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And reputational assets brand names

THIS CHAPTER WILL HELP YOU UNDERSTAND:
1. How to take stock of how well a company’s strategy is working 2. Why a company’s resources and capabilities are centrally important in giving the company a competitive edge over rivals
3. How to assess the company’s strengths and weaknesses in light of market opportunities and external threats
4. How a company’s value chain activities can affect the company’s cost structure and customer value proposition
5. How a comprehensive evaluation of a company’s competitive situation can assist managers in making critical decisions about their next strategic moves

© McGraw-Hill Education.

5. Is the firm competitively stronger or weaker than key rivals?

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

© McGraw-Hill Education.

Single-Business Company’s Strategy
STRATEGIC SUCCESS

• Trends in the firm’s sales and earnings growth• Trends in the firm’s stock price
• The firm’s overall financial strength
• The firm’s customer retention rate
• The 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

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Profitability

How Calculated

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Jump to Appendix 2 long image description

by creditors as well as by

and What They Mean (2 of 8)

What It Shows

Net return on total assets Profits after taxes

A measure of the return

Total assets
the firm’s total assets.
Profits after taxes

equity (ROE)

Total stockholders’ equity

A measure of the return that

capital (ROIC)—

Long-term debt +

return on capital

in the enterprise. A higher

employed (ROCE)

return reflects greater bottom-

and What They Mean (3 of 8)

Liquidity Ratios
How Calculated What It Shows

Current ratio

Current assets
Current liabilities

Current assets − Current liabilities

The cash available for a firm’s

and What They Mean (4 of 8)

Leverage Ratios

How Calculated

What It Shows
Measures the extent to which borrowed
Total assets

term debt) have been used to finance the firm’s operations. A low ratio is better—a high fraction indicates overuse of debt and greater risk of bankruptcy.

Long-term debt

A measure of creditworthiness and

balance-sheet strength. It indicates the
equity

lenders and stockholders. A ratio below 0.25 is preferable since the lower the ratio, the greater the capacity to borrow additional funds. Debt-to-capital ratios above 0.50 indicate an excessive
reliance on long-term borrowing, lower creditworthiness, and weak balance- sheet strength.

© McGraw-Hill Education.

Ratios

How Calculated

What It Shows
Total debt Shows the balance between debt (funds
borrowed, both short term and long term)
equity

and the amount that stockholders have

invested in the enterprise. The further the ratio is below 1.0, the greater the firm’s ability to borrow additional funds. Ratios above 1.0 put creditors at greater risk,
signal weaker balance sheet strength, and often result in lower credit ratings.

equity

long-term capital structure. Low ratios

indicate a greater capacity to borrow additional funds if needed.

minimum ratio of 2.0, but ratios above 3.0 signal progressively better
creditworthiness.

© McGraw-Hill Education.

Activity Ratios
What It Shows

Days of inventory

Average collection

Inventory
365

better.

Cost of goods sold

Inventory

Total sales ÷ 365

firm must wait after making a sale to

or receive cash payment. A shorter collection

Jump to Appendix 4 long image description

Other Ratios
How Calculated What It Shows
Annual dividends

A measure of the return that shareholders

per share

receive in the form of dividends. A “typical”

Current market price
per share
Current market price
per share confidence in a firm’s outlook and earnings
Earnings per share

growth; firms whose future earnings are at

risk or likely to grow slowly typically have ratios below 12.

Annual dividends Indicates the percentage of after-tax profits
per share

QUESTION 2: WHAT ARE THE FIRM’S MOST

COMPANIES?

● Are the determinants of its competitiveness and

ability to succeed in the marketplace

A capability or competence is the capacity of a firm to perform an internal activity competently through deployment of a firm’s resources.

A firm’s resources and capabilities represent its competitive assets and are determinants of its competitiveness and ability to succeed in the marketplace.

RESOURCES AND CAPABILITIES

 A capability:

● The capacity of a firm to perform some activity proficiently (e.g., superior skills in marketing)

Physical resources: land and real estate; manufacturing plants, equipment, or

company’s organizational design and reporting structure

of the workforce, cumulative learning, and tacit knowledge of employees; collective learning embedded in the organization, the intellectual capital and know-how of specialized teams and work groups; the knowledge of key personnel concerning important business functions; managerial talent and leadership skill; the creativity and innovativeness of certain personnel

Brands, company image, and reputational assets: brand names, trademarks, product or

ingrained beliefs within the company; the attachment of personnel to the company’s ideals; the compensation system and the motivation level of company personnel

A resource bundle is a linked and closely
integrated set of competitive assets centered around one or more cross-functional capabilities.

The VRIN Test for sustainable competitive
advantageasks if a resource is Valuable, Rare, Inimitable, and Non-substitutable.

CAPABILITIES

● Is the resource invulnerable to the threat of substitution of different types of resources and capabilities (non-substitutable)?

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COMPETITIVE POWER
Support for sustained
Nonsubstitutable

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.

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

© McGraw-Hill Education.

CAPABILITIES DYNAMICALLY
AND EXTERNAL THREATS?

 SWOT Analysis

Basing a company’s strategy on its most competitively valuable strengths gives the company its best chance for market success.

© McGraw-Hill Education.

STRENGTHS

A core competence is an activity that a firm performs proficiently and that is also central to its strategy and competitive success.

A distinctive competence is a competitively important activity that a firm performs better than its rivals—it thus represents a competitively
superior internal strength.

© McGraw-Hill Education.

A firm’s strengths represent its competitive assets. A firm’s weaknesses are shortcomings that
constitute competitive liabilities.

A company is well advised to pass on a particular market opportunity unless it has or can acquire the competencies needed to capture it.

© McGraw-Hill Education.

Weaknesses, Opportunities, and Threats (1 of 4)

Potential Weaknesses and Competitive

industry key success factors

Ample financial resources to grow the

No distinctive competencies or competitively

reputation

superior resources

A product or service with features and

attributes that are inferior to those of rivals

Attractive customer base

Weak balance sheet, few financial resources
to grow the firm, too much debt
technological skills, important patents

Resources and capabilities that are

hard to copy and for which there are

Lack of management depth

Wide geographic coverage or strong A plague of internal operating problems

global distribution capability

Weaknesses, Opportunities, and Threats (3 of 4)

Potential Market Opportunities

Company’s Future Profitability

product lines or new businesses

Weaknesses, Opportunities, and Threats (4 of 4)

technological developments to

Costly new regulatory requirements

Entering into alliances or joint ventures

inputs

or boost its competitive capability

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 and to market opportunities
 Correct important weaknesses and defend it against external threats

© McGraw-Hill Education.

Jump to Appendix 8 long image description

© McGraw-Hill Education.

• Do the firm’s strengths outweigh its weaknesses by an attractive margin?

• Does the firm have attractive market opportunities that are well suited to its internal strengths?

CUSTOMER VALUE PROPOSITION?

 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

VALUE CHAIN

The value chain:

A company’s value chain identifies the primary activities and related support activities that create customer value.

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Value Chain

© McGraw-Hill Education.

CHAINS OF RIVAL FIRMS

● Uses activity-based costing to evaluate the activities

● Does the same for significant competitors

AN ENTIRE INDUSTRY
Value Chain System

$ 28.16 $68.46

Spinning/Weaving/Dyeing

12.00
Cutting/Sewing/Finishing 9.50

Material Transportation

3.00
15.80
Cost of Goods
5.48 $154.38
Ocean Freight/Insurance 4.55
8.22
8.50

Packaging

15.15

Customer Shipping

14.00
30.00
Total Cost
About 60% $250.00
Boll & Brand Retail Price
Gross Margin $ 95.62

♦ Which activities in the value chain are primary activities? Which are secondary activities?

♦ Which activities are linked to the value chain for the entire industry?

Benchmarking is 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.”

© McGraw-Hill Education.

● Assesses whether the cost competitiveness and effectiveness of a firm’s value chain activities are in line with its competitors’ activities

 Sources of benchmarking information

STRATEGIC MANAGEMENT PRINCIPLE (9 of 14

Benchmarking the costs of a firm's activities

against those of rivals provides hard evidence of

DELIVERED-COST
INDUSTRY

 Why is the collection of competitive intelligence to accurately benchmark delivered costs of such importance in the cement industry?

 How could key data about competitors published by the PCA create an temptation for unethical price fixing, market or customer allocation schemes, dealing
arrangements, bid rigging, or bribery in the industry?

© McGraw-Hill Education.

IMPROVING INTERNALLY PERFORMED

 Invest in productivity-enhancing, cost-saving technological improvements.

 Find ways to detour around activities or items where costs are high.

PROPOSITION AND ENHANCING

 Implement best practices for quality of high-value activities.

 Adopt best practices for marketing, brand management, and enhancing customer perceptions.

© McGraw-Hill Education.

 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.

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.

SYSTEM

 Engage in cooperative advertising and promotions with forward channel allies.

© McGraw-Hill Education.

OPTION 2 FOR TRANSLATING PROFICIENT

INTO COMPETITIVE ADVANTAGE

COMPETITIVELY STRONGER OR

 Assessing the firm’s overall competitive strength

© McGraw-Hill Education.

STEPS IN THE COMPETITIVE

5. Use overall strength ratings to draw conclusions about the company’s net competitive advantage or disadvantage and to take specific note of areas of strength and weakness.

© McGraw-Hill Education.

ABC Co. Rival 1 Rival 2

Importance

Strength

Weighted

Strength Weighted Strength Weighted
Weight Rating
Score Rating Score
0.10 8 0.80 5 0.50 1 0.10

Reputation/image

0.10 8 0.80 7 0.70 1 0.10

Manufacturing capability

0.10 2 0.20 10 1.00 5 0.50
0.05 10 0.50 1 0.05 3 0.15
0.05 9 0.45 4 0.20 5 0.25
4 0.20 5 0.25
0.05 9 0.45

capability

Financial resources

0.10 5 0.50 10 1.00 3 0.30
0.30 5 1.50 10 3.00 1 0.30
0.15 5 0.75 7 1.05 1 0.15

Overall weighted competitive strength rating

5.95 7.70 2.10

© McGraw-Hill Education.

Jump to Appendix 14 long image description
COMPETITIVE STRENGTH ASSESSMENT

 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.

ISSUES AND PROBLEMS MERIT

ATTENTION?

ISSUES AND PROBLEMS MERIT

ATTENTION?

© McGraw-Hill Education.

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.

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