CHAPTER 4

EVALUATING A COMPANY’S RESOURCES,

CAPABILITIES, AND COMPETITIVENESS

McGraw-Hill/Irwin
Copyright ®2012 The McGraw-Hill Companies, Inc.
1. Learn how to take stock of how well a company’s strategy is
working.
2. Understand why a company’s resources and capabilities are
central to its strategic approach and how to evaluate their
potential for giving the company a competitive edge over rivals.
3. Discover how to assess the company’s strengths and
weaknesses in light of market opportunities and external
threats.
4. Grasp how a company’s value chain activities can affect the
company’s cost structure, degree of differentiation, and
competitive advantage.
5. Understand how a comprehensive evaluation of a company’s
competitive situation can assist managers in making critical
decisions about their next strategic move

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 EVALUATING A FIRM’S INTERNAL
SITUATION

1. How well is the firm’s present strategy working?

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

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 QUESTION 1: HOW WELL IS THE
COMPANY’S PRESENT STRATEGY
WORKING?

♦ Best indicators of a well-conceived,

well-executed strategy:
● The company is achieving its stated
financial and strategic objectives.
● The company is an above-average
industry performer.

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 Other Indicators of Strategic Success

♦ Growth in firm’s sales and market share

♦ Acquisition and retention of customers
♦ Increasing profit margins, net profits and ROI
♦ Growing financial strength and credit rating
♦ Positively viewed by shareholders and customers
♦ Leadership in factors relevant to market\industry
success
♦ Continuing improvement in operating performance

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4.1 Identifying the Components of a Single-Business Company’s Strategy

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 4.1 How Calculated
Key Financial
Ratios

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 4.1
Key Financial
Ratios (cont’d)

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 4.1
Key Financial
Ratios (cont’d)

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 QUESTION 2: WHAT ARE THE COMPANY’S
COMPETITIVELY IMPORTANT RESOURCES
AND CAPABILITIES?

♦ Competitive Assets
● Are the firm’s resources and capabilities.
● Are the determinants of its competitiveness
and ability to succeed in the marketplace.
● Are what a firm’s strategy depends on to
develop sustainable competitive advantage
over its rivals.

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 Resources and Capabilities

♦ A Resource
● Is a productive input or competitive asset that is
owned or controlled by a company (e.g., a fleet
of oil tankers).
♦ A Capability
● Is the capacity of a firm to perform some activity
proficiently (e.g., superior skills in marketing).

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4.2 Types of Company Resources

Tangible Resources
Physical resources
Financial resources
Technological assets
Organizational resources
Intangible Resources
Human assets and intellectual capital
Brands
External relationships
Company culture and incentive system

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 Resource and Capability Analysis

♦ Identify the firm’s resources and capabilities.

♦ Test the competitive power of the firm’s
resources and capabilities:
● Is the resource (or capability) competitively valuable?
● Is the resource rare—is it something rivals lack?
● Is the resource hard to copy?
● Can the resource be overcome by different types of
resources and capabilities—are there good
substitutes available for the resource?

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 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 functional systems, which
embody tacit knowledge.

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Managing Resources and Capabilities Dynamically

♦ Threats to Resources and Capabilities:

● Rivals providing better substitutes over time
● Capabilities decaying from benign neglect
● Disruptive competitive environment change
♦ Managing Capabilities Dynamically
● Is the process of creating new and\or updating
existing resources\capabilities to obtain durable
value in both resource types in syncing their
support of a resource-based competitive strategy.

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 QUESTION 3: IS THE COMPANY ABLE TO
SEIZE MARKET OPPORTUNITIES AND
NULLIFY EXTERNAL THREATS?

♦ SWOT Analysis
● Is a powerful tool for sizing up a firm’s:
 Internal strengths (the basis for strategy)
 Internal weaknesses (deficient capabilities)
 Market opportunities (strategic objectives)
 External threats (strategic defenses)

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Identifying a Company’s Internal Strengths

♦ A Competence
● Is an activity that a firm has learned to perform with
proficiency—a capability.
♦ A Core Competence
● Is a proficiently performed internal activity that is
central to a firm’s strategy and competitiveness.
♦ A Distinctive Competence
● Is a competitively valuable activity that a firm
performs better than its rivals.

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 Identifying a Company’s Weaknesses
and Competitive Deficiencies

♦ A Weakness (Competitive Deficiency)

● 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 skills, expertise, or intellectual capital
● Physical, organizational, or intangible assets
deficiencies
● Missing or inferior capabilities in key areas

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 Identifying a Company’s Market Opportunities

♦ Characteristics of Market Opportunities:

● An absolute “must pursue” market
 Represents much potential but is hidden
in “fog of the future.”
● A marginally interesting market
 Presents high risk and questionable profit
potential.
● An unsuitable\mismatched market
 The firm’s strengths are not matched to
market factors—best avoided.

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 Identifying the Threats to a Company’s
Future Profitability

♦ Types of Threats:
● Normal course-of-business threats
● Sudden-death threats
♦ Considering Threats:
● Identify the threats to the company’s
future prospects.
● Evaluate what strategic actions can be
taken to neutralize or lessen their impact.

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 What Do the SWOT Listings Reveal?

♦ SWOT Analysis Involves:

● Drawing conclusions from the SWOT
listings about the firm’s overall situation.
● Translating these conclusions into
strategic actions by the firm that:
 Match its strategy to its internal
strengths and to market opportunities.
 Correct important weaknesses, and
defend it against external threats.

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4.2 The Steps Involved in SWOT Analysis: Identify the Four
Components of SWOT, Draw Conclusions, Translate Implications
into Strategic Actions

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 QUESTION 4: ARE THE FIRM’S PRICES AND COSTS
COMPETITIVE WITH THOSE OF KEY RIVALS, AND
DOES IT HAVE AN APPEALING 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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 The Concept of a Company Value Chain

♦ The Value Chain

● Identifies the primary internal activities that create
customer value and the related support activities.
● Permits a deep look at the firm’s cost structure and
ability to offer low prices.
● Reveals the emphasis that a firm places on
activities that enhance differentiation and support
higher prices.

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4.3 A Representative Company Value Chain

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Comparing the Value Chains of Rival Firms

♦ Value Chain Analysis

● Facilitates a comparison, activity-by-activity, of how
effectively and efficiently a company delivers value
to its customers, relative to its competitors.
♦ The Value Chain Analysis Process:
● Segregate the firm’s operations into different types
of primary and secondary activities to identify the
major components of its internal cost structure.
● Use activity-based costing to evaluate the activities.
● Do the same for significant competitors.

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 Value Chain System for an Entire Industry

♦ Industry Value Chain:

● The firm’s internal value chain
● The value chains of industry suppliers
● The value chains of channel intermediaries
♦ Effects of the Industry Value Chain:
● Costs and 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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4.4 Representative Value Chain System for an Entire Industry

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 Benchmarking and Value Chain Activities

♦ Benchmarking:
● Involves improving a firm’s internal activities based
on learning other companies’ “best practices.”
● Assesses whether the cost competitiveness and
effectiveness of a firm’s value chain activities are in
line with its competitors’ activities.
♦ Sources of Benchmarking Information
● Reports, trade groups, analysts and customers
● Visits to benchmark companies
● Data from consulting firms

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Strategic Options for Remedying a Disadvantage
in Costs or Effectiveness

♦ There are three places in the total value

chain system for a company to look for
ways to improve its efficiency and
effectiveness:
● The firm’s own activity segments
● The suppliers’ part of the overall value chain
● The distribution channel portion of the chain.

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4.5 Translating Company Performance of Value Chain Activities
into Competitive Advantage

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4.5 Translating Company Performance of Value Chain Activities
into Competitive Advantage (cont’d)

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 QUESTION 5: IS THE COMPANY
COMPETITIVELY STRONGER OR
WEAKER THAN KEY RIVALS?

♦ Competitive Advantage Indicators:

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

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The Competitive Strength Assessment Process

Make a list of the industry’s key success factors

Step 1 and measures of competitive strength or
weakness (6 to 10 measures usually suffice).

Assign a weight to each competitive strength

Step 2
measure based on its perceived importance.

Rate the firm and its rivals on each competitive

Step 3 strength measure and multiply by each measure
by its corresponding weight.

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4.4 A Representative Weighted Competitive Strength Assessment

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 Strategic Implications of Competitive
Strength Assessment

♦ The higher a firm’s overall weighted strength rating,

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

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 QUESTION 6: WHAT STRATEGIC ISSUES
AND PROBLEMS MERIT FRONT-BURNER
MANAGERIAL ATTENTION?

♦ Identifying Strategic Issues:

● How to stave off market challenges from new foreign
competitors.
● How to combat the price discounting of rivals.
● How to reduce high costs and pave the way for price
reductions.
● How to sustain growth in light of slowing buyer demand.
● Whether to expand the firm’s product line.
● Whether to correct the firm’s competitive deficiencies by
acquiring a rival company with the missing strengths.
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 QUESTION 6: WHAT STRATEGIC ISSUES
AND PROBLEMS MERIT FRONT-BURNER
MANAGERIAL ATTENTION?

♦ Identifying Strategic Issues (cont’d):

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