Chapter 4: Evaluation a Company's Resources, Capabilities and Competitiveness

The question of organization exploitation (VRIO) evaluates the firm's resources and capabilities by asking:

- Is a firm organized to exploit the full competitive potential of its resources and capabilities? - Are systems in place to enable firms to support the execution of a particular strategy - Are the firm's structure, culture are control mechanisms aligned to incentivize employees to exploit firm resources?

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.

Competitive Advantage indicators include:

- Ability to effectively and efficiently bundle resources and capabilities; - Achieving a high rank on each key success factor; and - Having a net competitive advantage over its rivals.

A SWOT Analysis is a powerful tool for sizing up a firm's:

- Internal strengths (the basis for strategy); - Internal weaknesses (deficient capabilities); - Market opportunities (strategic objectives); & - External threats (strategic defenses).

Organizations should be careful and recognize the opportunities and grasp them whenever they arise. Opportunities may arise from

market, competition, industry/government and technology.

Weaknesses are the factors which do not

meet the standards we feel they should meet. However, sometimes weaknesses are controllable. They must be minimized and eliminated.

Value Chain Analysis for a cost advantage approach is used when

organizations try to compete on costs and want to understand the sources of their cost advantage or disadvantage and what factors drive those costs.

A resource is a

productive input or competitive asset that is owned or controlled by a company ). They can be tangible, or intangible.

When performing a SWOT analysis, the firm's strengths and weaknesses can be identified by

reviewing the VRIO Analysis completed in the previous step.

Opportunities arise when an organization can

take benefit of conditions in its environment to plan and execute strategies that enable it to become more profitable.

A capability is

the capacity of a firm to perform some activity proficiently (e.g., superior skills in marketing) by bundling the resources. They emerge over time through complex interactions among tangible and intangible resources.

If firms resources are not valuable the firm is

at a competitive disadvantage and can expect to earn below normal profits compared to industry rivals.

If firms resources are not valuable but NOT rare the firm is

at competitive parity and can expect to earn normal profits compared to industry rivals.

A distinctive competence is a

competitively valuable capability that a company performs better than its rivals.

Threats arise when

conditions in external environment jeopardize the reliability and profitability of the organization's business.

When evaluating a firm's internal situation, the fourth question to ask is

Are the firm's prices and costs competitive with those of key rivals, and does it have an appealing customer value proposition?

Cost Advantage

Better understanding costs and squeezing them from the value chain activities.

To identify opportunities available to the firm,

Examine the SGM, Key Success Factors, Porters Five Forces, and Industry Analysis

Differentiation

Focusing on the activities associated with core competencies and capabilities in order to perform them better.

The steps of value chain analysis for the firm's utilizing a differentiation advantage strategy:

Step 1: Identify customers' value-creating activities. Step 2: Evaluate the differentiation strategies for improving customer value. Step 3: Identify the best sustainable differentiation.

The steps of value chain analysis for the firm's utilizing a cost advantage strategy:

Step 1: Identify the firm's primary and support activities, Step 2: Establish the relative importance of each activity in the total cost of the product. improving customer value. Step 3: Identify the cost drivers for each activity. Step 4: Identify links between activities. Step 5: Identify opportunities for reducing costs.

The Competitive Strength Assessment Process

Step 1: Make List of industry's key success factors and measures of competitive strength or weakness. Step 2: Assign weight to each competitive strength measure based on its perceived importance. Step 3: Rate firm and rivals on each measure (multiply each measure by its corresponding weight)

If a firm's resources are valuable, rare, costly to imitate, and exploited by the organization, the firm can expect to build a

Sustained competitive advantage and earn above normal profits compared to its competitors.

If a firm's resources are valuable, rare, but not costly to imitate, the firm can expect to build a:

Temporary competitive advantage and will temporarily earn above-normal profits compared to industry rivals.

The question of imitability and substitutability

Valuable, rare resources can only be sources of sustainable competitive advantage if firms that do not possess them cannot obtain them. They must be "imperfectly imitable", i.e. impossible to perfectly imitate them. (E.g. A competitor steals all the scientists in an R&D lab and relocates them to a new facility. But, the "dynamics", "culture" and "atmosphere" are not the same.)

Firms should only seize those Opportunities that are

a good match with its Resource Strengths

TOWS analysis

a variant of SWOT analysis that helps leaders make better strategic decisions

A competency is

an internal capability that a company performs better than other internal capabilities. Anything a company does well.

The VRIO framework helps managers recognize:

the sources of Competitive Advantage

The first step of the VRIO Framework is to evaluate the value of the firm's resources and capabilities. Capabilities are valuable when

they enable a firm to conceive or implement strategies that improve efficiency and effectiveness, and allow the firm to exploit opportunities or negate threats. Value is dependent on the type of strategy the firm is employing: - For a low-cost Provider: value is in capabilities that result in operational efficiency (which lowers costs); - For a differentiator: the value is in the uniqueness drivers that add enhancing features.

A firm's profit depends on the effectiveness of performing _______________ efficiently..

value chain activities

A core competency is a

well-performed internal capability that is central, not peripheral, to a company's strategy, competitiveness, and profitability.

Based on the results of both industry and competitive analysis and evaluation of a company's competitiveness, managers should identify

what items should be on a company's "worry list"

A resource and capabilities analysis tells managers

what the firm should do, given the relative strengths and weaknesses of resources and capabilities. (The manager's job is to bundle resources and capabilities to achieve competitive advantage)

Tangible resources and capabilities can be financial, physical, technological, or organizational-based. Examples include:

(Financial:) - Ability to generate internal funds, - Ability to raise external capital, (Physical:) - Location of plants, offices, and equipment, - Access to raw materials and distribution channels, (Technological:) - Possession of patents, trademarks, and copyrights, (Organizational:) - Formal planning, command, control systems, & - Integrated management information systems.

Intangible resources and capabilities can be human, innovation, and reputational-based. Examples include:

(Human:) Knowledge, Trust, Managerial Talents, and Organizational Culture.; (Innovation:) A supportive atmosphere for new ideas, R&D capabilities, and capacities for organizational innovation and change; (Reputational:) Perception of product quality, durability, and reliability among customers, reputation as a good employer, and reputation as a socially responsible corporate citizen.

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: 1) match its strategy to its internal strengths and to market opportunities, and 2) correct important weaknesses, and defend it against external threats.

Outside of meeting strategic objectives and being an above-average industry performer, other indicators of strategic success include:

- Growth in firm's sales and market share, - Acquisition and retention of customers, - Increasing profit margins, net profits, & ROI, - Growing financial strength & credit rating, - Positively viewed by shareholders and customers, - Leadership in factors relevant to market\industry success, & - Continuing improvement in operating performance.

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 an advantage or disadvantage vis-à-vis, major competitors?

To be valuable, the capability must either

- Lower Costs, - Increase Revenues,& - If not valuable then you have a Competitive Disadvantage.

For a company's strategy to be well-conceived, it must be:

- Matched to its resource strengths and weaknesses; & - Aimed at capturing its best market opportunities and defending against external threats to its well-being.

Developing a worry list requires thinking strategically about the:

- Pluses and minuses in the industry and competitive situation; & - Company's resource strengths and weaknesses and attractiveness of its competitive position.

The Value Chain Analysis Process:

- Segregate the firm's operations (into different types of primary and secondary activities to identify the major components of its internal cost structure. - Make sure examining the value-added activities-source of cost advantage or differentiation. - Use activity-based costing to evaluate the activities. - Do the same for significant competitors.

There are three places in the total value chain system for a company to look for ways to improve its efficiency and effectiveness:

- The firm's own activity segments; - The suppliers' part of the overall value chain; & - The distribution channel portion of the chain.

Strategic Implications of Competitive Strength Assessment

- The higher a firm's overall weighted strength rating, the stronger its overall competitiveness versus rivals. - The rating score indicates the total net competitive advantage for a firm relative to other firms. - Firms with high competitive strength scores are targets for benchmarking. - The ratings show how a company compares against rivals, factor by factor (or capability by capability). - Strength scores can be useful in deciding what strategic moves to make.

The methods are firm can discourage the imitation of its resources or capabilities by rivals include:

- Unique Historical Conditions (Caterpillar, e.g.); - Causal Ambiguity (why resources create SCA is not understood, even by the firm owning them); - Imitating firms cannot duplicate the strategy since they do not understand why it is successful in the first place; - Social Complexity (trust, teamwork, informal relationships, causal ambiguity where the cause of effectiveness is uncertain.

Identifying Strategic Issues:

- Whether to expand into foreign markets rapidly or cautiously; - Whether to reposition the company and move to a different strategic group; - What to do about growing buyer interest in substitute products; and - What to do to combat the aging demographics of the firm's customer base.

Overall Value of a SWOT Analysis includes the ability to

- draw conclusions about the company's overall situation, and to - translate into strategic actions that 1) Better match the company's strategy to its resource strengths and market opportunities, 2) Correct problematic weaknesses, and 3) Defend against worrisome external threats.

Importance things to note about the meaning of "sustainable"

- sustainable is not measured in calendar time. - Sustainable does not mean the advantage will last forever. - Sustainable suggests the advantage lasts long enough that competitors stop trying to duplicate the strategy that makes the advantage sustained.

Benchmarking 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.

To determine the competitive power of a company resource, managers should ask the following four questions:

1) Is the resource really competitively valuable? 2) Is the resource rare and something rivals lack? 3) Is the resource hard to copy or imitate? 4) Can the resource be trumped by the substitute resource strengths and competitive capabilities of rivals?

Six questions to ask when evaluating a firm's internal situation

1.) How well is the firm's present strategy working? 2.) What are the firm's competitively important resources and capabilities? 3.) Is the firm able to take advantage of market opportunities and overcome external threats to its external well-being? 4.) Are the firm's prices and costs competitive with those of key rivals, and does it have an appealing customer value proposition? 5.) Is the firm competitively stronger or weaker than key rivals? 6.) What strategic issues and problems merit front-burner managerial attention?

When applying the VRIO Framework, a resource or bundle of resources is subject to each question to determine the competitive implication of the resource:

1.) Is it valuable? 2.) Is it rare? and 3.) Is it inimitable or non-substitutable? 4.) Is it organized? Must consider each of these questions in a comparative sense to your competitors

The Question of Rareness (VRIO) evaluates the firm's resources and capabilities by asking

Does the resource result in an increase in revenues, a decrease in costs, or some combination of the two? (If the resource is not rare then perfect competition sets in and there is no competitive advantage.)

Threats (SWOT)

External factors in the environment that are beyond an organization's control and could place the organization's mission or operation at risk. (Examples - Entry of foreign competitors, Introduction of new substitute products, Product life cycle in decline, Changing customer needs/tastes, Rival firms adopt new strategies, Increased government regulation, Economic downturn.)

When evaluating a firm's internal situation, the first question to ask is

How well is the firm's present strategy working?

When evaluating a firm's internal situation, the third question to ask is

Is the firm able to take advantage of market opportunities and overcome external threats to its external well-being?

When evaluating a firm's internal situation, the fifth question to ask is

Is the firm competitively stronger or weaker than key rivals?

A company can create competitive advantage by out-managing rivals in performing value chain activities in either/both of two ways:

Option 1: Develop competencies and capabilities that rivals don't have or cant match. Option 2: Do an overall better job than rivals of lowering combined costs of performing all the value chain activities

A firm's Strengths in a SWOT analysis are the characteristics of the business or a team that gives it an advantage over others in the industry. More specifically, strengths are

Positive tangible and intangible attributes, internal to an organization. (Examples - Well-known brand name, Lower costs [raw materials or processes], Superior management talent, Better marketing skills, Good distribution skills, Committed employees.)

Resource-Based View (or Resource & Capabilities Analysis)

Resources and capabilities (bundles of resources that are executed) lead to a sustainable competitive advantage for the firm because all firms are unique and have different capabilities.

Keyways to assess if the firm's costs are competitive with those of rivals is to use:

Value Chain Analysis & Benchmarking

When evaluating a firm's internal situation, the second question to ask is:

What are the company's competitively important resources and capabilities?

When evaluating a firm's internal situation, the sixth question to ask is

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

Value Chain Analysis facilitates a comparison, activity-by-activity, of how effectively and efficiently a company

delivers value to its customers, relative to its competitors

Opportunities (SWOT)

external factors that the company may be able to exploit to its advantage

Core competency can only be a distinctive competency if it

facilitates the company's competitive advantage.

Value Chain Analysis depends on the firm's

generic strategy.

A firm's strengths are beneficial aspects of the organization or the capabilities of an organization, which includes

human competencies, process capabilities, financial resources, products and services, customer goodwill and brand loyalty.

The step of implementing a resource-based view (or Resource & Capabilities Analysis) is to:

identify what the firm does well- or its competencies.

Weaknesses (SWOT Analysis) are the characteristics of the firm that

place it at a disadvantage relative to others or detract the organization from its ability to attain the core goal and influence its growth. (Examples - Limited financial resources, Limited distribution, Lack of patent protection, Higher costs, Out-of-date products/technology, Weak market image, Poor marketing skills, Limited management skills.)

A competitive advantage can be obtained by:

reconfiguring the value chain to lower costs or differentiate (i.e cost drivers and uniqueness drivers).

The second step to implementing a resource-based view (or Resource & Capabilities Analysis) is to determine if

the competitive advantage exists by the VRIO framework.

Value Chain Analysis for a differentiation advantage approach is used when

the firm strives to create a superior product or service using a differentiation strategy.

When evaluating a firm's internal situation (Q1), the best indicators of a well-conceived, well-executed strategy include:

The company is achieving its stated financial and strategic objectives and is an above-average industry performer.