Business Policy and Strategy – Week 2 Lecture 2
In
evaluating how well a company’s present strategy is working, a manager has to
start with what the strategy is. The first thing to pin down is the company’s
competitive approach. The three best indicators of how well a company’s
strategy is working are:
·
Whether the company is achieving its stated financial and
strategic objectives
·
Whether its financial performance is above the industry
average
·
Whether it is gaining customers and increasing its market
share
Specific
indicators of how well a company’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.
The
stronger a company’s current overall performance, the less likely the need for
radical changes in strategy. The weaker a company’s financial performance and
market standing, the more its current strategy must be questioned. Weak
performance is almost always a sign of weak strategy, weak execution, or both.
Identifying a Company’s Internal Strengths
An
internal strength is something a company is good at doing or an attribute that
enhances its competitiveness in the marketplace. 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. If a company’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
company’s strategy and is typically distinctive as well.
An
internal weakness is something a company lacks or does poorly (in comparison to
others) or a condition that puts it at a disadvantage in the marketplace. A
company’s internal weaknesses can relate to:
·
Inferior or unproven skills, expertise, or intellectual
capital in competitively important areas of the business
·
Efficiencies in competitively important physical, organizational,
or intangible assets.
Managers
can’t properly tailor strategy to the company’s situation without first
identifying its market opportunities and appraising the growth and profit
potential each one holds. Newly emerging and fast-changing markets sometimes
present stunningly big or “golden” opportunities which can only be leveraged by
diligent market reconnaissance and preparation for swift action.
Certain
factors in a company’s external environment pose threats to its profitability
and competitive well-being. External threats may pose no more than a moderate
degree of adversity, or they may be imposing enough to make a company’s
situation look tenuous.
It
is essential that managers be able to identify the company’s resources and
capabilities in order to craft strategy. Resource and capability analysis is a
powerful tool for sizing up a company’s competitive assets and determining if
they can support a sustainable competitive advantage over market rivals.
Identifying
Capabilities—Organizational capabilities are more complex than resources and
are harder to categorize and search out. Two methods for identifying
capabilities are available:
·
Start with a list of resources since capabilities are built
from resources and look for clues about the types of capabilities the firm is
likely to have accumulated
·
Start with a list of functions within the organization as
capabilities are largely derived from key functional components of the
organization.
Determining
if a company’s resources and capabilities are potent enough to produce a
sustainable competitive advantage is based upon four tests of competitive
power.
The
Four Tests of a Resource’s Competitive Power:
·
Is the resource or capability competitively valuable—Is it
directly relevant to the company’s strategy.
·
Is the resource or capability rare—Is it something rivals
lack.
·
Is the resource or capability hard to copy—Inimitable
·
Is the resource invulnerable to the threat of substitution
from different types of resources and capabilities—Non-substitutable
One
of the most telling signs of whether a company’s business position is strong or
precarious is whether its prices and costs are competitive with industry
rivals. Regardless of where on the quality spectrum a company competes, it must
remain competitive in terms of its customer value proposition in order to stay
in the game. Two analytical tools are particularly useful in determining
whether a company’s costs and customer value proposition are competitive and
thus conducive to winning in the marketplace: value chain analysis and
benchmark.
The
value chain consists of two broad categories of activities:
·
Primary activities: foremost in creating value for customers.
The primary purpose of value chain analysis is to facilitate a comparison,
activity-by-activity, of how effectively and efficiently a company delivers
value to its customers, relative to its competitors.
·
Support activities: facilitate and enhance the performance of
primary activities. The combined costs of all the various primary and support
activities comprising a company’s value chain define its internal cost
structure.
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. The value chains of the distribution channel partners are
also relevant because they impact the final retail price the consumer sees and
impact sales volume and customer satisfaction. Accurately assessing a company’s
competitiveness in end-use markets requires that company managers understand the
entire value chain system for delivering a product or service to end-users, not
just the company’s own value chain.
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