Slide strategic core concept and analytical approach 5e by thomson chapter4

► The second step is evaluate the competitive power of these resources and capabilities—whether they are potent enough for the company to be competitively successful and perhaps achieve

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Strategy – Core Concepts and Analytic

An e-book published and distributed

by McGraw Hill Education, Burr Ridge, Illinois

An e-book published and distributed

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Before executives can chart a new

strategy, they must reach a common understanding of the company’s

current position.

W Chan Kim and Rene Mauborgne

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Organizations succeed in a competitive

marketplace over the long run because

they can do certain things their customers value better than can their competitors.

Robert Hayes, Gary Pisano, and David Upton

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A new strategy nearly always involves

acquiring new resources and capabilities.

Laurence Capron and Will Mitchell

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1 Learn how to determine whether a firm’s strategy is

working well and to evaluate the competitive power of a

firm’s resources and capabilities.

2 Understand the meaning and significance of company

and industry value chains.

3 Gain proficiency in using four analytical tools to evaluate

a firm’s ability to compete successfully: SWOT analysis, value chain analysis, benchmarking, and competitive

strength assessment.

4 Learn what to look for in identifying the strategic issues

company managers must address.

Learning Objectives

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 Evaluating a Firm’s Resources and Ability to Compete

Successfully: The Six Questions to Answer

► Question 1: How Well Is the Firm’s Present Strategy Working?

► Question 2: What Are the Firm’s Important Resources and Capabilities and

Do They Have the Competitive Power to Enable the Company to Build and/or Sustain a Competitive Advantage over Rivals?

► Question 3: Are the Firm’s Resources and Capabilities Attractive and Matched to Its Market Opportunities and External Threats?

Well-► Question 4: Are the Firm’s Prices and Costs Competitive with Those of Key Rivals and Does It Have an Attractive Customer Value Proposition?

► Question 5: Is the Firm Competitively Stronger or Weaker than Key Rivals?

► Question 6: What Strategic Issues and Problems Merit Front-burner

Managerial Attention?

Chapter 4 Roadmap

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Evaluating a Firm’s Ability to Compete

Successfully: Six Key Questions

Evaluating a Firm’s Ability to Compete

Successfully: Six Key Questions

 The analytical spotlight in evaluating a firm’s resources and ability to compete successfully is trained on six questions:

► How well is the company’s present strategy working?

► What are the company’s important resources and capabilities, and

do they have the competitive power to enable the company to build and/or sustain a competitive advantage over rival companies?

► Does the company have attractively strong resource capabilities

and how well do they match its market opportunities and the

external threats to its future well-being?

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

► Is the company competitively stronger or weaker than key rivals?

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

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 Begin by understanding what its strategy is:

► Identify the firm’s competitive approach

• Lower-costs relative to rivals?

• A different or better product/service?

• Superior ability to serve a particular

market niche or group of buyers?

► Determine its competitive scope

• Broad or narrow geographic market coverage?

• Wide or narrow product line?

► Examine recent strategic moves

► Identify functional strategies

Question 1: How Well Is the Firm’s

Present Strategy Working?

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FIGURE 4.1 Identifying the Components of a Single-Business

Company’s Strategy

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Key Indicators of How Well

a Company’s Strategy Is Working

Key Indicators of How Well

 The three best indicators:

► Whether the firm is meeting or beating its financial and strategic

performance targets

► Whether the firm is an above-average industry performer

► Whether the firm is gaining customers and outcompeting one or

more of its close rivals

Persistent shortfalls in meeting performance targets and weak performance relative to rivals are warning signs that the firm has a weak strategy or suffers

from poor strategy execution or both.

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Other Good Indicators of How Well

 Whether the firm’s sales are growing faster, slower, or at about the same pace

as the market as a whole, thus resulting in a rising, eroding, or stable market share.

 How well the firm stacks up against rivals on product innovation, customer

service, product quality, delivery time, price, getting newly developed products

to market quickly, and other relevant factors affecting buyers’ choice of brands.

 Whether the firm’s image and reputation with its customers is growing stronger

or weaker.

 Whether the firm’s profit margins are increasing or decreasing.

 Trends in the firm’s net profits and return on investment and how these

compare to the same trends for rival companies.

 Whether the firm’s overall financial strength, credit rating, key financial and

operating ratios, and cash flows from operations are improving, holding steady,

or deteriorating.

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Strategic Insight

Sluggish financial performance and second-rate

market accomplishments almost always signal

weak strategy, weak execution, or both.

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Evaluating a Company’s Financial

Performance

Evaluating a Company’s Financial

Performance

 Accurate diagnosis of a company’s financial

performance and financial statements requires

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TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean

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 A company’s resources and capabilities are competitive assets and

determine whether its competitive power in the marketplace will be

impressively strong or disappointingly weak

► Companies with second-rate competitive assets nearly always are

relegated to a trailing position in the industry

 Resource and capability analysis is a two-step process for

determining whether a company’s competitive assets can provide the

foundation necessary for competitive success in the marketplace

► The first step is to identify the company’s competitively important

resources and capabilities

► The second step is evaluate the competitive power of these

resources and capabilities—whether they are potent enough for the company to be competitively successful and perhaps achieve a

sustainable competitive advantage over rival firms

Question 2: What Are the Company’s Resources and Capabilities and

Do They Have the Competitive Power to Enable the Company to Build

and/or Sustain a Competitive Advantage Over Rivals?

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 Any asset or productive input that a firm owns or

controls qualifies as a resource

► Firms typically have many kinds and types of resources

► More importantly, a company’s resources tend to vary

widely in quality, competitive relevance, and competitive value

 Our interest here is not in cataloging every resource

a company has but rather in identifying those

resources that are competitively relevant, assessing their competitive value, and evaluating the degree to which they can underpin its strategy

Identifying a Company’s Valuable

Resources

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 Competitively relevant and potentially valuable resources can relate to:

► Physical assets—natural-resource deposits, real estate, store locations,

plants, equipment, and distribution facilities

► Human assets and intellectual capital—the education, training and

experience of company’s workforce, special expertise and skills, managerial skills, the work ethic and motivational drive of the company’s workforce

► Organizational resources—quality control systems, proprietary technology,

state-of-the-art information systems, patents, just-in-time inventory systems

► Financial resources—cash on hand, balance sheet strength, credit rating,

and strength of access to additional financial capital

► Intangible assets—brand names, buyer loyalty and goodwill, trademarks,

company image and reputation

► Relationships—alliances or partnerships with suppliers, distributors,

dealers, and others that reduce costs and/or provide access to valuable

technologies, specialized know-how, or attractive geographic markets

Types of Competitively Relevant and

Valuable Company Resources

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Identifying Valuable Company Capabilities

 A capability concerns the proficiency with which a company can

perform an activity

 In general, the competitive value of a company’s capability to

perform an activity depends on two factors:

► The proficiency a company has achieved in performing the activity

► The role of the activity in the company’s strategy and its importance

to the company’s competitive success and performance

 There are four competitively relevant levels of capability:

► Minimal capability—achieved when a company has performed an

activity one or more times but still lacks the proficiency needed to perform the activity consistently well and at acceptable cost

► A demonstrated competence in performing an activity

► A core competence—a demonstrated competence in performing a

competitively relevant activity that is central to the company’s strategy

► A distinctive competence—the capability to perform a competitively

valuable activity better than any other company in the industry

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A Company Competence

 A company’s proficiency in performing an activity rises from

that of minimal capability to the level of a proven

competence when it demonstrates enough proficiency to

perform the activity consistently well and at acceptable cost

► Usually, competence in performing an activity originates with

deliberate efforts to simply develop the ability to do it, however

imperfectly or inefficiently Then, as experience builds and the

company gains enough proficiency to perform the activity consistently well and at an acceptable cost, its ability evolves into a true

competence and capability

 Whether a competence has competitive value depends on whether it relates directly to a company’s strategy and

competitive success or whether it has minimal competitive bearing (like routine maintenance or administering employee benefit programs ).

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Core Concept

A firm has a competence in performing an activity when, over time, it gains the experience, know-

how, and proficiency to perform that activity

consistently well and at acceptable cost

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Examples of Company Competencies

 Specific skills and expertise (like proficiencies in low-cost

manufacturing, picking locations for new stores, or designing an

unusually appealing and functional social media website)

 Proficiency in a single discipline or function that is performed in a

single department or organizational unit

 Inherently multidisciplinary and cross-functional activities that are the result of effective collaboration among people with different expertise working in different organizational units

► A competence in continuous product innovation, for example,

comes from teaming the efforts of people and groups with expertise in market research, new product R&D, design and engineering, cost-effective manufacturing, and market testing

Virtually all organizational capabilities and proven competencies

are knowledge based, residing in people and in a company’s

intellectual capital

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A Core Competence—A Competitvely

achieves a high level of proficiency in performing an activity

that is central to its strategy and competitiveness.

 A core competence is a more competitively valuable

capability than a competence because

► It adds power to a company’s strategy

► This added power, in turn, positively impacts

• The company’s efforts to compete successfully against rivals

• The company’s ability to achieve its financial and strategic objectives

• The company’s overall performance

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Core Concept

A core competence is an activity that a firm

performs not only consistently well and at

acceptable cost, but that is also central to its

strategy and competitiveness

A core competence is a more competitively

valuable capability than a competence because it adds power to a firm’s strategy and has a bigger

positive impact on its competitive strength and

profitability.

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Examples of Core Competencies

 A core competence can relate to any of several aspects of

a company’s business and strategy:

► Expertise in product innovation

► Expertise in developing new and more efficient production

technologies

► Expertise in marketing

► Skills in manufacturing a high-quality product at a low cost

► Strong capability to fill customer orders accurately and swiftly

 Often, the most valuable core competencies are grounded

in cross-department combinations of knowledge and

expertise rather than being the product of a single

department or work group

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A Distinctive Competence—A Very

Competitively Valuable Capability

A Distinctive Competence—A Very

Competitively Valuable Capability

 A core competence rises to an even higher level of

competitive importance and becomes a distinctive

competence when a company is able to achieve

sufficiently high proficiency to perform a competitively

important activity better than its rivals

 A distinctive competence thus represents a greater

proficiency (and a stronger capability) than a core

competence

 Because a distinctive competence represents a level of

proficiency that rivals do not have, it qualifies as a

competitively superior capability with competitive

advantage potenti al

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Core Concept

A distinctive competence is a competitively

important activity that a company performs better

than its rivals—it thus represents a competitively

superior capability

Because a distinctive competence represents a

competitively valuable capability that rivals do not have, it can be a basis for sustainable competitive advantage.

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Why a Distinctive Competence Matters

 A distinctive competence adds real power to a firm’s strategy and provides a pathway to

competitive advantage when:

► It relates to an activity important to competitive success

► Rival companies do not have offsetting competencies

or capabilities

► It is costly and time-consuming for rivals to imitate the competence

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Core Concept

A company’s resources and capabilities represent its competitive assets and are big determinants of its competitiveness and ability to succeed in the

marketplace.

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 A particular resource or capability which may not seem to

have much competitive value by itself can be much more

valuable when bundled with certain other company

resources and/or capabilities (that also, taken singly, appear

to lack “high” competitive value).

► For example, Nike’s resource bundle of styling expertise,

professional endorsements, well-regarded brand name and image,

marketing and brand-building skills, network of distributors/retailers, and managerial know-how has provided sufficient competitive power for Nike to remain the dominant global leader in athletic footwear and sports apparel for over 20 years

Astute Bundling of a Company’s Resources and

Capabilities Can Result in Added

Competitive Power

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Core Concept

A resource/capability bundle is a group of

resources and capabilities that, when linked and

integrated into a functioning whole, has greater

competitive value than the summed value of the

individual resource/capability components—in

other words, combining individual resources and

capabilities into an integrated bundle produces

a 1 +1 = 3 gain in competitive power versus

just a 1 + 1 = 2 gain when the same resources and capabilities are unbundled.

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 The competitive power of a resource or capability

is measured by how many of the following four

tests it can pass:

1 Does the resource or capability have competitive

value?

2 Do many or most rivals have much the same resource

or capability?

3 Is the resource or capability hard to copy?

4 Can the value of a resource or capability be trumped

by substitute resources and capabilities of rivals?

Ways to Test the Competitive Power

of a Resource or Capability

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Core Concept

The degree of success a company enjoys in the

marketplace is governed by the combined

competitive power of its resources and

capabilities.

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 Some things to consider in evaluating the

attractiveness of a company’s set of resources,

competencies, and capabilities

► Both core competencies and distinctive competencies

are valuable because they enhance a company’s competitiveness

► However, some competencies merely enable market

survival because most rivals also possess them

► Not having an important competence or competitive

capability that rivals have can result in competitive disadvantage

Does a Company Have a Competitively Attractive

Collection of Resources and Capabilities?

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 Why is it important for a company to keep

competencies updated and on the cutting-edge?

refurbished or altogether new resources/capabilities

► To effectively respond to ongoing changes in customer needs and expectations

► To protect accompany’s long-term competitiveness

against the improving resources/capabilities and

strategic maneuvering of rivals to steal away customers

► To help maintain or improve its performance over the

long-term

A Company’s Important Resources and

Capabilities Must Be Dynamic and

Freshly-Honed to Sustain Its Competitiveness

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Core Concept

A company requires a dynamically evolving

portfolio of competitively valuable resources and

capabilities to sustain its competitiveness and help drive improvements in its performance Otherwise, the power of its competitive assets grow stale.

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Management’s challenge in developing dynamic

capabilities has two elements:

1 Attending to ongoing recalibration of existing

competencies and capabilities

2 Casting a watchful eye for opportunities to develop totally

new capabilities for delivering better customer value

and/or outcompeting rivals

Keeping company competencies freshly honed

and on the cutting edge is a strategically

important top management task.

Dynamic Capabilities—What to Do?

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Strategic Insight

Executive attention to making sure a company

always has competitively valuable resources and capabilities that dynamically evolve and help

sustain the company’s competitiveness is a

strategically important top management task.

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