CHAPTER 4

EVALUATING A COMPANY’S
RESOURCES, CAPABILITIES,
AND COMPETITIVENESS
 Learning Objectives
1. Learn how to assess how well a company’s strategy is working.
2. Understand why a company’s resources and capabilities are
central to its strategic approach and how to evaluate their
potential for giving the company a competitive edge over rivals.
3. Discover how to assess the company’s strengths and
weaknesses in light of market opportunities and external
threats.
4. Grasp how a company’s value chain activities can affect the
company’s cost structure and customer value proposition.
5. Understand how a comprehensive evaluation of a company’s
competitive situation can assist managers in making critical
decisions about their next strategic moves.
 EVALUATING A FIRM’S
INTERNAL SITUATION

1. How well is the firm’s present strategy working?

2. What are the firm’s competitively important resources and
capabilities?
3. Is the firm able to take advantage of market opportunities and
overcome external threats to its external well-being?
4. Are the firm’s prices and costs competitive with those of key rivals,
and does it have an appealing customer value proposition?
5. Is the firm competitively stronger or weaker than key rivals?
6. What strategic issues and problems merit front-burner managerial
attention?
QUESTION 1: HOW WELL IS THE FIRM’S PRESENT
STRATEGY WORKING?

• Best indicators of a well-conceived,

well-executed strategy:
– The firm is achieving its stated financial and
strategic objectives.
– The firm is an above-average industry
performer.
 SPECIFIC INDICATORS OF
STRATEGIC SUCCESS
• Growth in firm’s sales and market share
• Acquisition and retention of customers
• Strengthening image and reputation with customers
• Increasing profit margins, net profits and ROI
• Growing financial strength and credit rating
• Leadership in factors relevant to market\industry success
• Continuing improvement in key measures of operating
performance
TABLE 4.1
Key Financial
Ratios
TABLE 4.1
Key Financial
Ratios
TABLE 4.1
Key Financial
Ratios
TABLE 4.1
Key Financial
Ratios
QUESTION 2: WHAT ARE THE FIRM’S COMPETITIVELY
IMPORTANT RESOURCES AND CAPABILITIES?

• Competitive Assets
– Are the firm’s resources and capabilities.
– Are the determinants of its competitiveness and
ability to succeed in the marketplace.
– Are what a firm’s strategy depends on to develop
sustainable competitive advantage over its rivals.
IDENTIFYING THE COMPANY’S RESOURCES AND CAPABILITIES

• A Resource
– Is a productive input or competitive asset that is
owned or controlled by a firm (e.g., a fleet of oil
tankers).
• A Capability
– Is the capacity of a firm to perform some activity
proficiently (e.g., superior skills in marketing).
TABLE 4.2 Types of Company Resources

Tangible Resources
Physical resources
Financial resources
Technological assets
Organizational resources
Intangible Resources
Human assets and intellectual capital
Brands, company image, and reputational assets
Relationships: alliances, joint ventures, or partnerships
Company culture and incentive system
 IDENTIFYING CAPABILITIES
• An Organizational Capability
– Is the intangible but observable capacity of a firm
to perform a critical activity proficiently using a
related combination (cross-functional bundle) of
its resources.
– Is knowledge-based, residing in people and in a
firm’s intellectual capital or in its organizational
processes and functional systems, which embody
tacit knowledge.
 VRIN TESTING:
RESOURCES AND CAPABILITIES

• Identifying the firm’s resources and

capabilities by testing the competitive power
of its resources and capabilities:
– Is the resource (or capability) competitively
Valuable?
– Is the resource Rare—is it something rivals lack?
– Is the resource hard to copy (Inimitable)?
– Is the resource invulnerable to the threat of
substitution from different types of resources and
capabilities (Non-substitutable)?
 MANAGING RESOURCES AND CAPABILITIES
DYNAMICALLY

• Threats to Resources and Capabilities:

– Rivals providing better substitutes over time
– Capabilities decaying from benign neglect
– Disruptive competitive environment change
• Managing Capabilities Dynamically
1. Attending to the ongoing modification
of existing competitive assets.
2. Taking advantage of any opportunities to
develop totally new kinds of capabilities.
QUESTION 3: IS THE COMPANY ABLE TO SEIZE MARKET
OPPORTUNITIES AND NULLIFY EXTERNAL THREATS?

• SWOT Analysis
– Is a powerful tool for sizing up a firm’s:
• Internal strengths (the basis for strategy)
• Internal weaknesses (deficient capabilities)
• Market opportunities (strategic objectives)
• External threats (strategic defenses)

SWOT analysis is a simple but powerful tool for sizing up a company’s strengths
and weaknesses, its market opportunities, and the external threats to its future
well-being.
 IDENTIFYING A FIRM’S WEAKNESSES AND
COMPETITIVE DEFICIENCIES

• A Weakness (Competitive Deficiency)

– Is something a firm lacks or does poorly (in
comparison to others) or a condition that puts it
at a competitive disadvantage in the marketplace.
• Types of Weaknesses:
– Inferior skills, expertise, or intellectual capital
– Deficiencies in physical, organizational, or
intangible assets
– Missing or competitively inferior capabilities
in key areas
 IDENTIFYING A COMPANY’S
MARKET OPPORTUNITIES

• Characteristics of Market Opportunities:

– An absolute “must pursue” market
• Represents much potential but is hidden
in “fog of the future.”
– A marginally interesting market
• Presents high risk and questionable profit
potential.
– An unsuitable\mismatched market
• Is best avoided as the firm’s strengths are not
matched to market factors.
IDENTIFYING THE THREATS TO A FIRM’S FUTURE
PROFITABILITY

• Types of Threats:
– Normal course-of-business threats
– Sudden-death (survival) threats
• Considering Threats:
– Identify the threats to the firm’s future prospects.
– Evaluate what strategic actions can be taken to
neutralize or lessen their impact.
 WHAT DO SWOT LISTINGS REVEAL?
• SWOT Analysis Involves:
– Drawing conclusions from the SWOT listings
about the firm’s overall situation.
– Translating these conclusions into
strategic actions by the firm that:
• Match its strategy to its internal strengths and
to market opportunities.
• Correct important weaknesses and defend it
against external threats.
 USING SWOT ANALYSIS
• What are the attractive aspects of the firm’s situation?
• What aspects are of the most concern?
• Are the firm’s internal strengths and competitive assets sufficiently
strong to enable it to compete successfully?
• Are the firm’s weaknesses and competitive deficiencies
correctable, or could they be fatal if not remedied soon?
• Do the firm’s strengths outweigh its weaknesses by an attractive
margin?
• Does the firm have attractive market opportunities
that are well suited to its internal strengths?
• Does the firm lack the competitive assets (internal strengths) to
pursue the most attractive opportunities?
• Where on a scale of 1 to 10 (1 = weak and 10 = strong)
do the firm’s overall situation and future prospects rank?
 QUESTION 4: ARE THE COMPANY’S COST
STRUCTURE AND CUSTOMER VALUE
PROPOSITION COMPETITIVE?

• Signs of A Firm’s Competitive Strength:

– Its prices and costs are in line with rivals.
– Its customer-value proposition is
competitive
and cost effective.
– Its bundled capabilities are yielding
a sustainable competitive advantage.
 THE CONCEPT OF A COMPANY
VALUE CHAIN

• The Value Chain

– Identifies the primary internal activities that create
and deliver customer value and the requisite
related support activities.
– Permits a deep look at the firm’s cost structure
and ability to offer low prices.
– Reveals the emphasis that a firm places on
activities that enhance differentiation and support
higher prices.
FIGURE 4.3 A Representative Company Value Chain
 COMPARING THE VALUE CHAINS
OF RIVAL FIRMS
• Value Chain Analysis
– Facilitates a comparison, activity-by-activity, of how
effectively and efficiently a firm delivers value to its
customers, relative to its competitors.
• The Value Chain Analysis Process:
– Segregate the firm’s operations into different types
of primary and secondary activities to identify the
major components of its internal cost structure.
– Use activity-based costing to evaluate the activities.
– Do the same for significant competitors.
 VALUE CHAIN SYSTEM FOR
AN ENTIRE INDUSTRY

• Industry Value Chain:

– The firm’s internal value chain
– The value chains of industry suppliers
– The value chains of channel intermediaries
• Effects of the Industry Value Chain:
– Costs and margins of suppliers and channel
partners can affect prices to end consumers.
– Activities of channel partners can affect industry
sales volumes and customer satisfaction.
FIGURE 4.4 A Representative Value Chain System
ILLUSTRATION CAPSULE 4.1
The Value Chain for KP MacLane,
a producer of Polo Shirts
 BENCHMARKING AND
VALUE CHAIN ACTIVITIES
• Benchmarking:
– Involves improving a firm’s internal activities based
on learning other companies’ “best practices.”
– Assesses whether the cost competitiveness and
effectiveness of a firm’s value chain activities are
in line with its competitors’ activities.
• Sources of Benchmarking Information
– Reports, trade groups, analysts and customers
– Visits to benchmark companies
– Data from consulting firms
QUESTION 5: IS THE FIRM COMPETITIVELY
STRONGER OR WEAKER THAN KEY RIVALS?

• Assessing the firm’s overall competitive

strength:
– How does the firm rank relative to
competitors on each of the important
factors that determine market success?
– Does the firm have a net competitive
advantage or disadvantage versus major
competitors?
THE COMPETITIVE STRENGTH ASSESSMENT PROCESS

Make a list of the industry’s key success factors and

Step 1 measures of competitive strength or weakness (6 to 10
measures usually suffice).

Assign a weight to each competitive strength measure

Step 2
based on its perceived importance.

Rate the firm and its rivals on each competitive strength

Step 3 measure and multiply by each measure by its
corresponding weight.
TABLE 4.4 A Representative Weighted Competitive Strength Assessment
 STRATEGIC IMPLICATIONS OF COMPETITIVE
STRENGTH ASSESSMENT
• The higher a firm’s overall weighted strength rating, the
stronger its overall competitiveness versus rivals.
• The rating score indicates the total net competitive
advantage for a firm relative to other firms.
• Firms with high competitive strength scores are targets for
benchmarking.
• The ratings show how a firm compares against rivals, factor
by factor (or capability by capability).
• Strength scores can be useful in deciding what strategic
moves to make.
 QUESTION 6: WHAT STRATEGIC ISSUES
AND PROBLEMS MERIT FRONT-BURNER MANAGERIAL
ATTENTION?

• Strategic “How To” Issues:

– How to meet challenges of new foreign
competitors.
– How to combat the price discounting of rivals.
– How to both reduce high costs and prepare for
price reductions.
– How to sustain growth as buyer demand slows.
– How to adapt to the changing demographics of
the firm’s customer base.
 QUESTION 6: WHAT STRATEGIC ISSUES
AND PROBLEMS MERIT FRONT-BURNER MANAGERIAL
ATTENTION?

• Strategic “Should We” Issues:

– Expand rapidly or cautiously into foreign markets.
– Reposition the firm to move to a different
strategic group.
– Counter increasing buyer interest in substitute
products.
– Expand of the firm’s product line.
– Correct the firm’s competitive deficiencies by
acquiring a rival firm with the missing strengths.