Chapter
4
Analyzing a
Company’s Resources
and Competitive Position
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“Before executives can
chart a new strategy, they
must reach common
understanding of the
company’s current position.”
W. Chan Kim and Renee Mauborgne
Chapter highlights
Situation Analysis
Question 1: How Well Is the Company’s Present Strategy
Working?
Question 2: What Are the Company’s Resource Strengths
and Weaknesses and Its External Opportunities and
Threats?
Question 3: Are the Company’s Prices and Costs
Competitive?
Question 4: Is the Company Competitively Stronger or
Weaker than Key Rivals?
Question 5: What Strategic Issues and Problems attract
Managerial Attention?
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Q #1: How Well Is the Company’s
Present Strategy Working?
Key Issues
Identify competitive approach
Low-cost leadership
Differentiation
Focus on a particular market niche
Determine competitive scope
Geographic market coverage
Operating stages in industry’s production/distribution chain
Examine recent strategic moves
Identify functional strategies
4-4
Approaches to Assess How Well
the Present Strategy Is Working
Qualitative assessment – Quantitative assessment – What
What is the strategy? are the results?
Completeness Is company achieving its
financial and strategic
Internal consistency objectives?
Rationale Is company an above-average
industry performer?
Relevance
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Key Indicators of How Well
the Strategy Is Working
Trend in sales and market share.
Acquiring and/or retaining customers.
Trend in profit margins.
Trend in net profits, ROI,
Overall financial strength and credit ranking.
Efforts at continuous improvement activities.
Trend in stock price and stockholder value.
Image and reputation with customers.
Leadership role(s) – Technology, quality, innovation, e-
commerce, etc.
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Q #2: What Are the Company’s Strengths,
Weaknesses, Opportunities and Threats ?
S W O T represents the first letter in
S trengths
S W
W eaknesses
O pportunities
T hreats O T
For a company’s strategy to be well-conceived, it must be
Matched to its resource strengths and weaknesses
Aimed at capturing its best market opportunities and erecting
defenses against external threats to its well-being
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Identifying Resource Strengths
and Competitive Capabilities
A strength is something a firm does well or an attribute that
enhances its competitiveness
Valuable competencies or know-how
Valuable physical assets
Valuable human assets
Valuable organizational assets
Valuable intangible assets
Important competitive capabilities
An attribute that places a company in a position of market
advantage
Alliances or cooperative ventures with partners
Resource strengths and competitive
capabilities are competitive assets!
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Competencies vs. Core Competencies
vs. Distinctive Competencies
A competence is the product of organizational learning and
experience and represents real proficiency in performing an
internal activity
A core competence is a well-performed
internal activity central (not peripheral or incidental)
to a company’s competitiveness and profitability
A distinctive competence is a competitively valuable activity a
company performs better than its rivals
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Examples: Core Competencies
Expertise in integrating multiple technologies
to create families of new products
Know-how in creating operating systems
for cost efficient supply chain management
Speeding new/next-generation products to market
Better after-sale service capability
Skills in manufacturing a high quality product
System to fill customer orders accurately and swiftly
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Distinctive Competence -- A
Competitively Superior Resource
A distinctive competence is a competitively significant activity
that a company performs better than its competitors
A distinctive competence
Represents a competitively valuable
capability rivals do not have 1
Presents attractive potential for
being a cornerstone of strategy
Can provide a competitive edge in the marketplace —because it
represents a competitively superior resource strength
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Examples: Distinctive
Competencies
Sony Corporation
Expertise in flat-panel HDTV
Toyota and Honda
Low-cost, high-quality manufacturing
capability and short design-to-market cycles
Intel
Abilityto design and manufacture
ever more powerful microprocessors for PCs
Wal-Mart
Low-cost distribution and use of
state-of-the-art retail technology
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Determining the Competitive
Value of a Company Resource
To qualify as competitively valuable or to be the basis for
sustainable competitive advantage, a “resource” must
pass 4 tests:
1. Is the resource hard to copy?
2. Does the resource have staying power –
is it durable?
3. Is the resource really competitively superior?
4. Can the resource be trumped by
the different capabilities of rivals?
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Identifying Resource Weaknesses
and Competitive Deficiencies
A weakness is something a firm lacks, does poorly, or a
condition placing it at a disadvantage
Resource weaknesses relate to
Inferior or unproven skills,
expertise, or intellectual capital
Lack of important physical,
organizational, or intangible assets
Missing capabilities in key areas
Resource weaknesses and deficiencies
are competitive liabilities!
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Identifying External Threats
Emergence of cheaper/better technologies
Introduction of better products by rivals
Entry of lower-cost foreign competitors
regulations
Rise in interest rates
Potential of a hostile takeover
Unfavorable demographic shifts
Adverse shifts in foreign exchange rates
Political upheaval in a country
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Q #4: Are the Company’s
Prices and Costs Competitive?
Assessing whether a firm’s costs are competitive with those of
rivals is a crucial part of company analysis
Key analytical tools
Value chain analysis
Benchmarking
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The Concept of a
Company Value Chain
A company’s business consists of all activities undertaken in
designing, producing, marketing, delivering, and supporting its
product or service
A company’s value chain consists of a linked set of value-
creating activities performed internally
The value chain contains two types of activities
Primary activities – where most of the value for customers is
created
Support activities – facilitate performance of the primary
activities
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Fig. 4.3: Representative
Company Value Chain
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Characteristics of
Value Chain Analysis
Combined costs of all activities in a company’s value chain
define the company’s internal cost structure
Compares a firm’s costs activity
by activity against costs of key rivals
From raw materials purchase to
Price paid by ultimate customer
Pinpoints which internal activities are a
source of cost advantage or disadvantage
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Why Do Value
Chains of Rivals Differ?
Several factors can cause differences in value chains of rival
companies
Internal operations
Strategy
Approaches used in execution of the strategy
Underlying economics of the activities
Differences complicate task of assessing rivals’ relative cost
positions
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Fig. 4.4: Representative Value
Chain for an Entire Industry
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Example: Value Chain Activities
Pulp & Paper Industry
Timber farming
Logging
Pulp mills
Papermaking
Distribution
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Example: Value Chain Activities
Home Appliance Industry
Parts and components manufacture
Assembly
Wholesale distribution
Retail sales
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Example: Value Chain Activities
Soft Drink Industry
Processing of basic ingredients
Syrup manufacture
Bottling and can filling
Wholesale distribution
Advertising Albertson’s
Retailing
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Example: Value Chain Activities
Software Computer Industry
Programming
Disk loading
Marketing
Distribution
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Activity-Based Costing: A Key
Tool in Analyzing Costs
Determining whether a company’s costs are in line with those
of rivals requires
Measuring how a company’s costs compare with those of rivals
activity-by-activity
Requires having accounting data to measure cost
of each value chain activity
Activity-based costing entails
Defining expense categories according
to specific activities performed and
Assigning costs to the activity
responsible for creating the cost
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Benchmarking
Benchmarking is a potent tool for learning which
companies are best at performing particular
activities and then using their techniques(‘best
practices’) to improve the cost and effectiveness
of a company’s owns internal activities.
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Benchmarking Costs of
Key Value Chain Activities
Focuses on cross-company comparisons of how certain
activities are performed and costs associated with these
activities
Purchase of materials
Payment of suppliers
Management of inventories
Getting new products to market
Performance of quality control
Filling and shipping of customer orders
Training of employees
Processing of payrolls
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Objectives of Benchmarking
Identify best practices in performing an activity
Understand the best practices in performing
an activity – learn what is the “best” way
to do a particular activity from those
demonstrating they are “best-in-world”
Learn how other firms achieve lower costs
Take action to improve company’s cost competitiveness
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Ethical Standards in
Benchmarking: Do’s and Don’ts
Avoid talk about pricing or competitively sensitive costs
Don’t ask rivals for sensitive data
Don’t share proprietary data without clearance
Have impartial third party assemble and present competitively
sensitive cost data with no names attached
Don’t disparage a rival’s business to outsiders based on data
obtained
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What Determines if a
Company Is Cost Competitive?
Cost competitiveness depends on how well a company
manages its value chain relative to how well competitors
manage their value chains
When costs are out-of-line, high-cost activities can exist in any
of three areas in the industry value chain
1. Suppliers’ activities
2. Company’s own internal activities
3. Forward channel activities
Internally Activities,
Activities,
Performed Costs, & Buyer/User
Costs, &
Activities, Margins of Value
Margins of
Costs, & Forward Chains
Suppliers
Margins Channel Allies
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Options to Correct
Internal Cost Disadvantages
Implement use of best practices throughout company
Eliminate some cost-producing activities altogether by revamping
value chain system
Relocate high-cost activities to lower-cost geographic areas
See if high-cost activities can be performed
cheaper by outside vendors/suppliers
Invest in cost-saving technology
Innovate around troublesome cost components
Simplify product design
Make up difference by achieving savings in backward or forward
portions of value chain system
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The Five Generic
Competitive Strategies
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Chapter Roadmap
Five Competitive Strategies
Low-Cost Provider Strategies
Differentiation Strategies
Best-Cost Provider Strategies
Focused (or Market Niche) Strategies
The Contrasting Features of the Five Generic Competitive
Strategies: A Summary
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Strategy and
Competitive Advantage
Competitive advantage exists when a firm’s strategy gives it
an edge in
Attracting customers and
Defending against competitive forces
Key to Gaining a Competitive Advantage
Convince customers firm’s product / service offers superior
value
A good product at a low price
A superior product worth paying more for
A best-value product
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What Is
“Competitive Strategy”?
Deals exclusively with a company’s
business plans to compete successfully
Specific efforts to please customers
Offensive and defensive moves
to counter maneuvers of rivals
Responses to prevailing market conditions
Initiatives to strengthen its market position
Narrower in scope than business strategy
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The Five Generic Competitive Strategies
Competitive Advantage
Sought
Lower Cost Differentiation
Broad Overall Low-Cost Broad
Range of Provider Differentiation
Market Target
Buyers Strategy Strategy
Best-Cost
Provider
Strategy
Narrow Focused Focused
Buyer
Low-Cost Differentiation
Segment
or Niche Strategy Strategy
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Low-Cost Provider Strategies
Keys to Success
Make achievement of meaningful lower costs
than rivals is the theme of firm’s strategy
Include features and services in product
offering that buyers consider essential
Find approaches to achieve a cost advantage
in ways difficult for rivals to copy or match
Low-cost leadership means low
overall costs, not just low
manufacturing or production costs!
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When Does a Low-Cost
Strategy Work Best?
Price competition is vigorous
Product is standardized or readily available
from many suppliers
There are few ways to achieve
differentiation that have value to buyers
Most buyers use product in same ways
Buyers incur low switching costs
Buyers are large and have
significant bargaining power
Industry newcomers use introductory low prices to attract
buyers and build customer base
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Pitfalls of Low-Cost Strategies
Being overly aggressive in cutting price
Low cost methods are easily imitated by rivals
Becoming too fixated on reducing costs
and ignoring
Buyer interest in additional features
Declining buyer sensitivity to price
Changes in how the product is used
Technological breakthroughs open up cost reductions for rivals
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Differentiation Strategies
Objective
Incorporate differentiating features that cause buyers to
prefer firm’s product or service over brands of rivals
Keys to Success
Find ways to differentiate that create value for buyers
and are not easily matched or cheaply copied by rivals
Not spending more to achieve differentiation
than the price premium that can be charged
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Signaling Value as Well
as Delivering Value
Incomplete knowledge of buyers causes them to
judge value based on such signals as
Price
Attractive packaging
Extensive ad campaigns
Ad content and image
Characteristics of seller
Facilities
Customers
Professionalism and personality of employees
Signals of value may be as important as actual value when
Nature of differentiation is hard to quantify
Buyers are making first-time purchases
Repurchase is infrequent
Buyers are unsophisticated
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When Does a Differentiation
Strategy Work Best?
There are many ways to differentiate a product that have
value and please customers
Buyer needs and uses are diverse
Few rivals are following a similar
differentiation approach
Technological change and
product innovation are fast-paced
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Pitfalls of
Differentiation Strategies
Buyers see little value in unique attributes of product
Appealing product features are easily copied by rivals
Differentiating on a feature buyers do not perceive as lowering
their cost or enhancing their well-being
Over-differentiating such that product
features exceed buyers’ needs
Charging a price premium
buyers perceive is too high
Not striving to open up meaningful gaps in quality, service, or
performance features vis-à-vis rivals’ products
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Best-Cost Provider Strategies
Combine a strategic emphasis on low-cost with a strategic
emphasis on differentiation
Make an upscale product at a lower cost
Give customers more value for the money
Objectives
Deliver superior value by meeting or exceeding buyer
expectations on product attributes and beating their price
expectations
Be the low-cost provider of a product with good-to-excellent
product attributes, then use cost advantage to underprice
comparable brands
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Competitive Strength of a
Best-Cost Provider Strategy
A best-cost provider’s competitive advantage comes
from matching close rivals on key product attributes and
beating them on price
Success depends on having the skills and capabilities to
provide attractive performance and features at a lower
cost than rivals
A best-cost producer can often out-compete both
a low-cost provider and a differentiator when
Standardized features/attributes
won’t meet diverse needs of buyers
Many buyers are price and value sensitive
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Risk of a Best-Cost
Provider Strategy
A best-cost provider may get squeezed between
strategies of firms using low-cost and differentiation
strategies
Low-cost leaders may be able to drain off
customers away with a lower price
High-end differentiators may be able to
steal customers away with better product attributes
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Focus / Niche Strategies
Involve concentrated attention on a narrow piece of the total
market
Objective
Serve niche buyers better than rivals
Keys to Success
Choose a market niche where buyers have distinctive
preferences, special requirements, or unique needs
Develop unique capabilities to serve needs of target buyer
segment
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What Makes a Niche
Attractive for Focusing?
Big enough to be profitable and offers good growth potential
Costly or difficult for multi-segment competitors
to meet specialized needs of niche members
Focuser has resources and capabilities
to effectively serve an attractive niche
Few other rivals are specializing in same niche
Focuser can defend against challengers via superior ability to
serve niche members
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Risks of a Focus Strategy
Competitors find effective ways to match
a focuser’s capabilities in serving niche
Niche buyers’ preferences shift towards product attributes
desired by majority of buyers – niche
becomes part of overall market
Segment becomes so attractive it becomes crowded with rivals,
causing segment profits to be splintered
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Deciding Which Generic
Competitive Strategy to Use
Each positions a company differently in its market
Each establishes a central theme for how a company will endeavor
to outcompete rivals
Each creates some boundaries for maneuvering as market
circumstances unfold
Each points to different ways of experimenting with the basics of the
strategy
Each entails differences in product line, production emphasis,
marketing emphasis, and means to sustain the strategy
The big risk – Selecting a “stuck in the middle”
strategy!
This rarely produces a sustainable competitive
advantage or a distinctive competitive position.
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Fig. 6.1: A Company’s Menu of Strategy Options
4-52
Strategic Alliances and
Collaborative Partnerships
Companies sometimes use strategic
alliances or collaborative
partnerships to complement their
own strategic initiatives and
strengthen their competitiveness.
Such cooperative strategies go
beyond normal company-to-
company dealings but fall short of
merger or full joint venture
partnership.
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Alliances Can Enhance a
Firm’s Competitiveness
Alliances and partnerships can help companies cope with
two demanding competitive challenges
to build a market presence in many
different national markets
to seize opportunities on the frontiers
of advancing technology
Collaborative arrangements can help a company lower
its costs and/or gain access to needed expertise and
capabilities
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Why Are Strategic
Alliances Formed?
To collaborate on technology development or new product
development
To fill gaps in technical or manufacturing expertise
To acquire new competencies
To improve supply chain efficiency
To gain economies of scale in
production and/or marketing
To acquire or improve market access via joint marketing
agreements
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Why Alliances Fail
Ability of an alliance to endure depends on
How well partners work together
Success of partners in responding
and adapting to changing conditions
Willingness of partners to
renegotiate the bargain
Reasons for alliance failure
Diverging objectives and priorities of partners
Inability of partners to work well together
Changing conditions rendering purpose of alliance obsolete
Emergence of more attractive technological paths
Marketplace rivalry between one or more allies
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Merger and Acquisition Strategies
Merger – Combination and pooling of equals, with newly
created firm often taking on a new name
Acquisition – One firm, the acquirer, purchases and absorbs
operations of another, the acquired
Merger-acquisition
Much-used strategic option
Especially suited for situations where
alliances do not provide a firm with needed
capabilities or cost-reducing opportunities
Ownership allows for tightly integrated operations, creating
more control and autonomy than alliances
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Objectives of Mergers
and Acquisitions
To pave way for acquiring firm to gain more market share and
create a more efficient operation
To expand a firm’s geographic coverage
To extend a firm’s business into new product
categories or international markets
To gain quick access to new technologies
To invent a new industry and lead the convergence of
industries whose boundaries are blurred by changing
technologies and new market opportunities
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Pitfalls of Mergers
and Acquisitions
Combining operations may result in
Resistance from rank-and-file employees
Hard-to-resolve conflicts in management styles and corporate
cultures
Tough problems of integration
Greater-than-anticipated difficulties in
Achieving expected cost-savings
Sharing of expertise
Achieving enhanced competitive capabilities
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Vertical Integration Strategies
Extend a firm’s competitive scope within
same industry
Backward into sources of supply
Forward toward end-users of final product
Can aim at either full or partial integration
Internally Activities, Costs,
Activities,
Performed & Margins of Buyer/User
Costs, &
Activities, Forward Channel Value
Margins of
Costs, & Allies & Chains
Suppliers
Margins Strategic Partners
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Strategic Advantages
of Forward Integration
To gain better access to end users
and better market visibility
To compensate for undependable distribution
channels which undermine steady operations
To offset the lack of a broad product line, a firm may sell
directly to end users
To bypass regular distribution channels in favor of direct sales
and Internet retailing which may
Lower distribution costs
Produce a relative cost advantage over rivals
Enable lower selling prices to end users
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Outsourcing Strategies
Concept
Outsourcing involves withdrawing from certain value
chain activities and relying on outsiders
to supply needed products, support
services, or functional activities
Internally
Performed
Activities Functional
Suppliers
Activities
Support Distributors
Services or Retailers
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Pitfalls of Outsourcing
Farming out too many or the wrong activities, thus
Hollowing out capabilities
Losing touch with activities and expertise that determine overall
long-term success
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Offensive and Defensive Strategies
Offensive Strategies Defensive Strategies
Used to build new or Used to protect competitive
stronger market position advantage (rarely used to
and/or create competitive create advantage)
advantage
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[Link] Competitor Strengths
Objectives
Whittle away at a rival’s
competitive advantage
Gain market share by out-matching
strengths of weaker rivals
Challenging strong competitors with a lower price is
foolhardy unless the aggressor has a cost advantage
or advantage of greater financial strength!
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Options for Attacking
a Competitor’s Strengths
Offer equally good product at a lower price
Develop low-cost edge, then use it to under-price rivals
Leapfrog into next-generation technologies
Add appealing new features
Run comparison ads
Construct new plant capacity in rival’s market strongholds
Offer a wider product line
Develop better customer service capabilities
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[Link] Competitor
Weaknesses
Objective
Utilize company strengths to exploit a
rival’s weaknesses
Weaknesses to Attack
Customers that a rival is least equipped to serve
Rivals providing sub-par customer service
Rivals with weaker marketing skills
Geographic regions where rival is weak
Market segments a rival is neglecting
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3. Launching Simultaneous
Offensives on Many Fronts
Objective
Launch several major initiatives to
Throw rivals off-balance
Splinter their attention
Force them to use substantial
resources to defend their position
A challenger with superior resources can overpower
weaker rivals by out-competing them across-the-
board long enough to become a market leader!
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4. End-Run Offensives
Objectives
Maneuver around strong competitors
Capture unoccupied or less contested markets
Change rules of competition in aggressor’s favor
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Approaches for
End-Run Offensives
Introduce new products that redefine market and terms of
competition
Build presence in geographic areas
where rivals have little presence
Create new segments by introducing products
with different features to better meet buyer needs
Introduce next-generation
technologies to leapfrog rivals
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5. Guerrilla Offenses
Approach
Use principles of surprise and hit-and-run to
attack in locations and at times where conditions
are most favorable to initiator
Appeal
Well-suited to small challengers
with limited resources and
market visibility
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Options for Guerrilla Offenses
Make random, scattered raids on leaders’ customers
Occasional low-balling on price
Intense bursts of promotional activity
Special campaigns to attract buyers from
rivals plagued with a strike or delivery problems
Challenge rivals encountering problems with quality or
providing adequate technical support
File legal actions charging antitrust violations,
patent infringements, or unfair advertising
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6. Preemptive Strikes
Approach
Involves moving first to secure an
advantageous position that rivals are foreclosed
or discouraged from duplicating!
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Preemptive Strike Options
Secure exclusive/dominant access to best distributors
Secure best geographic locations
Tie up best or most sources of essential raw materials
Obtain business of prestigious customers
Expand capacity ahead of demand in hopes
of discouraging rivals from following suit
Build an image in buyers’ minds that
is unique or hard to copy
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Choosing Rivals to Attack
Four types of firms can be the target of a fresh offensive
Vulnerable market leaders
Runner-up firms with weaknesses
where challenger is strong
Struggling rivals on verge
of going under
Small local or regional
firms with limited capabilities
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DEFENSIVE-
1. Block Avenues
Open to Challengers
Participate in alternative technologies
Introduce new features, add new models, or broaden product line to close
gaps rivals may pursue
Maintain economy-priced models
Increase warranty coverage
Offer free training and support services
Reduce delivery times for spare parts
Make early announcements about new
products or price changes
Challenge quality or safety of rivals’ products
using legal tactics
Sign exclusive agreements with distributors
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2. Signal Challengers
Retaliation Is Likely
Publicly announce management’s strong commitment to
maintain present market share
Publicly commit firm to policy of
matching rivals’ terms or prices
Maintain war chest of cash reserves
Make occasional counterresponse
to moves of weaker rivals
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First-Mover Advantages
When to make a strategic move is often as crucial as what
move to make
First-mover advantages arise when
Pioneering helps build firm’s image and reputation
Earlycommitments to new technologies,
new-style components, and distribution
channels can produce cost advantage
Loyalty of first time buyers is high
Moving first can be a preemptive strike
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First-Mover Disadvantages
Moving early can be a disadvantage (or fail to produce an
advantage) when
Costs of pioneering are sizable and
loyalty of first time buyers is weak
Innovator’s products are primitive,
not living up to buyer expectations
Rapid technological change allows
followers to leapfrog pioneers
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Timing and Competitive Advantage
Principle 1
Being a fast follower can sometimes yield
as good a result as being a first mover
Principle 2
Being a late-mover may or may not be fatal --
it varies with the situation
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