Chapter 4

• Evaluating a Firm's Internal Situation

  1. how well is the firm's strategy working?
  2. what are the company's competitively important resources and capabilities?
  3. are the company's cost structure and customer value proposition competitive?
  4. is the company competitively stronger or weaker than key rivals?
  5. what strategic issues and problems merit front-burner managerial attention?
• The two best indicators of how well a firm's strategy is working are:

  1. whether the firm is recording gains in financial strength and profitability
  2. whether the firm's competitive strength and market standing are improving
• other strategy performance indicators

  • trends in the firm's sales and earnings growth
  • trends in the firm's stock price
  • the firm's overall financial strength
  • the firm's customer retention rate
  • the rate at which new customers are acquired
  • changes in firm's image and reputation with customers
  • evidence of improvement in internal processes such as defect rate, order fulfillment, delivery times, days of inventory, and employee productivity
• a company's business model and strategy:

  • must be well matched to its collection of resources and capabilities
  • requires a tight fit with a company's internal situation
  • is strengthened when exploiting resources that are competitively valuable, rare, hard to copy, and not easily trumped to rivals' equivalent substitute resources
• a resource is a competitive asset that is owned or controlled by a firm; a capability is the capacity of a firm to competently perform some internal activity.
• capabilities are developed and enabled through the deployment of a firm's resources.
• Analyzing the resources and capabilities of a firm is a two-step process

  1. identify the company's most competitively important resources and capabilities
  2. apply the four tests of competitive power to ascertain which resources and capabilities can support a sustainable competitive advantage over rival firms
• common types of tangible resources

  • physical resources
  • financial resources
  • technological assets
  • organizational resources
• common types of intangible resources

  • human assets and intellectual capital
  • brand, image, and reputational assets
  • relationships
  • company culture
• VRIN competitive power tests:

  is the resource or capability...

  • competitively valuable?
  • rare -something rivals lack?
  • inimitable or hard to copy?
  • nonsubstitutable or is it vulnerable to the threat of substitution from different types of resources and capabilities?
• the four VRIN tests for sustainable competitive advantage ask if a resource or capability is valuable, rare, inimitable, and nonsubstitutable
• 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
• companies that lack a standalone resource that is competitively powerful may nonetheless develop a competitive advantage through resource bundles that enable the superior performance of important cross-functional capabilities
• management's organization-building challenge has two elements

  1. attending to ongoing strengthening and recalibration of existing capabilities and resources
  2. casting a watchful eye for opportunities to develop totally new capabilities for delivering better customer value and/or outcompeting rivals
• A dynamic capability is an ability to modify, deepen, or reconfigure the company’s existing resources and capabilities in response to its changing environment or market opportunities.
• SWOT analysis-

  Strengths

  Weaknesses

  Opportunities

  Threats
• A well-conceived strategy is:

  • matched to the firm's resource strengths and weaknesses
  • aimed at capturing the firm's best market opportunities
  • positioned to defend against external threats to its well-being
• SWOT analysis is a simple but powerful tool for sizing up a firm's internal strengths and competitive deficiencies, its market opportunities, and the external threats to its future well-being.
• The value of a SWOT analysis is in:

  1. drawing conclusions from SWOT listings about the firm's overall situation
  2. translating those conclusions into effective strategic actions that better match the firm's strategy to its strengths and market opportunities, correct problematic weaknesses, and defend against worrisome external threats
• Why are both cost structure and value important?

  delivering a profitable customer value proposition that maintains a competitive edge of over rivals requires effectively controlling the costs of differentiating features in industries where price competition is a dominant feature.
• Useful analytical tools:

  • value chain analysis
  • benchmarking
• a company's value chain identifies the primary activities that create customer value and related support activities
• benchmarking entails comparing how different firms perform various value chain maintenance and then making cross-firm comparisons of the costs and effectiveness of these activities.

  • how materials are purchased
  • how inventories are managed
  • how products are assembled
  • how customer orders are filled and shipped
  • how maintenance is performed
• Benchmarking is a potent tool for learning which companies are best at performing particular activities and then using their techniques (or “best practices”) to improve the cost and effectiveness of a company’s own internal activities.
• A best practice is a method of performing an activity that consistently delivers superior results compared to other approaches.
• The value chains of forward channel partners are relevant because:

  • costs and margins of the activities of distributors and retail dealers are part of the price the consumer pays and can strongly affect a firm's customer value proposition.
  • accurately assessing the competitiveness of a firm's cost structure and value proposition helps its managers understand both an industry's value chain system and its internal value chain.
• There are three main areas of a firm's overall value chain where cost differences with rivals can occur.

  • a firm's own internal activities
  • value chain activities performed by suppliers
  • value chain activities performed by forward channel allies
• improving internally performed value chain activities

  • implement the use of best practices throughout the firm
  • eliminate cost-producing activities by revamping the value chain
  • relocate high-cost internal activities to lower-cost areas
  • outsource internal activities to vendors or contractors to perform them more cheaply than in-house
• Improving internally performed value chain activities

  • invest in productivity-enhancing, cost-saving technology
  • find ways around activities or items where costs are high
  • redesign products and/or components to economize on manufacturing or assembly costs
  • reduce costs in supplier or forward portions of value chain system to make up for higher internal costs
• Rectifying a weakness in the customer value proposition

  1. implement the use of best practices throughout the ceremony, particularly for activities that are important for creating customer value- product design, product quality, or customer service
  2. adopt best practices for marketing, brand management, and customer relationship management to improve brand image customer loyalty
  3. reallocate resources to activities having a significant impact on value delivered to customers
• Remedying supplier-related cost disadvantages

  • pressure supplier for lower prices
  • switch to lower-priced substitutes
  • collaborate closely with suppliers to identify mutual cost-saving opportunities
  • integrate backward into business of high-cost suppliers
• Enhancing the customer value proposition

  • select and retain best-quality performing suppliers
  • provide quality-based incentives to suppliers
  • integrate suppliers into the product design process
• combat forward channel cost disadvantages by

  • pressuring dealer-distributors and other forward channel allies to reduce their costs and markups
  • working with following channel allies to identify win-win opportunities to reduce costs
  • changing to a more economical distribution strategy or integrate forward into company-owned retail outlets
• improve the customer value proposition by use of

  • cooperative advertising and promotions with forward channel allies
  • training programs for dealers, distributors, or retailers to improve the purchasing experience or customer service
  • creating and enforcing operating standards for resellers or franchisees to ensure consistent store operations
• A company's value-creating activities are enabled by firm-specific resources and capabilities that are

  • valuable, rare, and necessary preconditions for competitive advantage
  • effectively deployed in a value-creating activity
• Determining a company's overall competitive position requires answering two questions

  1. how does the company rank relative to competitors on each of the important factors that determine market success
  2. does the company have a net competitive advantage or disadvantage versus its major competitors
• The final and most important analytical step is to focus management on crucial strategic issues

  • precise pinpointing of problems sets the agenda for actions to take next to improve the firm's performance and business outlook
  • compiling a "worry list" of problems and issues creates an agenda for managerial strategy making