Ch. 4 Evaluating a Company's Resouces, Capabilities, and Competitiveness

How Value Chain Activities Relate to Resources and Capabilities:

-An organizational capability or competence implies a capacity for action; in contrast, a valuecreating activity initiates the action. -There is a dynamic relationship between a company's activities and it

The Role of Dynamic Capabilities

-Companies that know the importance of recalibrating and upgrading their most valuable resources and capabilities ensure that these activities are done on a continual basis. A-t that point, their ability to freshen and renew their competitive assets becomes a capability in itself—a dynamic capability

The answers to two questions are of particular interest of competitive strength

-How does the company rank relative to competitors on each of the important factors that determine market success? -Does the company have a net competitive advantage or disadvantage to major competitors?

The Four Tests of a Resource's Competitive Power:

-Is the resource or capability competitively valuable—Is it directly relevant to the company's strategy. -Is the resource or capability rare—Is it something rivals lack. -Is the resource or capability hard to copy—Inimitable -Is the resource invulnerable to the threat of substitution from different types of resources and capabilities—Non-substitutable

Improving Value Chain Activities of Distribution Partners: There are three main ways to combat a cost disadvantage in the forward portion of the industry value chain:

-Pressure dealer-distributors and other forward channel allies to reduce their costs and markups. -Collaborate with forward channel allies to identify win-win opportunities to reduce costs. -Change to a more economical distribution strategy, including switching to cheaper distribution channels or perhaps integrating forward into company-owned retail outlets

Two methods for identifying capabilities are available:

-Start with a list of resources since capabilities are built from resources and look for clues about the types of capabilities the firm is likely to have accumulated -Start with a list of functions within the organization as capabilities are largely derived from key functional components of the organization

The followings are steps for compiling a competitive strength assessment:

-Step 1: make a list of the industry's key success factors and most telling measures of competitive strength or weakness -Step 2: assign weights to each of the measures based upon perceived importance -Step 3: rate the firm and its rivals on each factor and multiply the rating by the weight to obtain the score for each measure -Step 4: sum the weighted scores for measure to get an overall measure of competitive strength for each company being rated -Step 5: use the overall strength ratings to draw conclusions about the size and extent of the company's net competitive advantage or disadvantage and to take specific note of areas of strengths and weaknesses

The two most important parts of SWOT analysis are:

-The final piece of SWOT analysisisto translate the diagnosis of the company'ssituation into actions for improving the company's strategy and business prospects. A company's internal strengths should always serve as the basis of its strategy—placing heavy reliance on a company's best competitive assets is the soundest route to attracting customers and competing successfully against rivals. -As a rule, strategies that place heavy demands on areas where the company is weakest or has unproven competencies should be avoided.

Strategic Implications of Competitive Strength Assessments:

-The strength ratings provide guidelines for designing wise offensive and defensive strategies -When a company has important competitive strengths in areas where one or more rivals are weak, it makes sense to consider offensive moves to exploit rivals' competitive weaknesses. -When a company has important competitive weaknesses in areas where one or more rivals are strong, it makes sense to consider defensive moves to curtail its vulnerability.

To improve the effectiveness of the company's customer value proposition and enhance differentiation, managers can take several approaches:

-They can adopt best practices for quality, marketing, and customer service -They can reallocate resources to activities that address buyers' most important purchase criteria, which will have the biggest impact on the value delivered to the customer -They can adopt new technologies that spur innovation, improve design, and enhance creativity

A company's value-creating activities can offer a competitive advantage in one of two ways:

-They can contribute to greater efficiency and lower costs relative to competitors -They can provide a basis for differentiation, so customers are willing to pay relatively more for the company's goods and services.

Improving Internally Performed Value Chain Activities

-They can implement best practices throughout the company, particularly for high-cost activities -They can redesign the product and/or some of its components to eliminate high-cost components or facilitate speedier and more economical manufacture or -They can relocate high-cost activities (such as manufacturing) to geographic areas where they can be performed more cheaply or outsource activities to lower-cost vendors or contractors

Other indicators of how well a company's strategy is working include:

-Trends in the company's sales and earnings growth -Trends in the company's stock price -The company's overall financial strength -The company's customer retention rate -The rate at which new customers are acquired

The three best indicators of how well a company's strategy is working are:

-Whether the company is achieving its stated financial and strategic objectives -Whether its financial performance is above the industry average -Whether it is gaining customers and increasing its market share

There are three main areas in a company's overall value chain where important differences in the costs of competing firms can occur:

-a company's own activity segments -suppliers' part of the industry value chain -the forward channel portion of the industry chain.

Assessing a Company's Competencies—What Activities Does It Perform Well?

-competence -core competence -a distincitve competence

capability

-the capacity of a firm to perform some internal activity competently -developed and enabled through the deployment of a company's resources

Identifying a Company's Internal Strengths

A strength is something a company is good at doing or an attribute that enhances its competitiveness in the marketplace. One of the most important aspects of appraising a company's resource strengths has to do with its competence level in performing key pieces of its business. Company competencies can range from merely a competence in performing an activity to a core competence to a distinctive competence.

Identifying the External Threats to a Company's Future Profitability

Certain factors in a company's external environment pose threats to its profitability and competitive well-being.

Summing a company's weighted strength ratings for all the measures yields an overall strength rating.

Comparisons of the weighted overall strength scores indicate which competitors are in the strongest and weakest competitive positions and who has how big a net competitive advantage over whom.

Identifying Capabilities

Organizational capabilities are more complex than resources and are harder to categorize and search out

A Company's Primary and Secondary Activities Identify the Major Components of Its Internal Cost Structure

The combined costs of all the various primary and support activities comprising a company'svalue chain define its internal cost structure.

Comparing the Value Chains of Rival Companies

The primary purpose of value chain analysis is to facilitate a comparison, activity-by-activity, of how effectively and efficiently a company delivers value to its customers, relative to its competitors

A company's resources and capabilities must be managed dynamically.

This requires a constantly evolving portfolio to sustain its competitiveness and help drive improvements in its performance

Competitive Strength Assessment

Using value chain analysis and benchmarking to determine a company's competitiveness on price and cost is necessary but not sufficient.

resource

a competitive asset that is owned or controlled by a company

distinctive competence

a competitively important activity that a company performs better than its rivals

core competence

a competitively important activity that a company performs better than other internal activities

The conceptual differences between a competence, a core competence, and a distinctive competence

a distinctive competence draw attention to the fact that competitive capabilities are not all equal

resource bundle

a linked and closely integrated set of competitive assets centered around one or more cross-functional capabilities

In evaluating how well a company's present strategy is working

a manager has to start with what the strategy is

A best practice

a method of performing an activity that consistently delivers superior results compared to other approaches.

Benchmarking

a potent tool for improving a company's own internal activities that is based on learning how other companies perform them and borrowing their "best practices"

Resource and capability analysis

a powerful tool for sizing up a company's competitive assets and determining if they can support a sustainable competitive advantage over market rivals

core competence

a proficiently performed internal activity that is central to a company's strategy and competitiveness.

SWOT analysis

a simple but powerful tool for sizing up a company's resource capabilities and deficiencies, its market opportunities, and the external threats to its future well-being

The value chains of the distribution channel partners

also relevant because they impact the final retail price the consumer sees and impact sales volume and customer satisfaction.

competence

an activity that a company has learned to perform with proficiency—a capability

A sustainable competitive advantage

an advantage over market rivals that persists despite efforts of the rivals to overcome it.

A company's resources and capabilities represent its competitive assets

are big determinants of its competitiveness and ability to succeed in the marketplace.

The market opportunities most relevant to a company

are those that match up well with the company's competitive assets, offer the best prospects for growth and profitability, and present the most potential for competitive advantage.

VRIN tests for sustainable competitive advantage

ask if a resource is Valuable, Rare, Inimitable, and Non-substitutable

Benchmarking entails

comparing how different companies perform various value chain activities.

The explosive interest of companies in benchmarking costs and identifying best practices has prompted

consulting organizations and several associations to gather benchmarking data, distribute information about best practices, and provide comparative cost data without identifying the names of particular companies.

It is essential that managers be able to identify the company's resources and capabilities in order to

craft strategy

Evidence of improvement in internal processes such as

defect rate, order fulfillment, delivery times, days of inventory, and employee productivity

support activities

facilitate and enhance the performance of primary activities

primary activities

foremost in creating value for customers

the tough part of benchmarking is

how to gain access to information about other companies' practices and costs

Social complexity and casual ambiguity are two factors that

inhibit the ability of rivals to imitate a firm's most valuable resources and capabilities.

A weakness or competitive deficiency

is something a company lacks or does poorly in comparison to others or a condition that puts it at a disadvantage in the marketplace.

A company is well advised to pass on a particular market opportunity unless

it has or can acquire the resources to capture it.

Regardless of where on the quality spectrum a company competes

it must remain competitive in terms of its customer value proposition in order to stay in the game.

A company's strengths represent

its competitive assets; its weaknesses are shortcomings that constitute competitive liabilities

A company's value chain is embedded in a

larger system of activities that includes the value chains of its suppliers and the value chains of whatever wholesale distributors and retailers it utilizes in getting its product or service to end users

Casual ambiguity

makes it very hard to figure out how a complex resource or capability contributes to competitive advantage and therefore exactly what to imitate.

This step involves drawing on the results

of both industry and competitive analysis and the evaluations of the company's own competitiveness.

The value chain consists of two broad categories of activities:

primary activities support activities

Appraising a company's resource strengths and weaknesses and its external opportunities and threats, commonly known as SWOT analysis

provides a good overview of whether its overall situation is fundamentally healthy or unhealthy

Value chain analysis and benchmarking can

reveal a great deal about a firm's cost competitiveness

Resource and capability analysis is a powerful tool for

sizing up a company's competitive assets and determining if they can support a sustainable competitive advantage over market rivals.

competence

something an organization is good at doing. It is nearly always the product of experience, representing an accumulation of learning and the buildup of proficiency in performing an internal activity

Zeroing in on the strategic issues a company faces and compiling a "worry list" of problems and roadblocks creates a

strategic agenda of problems that merit prompt managerial attention.

One of the most telling signs of whether a company's business position

strong or precarious is whether its prices and costs are competitive with industry rivals

Determining if a company's resources and capabilities are potent enough to produce a

sustainable competitive advantage is based upon four tests of competitive power.

Accurately assessing a company's competitiveness in end-use markets requires

that company managers understand the entire value chain system for delivering a product or service to end-users, not just the company's own value chain.

A first-rate SWOT analysis provides

the basis for crafting a strategy that capitalizes on the company's resources, aims squarely at a capturing the company's best opportunities, and defends against competitive and macro-environmental threats.

dynamic capability

the capacity of a company to modify its existing resources and capabilities to create new ones.

The first thing to pin down is

the company's competitive approach

Using a weighted rating system is more effective

the different measures of competitive strength are unlikely to be equally important.

. The stronger a company's current overall performance,

the less likely the need for radical changes in strategy

The weaker a company's financial performance and market standing

the more its current strategy must be questioned.

A good strategy must contain ways

to deal with all the strategic issues and obstacles that stand in the way of the company's financial and competitive success in the years ahead

Two analytical tools are particularly useful in determining whether a company's costs and customer value proposition are competitive and thus conducive to winning in the marketpla

value chain analysis and benchmarking

Weak performance is almost always a sign of

weak strategy, weak execution, or both.

The final and most important analytical step is to

zero in on exactly what strategic issues that company managers need to address and resolve for the company to be more financially and competitively successful in the years ahead