MGMT 490 Business Policy Chapter 4 Evaluating a Company's Resources, Capabilities, and Competitiveness

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

(1) whether the company is achieving its stated financial and strategic objectives, (2) whether its financial performance is above the industry average, and (3) whether it is gaining customers and gaining market share.

Tangible resource

(Financial, physical, technological (patents), organizational (workstation, communication satellite))

Social complexity

(company culture, interpersonal relationships among managers or R&D teams, trust-based relations with customers or suppliers) and causal ambiguity are two factors that inhibit the ability of rivals to imitate a firm's most valuable resources and capabilities.

Competitive assets

- Are the firm's resources and capabilities - Are the determinants of its competitiveness and ability to succeed in the marketplace - Are what a firm's strategy depends on to develop sustainable competitive advantage over its rivals

Signs of A Firm's Competitive Strength

- Its prices and costs are in-line with rivals - Its customer-value proposition is competitive and cost effective - Its bundled capabilities are yielding a sustainable competitive advantage

Support activities of value chain

- Product R&D, technology, and system development - HR management - General administration

Threats to Resources and Capabilities

- Rivals providing better substitutes over time - Capabilities decaying from benign neglect - Disruptive competitive environment change

Primary activities of value chain

- Supply chain management - Operations - Distribution - Sales and marketing - Service - Profit margin

Indicators of strategic success

- growth in sales and market share - acquisition and retention of customers - strengthening image and reputation - increasing profit margins and net profits - leadership in factors relevant to industry success - continuing improvement of key measures of operating performance

Organizational Capability

- intangible but observable capacity of a firm to perform some activity proficiently using a related combination of its resources (resource bundle) - is knowledge-based, residing in people and in a firm's intellectual capital or in its organizational processes and functional systems, which embody tacit knowledge.

What's the most important with the swot analisys

Draw conclusion and draft strategic actions

SWOT Analysis Involves

Drawing conclusions from the SWOT listings about the firm's overall situation Translating these conclusions into strategic actions by the firm that: - Match its strategy to its internal strengths & market opportunities - Correct important weaknesses and defend it against external threats

____ the less competitively vulnerable the company becomes.

The greater the amount of customer value that a company can offer profitably relative to close rivals

Resource bundle

linked and closely integrated set of competitive assets centered around one or more cross-functional capabilities. they often pass the four tests of a ressource competitive power when 1 resource in the bundle cannot

Causal ambiguity

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

A company's competitive strength scores

point directly to the kinds of offensive and defensive actions it can use to exploit its competitive strengths and reduce its competitive vulnerabilities.

Resource and Capability Analysis

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

a firm's strengths

represent its competitive assets.

a firm's weaknesses

shortcomings that constitute competitive liabilities.

Capability or competence

the capacity of a firm to perform an internal activity competently through deployment of a firm's resources.

Value-creating activities have a dynamic relationship and contributes to

the formation an development of other capabilities

What are the company's most important resources and capabilities and can they give the company a sustainable advantage over competitors?

A company's resources can be identified using the tangible/intangible typology presented in this chapter. Its capabilities can be identified either by starting with its resources to look for related capabilities or looking for them within the company's different functional domains. The answer to the second part of the question comes from conducting the four tests of a resource's competitive power—the VRIN tests. If a company has resources and capabilities that are competitively valuable and rare, the firm will have a competitive advantage over market rivals. If its resources and capabilities are also hard to copy (inimitable), with no good substitutes (nonsubstitutable), then the firm may be able to sustain this advantage even in the face of active efforts by rivals to overcome it

Competitive assets

A firm's resources and capabilities that are determinants of its competitiveness and ability to succeed in the marketplace.

Identifying Market Opportunities

Absolute "must pursue" market: Represents much potential but is hidden in "fog of the future." Marginally interesting market: Presents high risk and questionable profit potential. Unsuitable\mismatched market: Is best avoided as the firm's strengths are not matched to market factors

Resource and capabilities analysis

Analyse to see if that segment will be competitive and sustainable on the long term, done by finding all your resources than pplying the four tests of a resource power.

Performing value chain activities with capabilities that permit the company to either outmatch rivals on differentiation or beat them on costs will give the company a

competitive advantage.

A company's resources and capabilities represent its

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

The higher a company's costs are above those of close rivals, the more _________ it becomes

competitively vulnerable

The payoff from SWOT analysis comes from the __________ and ___________ that flow from the four lists

conclusions about a company's situation and the implications for strategy improvement

A company's cost-competitiveness depends

costs of internally performed activities (its own value chain) but also on costs in the value chains of its suppliers and distribution-channel allies.

A company's value chain

identifies the primary activities and related support activities that create customer value.

SWOT analysis

is a simple but powerful tool for sizing up a company's strengths and weaknesses, its market opportunities, and the external threats to its future well-being. internal strengths (basis for strategy) internal weaknesses (deficient capabilities) market opportunities (strategic objectives) external threats (strategic defenses)

Managing Capabilities Dynamically involves:

- Attending to the ongoing modification of existing competitive assets - Taking advantage of any opportunities to develop totally new kinds of capabilities

The Value Chain

- Identifies the primary internal activities that create and deliver customer value and the requisite related support activities - Permits a deep look at the firm's cost structure and ability to offer low prices - Reveals the emphasis that a firm places on activities that enhance differentiation and support higher prices

indicators of weak strategy or weak execution (or both)

- sluggish financial performance - second-rate market accomplishments

Improving Supplier-Related Value Chain Activities

-Pressure suppliers for lower prices. Switch to lower-priced substitute inputs. -Collaborate closely with suppliers to identify mutual cost-saving opportunities. -Work with suppliers to enhance the firm's differentiation. -Select and retain suppliers who meet higher-quality standards. -Coordinate with suppliers to enhance design or other features desired by customers. Provide incentives to suppliers to meet higher-quality standards, and assist suppliers in their efforts to improve. Just in time delivery, finding suppliers with better quality products, mutual cost-saving opportunity (example: using company warehouse to store products), integrating supplier in quality process

SWOT Analysis used to answer:

is the company able to seize market opportunities and nullify external threats?

Improving Value Chain Activities of Distribution Partners

>>> Achieving cost-based competitiveness - Pressure 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. Finding cheaper channels, pressure distributor, mutual cost saving like shipping in bulk

Intangible resource

Brand, relationship, human resource, company culture, human and intellectual capital

resource vs capability?

Capability (perform activity) is developed and enable through the deployment of a company resource (compatitive asset)

Identifying Strengths

Competence: Is an activity that a firm has learned to perform with proficiency—a capability Core Competence: Is a proficiently performed internal activity that is central to a firm's strategy and competitiveness Distinctive Competence: Is a competitively valuable activity that a firm performs better than its rivals

what creates an agenda of strategic issues that merit prompt managerial attention.

Compiling a "priority list" of problems

Value Chain Analysis

Facilitates a comparison, activity-by-activity, of how effectively & efficiently a firm delivers value to its customers, relative to its competitors Process: 1. Segregate the firm's operations into different types of primary and secondary activities to identify the major components of its internal cost structure 2. Use activity-based costing to evaluate the activities 3. Do the same for significant competitors

Value Chain supporting activities

HR, Administration, R&D

Are the company's cost structure and value proposition competitive?

One telling sign of whether a company's situation is strong or precarious is whether its costs are competitive with those of industry rivals. Another sign is how the company compares with rivals in terms of differentiation—how effectively it delivers on its customer value proposition. Value chain analysis and benchmarking are essential tools in determining whether the company is performing particular functions and activities well, whether its costs are in line with those of competitors, whether it is differentiating in ways that really enhance customer value, and whether particular internal activities and business processes need improvement. They complement resource and capability analysis by providing data at the level of individual activities that provide more objective evidence of whether individual resources and capabilities, or bundles of resources and linked activity sets, are competitively superior.

Two factors that inhibit the ability of rivals to imitate a firm's most valuable resources and capabilities:

Social complexity (company culture, interpersonal relationships among managers or R&D teams, trust-based relations with customers or suppliers) Causal ambiguity (the fact that it is hard to figure out how a complex resource contributes to competitive advantage and therefore exactly what to imitate)

competitive strength assessment is

Step 1 make a list of the industry's key success factors and other telling measures of competitive strength or weakness (6 to 10 measures usually suffice). Step 2 is to assign weights to each of the measures of competitive strength based on their perceived importance. (The sum of the weights for each measure must add up to 1.) Step 3 is to calculate weighted strength ratings by scoring each competitor on each strength measure (using a 1-to-10 rating scale, where 1 is very weak and 10 is very strong) and multiplying the assigned rating by the assigned weight. Step 4 is to sum the weighted strength ratings on each factor to get an overall measure of competitive strength for each company being rated. Step 5 is to 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 strength and weakness.

STRATEGIC ISSUES AND PROBLEMS MERIT FRONT-BURNER MANAGERIAL ATTENTION

Strategic priority "how to" issues: - How to meet challenges of new foreign competitors - How to combat the price discounting of rivals - How to both reduce high costs and prepare for price reductions - How to sustain growth as buyer demand slows - How to adapt to the changing demographics of the firm's customer base Strategic priority "should we" issues: - Expand rapidly or cautiously into foreign markets? - Reposition the firm to move to a different strategic group? - Counter increasing buyer interest in substitute products? - Expand the firm's product line? - Correct the firm's competitive deficiencies by acquiring a rival firm with the missing strengths?

Value Chain primary activities

Suply chain management, operations, distribution, sales and marketing, service = profit

How to do the four tests of a resource power

The competitive power of a resource or capability is measured by how many of four specific tests it can pass.4 These tests are referred to as the VRIN tests for sustainable competitive advantage—VRIN is a shorthand reminder standing for Valuable, Rare, Inimitable, and Nonsubstitutable.

Is the company able to seize market opportunities and overcome external threats to its future well-being?

The answer to this question comes from performing a SWOT analysis. The two most important parts of SWOT analysis are (1) drawing conclusions about what strengths, weaknesses, opportunities, and threats tell about the company's overall situation; and (2) acting on the conclusions to better match the company's strategy to its internal strengths and market opportunities, to correct the important internal weaknesses, and to defend against external threats. A company's strengths and competitive assets are strategically relevant because they are the most logical and appealing building blocks for strategy; internal weaknesses are important because they may represent vulnerabilities that need correction. External opportunities and threats come into play because a good strategy necessarily aims at capturing a company's most attractive opportunities and at defending against threats to its well-being.

On an overall basis, is the company competitively stronger or weaker than key rivals?

The key appraisals here involve how the company matches up against key rivals on industry key success factors and other chief determinants of competitive success and whether and why the company has a net competitive advantage or disadvantage. Quantitative competitive strength assessments, using the method page 114presented in Table 4.4, indicate where a company is competitively strong and weak and provide insight into the company's ability to defend or enhance its market position. As a rule, a company's competitive strategy should be built around its competitive strengths and should aim at shoring up areas where it is competitively vulnerable. 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.

How to improve cost of internal 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 assembly. 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.

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

This analytic step zeros in on the strategic issues and problems that stand in the way of the company's success. It involves using the results of industry analysis as well as resource and value chain analysis of the company's competitive situation to identify a "priority list" of issues to be resolved for the company to be financially and competitively successful in the years ahead. Actually deciding on a strategy and what specific actions to take is what comes after developing the list of strategic issues and problems that merit front-burner management attention.

How well is the present strategy working?

This involves evaluating the strategy in terms of the company's financial performance and market standing. The stronger a company's current overall performance, the less likely the need for radical strategy changes. The weaker a company's performance and/or the faster the page 113changes in its external situation (which can be gleaned from PESTEL and industry analysis), the more its current strategy must be questioned.

Specific indicators of how well a company's strategy is working (strategic success) 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. page 85The rate at which new customers are acquired. Evidence of improvement in internal processes such as defect rate, order fulfillment, delivery times, days of inventory, and employee productivity.

Identifying Threats

Types: - Normal course-of-business threats - Sudden-death threats Identify the threats to the firm's future prospects and evaluate what strategic actions can be taken to neutralize or lessen their impact

Identifying capability

Virtually all organizational capabilities are knowledge-based, residing in people and in a company's intellectual capital, or in organizational processes and systems, which embody tacit knowledge looking over the firm's resources and considering whether (and to what extent) the firm has built up any related capabilities. managers to survey the various functions a firm performs to find the different capabilities associated with each function. (Thompson 90)

Identifying Weaknesses:

Weakness: Is something a firm lacks or does poorly (in comparison to others) or a condition that puts it at a competitive disadvantage in the marketplace Types: - Inferior skills, expertise, or intellectual capital - Deficiencies in physical, organizational, or intangible assets - Missing or competitively inferior capabilities in key areas

A distinctive competence

a capability that enables a company to perform a particular set of activities better than its rivals. It represents a competitively superior internal strength

Resource

a competitive asset that is owned or controlled by a firm

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." Benchmarking the costs of company activities against those of rivals provides hard evidence of whether a company is cost-competitive.

High-weighted competitive strength ratings signal

a strong competitive position and possession of competitive advantage; low ratings signal a weak position and competitive disadvantage.

VRIN test

a test for sustainable competitive advantage, asks if a resource is Valuable, Rare, Inimitable, and Non-substitutable

A core competence

activity that a company performs proficiently and that is also central to its strategy and competitive success.

Evaluating a company's cost-competitiveness involves using what accountants call

activity-based costing to determine the costs of performing each value chain activity.

A competence is

an activity that a company has learned to perform with proficiency ( a capability).

A dynamic capability is

an ongoing capacity of a company to modify its existing resources and capabilities or create new ones by: -Improving existing resources and capabilities incrementally -Adding new resources and capabilities to the firm's competitive asset portfolio