Business Policy and Strategy – Week 2 Lecture 2

Evaluating a Company’s Resources, Capabilities, and Competitiveness

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.

Identifying Company Internal Weaknesses

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.

Identifying a Company’s Market Opportunities

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.

Identifying External Threats

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.

Identifying the Company’s Resources and Capabilities

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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