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.
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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?
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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?

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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

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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

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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

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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 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

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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

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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

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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

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Company Value Chain

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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

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Activity-Based Costing

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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
 Getting new products to market
 Performance of quality control
 Filling and shipping of customer orders

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Industry Value Chain

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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

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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

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Integrating Forward to Enhance
Competitiveness

 Gain better access to

end users
 Improve market
visibility
 Include the purchasing
experience as a
differentiating feature

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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

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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

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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

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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

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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

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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

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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
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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

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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

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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?

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Competitive Strength Assessments

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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
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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”?

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