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

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

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

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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

© McGraw-Hill Education.	Jump to Appendix 2 long image description	by creditors as well as by
© McGraw-Hill Education.	Jump to Appendix 2 long image description

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-

Liquidity Ratios

How Calculated

What It Shows

Current ratio

Current assets

Current liabilities

Current assets − Current liabilities

The cash available for a firm’s

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.

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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.

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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

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.

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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.

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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.

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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.

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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		inputs

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

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Jump to Appendix 8 long image description

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• 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

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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	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.”

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● 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?

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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.

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 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.

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OPTION 2 FOR TRANSLATING PROFICIENT

INTO COMPETITIVE ADVANTAGE

COMPETITIVELY STRONGER OR

 Assessing the firm’s overall competitive strength

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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.

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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	0.05	9	0.45
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
				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			7.70		2.10

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?

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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.