1
= 15
= - 2.14

SPACE Matrix Calculations

ES Average Score = -3.28 + Average FS Score( + 4.28) = + 1
Average CA Score = -2.14 + Average IS Score ( 4.42) = + 2.28
FS

CA

ES
4-32

IS

Examples of strategic profiles

Aggressive profiles

Conservative Profile

Competitive Profile
Conservative profile
Defensive Profile
4-33

Interpreting the Profiles

An aggressive profile suggests and Innovator Strategy; the

company is in a position to invest further and introduce new
market offerings; product development and market
development are real options here.

A conservative profile is suggestive of an Analyzer Strategy;

the company will staunchly defend its domain while cautiously
looking for new opportunities of diversification

A Competitive Profile may augur well for a flankers role, as

the company may not have the resource strengths to meet the
competitors head-on

A Defensive Profile is self-explanatory where the company is

only looking to doggedly defend its domain and innovates only
on the periphery.

4-34

Question 3: Are the Companys

Prices and Costs Competitive?

Assessing whether a firms costs are competitive

with those of rivals is a crucial part of company
situation analysis

Key analytical tools

Value chain analysis

Benchmarking
4-35

Concept: Company Value

A companys business consists of all activities
Chain
undertaken in designing, producing, marketing, delivering,

and supporting its product or service

All these activities that a company performs internally

combine to form a value chain so-called because the
underlying intent of a companys activities is to do things
that ultimately create value for buyers

The value chain contains two types of activities

Primary activities (where most of

the value for customers is created)

Support activities that facilitate

performance of the primary activities
4-36

Fig. 4.3: A Representative Company

Value Chain

4-37

Value Chain Activities in Service

Wholesalers:
Firms
Primary Activities:

(a) merchandize selection and purchasing,

(b) Inbound shipping and warehousing
(c) outbound distribution to retailers
Department Store Retailer
Primary Activities
(a) merchandize selection and buying
(b) store layout and product display
(c) advertising and customer service
A Hotel Chain
Primary Activities
(a) site selection and construction
(b) reservations
(c) hotel operations
(d) managing lineup of hotel locations
4-38

Steps in Corporate Value Chain

Analysis
1.
Examine each product lines value chain in terms of

various activities involved in producing that product or

service.

Which activities can be considered core competency or

weakness

Can any core competency be labeled as distinctive

competency
2.
Examine the linkages within each products value chain

Linkages are the connections between the way one value

activity is performed and the cost of performance of another
activity
3. Examine the potential synergies among the value chain of
different product lines/ businesses

4-39

Why Value Chains of Rival

Companies Often Differ?

A companys value chain depends on:

the manner in which it performs its own business
and internal operations,
its strategy, the approaches it is using to execute
this strategy,
underlying economics of the activities themselves
Because these activities differ from company to
company the value chain of rival companies differ
and thus their cost positions

4-40

Why Value Chains of Rival

Companies Often Differ?
a.
-

Competing companies may differ on the degree of

vertical integration
Comparing the value chain of a fully integrated
and partially integrated rivals require adjusting the
differences in scope of activities
The costs of internally performed activities for a
manufacturer will be greater than the cost of
internally performed activities of producers who
buy the needed parts and components from
outside suppliers and only perform assembly line
operations

4-41

Why Value Chains of Rival

Companies Often Differ?
b. There is legitimate reason to expect that value chain and cost
differences between companies pursuing a low cost/ low price
strategy and a rival that is positioned on high end of the market
would be different
c. Cost and price differences among rival firms can have their
origin in activities performed by suppliers and distributors
or by distribution channel allies involved in getting these
product to end users
- Suppliers or wholesale dealers may have excessively high cost
or profit structures that jeopardize a companys cost
competitiveness even though its cost for internally performed
activities are competitive

4-42

1.

2.

The Value Chain System for

Entire
Industry
Accurately assessing
a companys
competitiveness in end use

markets require that managers must understand the entire value

chain system for delivering a product or service to end
users, not just companys own value chain
At the very least it means considering the value chain of
suppliers and forward channel allies
Suppliers value chains are relevant because:
Suppliers perform activities and incur costs in creating and
delivering the purchased inputs used in companys own value
chain
The costs, performance features and quality of these inputs
influence a companys own cost and product differentiation
capabilities
Any thing a company can do to help its suppliers take cost out
of their value chain activities or improve the quality and
performance of the item being supplied can enhance its own
competitiveness

4-43

The Value Chain System for

Entire Industry

1.

2.

Forward channel and customer value chain are

relevant because:
The costs and margins of a companys
distribution allies are part of the price paid by end
users
The activities that distribution allies perform affect
end users satisfaction
For these reasons companies normally work
closely with forward channel allies to perform
these value chain activities in a mutually
beneficial way

4-44

Representative Value Chain for an Entire

Industry

4-45

Developing Data to Measure a

Companys Cost Competitiveness

After identifying key value chain activities, the next step

involves determining costs of performing specific value chain
activities using activity-based costing

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 a significant or growing proportion of costs

4-46

Activity-Based Costing: A Key

Tool in Analyzing Costs

Determining whether a companys costs are in line with

those of rivals requires:

Measuring how a companys costs compare with those of

rivals activity-by-activity

Requires having accounting data to measure cost

of each value chain activity

Activity-based costing entails:

Defining expense categories according

to specific activities performed and

Assigning costs to the activity

responsible for creating the cost
4-47

4-48

Benchmarking Costs of
Key Value Chain Activities

Focuses on cross-company comparisons of how

certain activities are performed and what costs are
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
4-49

Strategic Options for

Remedying a Cost Disadvantage

1.
2.
3.

Companys competitiveness on cost depends on

how efficiently it manages the value chain activities
relative to how well competitors manage theirs
There are three main areas in a companys value
chain where important differences in the cost of
competing firms can occur
A companys own activity segment
Suppliers part of the industry value chain
The forward channel portion of the industry chain

4-50

1.
2.

3.
4.
5.
6.
7.
8.

Remedying an Internal Cost

Implement the use of the best practices throughout the company
Disadvantage
particularly for high cost activities
Try to eliminate cost-producing activities altogether by revamping the value
chain
- cutting out low value added activities
- bypassing the value chains and associated costs of distribution by
marketing directly to end users
Relocate high cost manufacturing activities to other geographic areas
Whether certain internally performed activities can be outsourced more
cheaply than they could be done in-house
Invest in productivity enhancing, cost saving technological improvements
Find ways to detour around the activities or items where costs are high
Redesign the product and/or some components to facilitate speedier and
more economical manufacture or assembly
Try to make up the internal cost disadvantage by reducing the costs in
supplier or forward channel portions of the industry value chain usually
the last resort

4-51

Remedying a Supplier-Related
Cost Disadvantage

Pressurizing suppliers for lower prices

Switching to lower-priced substitute inputs
Collaborating closely with suppliers to identify
mutual cost saving opportunities
Just in time deliveries from supplier can lower:
- companys inventory and logistic costs
- supplier can economize on their warehousing,
shipping, and production scheduling costs
Companies may find it cheaper to integrate
backward

4-52

Remedying a Cost Disadvantage

Associated with Activities Performed
by
Forward dealer
Channel
Allies and other
1. Pressurize
distributors

2.

3.

forward channel allies to reduce their costs

and markups
Work closely with forward channel allies to
identify win-win opportunities to reduce
costs
Change to a more economical distribution
strategy, including switching distribution
channels or integrating forward into
company-owned retail outlets
4-53

Fig. 4.5: Translating Company Performance of

Value Chain Activities into Competitive Advantage

4-54

Question 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--vis major competitors?
4-55

Question 5: What Strategic

Issues
Based on results of both industry and
Merit Managerial
competitive analysis and an evaluation of a
Attention?
companys competitiveness, what items
should be on a companys worry list?

Requires thinking strategically about

Pluses and minuses in the industry

and competitive situation

Companys resource strengths and weaknesses

attractiveness
of its competitive
position
Aand
good
strategy must
address what
to do

about each and every strategic issue!

4-56