operational planning and policy – assignment
A company’s resources and capabilities are integral to achieving sustainable competitive advantage. Refer to your Thompson (2020) readings and the required videos.
For this assignment, consider your own company or one that you know well.Develop your analysis by responding to the following questions:
- What are the company’s most important resources and why?
- What are the company’s most important capabilities and why?
- How do the company’s most important resources and capabilities create lasting competitive advantage?
- Relate your response to each of the above to our coursework (Thompson text) from this week.
Submission Details:
- Your analysis must be driven by facts, research, and data.
- Your analysis should be 500 words.
- Incorporate a minimum of at least one course (our text) and one non-course scholarly/peer reviewed source in your paper. All written assignments must include a coverage page, introductory and concluding paragraphs, reference page, double-spaced and proper in-text citations using APA guidelines.
PLEASE SUBMIT TURNITIN REPORT
CHAPTER 5 The Five Generic Competitive Strategiwes
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Chapter 5 describes the five basic competitive strategy options—which of the five to employ is a company’s first and foremost choice in crafting overall strategy and beginning its quest for competitive advantage.
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Learning Objectives
This chapter will help you understand:
What distinguishes each of the five generic strategies and why some of these strategies work better in certain kinds of competitive conditions than in others.
The major avenues for achieving a competitive advantage based on lower costs.
The major avenues to a competitive advantage based on differentiating a company’s product or service offering from the offerings of rivals.
The attributes of a best-cost strategy—a hybrid of low-cost and differentiation strategies
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This chapter describes the five generic competitive strategy options. Each of the five generic strategies represents a distinctly different approach to competing in the marketplace. Each of the five generic strategies represents a distinctly different approach to competing in the marketplace. Which of the five to employ is a company’s first and foremost choice in crafting an overall strategy and beginning its quest for competitive advantage.
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Why Do Strategies Differ?
A firm’s competitive strategy deals exclusively with the specifics of its efforts to position itself in the market-place, please customers, ward off competitive threats, and achieve a particular kind of competitive advantage.
Key factors that distinguish one strategy from another
Is the firm’s market target broad or narrow?
Is the competitive advantage being pursued linked to low costs or product differentiation?
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A company’s competitive strategy deals exclusively with the specifics of management’s game plan for competing successfully— its specific efforts to please customers, strengthen its market position, counter the maneuvers of rivals, respond to shifting market conditions, and achieve a particular kind of competitive advantage.
The biggest and most important differences among competitive strategies boil down to:
Whether a company’s market target is broad or narrow
Whether the company is pursuing a competitive advantage linked to low costs or product differentiation
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of Generic Competitive Strategies
GENERIC COMPETITIVE STRATEGIES | |
Broad, Low-cost Strategy |
Striving to achieve broad lower overall costs than rivals on comparable products that attract a broad spectrum of buyers, usually by underpricing rivals |
Broad Differentiation Strategy |
Seeking to differentiate the firm’s product offering from its rivals’ with attributes that will appeal to a broad spectrum of buyers. |
Focused Low-cost Strategy |
Concentrating on a narrow buyer segment (or market niche striving to meet these needs at lower costs than rivals (thereby being able to serve niche members at a lower price) |
Focused Differentiation Strategy |
Concentrating on a narrow buyer segment (or market niche) by offering its members customized attributes that meet their specific tastes and requirements of niche members better than rivals |
Best-cost (Hybrid) Strategy |
Striving to incorporate upscale product attributes at a lower cost than rivals. Being the “best-cost” producer of an upscale, multifeatured product allows a firm to give customers more value for their money by underpricing rivals whose products have similar upscale, multifeatured attributes |
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Five distinct competitive strategy approaches stand out:
A low-cost strategy: striving to achieve lower overall costs than rivals and appealing to a broad spectrum of customers, usually by under pricing rivals.
A broad differentiation strategy: seeking to differentiate the company’s product/ service offering from rivals’ in ways that will appeal to a broad spectrum of buyers
A focused low-cost strategy: concentrating on a narrow buyer segment and outcompeting rivals by serving niche members at a lower cost than rivals
A focused differentiation strategy: concentrating on a narrow buyer segment and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals products
A best-cost producer strategy: giving customers more value for the money by incorporating good-to-excellent product attributes at a lower cost than rivals; the target is to have the lowest (best) costs and prices compared to rivals offering products with comparable attributes
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FIGURE 5.1 The Five Generic Competitive Strategies
Source: This is an expanded version of a three-strategy classification discussed in Michael E. Porter, Competitive Strategy (New York: Free Press, 1980).
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Figure 5.1 The Five Generic Competitive Strategies examines how each of the five strategies stake out a different market position.
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Low-Cost Strategies
Effective low-cost approaches
Pursue cost savings that are difficult to imitate
Avoid reducing product quality to unacceptable levels
Competitive advantages and risks
Greater total profits and increased market share gained from underpricing competitors
Larger profit margins when selling products at prices comparable to and competitive with rivals
Low pricing does not attract enough new buyers
Rival’s retaliatory price-cutting sets off a price war
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A low-cost producer’s basis for competitive advantage is lower overall costs than competitors. Successful low-cost leaders, who have the lowest industry costs, are exceptionally good at finding ways to drive costs out of their businesses and still provide a product or service that buyers find acceptable.
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The Two Major Avenues for Achieving a Cost Advantage
Low-cost advantage
Cumulative costs across the overall value chain must be lower than competitors’ cumulative costs.
Options for translating a low-cost advantage over rivals into attractive profit performance:
Perform value-chain activities more cost-effectively than rivals
Revamp the firm’s overall value chain to eliminate or bypass cost-producing activities
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A company has two options for translating a low-cost advantage over rivals into attractive profit performance.
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Cost-Efficient Management of Value Chain Activities (1 of 2)
Cost driver
A factor with a strong influence on a firm’s costs
Can be asset-based or activity-based
Securing a cost advantage
Use lower-cost inputs and hold minimal assets
Offer only “essential” product features or services
Offer only limited product lines
Use low-cost distribution channels
Use the most economical delivery methods
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A cost driver is a factor that has a strong influence on a firm’s costs. A low-cost advantage over rivals can translate into better profitability than rivals attain.
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FIGURE 5.2 Cost Drivers: The Keys to Driving Down Company Costs
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Source: Adapted from Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press, 1985).
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Figure 5.2 shows the most important cost drivers.
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Cost-Cutting Methods (1 of 2)
Capturing all available economies of scale
Taking full advantage of experience and learning-curve effects
Operating facilities at full or near-full capacity
Improving supply chain efficiency
Substituting lower-cost inputs wherever there is little or no sacrifice in product quality or performance
Using the firm’s bargaining power vis-à-vis suppliers or others in the value chain system to gain concessions
Using online systems and sophisticated software to achieve operating efficiencies
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Particular attention must be paid to a set of factors known as cost drivers that have a strong effect on a company’s costs and can be used as levers to lower costs.
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Cost-Cutting Methods (2 of 2)
Improving process design and employing advanced production technology
Being alert to the cost advantages of outsourcing or vertical integration
Motivating employees through incentives and company culture
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Particular attention must be paid to a set of factors known as cost drivers that have a strong effect on a company’s costs and can be used as levers to lower costs.
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Revamping the Value Chain System
to Lower Costs
Selling direct to consumers and bypassing the activities and costs of distributors and dealers by using a direct sales force and a company website
Streamlining operations to eliminate low value-added or unnecessary work steps and activities
Reduce materials-handling and shipping costs by having suppliers locate their plants or warehouses close to the firm’s own facilities
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Dramatic cost advantages can often emerge from redesigning the company’s value chain system in ways that eliminate costly work steps and entirely bypass certain cost-producing value chain activities.
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Vanguard’s Path to Becoming the Low-Cost Leader in Investment Management
Describe Vanguard’s business segment.
How well are Vanguard’s competitive strengths matched to the five forces in its competitive environment?
Which of Vanguard’s value chain activities would be most easily overcome by rivals? most difficult to overcome?
Assume you have been tasked to revamp a rival’s value chain activities to better compete with Vanguard. In what order of expected payoff should you attempt to revamp its value chain activities?
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Illustration Capsule 5.1 shows how Vanguard managed its value chain to achieve a huge low-cost advantage over rival supermarket chains.
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The Keys to a Successful Low-Cost Strategy
Success in achieving a low-cost edge over rivals comes from out-managing rivals in finding ways to perform value chain activities faster, more accurately, and more cost-effectively by:
Spending aggressively on resources and capabilities that promise to drive costs out of the business
Carefully estimating the cost savings of new technologies before investing in them
Constantly reviewing cost-saving resources to ensure they remain competitively superior
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Success in achieving a low-cost edge over rivals comes from out-managing rivals in finding ways to perform value chain activities faster, more accurately, and more cost-effectively.
A low-cost producer is in the best position to win the business of price-sensitive buyers, set the floor on market price, and still earn a profit.
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When a Low-Cost Strategy Works Best
Price competition among rival sellers is vigorous.
Identical products are available from many sellers.
There are few ways to differentiate industry products.
Most buyers use the product in the same ways.
Buyers incur low costs in switching among sellers.
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A low-cost producer strategy becomes increasingly appealing and competitively powerful when the forces of competition are favorable to a particular competitor’s market position.
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Pitfalls to Avoid in Pursuing a Low-Cost Strategy
Engaging in overly aggressive price cutting that does not result in unit sales gains sufficient to recoup forgone profits
Relying on a cost advantage that is not sustainable because rival firms can easily copy or overcome it
Becoming so fixated on cost reduction such that the firm’s offerings lack the primary features that attract buyers
Having a rival discover a new lower-cost value chain approach or develop a cost-saving technological breakthrough
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Reducing price does not lead to higher total profits unless the added gains in unit sales are large enough to bring in a bigger total profit despite lower margins per unit sold.
A low-cost producer’s product offering must always contain enough attributes to be attractive to prospective buyers. Low price, by itself, is not always appealing to buyers.
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Broad Differentiation Strategies
Effective Differentiation Approaches
Carefully study buyer needs and behaviors, values, and willingness to pay for a unique product or service
Incorporate features that both appeal to buyers and create a sustainably distinctive product offering
Use higher prices to recoup differentiation costs
Advantages of Differentiation
Command premium prices for the firm’s products
Increased unit sales due to attractive differentiation
Brand loyalty that bonds buyers to the differentiating features of the firm’s products
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Differentiation enhances profitability whenever a company’s product can command a sufficiently higher price or produce sufficiently greater unit sales to more than cover the added costs of achieving the differentiation.
The essence of a broad differentiation strategy is to offer unique product attributes that a wide range of buyers find appealing and worth paying for.
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Cost-Efficient Management of Value Chain Activities (2 of 2)
A value driver can
Have a strong differentiating effect
Be based on physical as well as functional attributes of a firm’s products
Be the result of superior performance capabilities of the firm’s human capital
Have an effect on more than one of the firm’s value chain activities
Create a perception of value (brand loyalty) in buyers where there is little reason for it to exist
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A value driver is a factor that can have a strong differentiating effect.
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FIGURE 5.3 Value Drivers: The Keys to Creating a Differentiation Advantage
Source: Adapted from Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press, 1985).
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Figure 5.3 contains a list of important value drivers.
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Managing the Value Chain to Create the Differentiating Attributes
Create product features and performance attributes that appeal to a wide range of buyers.
Improve customer service or add extra services.
Invest in production-related R&D activities.
Strive for innovation and technological advances.
Pursue continuous quality improvement.
Increase marketing and brand-building activities.
Seek out high-quality inputs.
Emphasize HRM activities that improve the skills, expertise, and knowledge of company personnel.
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Differentiation is not something hatched in marketing and advertising departments, nor is it limited to the catchalls of quality and service. Differentiation opportunities can exist in activities all along an industry’s value chain. The most systematic approach that managers can take, however, involves focusing on the value drivers, a set of factors—analogous to cost drivers—that are particularly effective in creating differentiation.
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Revamping the Value Chain System to Increase Differentiation
Approaches to enhancing differentiation through changes in the value chain system
Coordinating with downstream channel allies to enhance customer perceptions of value
Coordinating with suppliers to better address customer needs
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Just as pursuing a cost advantage can involve the entire value chain system, the same is true for a differentiation advantage.
Activities performed upstream by suppliers or downstream by distributors and retailers can have a meaningful effect on customers’ perceptions of a company’s offerings and its value proposition
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Delivering Superior Value via a Broad Differentiation Strategy
Broad Differentiation:
Offering Customers Something That Rivals Cannot or Do Not
1. Incorporate product attributes and user features that lower the buyer’s overall costs of using the firm’s product
2. Incorporate tangible features (e.g., styling) that increase customer satisfaction with the product
3. Incorporate intangible features (e.g., buyer image) that enhance buyer satisfaction in noneconomic ways
4. Signal the value of the firm’s product offering to buyers (e.g., price, packaging, placement, advertising)
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Differentiation strategies depend on meeting customer needs in unique ways or creating new needs through activities such as innovation or persuasive advertising. The objective is to offer customers something that rivals can’t—at least in terms of the level of satisfaction. The four basic routes to achieving this aim are listed in the slide content.
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Differentiation: Signaling Value
Signaling value is important when:
The nature of differentiation is based on intangible features and is therefore subjective or hard to quantify by the buyer.
Buyers are making a first-time purchase and are unsure what their experience will be with the product.
Product or service repurchase by buyers is infrequent.
Buyers are unsophisticated.
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Differentiation can be based on tangible or intangible attributes. Easy-to-copy differentiating features cannot produce a sustainable competitive advantage.
The value of certain differentiating features is rather easy for buyers to detect, but in some instances, buyers may have trouble assessing what their experience with the product will be. Successful differentiators go to great lengths to make buyers knowledgeable about a product’s value and employ various signals of value.
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Successful Approaches to Sustainable Differentiation
Differentiation that is difficult for rivals to duplicate or imitate
Company reputation
Long-standing relationships with buyers
A unique product or service image
Differentiation that creates substantial switching costs that lock in buyers
Patent-protected product innovation
Relationship-based customer service
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The most successful approaches to differentiation are those that are difficult for rivals to duplicate. Indeed, this is the route to a sustainable competitive advantage.
While resourceful competitors can, in time, clone almost any tangible product attribute, socially complex intangible attributes such as company reputation, long-standing relationships with buyers, and image are much harder to imitate.
Differentiation that creates switching costs that lock in buyers also provides a route to sustainable advantage.
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When a Differentiation Strategy Works Best
Market Circumstances Favoring Differentiation
Buyer needs and uses for the product are diverse.
There are many ways that differentiation can have value to buyers.
Few rival firms are following a similar differentiation approach.
There is rapid change in the product’s technology and features.
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Differentiation strategies tend to work best in market circumstances where differentiation yields a longer-lasting and more profitable competitive edge that is based on a well-established brand image, patent-protected product innovation, complex technical superiority, a reputation for superior product quality and reliability, relationship-based customer service, and unique competitive capabilities.
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Pitfalls to Avoid in Pursuing a
Differentiation Strategy
Relying on product attributes easily copied by rivals
Introducing product attributes that do not evoke an enthusiastic buyer response
Eroding profitability by overspending on efforts to differentiate the firm’s product offering
Offering only trivial improvements in quality, service, or performance features vis-à-vis the products of rivals
Over-differentiating the product quality, features, or service levels exceeds the needs of most buyers
Charging too high a price premium
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Any differentiating feature that works well is a magnet for imitators. This is why a firm must seek out sources of value creation that are time-consuming or burdensome for rivals to match if it hopes to use differentiation to win a sustainable competitive edge. Overdifferentiating and overcharging are fatal strategy mistakes.
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Focused (or Market Niche) Strategies
Focused Strategy Approaches
Focused Low-Cost Strategy
Focused Market Niche Strategy
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What sets focused strategies apart from broad low-cost and broad differentiation strategies is their concentrated attention on a narrow piece of the total market.
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Clinícas del Azúcar’s Focused Low-Cost Strategy
Which uniqueness drivers are responsible for the success of Clinícas del Azúcar?
Which competitive conditions would mitigate against successful entry of the Clinícas del Azúcar into the U.S. diabetes care market?
What part do customer expectations about patient-doctor relationships play in the delivery of health care in the United States?
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Illustration Capsule 5.2 describes how Clinícas del Azúcar’s focus on lowering the costs of diabetes care is allowing to address a major health issue in Mexico.
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When a Focused Low-Cost or Focused Differentiation Strategy Is Attractive
The target market niche is big enough to be profitable and offers good growth potential.
Industry leaders chose not to compete in the niche; focusers avoid competing against strong competitors.
It is costly or difficult for multi-segment competitors to meet the specialized needs of niche buyers.
The industry has many different niches and segments.
Rivals have little or no entry interest in the target segment.
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A focused strategy aimed at securing a competitive edge based on either low costs or differentiation becomes increasingly attractive as more of the following favorable conditions listed in the slide are met.
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The Risks of a Focused Low-Cost or Focused Differentiation Strategy
Competitors will find ways to match the focused firm’s capabilities in serving the target niche.
The specialized preferences and needs of niche members shift over time toward the product attributes desired by the majority of buyers.
As attractiveness of the segment increases, it draws in more competitors, intensifying rivalry and splintering segment profits.
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There are several inherent risks related to increased attractiveness of the focuser’s segment, changes in competitor capabilities and changes in the characteristics of the segment’s customers.
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Canada Goose’s Focused Differentiation Strategy
Which decisions did CEO Dani Reiss make that launched Canada Goods on its chosen strategic path?
Which uniqueness drivers are responsible for the success of Canada Goose?
Which of Canada Goose’s uniqueness drivers are competitors likely to attempt to copy first?
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Illustration Capsule 5.3 describes how Canada Goose has been gaining attention with its focused differentiation strategy.
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Best-Cost (Hybrid) Strategies
Differentiation:
Providing desired quality, features, performance,
service attributes
Low Cost Producer:
Charging a lower price
than rivals with similar
caliber product offerings
Best-Cost Hybrid Approach
Value-Conscious Buyer
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Best-cost strategies are a hybrid of low cost and differentiation strategies, incorporating features of both simultaneously. They may target either a broad or narrow (focused) base of value-conscious customers.
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When a Best-Cost Strategy Works Best
Product differentiation is the market norm.
There are a large number of value-conscious buyers who prefer mid-range products.
There is competitive space near the middle of the market for a competitor with either a medium-quality product at a below-average price or a high-quality product at an average or slightly higher price.
Economic conditions have caused more buyers to become value-conscious.
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The target market for a best-cost strategy is value-conscious middle-market buyers who are looking for appealing extras and functionality at a comparatively low price, regardless of whether they represent a broad or more focused segment of the market.
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T he Risk of a Best-Cost Strategy
Best-Cost Strategy
Low-Cost Producers
High-End Differentiators
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A company’s biggest vulnerability in employing a best-cost strategy is getting squeezed between the strategies of firms using low-cost and high-end differentiation strategies.
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Trader Joe’s Focused Best-Cost Strategy
How can higher product quality lower product costs?
In which stages of an industry life cycle are low-cost leadership, differentiation, focused niche, and best-cost provider strategies most appropriate?
Could the lower-selling prices of its groceries versus its competitors be used as a proxy for measuring the strength of its focused best-cost strategy?
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Illustration Capsule 5.4 describes how Trader Joe’s has applied the principles of a focused best-cost strategy to thrive in the competitive grocery store industry.
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The Contrasting Features of the Generic Competitive Strategies
Each generic strategy:
Positions the firm differently in its market
Establishes a central theme for how the firm intends to outcompete rivals
Creates boundaries or guidelines for strategic change as market circumstances unfold
Entails different ways and means of maintaining the basic strategy
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The choice of which generic strategy to employ spills over to affect many aspects of how the business will be operated and the manner in which value chain activities must be managed. Deciding which generic strategy to employ is perhaps the most important strategic commitment a company makes—it tends to drive the rest of the strategic actions a company decides to undertake.
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Table 5.1 Distinguishing Features of the Five Generic Competitive Strategies (1 of 2)
FEATURE Low-Cost Broad Differentiation Focused low-cost Focused differentiation Best-Cost
Strategic target A broad cross-section of the market A broad cross-section of the market A narrow market niche where buyer needs and preferences are distinctively different A narrow market niche where buyer needs and preferences are distinctively different Value-conscious buyers. Or, a middle-market range
Basis of competitive strategy Lower overall costs than competitors Ability to offer buyers something attractively different from competitors’ offerings Lower overall cost than rivals in serving niche members Attributes that appeal specifically to niche members Ability to offer better goods at attractive prices
Product line A good basic product with few frills (acceptable quality and limited selection) Many product variations, wide selection, emphasis on differentiating features Features and attributes tailored to the tastes and requirements of niche members Features and attributes tailored to the tastes and requirements of niche members Items with appealing attributes and assorted features; better quality, not best
Production emphasis A continuous search for cost reduction without sacrificing acceptable quality and essential features Build in whatever differentiating features buyers are willing to pay for; strive for product superiority A continuous search for cost reduction for products that meet basic needs of niche members Small-scale production or custom-made products that match the tastes and requirements of niche members Build in appealing features and better quality at lower cost than rivals
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Deciding which generic competitive strategy to employ is not a trivial matter. Each of the five generic competitive strategies positions the company differently in its market and competitive environment. Each establishes a central theme for how the company will endeavor to outcompete rivals. Each creates some boundaries or guidelines for maneuvering as market circumstances unfold and as ideas for improving the strategy are debated. Each entails differences in terms of product line, production emphasis, marketing emphasis, and means of maintaining the strategy, as shown in Table 5.1.
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Table 5.1 Distinguishing Features of the Five Generic Competitive Strategies (2 of 2)
FEATURE Low-Cost Broad Differentiation Focused low-cost Focused differentiation Best-Cost
Marketing emphasis Low prices, good value
Also, try to make a virtue out of product features that lead to low cost Tout differentiating features.
Also, charge a premium price to cover the extra costs of differentiating features Communicate attractive features of a budget-priced product offering that fits niche buyers’ expectations Communicate how product offering does the best job of meeting niche buyers’ expectations Emphasize delivery of best value for the money
Keys to maintaining the strategy Economical prices, good value
Also, strive to manage costs down, year after year, in every area of the business Stress constant innovation to stay ahead of imitative competitors
Also, concentrate on a few key differentiating features. Stay committed to serving the niche at the lowest overall cost; don’t blur the firm’s image by entering other market segments or adding other products to widen market appeal Stay committed to serving the niche better than rivals; don’t blur the firm’s image by entering other market segments or adding other products to widen market appeal. Unique expertise in simultaneously managing costs down while incorporating upscale features and attributes
Resources and capabilities required Capabilities for driving costs out of the value chain system.
Examples: large-scale automated plants, an efficiency-oriented culture, bargaining power Capabilities concerning quality, design, intangibles, and innovation Examples: marketing capabilities, R&D teams, technology Capabilities to lower costs on niche goods Examples: Lower input costs for the specific product desired by the niche, batch production capabilities Capabilities to meet the highly specific needs of niche members
Examples: custom production, close customer relations. Capabilities to simultaneously deliver lower cost and higher-quality or differentiated feature
Examples: TQM practices, mass customization
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Deciding which generic competitive strategy to employ is not a trivial matter. Each of the five generic competitive strategies positions the company differently in its market and competitive environment. Each establishes a central theme for how the company will endeavor to outcompete rivals. Each creates some boundaries or guidelines for maneuvering as market circumstances unfold and as ideas for improving the strategy are debated. Each entails differences in terms of product line, production emphasis, marketing emphasis, and means of maintaining the strategy, as shown in Table 5.1.
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Successful Generic Strategies Are Resource-Based
A firm’s competitive strategy is most likely to succeed if it is predicated on leveraging a competitively valuable collection of resources and capabilities that match the strategy.
Sustaining a firm’s competitive advantage depends on its resources, capabilities, and competences that are difficult for rivals to duplicate and have no good substitutes.
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A company’s competitive strategy should be well-matched to its internal situation and predicated on leveraging its collection of competitively valuable resources and capabilities.
For all types of generic strategies, success in sustaining the competitive edge depends on having resources and capabilities that rivals have trouble duplicating and for which there are no good substitutes.
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FIGURE 5.4 Three Approaches to Competitive Advantage and the Value-Price-Cost Framework
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Figure 5.4 shows how a low cost generic strategy achieves lower costs than an average competitor, at the sacrifice of some perceived value to the consumer. If the decrease in producer costs is less than the decrease in perceived value by the consumer, then the total economic value (V-C) for the low cost leader will be greater than the total economic value produced by its average rival, creating a competitive advantage for the low cost leader. This is clearly the case for the example of a low cost strategy depicted in this figure.
The low-cost leader has chosen to charge a lower price than its average rival. The result is that even with a lower V, the low cost leader offers a more attractive (larger) consumer value proposition (depicted in gold) and finds itself with a better profit formula (depicted in blue).
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Three Approaches to Competitive Advantage and the Value-Price-Cost Framework
Figure 5.4 shows how a low cost generic strategy achieves lower costs than an average competitor, at the sacrifice of some perceived value to the consumer. If the decrease in producer costs is less than the decrease in perceived value by the consumer, then the total economic value (V-C) for the low cost leader will be greater than the total economic value produced by its average rival, creating a competitive advantage for the low cost leader. This is clearly the case for the example of a low cost strategy depicted in this figure.
The low-cost leader has chosen to charge a lower price than its average rival. The result is that even with a lower V, the low cost leader offers a more attractive (larger) consumer value proposition (depicted in gold) and finds itself with a better profit formula (depicted in blue).
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APPENDIX: IMAGE DESCRIPTIONS FOR UNSIGHTED STUDENTS
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Appendix 1 Figure 5.1 The Five Generic Competitive Strategies, Text Alternative
The illustration lists two types of competitive advantages being pursued: lower cost and differentiation. It also lists two market targets: a broad cross-section of buyers, and a narrow buyer segment (or market niche). The combination of these types creates the five generic strategies:
Overall low-cost provider strategy (lower cost or a broad cross-section of buyers)
Focused low-cost strategy (lower cost or a narrow buyer segment)
Broad differentiation strategy (differentiation or a broad cross-section of buyers)
Focused differentiation strategy (differentiation or a narrow buyer segment)
Best-Cost Provider strategy (an equal balance of competitive advantages and market targets)
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Appendix 2 Figure 5.2 Cost Drivers: The Keys to Driving Down Company Costs, Text Alternative
The cost drivers listed are:
Incentive systems and culture; economies of scale; learning and experience; capacity utilization; supply chain efficiencies; input costs; production technology and design; communication systems and information technology; bargaining power; and outsourcing or vertical integration.
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Appendix 3 Figure 5.3 Value Drivers: The Keys to Creating a Differentiation Advantage, Text Alternative
The value drivers listed are: quality control processes; product features and performance; customer services; production R&D; technology and innovation; input quality; employee skill, training, experience; and sales and marketing.
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Appendix 4: Figure 5.4 Three Approaches to Competitive Advantage and the Value-Price-Cost Framework, Text Alternative
This figure illustrates the three basic approaches to competitive advantage in terms of the value-price-cost framework.
The left part of the figure represents an average competitor’s cost of producing a good, how highly the consumer values it, and its price. Moving to low-cost strategy, the figure shows how this strategy aims to achieve lower costs than an average competitor, at the sacrifice of some of the perceived value to the consumer.
A differentiation strategy shows that costs might well exceed those of the average competitor, but if the strategy is successful the disadvantage is made up for by the rise in the perceived value of the differentiation good.
If a company uses a best-cost strategy, it pursues the middle ground of offering neither the mostly highly valued goods in the market nor he lowest costs. But in comparison with the average rival, it does better on both scores, resulting in more total economic value and a substantial competitive advantage
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Concepts
and Cases
22e
Thompson
Peteraf
Gamble
Strickland
The Quest for Competit ive Advantage
STRATEGY
Crafting & Executing
CHAPTER 4 Evaluating a Company’s Resources, Capabilities, and Competitiveness
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©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Copyright
© McGraw-Hill Education
. Permission required for reproduction or display.
Chapter 3 described how to use the tools of industry and competitor analysis to assess a company’s external environment and lay the groundwork for matching a company’s strategy to its external situation.
Chapter 4 discusses techniques for evaluating a company’s internal situation, including its collection of resources and capabilities and the activities it performs along its value chain.
Internal analysis enables managers to determine whether their strategy is likely to give the company a significant competitive edge over rival firms. Combining internal and external analyses facilitates an understanding of how to reposition a firm to take advantage of new opportunities and to cope with emerging competitive threats.
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Chapter 4–‹#›
Learning Objectives
This chapter will help you understand:
How to evaluate how well a firm’s strategy is working.
How to assess the company’s strengths and weaknesses in light of market opportunities and external threats.
Why a company’s resources and capabilities are critical in gaining a competitive edge over rivals.
How value chain activities affect a company’s cost structure and customer value proposition.
How a comprehensive evaluation of a firm’s competitive situation can assist managers in making critical decisions about their next strategic moves.
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In this chapter, the analytic spotlight will be trained on six questions:
How well is the firm’s present strategy working?
What are the firm’s most important resources and capabilities, and will they give the firm a lasting competitive advantage over rival companies?
What are the firm’s strengths and weaknesses in relation to the market opportunities and external threats?
How do a firm’s value chain activities impact its cost structure and customer value proposition?
Is the firm competitively stronger or weaker than key rivals?
What strategic issues and problems merit front-burner managerial attention?
In probing for answers to these questions, five analytic tools—resource and capability analysis, SWOT analysis, value chain analysis, benchmarking, and competitive strength assessment—will be used.
All five are valuable techniques for revealing a firm’s competitiveness and for helping managers match their strategy to the firm’s particular circumstances.
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Chapter 4–‹#›
QUESTION 1: How Well Is the Company’s Present Strategy Working?
The three best indicators of how well a company’s strategy is working are:
Whether it is achieving its stated financial and strategic objectives
Whether its financial performance is above the industry average
Whether it is gaining customers and gaining market share
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Strategic success in a firm’s present competitive approach requires asking:
Has the firm been successful actions in attracting customers and improving its market position?
Has the firm gained a sustainable competitive advantage based on low product costs or better product offerings?
Is the firm appropriately concentrating its resources on serving a broad spectrum of customers or a narrow market niche?
Are the firm’s functional strategies in R&D, production, marketing, finance, human resources, information technology strengthening its competitive position?
Has the firm been successful in its efforts to establish alliances with other enterprises?
Persistent shortfalls in meeting its performance targets and weak marketplace performance relative to rivals are reliable warning signs that the firm has a weak strategy, suffers from poor strategy execution, or both.
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Chapter 4–‹#›
FIGURE 4.1 Identifying the Components of a Single-Business Company’s Strategy
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FIGURE 4.1 Identifying the Components of a Single-Business Company’s Strategy
Single business strategic action plan components include:
Moves to respond to changing conditions in the macro-environment or in industry and competitive conditions
Basing competitive advantage on lower costs, better products, superior service of a market niche or specific buyers
Expanding or narrowing geographic coverage
Partnering to build valuable partnerships and strategic alliances with other enterprises in the same industry
Key functional strategies of the overall business strategy:
R&D, technology, product design; supply chain management; production; sales, marketing, and distribution; information technology; human resources; and finance.
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Specific Indicators of Strategic Success
Sales and earnings growth trends
Company’s overall financial strength
Customer retention rate
Stock price trends
Rate of new customers acquired
Evidence of improvement in internal processes
defect rate, order fulfillment, delivery times, days of inventory, and employee productivity
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Specific indicators of how well a firm’s strategy is working 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.
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.
Strategic Management Principle
Sluggish financial performance and second-rate market accomplishments almost always signal weak strategy, weak execution, or both.
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Chapter 4–‹#›
TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean (1 of 8)
Profitability Ratios How Calculated What It Shows
Gross profit margin Sales revenues − Cost of goods sold
Sales revenues Shows the percentage of revenues available to cover operating expenses and yield a profit.
Operating profit margin (or return on sales) Sales revenues − Operating expenses
Sales revenues
or
Operating income
Sales revenues Shows the profitability of current operations without regard to interest charges and income taxes. Earnings before interest and taxes is known as EBIT in financial and business accounting.
Net profit margin (or net return on sales) Profits after taxes
Sales revenues Shows after-tax profits per dollar of sales.
Total return on assets Profits after taxes + Interest
Total assets A measure of the return on total investment in the enterprise. Interest is added to after-tax profits to form the numerator, since total assets are financed by creditors as well as by stockholders.
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The stronger a company’s current overall performance, the more likely it has a well-conceived, well-executed strategy. The weaker a company’s financial performance and market standing, the more its current strategy must be questioned and the more likely the need for radical changes.
Table 4.1 provides a compilation of the profitability ratios most commonly used to evaluate a company’s financial performance and balance sheet strength.
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Chapter 4–‹#›
TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean (2 of 8)
Profitability Ratios How Calculated What It Shows
Net return on total assets (ROA) Profits after taxes
Total assets
A measure of the return earned by stockholders on the firm’s total assets.
Return on stockholders’ equity (ROE) Profits after taxes
Total stockholders’ equity The return stockholders are earning on their capital investment in the enterprise. A return in the 12% to 15% range is average.
Return on invested capital (ROIC)—sometimes referred to as return on capital employed (ROCE)
Profits after taxes
Long-term debt +
Total stockholders’ equity A measure of the return that shareholders are earning on the monetary capital invested in the enterprise. A higher return reflects greater bottom-line effectiveness in the use of long-term capital.
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The stronger a company’s current overall performance, the more likely it has a well-conceived, well-executed strategy. The weaker a company’s financial performance and market standing, the more its current strategy must be questioned and the more likely the need for radical changes.
Table 4.1 provides a compilation of the financial profitability ratios most commonly used to evaluate a company’s financial performance and balance sheet strength.
© McGraw-Hill Education
Chapter 4–‹#›
TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean (3 of 8)
Liquidity Ratios How Calculated What It Shows
Current ratio Current assets
Current liabilities Shows a firm’s ability to pay current liabilities using assets that can be converted to cash in the near term. Ratio should be higher than 1.0.
Working capital Current assets − Current liabilities The cash available for a firm’s day-to-day operations. Larger amounts mean the firm has more internal funds to (1) pay its current liabilities on a timely basis and (2) finance inventory expansion, additional accounts receivable, and a larger base of operations without resorting to borrowing or raising more equity capital.
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The stronger a company’s current overall performance, the more likely it has a well-conceived, well-executed strategy. The weaker a company’s financial performance and market standing, the more its current strategy must be questioned and the more likely the need for radical changes.
Table 4.1 provides a compilation of the assets-to-liabilities liquidity ratios most commonly used to evaluate a company’s financial performance and balance sheet strength.
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Chapter 4–‹#›
TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean (4 of 8)
Leverage Ratios How Calculated What It Shows
Total debt-to-assets ratio Total debt
Total assets
Measures the extent to which borrowed funds (both short-term loans and long-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-to-capital ratio Long-term debt
Long-term debt +
Total stockholders’ equity A measure of creditworthiness and balance-sheet strength. It indicates the percentage of capital investment that has been financed by both long-term 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.
The stronger a company’s current overall performance, the more likely it has a well-conceived, well-executed strategy. The weaker a company’s financial performance and market standing, the more its current strategy must be questioned and the more likely the need for radical changes.
Table 4.1 provides a compilation of the financial leverage ratios most commonly used to evaluate a company’s financial performance and balance sheet strength.
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TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean (5 of 8)
Leverage Ratios How Calculated What It Shows
Debt-to-equity ratio Total debt
Total stockholders’ equity Shows the balance between debt (funds borrowed, both short term and long term) 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.
Long-term debt-to-equity ratio Long-term debt
Total stockholders’ equity Shows the balance between long-term debt and stockholders’ equity in the firm’s long-term capital structure. Low ratios indicate a greater capacity to borrow additional funds if needed.
Times-interest-earned (or coverage) ratio Operating income
Interest expenses Measures the ability to pay annual interest charges. Lenders usually insist on a minimum ratio of 2.0, but ratios above 3.0 signal increasing creditworthiness.
© McGraw-Hill Education.
The stronger a company’s current overall performance, the more likely it has a well-conceived, well-executed strategy. The weaker a company’s financial performance and market standing, the more its current strategy must be questioned and the more likely the need for radical changes.
Table 4.1 provides a compilation of the debt-to-equity leverage ratios and income-to-expenses coverage ratio most commonly used to evaluate a company’s financial performance and balance sheet strength.
© McGraw-Hill Education
Chapter 4–‹#›
TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean (6 of 8)
Activity Ratios How Calculated What It Shows
Days of inventory Inventory
Cost of goods sold ÷ 365 Measures inventory management efficiency. Fewer days of inventory are better.
Inventory turnover Cost of goods sold Inventory Measures the number of inventory turns per year. Higher is better.
Average collection period Accounts receivable
Total sales ÷ 365
or
Accounts receivable
Average daily sales Indicates the average length of time the firm must wait after making a sale to receive cash payment. A shorter collection time is better.
© McGraw-Hill Education.
The stronger a company’s current overall performance, the more likely it has a well-conceived, well-executed strategy. The weaker a company’s financial performance and market standing, the more its current strategy must be questioned and the more likely the need for radical changes.
Table 4.1 provides a compilation of the inventory and accounts receivable collection activity ratios most commonly used to evaluate a company’s financial performance and balance sheet strength.
© McGraw-Hill Education
Chapter 4–‹#›
TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean (7 of 8)
Other Ratios How Calculated What It Shows
Dividend yield on common stock Annual dividends
per share
Current market price
per share A measure of the return that shareholders receive in the form of dividends. A “typical” dividend yield is 2% to 3%. The dividend yield for fast-growth firms is often below 1%; the dividend yield for slow-growth firms can run 4% to 5%.
Price-to-earnings (P/E) ratio Current market price
per share
Earnings per share P/E ratios above 20 indicate strong investor confidence in a firm’s outlook and earnings growth; firms whose future earnings are at risk or likely to grow slowly typically have ratios below 12.
Dividend payout ratio Annual dividends
per share
Earnings per share Indicates the percentage of after-tax profits paid out as dividends.
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The stronger a company’s current overall performance, the more likely it has a well-conceived, well-executed strategy. The weaker a company’s financial performance and market standing, the more its current strategy must be questioned and the more likely the need for radical changes.
Table 4.1 provides a compilation of dividend yield, price-to-earnings, and dividend payout ratios most commonly used to evaluate a company’s financial performance and balance sheet strength.
© McGraw-Hill Education
Chapter 4–‹#›
TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean (8 of 8)
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Other Ratios How Calculated What It Shows
Internal cash flow After-tax profits + Depreciation A rough estimate of the cash a firm’s business is generating after payment of operating expenses, interest, and taxes. Such amounts can be used for dividend payments or funding capital expenditures.
Free cash flow After-tax profits + Depreciation –
Capital expenditures – Dividends
A rough estimate of the cash a firm’s business is generating after payment of operating expenses, interest, taxes, dividends, and desirable reinvestments in the business. The larger a firm’s free cash flow, the greater its ability to internally fund new strategic initiatives, repay debt, make new acquisitions, repurchase shares of stock, or increase dividend payments.
© McGraw-Hill Education.
The stronger a company’s current overall performance, the more likely it has a well-conceived, well-executed strategy. The weaker a company’s financial performance and market standing, the more its current strategy must be questioned and the more likely the need for radical changes.
Table 4.1 provides a compilation of cash flow ratios most commonly used to evaluate a company’s financial performance and balance sheet strength.
© McGraw-Hill Education
Chapter 4–‹#›
QUESTION 2: What Are the Company’s Strengths and Weaknesses in Relation to the Market Opportunities and External Threats?
SWOT analysis is a tool for identifying situational reasons underlying a firm’s performance.
Internal strengths (the basis for strategy)
Internal weaknesses (deficient capabilities)
Market opportunities (strategic objectives)
External threats (strategic defenses)
© McGraw-Hill Education.
SWOT can help explain why a strategy is working well (or not) by taking a close look a company’s strengths in relation to its weaknesses and in relation to the strengths and weaknesses of competitors. Are the firm’s strengths enough to make up for its weaknesses? Has the firm’s strategy built on these strengths and shielded the firm from its weaknesses? Do the firm’s strengths exceed those of its rivals? Similarly, a SWOT analysis can help determine whether a strategy has been effective in fending off external threats and positioning the firm to take advantage of market opportunities.
SWOT analysis is a widely used diagnostic tool popular for its ease of use, also because it can be used to evaluate the efficacy of a strategy and as the basis for crafting a strategy from the outset to determine whether the firm is positioned to pursue new market opportunities and to defend against emerging threats to its future well-being.
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Identifying a Company’s Internal Strengths
A competence is an activity that a firm has learned to perform with proficiency and at an acceptable cost—a true capability, in other words.
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 represents a competitively superior internal strength.
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A firm’s strengths represent its competitive assets. Basing a firm’s strategy on its most competitively valuable strengths gives the firm its best chance for market success. When a company’s proficiency rises from that of mere ability to perform an activity to the point of being able to perform it consistently well and at acceptable cost, it is said to have a competence—a true capability, in other words. If a firm’s competence level in some activity domain is superior to that of its rivals it is known as a distinctive competence. A core competence is a proficiently performed internal activity that is central to a firm’s strategy and is typically distinctive as well. A core competence is a more competitively valuable strength than a competence because of the activity’s key role in the firm’s strategy and the contribution it makes to the firm’s market success and profitability
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Identifying a Company’s Internal Weaknesses
A 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 of weaknesses
Inferior or unproven skills, expertise, or intellectual capital in competitively important areas of the business
Deficiencies in physical, organizational, or intangible assets
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A firm’s weaknesses are shortcomings that constitute competitive liabilities, weakness, or competitive deficiency, and 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. A firm’s internal weaknesses can relate to (1) inferior or unproven skills, expertise, capabilities, or intellectual capital in competitively important areas of the business; (2) deficiencies in competitively important physical, organizational, or intangible assets.
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Chapter 4–‹#›
Identifying a Company’s Market Opportunities
Characteristics of market opportunities
Newly emerging and fast-changing markets may represent “golden opportunities” but are often hidden in “fog of the future.”
Opportunities can evolve in mature markets.
Opportunities with market factors aligned with the firm’s strengths offer the most potential for the firm to gain competitive advantage.
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Depending on the prevailing circumstances, a firm’s opportunities can be plentiful or scarce, fleeting or lasting, and can range from wildly attractive to marginally interesting to unsuitable. A firm 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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Chapter 4–‹#›
Identifying External Threats
Types of threats
Normal course-of-business
Sudden-death (survival)
Considering threats
Identify threats to the firm’s future prospects
Evaluate strategic actions to be taken to neutralize or lessen impact
© McGraw-Hill Education.
Simply making lists of a firm’s strengths, weaknesses, opportunities, and threats is not enough. The payoff from SWOT analysis comes from the conclusions about a firm’s situation and the implications for strategy improvement that flow from the four lists.
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Chapter 4–‹#›
TABLE 4.2 What to Look for in Identifying a Company’s Strengths, Weaknesses, Opportunities, and Threats (1 of 4)
Strengths and Competitive Assets Weaknesses and Competitive Deficiencies
Ample financial resources to grow the business No distinctive core competencies
Strong brand-name image or company reputation Lack of attention to customer needs
Cost advantages over rivals Weak balance sheet, too much debt
Attractive customer base Higher costs than competitors
Proprietary technology, superior technological skills, important patents Too narrow a product line relative to rivals
Strong bargaining power over suppliers or buyers Weak brand image or reputation
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Table 4.2-1 lists many of the things to consider in compiling a company’s strengths and weaknesses. Sizing up a company’s complement of strengths and deficiencies is akin to constructing a strategic balance sheet, where strengths represent competitive assets and weaknesses represent competitive liabilities. Ideally, the company’s competitive assets should outweigh its competitive liabilities by an ample margin.
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Chapter 4–‹#›
TABLE 4.2 What to Look for in Identifying a Company’s Strengths, Weaknesses, Opportunities, and Threats (2 of 4)
Strengths and Competitive Assets (continued) Weaknesses and Competitive Deficiencies (continued)
Superior product quality Lack of adequate distribution capability
Wide geographic coverage or strong global distribution capability Lack of management depth
Alliances or joint ventures that provide access to valuable technology competencies, or attractive geographic markets A plague of internal operating problems or obsolete facilities
Too much underutilized plan capacity
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Table 4.2-2 lists many of the things to consider in compiling a company’s strengths and weaknesses. Sizing up a company’s complement of strengths and deficiencies is akin to constructing a strategic balance sheet, where strengths represent competitive assets and weaknesses represent competitive liabilities. Ideally, the company’s competitive assets should outweigh its competitive liabilities by an ample margin.
© McGraw-Hill Education
Chapter 4–‹#›
TABLE 4.2 What to Look for in Identifying a Company’s Strengths, Weaknesses, Opportunities, and Threats (3 of 4)
Market Opportunities External Threats
Meet sharply rising buyer demand for the industry’s product Increasing intensity of competition
Serve additional customer groups or market segments Slowdowns in market growth
Expand into new geographic markets Likely entry of potent new competitions
Expand the company’s product line to meet a broader range of customer needs Growing bargaining power of customers or suppliers
Enter new product lines or new businesses A shift in buyer needs and tastes away from the industry’s product
Take advantage of failing trade barriers in attractive foreign markets Adverse demographic changes that threaten to curtail demand for the industry’s product
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Table 4.2-3 displays a sampling of potential threats and market opportunities. Sizing up a company’s complement of strengths and deficiencies is akin to constructing a strategic balance sheet, where strengths represent competitive assets and weaknesses represent competitive liabilities. Ideally, the company’s competitive assets should outweigh its competitive liabilities by an ample margin.
© McGraw-Hill Education
Chapter 4–‹#›
TABLE 4.2 What to Look for in Identifying a Company’s Strengths, Weaknesses, Opportunities, and Threats (4 of 4)
Market Opportunities (continued) External Threats (continued)
Take advantage of an adverse change in the fortunes of rival firms Adverse economic conditions that threaten critical suppliers or distributors
Acquire rival firms or companies with attractive technological expertise or competencies Changes in technology—particularly disruptive technology that can undermine the company’s distinctive competencies
Take advantage of emerging technological developments to innovate
Enter into alliances or other cooperative ventures Restrictive foreign trade policies
Costly new regulatory requirements
Tight credit conditions
Rising prices on energy or other key inputs
© McGraw-Hill Education.
Table 4.2-4 displays a sampling of potential threats and market opportunities. Sizing up a company’s complement of strengths and deficiencies is akin to constructing a strategic balance sheet, where strengths represent competitive assets and weaknesses represent competitive liabilities. Ideally, the company’s competitive assets should outweigh its competitive liabilities by an ample margin.
© McGraw-Hill Education
Chapter 4–‹#›
What Do SWOT Listings Reveal?
New strategy
SWOT is the foundation for positioning the firm to use its strengths to seize opportunities and to shore up its competitive deficiencies to mitigate external threats.
Existing strategy
SWOT insights into the firm’s overall business situation can translate into recommended strategic actions.
© McGraw-Hill Education.
The SWOT analysis process involves more than making four lists. In crafting a new strategy, it offers a strong foundation for understanding how to position the firm to build on its strengths in seizing new business opportunities and how to mitigate external threats by shoring up its competitive deficiencies. In assessing the effectiveness of an existing strategy, it can be used to glean insights regarding the firm’s overall business situation (thus the name Situational Analysis); and it can help translate these insights into recommended strategic actions.
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Chapter 4–‹#›
FIGURE 4.2 The Steps Involved in SWOT Analysis: Identify the Four Components of SWOT, Draw Conclusions, Translate Implications into Strategic Actions
Access the text alternative for these images.
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Figure 4.2 shows the steps involved in gleaning insights from SWOT analysis.
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Chapter 4–‹#›
QUESTION 3: What Are the Company’s Most Important Resources and Capabilities, and Will They Give the Company a Lasting Competitive Advantage?
Competitive assets
Resources and capabilities
They determine competitiveness and the ability to succeed in the marketplace.
A firm’s strategy depends on these to develop sustainable competitive advantage over its rivals.
© McGraw-Hill Education.
A firm’s resources and capabilities are its competitive assets and they 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.
Connect Activity
Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.
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Chapter 4–‹#›
Identifying the Company’s
Resources and Capabilities
A resource
A productive input or competitive asset that is owned or controlled by a firm (e.g., a fleet of oil tankers)
A capability
The capacity of a firm to perform some activity proficiently (e.g., superior skills in marketing)
© McGraw-Hill Education.
A resource is a competitive asset that is owned or controlled by a firm.
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.
Resource and capability analysis is a powerful tool for sizing up a firm’s competitive assets and determining if they can support a sustainable competitive advantage over market rivals.
© McGraw-Hill Education
Chapter 4–‹#›
TABLE 4.3 Types of Company Resources (1 of 2)
Tangible resources
Physical resources: land and real estate; manufacturing plants, equipment, or distribution facilities; the locations of stores, plants, or distribution centers, including the overall pattern of their physical locations; ownership of or access rights to natural resources (such as mineral deposits)
Financial resources: cash and cash equivalents; marketable securities; other financial assets such as a company’s credit rating and borrowing capacity
Technological assets: patents, copyrights, production technology, innovation technologies, technological processes
Organizational resources: IT and communication systems (satellites, servers, workstations, etc.); other planning, coordination, and control systems; the company’s organizational design and reporting structure
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Tangible resources are the most easily identified, because tangible resources are those that can be touched or quantified readily. Obviously, they include various types of physical resources such as manufacturing facilities and mineral resources, but they also include a company’s financial resources, technological resources, and organizational resources such as the company’s communication and control systems.
Technological resources are included among tangible resources, by convention, even though some types, such as copyrights and trade secrets, might be more logically categorized as intangible.
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Chapter 4–‹#›
TABLE 4.3 Types of Company Resources (2 of 2)
Copyright McGraw-Hill Education. Permission required for reproduction or display.
Intangible resources
Human assets and intellectual capital: the education, experience, knowledge, and talent 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 company image, buyer loyalty and goodwill; company reputation for quality, service, and reliability; reputation with suppliers and partners for fair dealing
Relationships: alliances, joint ventures, or partnerships that provide access to technologies, specialized know-how, or geographic markets; networks of dealers or distributors; the trust established with various partners
Company culture and incentive system: the norms of behavior, business principles, and ingrained beliefs within the company; the attachment of personnel to the company’s ideals; the compensation system and the motivation level of company personnel
© McGraw-Hill Education.
Intangible resources are harder to discern, but they are often among the most important of a firm’s competitive assets. They include various sorts of human assets and intellectual capital (skills and knowledge), as well as its brands, image, and reputational assets. While intangible resources have no material existence on their own, they are often embodied in something material.
It is important to remember that it is not exactly how a resource is categorized that matters, rather, that all of the firm’s different types of resources are included in the inventory.
The real purpose of using categories in identifying a firm’s resources is to ensure that none of a firm’s resources go unnoticed when sizing up its competitive assets
© McGraw-Hill Education
Chapter 4–‹#›
Identifying Capabilities
An organizational capability
Is the intangible but observable capacity of a firm to perform a critical activity proficiently using a related combination (cross-functional bundle) of its resources
Is knowledge-based, residing in people and in a firm’s intellectual capital or in its organizational processes and systems, embodying tacit knowledge
A resource bundle
Is a linked and closely integrated set of competitive assets centered around one or more cross-functional capabilities
© McGraw-Hill Education.
Organizational capabilities are more complex entities than resources; indeed, they are built up through the use of resources and draw on some combination of the firm’s resources as they are exercised.
Two approaches to identifying a firm’s capabilities:
A complete listing of resources the firm has accumulated considering whether (and to what extent the firm has built up any related capabilities through their use).
A functional approach that identifies capabilities related to specific functions that draw on a limited set of resources involving a single department or organizational unit and cross-functional capabilities that are multidimensional—they spring from effective collaboration among people with different types of expertise working in different organizational units.
© McGraw-Hill Education
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Assessing the Competitive Power of a Company’s Resources and Capabilities
The Total Economic Value produced by a firm is equal to V-C. It is the difference between the buyer’s perceived value (V) regarding a product or service and what it costs (C) the firm to produce it.
Competitively superior resources and capabilities are strategic assets capable of producing a sustainable competitive advantage with far greater profit potential.
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A competitive advantage means that you can produce more value (V) for the customer than rivals can, or the same value at lower cost (C). In other words, your V-C is greater than the V-C of competitors. V-C is what we call the Total Economic Value produced by a company.
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VRIN: Four Tests of a Resource’s
Competitive Power
The VRIN Test for sustainable competitive advantage asks if a resource or capability is Valuable, Rare, Inimitable, and Non-substitutable.
V: Is the resource (or capability) competitively valuable?
R: Is it rare—is it something rivals lack?
I: Is it hard to copy (inimitable)?
N: Is it invulnerable to the threat of substitution of different types of resources and capabilities (non-substitutable)?
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The competitive power of a resource or capability is measured by how many of four specific tests it can pass. 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. The first two tests determine whether a resource or capability can support a competitive advantage. The last two determine whether the competitive advantage can be sustained. Resources can contribute to a sustainable competitive advantage only when resource substitutes aren’t on the horizon.
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Social Complexity and Causal Ambiguity
Two factors that inhibit the ability of rivals to imitate a firm’s most valuable resources and capabilities.
Social complexity refers to factors in a firm’s culture, the interpersonal relationships among managers or R&D teams, its trust-based relations with customers or suppliers that contribute to its competitive advantage.
Causal ambiguity about the how the firm uses its resources and relationships puts competitors at a loss in understanding how to imitate these complex resources.
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Social complexity 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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Managing Resources and Capabilities Dynamically
Threats to resources and capabilities
Rivals develop better substitutes over time.
Current capabilities decay from benign neglect.
Disruptive changes in the competitive environment.
Manage capabilities dynamically
Attend to the ongoing modification of existing competitive assets.
Take advantage of opportunities to develop totally new kinds of capabilities.
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Rivals that are initially unable to replicate a key resource may develop better and better substitutes over time. Resources and capabilities can depreciate like other assets if they are managed with benign neglect. Disruptive changes in technology, customer preferences, distribution channels, or other competitive factors can also destroy the value of key strategic assets. Rivals that are initially unable to replicate a key resource may develop better and better substitutes over time. Resources and capabilities can depreciate like other assets if they are managed with benign neglect. Disruptive changes in technology, customer preferences, distribution channels, or other competitive factors can also destroy the value of key strategic assets.
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The Role of Dynamic Capabilities
To sustain its competitiveness and help drive improvements in its performance, a firm requires a dynamically evolving portfolio of resources and capabilities.
A dynamic capability is the ongoing capacity of a firm to modify its existing resources and capabilities or create new ones.
Improve on existing resources and capabilities incrementally.
Add new resources and capabilities to the firm’s competitive asset portfolio.
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Companies that know the importance of recalibrating and upgrading their most valuable resources and capabilities ensure that these activities are done on a continual basis. By incorporating these activities into their routine managerial functions, they gain the experience necessary to be able to do them consistently well. At that point, their ability to freshen and renew their competitive assets becomes a capability in itself—a dynamic capability.
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QUESTION 4: How Do Value Chain Activities Impact a Company’s Cost Structure and Its 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.
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Strategic Management Principle
The higher a firm’s costs are above those of close rivals, the more competitively vulnerable it becomes. Conversely, the greater the amount of customer value that a firm can offer profitably relative to close rivals, the less competitively vulnerable the firm becomes.
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The Concept of a Company Value Chain
The value chain
Identifies the primary activities and related support activities that create customer value
Identifies the inner workings of the firm’s customer value proposition and business model
Permits a deep look at the firm’s cost structure and its ability to profitably offer low prices
Reveals the emphasis that a firm places on activities that enhance differentiation and support higher prices
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Every firm’s business consists of a collection of activities undertaken in the course of producing, marketing, delivering, and supporting its product or service.
All the various activities that a firm performs internally combine to form a value chain—so called because the underlying intent of a firm’s activities is
ultimately to create value for buyers.
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FIGURE 4.3 A Representative Company Value Chain
Source: Based on the discussion in Michael E. Porter, Competitive Advantage (New York: Free Press, 1985), pp. 37-43.
Access the text alternative for these images.
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As shown in Figure 4.3, a company’s value chain consists of two broad categories of activities: the primary activities foremost in creating value for customers and the requisite support activities that facilitate and enhance the performance of the primary activities. The kinds of primary and secondary activities that constitute a company’s value chain vary according to the specifics of a company’s business; hence, the listing of the primary and support activities in Figure 4.3 is illustrative rather than definitive.
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Comparing Value Chains of Rival Companies
Value chain analysis
Facilitates a comparison, activity-by-activity, of how effectively and efficiently a firm delivers value to its customers, relative to its competitors
The value chain analysis process
Segregates a firm’s operations into different types of primary and secondary activities to identify major components of its internal cost structure
Uses activity-based costing to evaluate activities
Same for significant competitors
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Value chain analysis facilitates a comparison of how rivals, activity by activity, deliver value to customers. Even rivals in the same industry may differ significantly in terms of the activities they perform. How each activity is performed may affect a company’s relative cost position as well as its capacity for differentiation. Thus, even a simple comparison of how the activities of rivals’ value chains differ can reveal competitive differences.
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The Value Chain System
An industry value chain includes
Internal value chain
Value chains of upstream industry suppliers
Value chains of forward channel intermediaries
Effects of the industry value chain
Costs and profit margins of suppliers and channel partners can affect prices to end consumers.
Activities of channel partners can affect industry sales volumes and customer satisfaction.
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A company’s value chain is embedded in a larger system of activities that includes the value chains of its suppliers and the value chains of whatever wholesale distributors and retailers it utilizes in getting its product or service to end users. This value chain system (sometimes called a vertical chain) has implications that extend far beyond the company’s costs.
Strategic Management Principle
A firm’s cost competitiveness depends not only on the costs of internally performed activities (its own value chain) but also on costs in the value chains of its suppliers and distribution channel allies.
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FIGURE 4.4 A Representative Value Chain System
Source: Based in part on the single-industry value chain display in Michael E. Porter, Competitive Advantage (New York: Free Press, 1985), p. 35.
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A typical value chain system that incorporates the value chains of suppliers and forward-channel allies (if any) is shown in Figure 4.4. As was the case with company value chains, the specific activities constituting value chain systems vary significantly from industry to industry.
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Illustration Capsule 4.1 The Value Chain for Boll & Branch
Source: Adapted from Christina Brinkley, “What Goes into the Price of Luxury Sheets?” The Wall Street Journal, March 29, 2014, www.wsj.com/articles/SB100001424052702303725404579461953672838672 (accessed February 16, 2016).
Access the text alternative for these images.
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Illustration Capsule 4.1 shows representative costs for various external and internal value chain activities performed by Boll & Branch, a maker of luxury linens and bedding sold directly to consumers online.
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The Value Chain for Boll & Branch
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?
Where in the industry activity chain could Boll & Branch possibly reduce cost(s) without reducing its competitive strength?
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A company’s primary and secondary activities identify the major components of its internal cost structure. The combined costs of all the various primary and support activities constituting a company’s value chain define its internal cost structure. Evaluating a company’s internal and external cost-competitiveness involves using what accountants call activity-based costing to determine the costs of performing each value chain activity.
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Benchmarking: Assessing the Cost and Effectiveness of Value Chain Activities
Benchmarking
Involves improving internal activities based on learning from other companies’ “best practices”
Assesses whether the cost competitiveness and effectiveness of a company’s value chain activities are in line with its competitors’ activities
Sources of benchmarking information
Market data reports from consulting companies and market analysts, publications of industry trade groups and government agencies, and customers
Visits to benchmark firms
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Benchmarking is a potent tool for improving a firm’s own internal activities that is based on learning how firms perform them and borrowing their “best practices.” The comparison is often made between companies in the same industry, but benchmarking can also involve comparing how activities are done by companies in other industries.
Strategic Management Principle
Benchmarking the costs of a firm’s activities against those of rivals provides hard evidence of whether the firm is cost-competitive.
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Illustration Capsule 4.2 Benchmarking in the Solar Industry
What benchmarks does the solar industry use in comparing costs among industry competitors?
How has SunPower responded to the continued downward pricing pressure in the industry?
Why is the collection of competitive intelligence to accurately benchmark delivered costs of such importance in the solar industry?
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As competition grows, benchmarking plays an increasingly critical role in assessing a solar company’s relative costs and price positioning compared to other firms. This is often measured using the all-in installation and production costs per kilowatt hour generated by a solar asset, called the “Levelized Cost of Energy” (LCOE). Kilowatt hours are the units of electricity that are sold to consumers.
SunPower’s quarterly earnings calls highlighted efforts to compete on benchmark prices by simplifying its company structure; divesting from non-core assets; and diversifying beyond the low-cost, large-scale utility solar market and into residential and commercial solar – where it could compete more easily on price.
For solar to play a major role in U.S. power generation, costs must keep falling. As solar companies race towards lower costs, benchmarking will continue to be a core strategic tool in determining pricing and market positioning.
Connect Activity
Consider adding a File Attachment assignment requiring the student to develop a graphic showing the elements of Delivered Cost in the Cement Industry and CEMEX in particular. Have the student include details on the costs of each element relative to industry averages as well as a discussion of how the analysis informs competitive advantage. You can post instructions for the student within the assignment and collect their attachments for grading.
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Strategic Options for Remedying a Cost or Value Disadvantage
Areas in the total value chain system assess ways to improve efficiency and effectiveness.
Internal activity segments
Suppliers’ part of the value chain system
Forward-channel portion of the value chain system
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There are three main areas in a company’s total value chain system where company managers can try to improve its efficiency and effectiveness in delivering customer value: (1) a company’s own internal activities, (2) suppliers’ part of the value chain system, and (3) the forward-channel portion of the value chain system.
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Improving Internally Performed
Value Chain Activities
Implement best practices throughout the firm, particularly for high-value activities.
Redesign products, components and activities to facilitate speedier and more economical manufacture or assembly.
Relocate high-cost activities to external value chains to be performed more cheaply by vendors or contractors.
Reallocate resources to activities that address buyers’ most important purchase criteria.
Adopt productivity-enhancing, cost-saving technological improvements that spur innovation, improve design, and enhance creativity.
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Strategic approaches to reducing internally performed value chain activity costs that will improve a firm’s cost-competitiveness by:
Implementing best practices throughout the firm, particularly for high-cost activities.
Redesigning the product and/or some of its components to eliminate high-cost components or facilitate speedier and more economical manufacture or assembly.
Relocating 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.
Adopting technologies that spur innovation, improve design, and enhance creativity.
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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.
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Supplier-related cost disadvantages can be attacked by pressuring suppliers for lower prices, switching to lower-priced substitute inputs, and collaborating closely with suppliers to identify mutual cost-saving opportunities.
A firm can enhance its customer value proposition through its supplier relationship by selecting and retaining suppliers that meet higher-quality standards, providing quality-based incentives to suppliers, and integrating suppliers into the design process.
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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.
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Any of three means can be used to achieve better cost-competitiveness in the forward portion of the industry value chain:
Pressure distributors, dealers, and other forward-channel allies to reduce their costs and markups.
Collaborate with forward channel intermediaries to identify win–win opportunities to reduce costs
Change to a more economical distribution strategy, including switching to cheaper distribution channels (selling direct via the Internet) or integrating forward into company-owned retail outlets.
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Enhancing Differentiation Through Activities at the Forward End of the Value Chain System
Engage in cooperative advertising and promotions with forward-channel allies.
Use exclusive arrangements with downstream sellers or other mechanisms that increase their incentives to enhance delivered customer value.
Create and enforce standards for downstream activities and assist in training channel partners in business practices.
© McGraw-Hill Education.
The means to enhancing differentiation through activities at the forward end of the value chain system include (1) engaging in cooperative advertising and promotions
with forward allies (dealers, distributors, retailers, etc.), (2) creating exclusive arrangements with downstream sellers or utilizing other mechanisms that increase their incentives to enhance delivered customer value, and (3) creating and enforcing standards for downstream activities and assisting in training channel partners in business practices.
Strategic Management Principle
Performing value chain activities with capabilities that permit the firm to either outmatch rivals on differentiation or beat them on costs will give the firm a competitive advantage.
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Translating Proficient Performance of Value Chain Activities into Competitive Advantage
Option 1: Beat rivals by creating more customer value from value chain activities, for a differentiation-based competitive advantage
1. Managers decide to perform value chain activities in ways that drive improvements in quality, features, performance, and other differentiation-enhancing aspects.
2. Competencies gradually emerge in performing value chain activities that drive improvements in quality, features, and performance.
3. Company proficiency in performing some of these differentiation-enhancing activities rises to the level of a core competence.
4. Company proficiency in performing the core competence continues to build and evolves into a distinctive competence.
5. Company gains a competitive advantage based on superior differentiation capabilities.
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A company that does a first-rate job of managing its activities of its value chain relative to competitors stands a good chance of profiting from its competitive advantage. A company’s external value-creating activities in its value can offer a competitive advantage.
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Translating Proficient Value Chain Activity Performance into Competitive Advantage
Option 2: Beat rivals by conducting value chain activities more efficiently, for a cost-based competitive advantage
1. Company managers decide to perform value chain activities in the most cost-efficient manner.
2. Competencies gradually emerge in driving down the cost of value chain activities (such as production, inventory management, etc.).
3. Company capabilities in performing certain value chain activities more efficiently rise to the level of a core competence.
4. Company proficiency in performing the core competence continues to build and evolves into a distinctive competence.
5. Company gains a competitive advantage based on superior differentiation capabilities.
© McGraw-Hill Education.
A company that does a first-rate job of managing its activities of its value chain relative to competitors stands a good chance of profiting from its competitive advantage. A company’s external value-creating activities in its value can offer a competitive advantage.
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QUESTION 5: Is the Company Competitively Stronger or Weaker Than Key Rivals?
Assessing overall competitive strength
How does the firm rank relative to competitors on each of the important factors that determine market success?
Does the firm have a net competitive advantage or disadvantage versus major competitors?
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Using resource analysis, value chain analysis, and benchmarking to determine a company’s competitiveness on value and cost is necessary but not sufficient. A more
comprehensive assessment needs to be made of the firm’s overall competitive strength. The answers to two questions are of particular interest: First, how does the
firm rank relative to competitors on each of the important factors that determine market success? Second, all things considered, does the firm have a net competitive advantage or disadvantage versus major competitors?
Strategic Management Principles
High-weighted competitive strength ratings signal a strong competitive position and possession of competitive advantage; low ratings signal a weak position and competitive disadvantage.
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Steps in the Competitive Strength
Assessment Process
Make a list of the industry’s key success factors and measures of competitive strength or weakness.
Assign weights to each competitive strength measure based on its perceived importance.
Score competitors on each competitive strength measure and multiply by each measure by its corresponding weight.
Sum the weighted strength ratings on each factor to get an overall measure of competitive strength for each firm.
Use overall strength ratings to draw conclusions about the firm’s net competitive advantage or disadvantage and to take specific note of areas of strength and weakness.
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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. Assign weights to each competitive strength measure based on its perceived importance. (The sum of the weights for each measure must add up to 1.)
Step 3. 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. Sum the weighted strength ratings on each factor to get an overall measure of competitive strength for each company being rated.
Step 5. 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.
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TABLE 4.4 A Representative Weighted Competitive Strength Assessment
Access the text alternative for these images.
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Table 4.4 provides an example of competitive strength assessment in which a hypothetical firm (ABC Company) competes against two rivals. In the example, relative cost is the most telling measure of competitive strength, and the other strength measures are of lesser importance. The firm with the highest rating on a given measure has an implied competitive edge on that measure, with the size of its edge reflected in the difference between its weighted rating and rivals’ weighted ratings.
The overall competitive strength scores indicate how all the different strength measures add up—whether the firm is at a net overall competitive advantage or disadvantage against each rival. The higher a firm’s overall weighted strength rating, the stronger its overall competitiveness versus rivals.
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Strategic Implications of a 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 firm compares against rivals, factor by factor (or capability by capability).
Strength scores can be useful in deciding what strategic moves to make.
© McGraw-Hill Education.
A company’s competitive strength scores pinpoint its strengths and weaknesses against rivals and point directly to the kinds of offensive and defensive actions it can use to exploit its competitive strengths and reduce its competitive vulnerabilities.
A competitively astute company should utilize the strength scores in deciding what strategic moves to make. 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.
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QUESTION 6: What Strategic Issues and Problems Merit Front-Burner Managerial Attention?
Which and how serious are the strategic issues that managers must address—and resolve—for the firm to be more financially and competitively successful in the years ahead.
A good strategy must contain ways to deal with all the strategic issues and obstacles that stand in the way of the firm’s financial and competitive success in the years ahead.
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The final and most important analytic step is to zero in on exactly what strategic issues company managers need to address—and resolve—for the firm to be more financially and competitively successful in the years ahead. This step involves drawing on the results of both industry analysis and the evaluations of the company’s internal situation.
The task here is to get a clear fix on exactly what strategic and competitive challenges confront the company, which of the company’s competitive shortcomings need fixing,
and what specific problems merit company managers’ front-burner attention. Pinpointing the specific issues that management needs to address sets the agenda for deciding what actions to take next to improve the company’s performance and business outlook.
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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
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Compiling a “priority list” of problems creates an agenda of strategic issues that merit prompt managerial attention. Compiling a list of problems and roadblocks creates a strategic agenda of problems that merit prompt managerial attention. 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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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?
© McGraw-Hill Education.
Pinpointing the specific issues that management needs to address sets the agenda for deciding what actions to take next to improve the company’s performance and business outlook.
© McGraw-Hill Education
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APPENDIX: IMAGE DESCRIPTIONS FOR UNSIGHTED STUDENTS
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Appendix 1 Figure 4.1 Identifying the Components of a Single-Business Company’s Strategy, Text Alternative
Single business strategic action plan components include:
Moves to respond to changing conditions in the macro-environment or in industry and competitive conditions
Initiatives to build competitive advantage based on:
Lower costs and prices relative to rivals?
A better product or service (design, features, quality, wider selection, etc.)?
Superior ability to service a market niche or specific group of buyers?
Efforts to expand or narrow geographic coverage
Efforts to build competitively valuable partnerships and strategic alliances with other enterprises within its industry
Key functional strategies of the overall business strategy:
R&D, technology, product design; supply chain management; production; sales, marketing, and distribution; information technology; human resources; and finance.
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Appendix 2 Figure 4.2 The Steps Involved in SWOT Analysis: Identify the Four Components of SWOT, Draw Conclusions, Translate Implications into Strategic Actions, Text Alternative
What can be gleaned from the SWOT listings?
The first two steps of SWOT analysis are:
Identify company strengths and competitive assets.
Identify company weaknesses and competitive deficiencies.
These two steps lead to conclusions concerning the company’s overall business situation. This includes determining what are the underlying reasons for the success (or lack of success) of the company’s strategy. It also includes what the attractive and unattractive aspects of the company’s situation are.
The last two steps of SWOT analysis are:
Identify market opportunities.
Identify external threats.
These two steps reveal implications for improving company strategy. This includes using company strengths as the foundation for the company’s strategy; shoring up weaknesses that are interfering with the success of the strategy; pursuing those market opportunities best suited to company strengths; correcting weaknesses that impair pursuit of important market opportunities; repair weaknesses that heighten vulnerability of external threats; and using company strengths to lessen the impact of important external threats.
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Appendix 3 Figure 4.3 A Representative Company Value Chain, Text Alternative
Primary activities and costs of a company’s value chain are:
Supply chain management
Operations
Distribution
Sales and marketing service
Profit margin
These primary activities and costs are supported by the following
Product R&D
Technology
Systems development
Human resource management
General administration
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© McGraw-Hill Education
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Appendix 4 Figure 4.4 A Representative Value Chain System, Text Alternative
A representative value chain system shows the following
Supplier-related value chains: activities, costs, and margins of suppliers
A firm’s own value chain: internally performed activities, costs, and margins
Forward-channel value chains: (1) activities, costs, and margins of forward-channel allies and strategic partners and (2) buyer or end-user value chains
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Appendix 5 Illustration Capsule 4.1 The Value Chain for Boll & Branch, Text Alternative
The cost of goods, including the raw cotton; the spinning, weaving, and dyeing; cutting, sewing, and finishing; the transportation of the material, and the factory fee is $68.46.
The inspection fees, ocean freight/insurance, import duties, warehouse/packing, packaging, customer shipping, and promotions/donations total $154.38.
Boll & Branch’s markup is about 60%.
Boll & Branch’s retail price is $250.00, resulting in a gross margin of $95.62.
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Appendix 6 Table 4.4 A Representative Weighted Competitive Strength Assessment
Rating scale: 1 equals very weak, 10 equals very strong
ABC CO. ABC CO. RIVAL 1 RIVAL 1 RIVAL 2 RIVAL 2
Key success factor/strength measure Importance weight Strength Rating Weighted Score Strength Rating Weighted score Strength Rating Weighted Score
Quality/product performance 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
Technological skills 0.05 10 0.50 1 0.05 3 0.15
Dealer network/ distribution capability 0.05 9 0.45 4 0.20 5 0.25
New product innovation capability 0.05 9 0.45 4 0.20 5 0.25
Financial resources 0.10 5 0.50 10 1.00 3 0.30
Relative cost position 0.30 5 1.50 10 3.00 1 0.30
Customer servicer capabilities 0.15 5 0.75 7 1.05 1 0.15
Sum of importance weights 1.00 0 0 0 0 0 0
Overall weighted 0 0 ABC Co = 5.95 0 Rival 1 = 7.70 0 Rival 2 = 2.10
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© McGraw-Hill Education
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Concepts
and Cases
22e
Thompson
Peteraf
Gamble
Strickland
T h e Q u e s t f o r C o m p e t i t i v e A d v a n t a g e
STRATEGY
Crafting & Executing