Analyzing A Company's Competitive Strength and Cost Structure

Chapter 5
Analyzing a
Company’s
Competitive
Strength and Cost
Structure
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
1-1
Key Questions in Situation Analysis
 Question 1: How well is the company’s

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 merit front-burner managerial
attention?
5-2
Situation Analysis Question 1: How
Well is the Company’s Strategy
Working?
1. Is the company achieving its
financial and strategic objectives?
2. Is the company an above-average
industry performer?
5-3
Performance Indicators
 Trends in sales and earnings growth

 Trends in the company’s stock price
 The company’s overall financial strength
 The rate at which new customers are acquired
 Image and reputation with customers
 Evidence of improvement in internal processes
such as defect rate, order fulfillment, and days
of inventory
5-4
Situation Analysis Question 2: The
Company’s Strengths, Weaknesses,
Opportunities and Threats
 S W O T represents the first letter in
 Strengths
 Weaknesses
 Opportunities
 Threats
 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 defending against external threats to its well-
being
5-5
Identifying Resource Strengths
and Competitive Capabilities
 Common types of resource strengths

include
 Skills or specialized expertise in a
competitively important capability
 Valuable physical assets
 Valuable human assets or intellectual capital
 Valuable organizational assets
 Valuable intangible assets
 Competitively valuable alliances or
cooperative ventures
5-6
Identifying Resource Weaknesses
and Competitive Deficiencies
 A weakness is something a firm lacks,

does poorly, or a condition placing it at a
disadvantage in the marketplace
 Resource weaknesses relate to
 Inferior or unproven skills,
expertise, or intellectual capital
 Deficiencies in competitively important
physical, organizational, or intangible assets
 Missing or competitive inferior capabilities in
key areas
5-7
Identifying a Company’s
Market Opportunities
 Opportunities most relevant to

a company are those offering
 Good match with its
financial and
organizational resource
capabilities
 Best prospects for growth
and profitability
 Most potential for
competitive advantage
5-8
Identifying External Threats to
Profitability and Competitiveness
 Entry of lower-cost foreign competitors

 Burdensome regulations
 Rise in interest rates
 Potential of a hostile takeover
 Unfavorable demographic shifts
 Adverse shifts in foreign exchange rates
5-9
Situation Analysis Question 3: How
Competitive Are the Company’s
Prices and Costs?
 Assessing whether a firm’s costs are
competitive with those of rivals is a
crucial part of company situation analysis
 Key analytical tools
 Value chain analysis
 Benchmarking
5-10
Company Value Chain
5-11
Developing Data to Measure a
Company’s Cost Competitiveness
 After identifying key value

chain activities, the next step
involves determining costs
of value chain activities using
activity-based costing
 Appropriate degree of disaggregation

 Depends on the number of broad categories
of primary and support activities
 Requires finer classifications if problematic
cost disadvantages exist
5-12
Activity-Based Costing
5-13
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
 Getting new products to market
 Performance of quality control
 Filling and shipping of customer orders
5-14
Industry Value Chain
5-15
Vertical Integration: Operating
Across More Industry Value Chain
Segments
 Extend a firm’s competitive scope

within the same industry
Backward into sources of supply
Forward toward end-users of final
product
 Can aim at either full or partial
integration
5-16
Advantages of a Vertical Integration
Strategy
 Strengthen the firm’s competitive

position
 Boost profitability
Must achieve same scale economies
as outside suppliers
Match or beat suppliers’ production
efficiency with no drop-off in quality
5-17
Integrating Forward to Enhance
Competitiveness
 Gain better access to

end users
 Improve market
visibility
 Include the purchasing
experience as a
differentiating feature
5-18
Disadvantages of a Vertical
Integration Strategy
 Boosts capital investment in

the industry
 Increases business risk if
industry growth and profits sour
 May slow technological
advances if the vertically
integrated company is saddled
with older technology
 Poses all types of capacity-
matching problems
 May require radically different
skills and business capabilities
5-19
The Case for Outsourcing
 Activity can be performed better or

more cheaply by outside specialists
 Activity is not crucial to achieve a
sustainable competitive advantage
 It improves firm’s ability to innovate
 Firm can concentrate on core value
chain activities and leverage its
resource strengths
5-20
Building a Competitively Superior
Value Chain
 There are three main areas of a

company’s overall value chain where
cost differences occur
1. Activities performed by
suppliers
2. A company’s own internal
activities
3. Activities performed by
forward channel allies
5-21
Correcting Internal Cost
Disadvantages
 Implement best practices throughout

the company
 Try to eliminate some cost-producing
activities altogether by revamping value
chain
 Relocate high-cost activities to lower-
cost geographic areas
 See if high-cost activities can be
outsourced
5-22
Correcting Internal Cost
Disadvantages
 Invest in productivity enhancing, cost-

saving technology
 Find ways to detour around activities or
items where costs are high
 Redesign the product or its
components to reduce manufacturing
costs
 Make up difference by achieving
savings in backward or forward
portions of value chain system
5-23
Correcting Supplier-Related Cost
Disadvantages
 Pressure suppliers 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
5-24
Correcting Cost Disadvantages
Associated With Forward Channel
Allies
 Pressure dealer-distributors to reduce

their costs
 Work closely with forward channel
allies to identify win-win opportunities to
reduce costs
 Change to a more economical
distribution strategy
 Switch to cheaper distribution channels
 Integrate forward into company-owned retail
outlets
5-25
Developing a Best Cost Advantage
 Companies that do a first rate job of

managing value chain activities
relative to competitors can achieve
a Best Cost Advantage
5-26
Developing a Best Cost Advantage
 Best Cost Provider Strategies yield

unique industry positioning by exceeding
buyers’ expectations for differentiating
features and low prices
 Contingent on
A superior value chain
configuration
Unmatched efficiency in managing
value chain activities
5-27
Situation Analysis Question 4: What
Is the Company’s Competitive
Strength?
 Overall competitive position involve
answering two questions
 How does a company rank relative
to competitors on each industry key
success factor?
 Does a company have a net

competitive advantage or disadvantage
vis-à-vis major competitors?
5-28
Competitive Strength Assessments
5-29
Interpreting the Competitive
Strength Assessments
 Shows how firm stacks up against rivals,

measure-by-measure
 Indicates whether firm is at a
competitive advantage or
disadvantage against each rival
 Identifies possible offensive strategies
that can be waged against rivals’
weaknesses
 Identifies the need for defensive
actions to correct competitive
weaknesses
5-30
Situation Analysis Question 5: What
Strategic Issues Must be Addressed
by Management?
 Final and most
important analytical step
in assessing
“Where are we now?”
 Based on results of both industry and
competitive analysis
 Pinpointing the precise things that should
be on management’s “worry list”?
5-31

Analyzing A Company's Competitive Strength and Cost Structure

Uploaded by

Copyright:

Available Formats

Analyzing A Company's Competitive Strength and Cost Structure

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Analyzing A Company's Competitive Strength and Cost Structure

Uploaded by

Copyright:

Available Formats

Chapter 5

 Question 1: How well is the company’s

 Trends in sales and earnings growth

 Common types of resource strengths

 A weakness is something a firm lacks,

 Opportunities most relevant to

 Entry of lower-cost foreign competitors

 Key analytical tools

 Value chain analysis

 After identifying key value

 Appropriate degree of disaggregation

 Extend a firm’s competitive scope

 Strengthen the firm’s competitive

 Gain better access to

 Boosts capital investment in

 Activity can be performed better or

 There are three main areas of a

 Implement best practices throughout

 Invest in productivity enhancing, cost-

 Pressure suppliers for lower prices

 Pressure dealer-distributors to reduce

 Companies that do a first rate job of

 Best Cost Provider Strategies yield

 Does a company have a net

 Shows how firm stacks up against rivals,

You might also like