Chapter 4

Evaluating a
Company’s
Resources,
Capabilities, and
Competitiveness

Oct. 21, 2024

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Quotes by famous People

Crucial, of course, is having a

difference that matters in the
industry.
--Cynthia Montgomery-Professor and author

If you don't have a competitive advantage, don't

compete.
--Jack Welch-Former CEO of General Electric

杰克●韦尔奇 Organizations succeed in a competitive

marketplace over the long run because
没有金刚钻，就别那拦瓷器活。 they can do certain things their
customers value better than can their
competitors.
-- Robert Hayes, Gary Pisano, and David Upton
Professors and consutants
 Learning Objectives

After reading this chapter, you should be able to:

1. Evaluate how well a company’s strategy is working.
2. Assess the company’s strengths and weaknesses in light
of market opportunities and external threats.
3. Explain why a company’s resources and capabilities are
critical for gaining a competitive edge over rivals.
4. Understand how value chain activities affect a company’s
cost structure and customer value proposition.
5. Explain how a comprehensive evaluation of a company’s
competitive situation can assist managers in making critical
decisions about their next strategic moves.

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 Chapter Overview

This chapter focuses on six strategic questions:

1. How well is the company’s present strategy working?
2. What are the company’s strengths and weaknesses in relation to the
market opportunities and external threats?
3. What are the company’s most important resources and capabilities,
and will they give the company a lasting competitive advantage over
rival companies?
4. How do a company’s value chain activities impact its cost structure
and customer value proposition?
5. Is the company competitively stronger or weaker than key rivals?
6. What strategic issues and problems merit front-burner managerial
attention?

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 Tools and Techniques of Strategic Analysis

Answering the six strategic questions about how well a

company’s current competitive capabilities and strategy are
matched to its present and future circumstances:
1. Resource and capability analysis.
2. SWOT analysis.
3. Value chain analysis.
4. Benchmarking.
5. Competitive strength assessment.

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 QUESTION 1: How Well Is the Company’s
Present Strategy Working?

The three best indicators of how well a company’s

strategy is working are:
1. Whether it is achieving its stated financial and
strategic objectives.
2. Whether its financial performance is above the
industry average.
3. Whether it is gaining customers and gaining market
share.

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 FIGURE 4.1 Identifying the Components of a Single-Business
Company’s Strategy

Access the text alternative for slide images.

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 Specific Indicators of Strategic Success

Sales and earnings Firm’s overall

Stock price trends.
growth trends. financial strength.

Rate of new customers Customer retention

acquired. rate.

Evidence of improvement in internal processes:

defect rate, order fulfillment, delivery times,
days of inventory, and employee productivity.

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 TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean 1

Profitability Ratios How Calculated What It Shows

Gross profit margin. Sales revenues − Cost of goods sold Shows the percentage of
Sales revenues revenues available to cover
operating expenses and
yield a profit.
Operating profit Sales revenues − Operating expenses Shows the profitability of
margin (or return on Sales revenues current operations without
sales). or regard to interest charges
Operating income
Sales revenues
and income taxes. Earnings
before interest and taxes is
known as EBIT in financial
and business accounting.
Net profit margin (or Profits after taxes Shows after-tax profits per
net return on sales). Sales revenues dollar of sales.

Total return on Profits after taxes + Interest Shows after-tax profits per
assets. Total assets dollar of sales.

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 TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean 2

Profitability Ratios How Calculated What It Shows

Net return on total assets Profits after taxes A measure of the return
(ROA). Total assets earned by stockholders on
the firm’s total assets.
Return on stockholders’ Profits after taxes The return stockholders are
equity (ROE). Total stockholders’ equity earning on their capital
investment in the
enterprise. A return in the
12% to 15% range is
average.
Return on invested capital Profits after taxes A measure of the return that
(ROIC)—sometimes Long-term debt + shareholders are earning
referred to as return on Total stockholders’ equity on the monetary capital
capital employed (ROCE)​. invested in the enterprise. A
higher return reflects
greater bottom-line
effectiveness in the use of
long-term capital.

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 TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean 3

Liquidity Ratios How Calculated What It Shows

Current ratio. Current assets Shows a firm’s ability to pay
Current liabilities current liabilities using
assets that can be
converted to cash in the
near term. Ratio should be
higher than 1.0.
Working capital. Current assets − Current liabilities The cash available for a
firm’s day-to-day
operations. Larger amounts
mean the firm has more
internal funds to (1) pay its
current liabilities on a timely
basis and (2) finance
inventory expansion,
additional accounts
receivable, and a larger
base of operations without
resorting to borrowing or
raising more equity capital.

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 TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean 4

Leverage Ratios How Calculated What It Shows

Total debt-to-assets Total debt Measures the extent to which
ratio. Total assets borrowed funds (both short-term
loans and long-term debt) have
been used to finance the firm’s
operations. A low ratio is better—a
high fraction indicates overuse of
debt and greater risk of
bankruptcy.
Long-term debt-to- Long-term debt A measure of creditworthiness and
capital ratio. Long-term debt + balance-sheet strength. It indicates
Total stockholders’ equity the percentage of capital
investment that has been financed
by both long-term lenders and
stockholders. A ratio below 0.25 is
preferable since the lower the ratio,
the greater the capacity to borrow
additional funds. Debt-to-capital
ratios above 0.50 indicate an
excessive reliance on long-term
borrowing, lower creditworthiness,
and weak balance- sheet strength.

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 TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean 5

Leverage Ratios How Calculated What It Shows

Debt-to-equity ratio. Total debt Shows the balance between debt
Total stockholders’ equity (funds borrowed, both short term
and long term) and the amount that
stockholders have invested in the
enterprise. The further the ratio is
below 1.0, the greater the firm’s
ability to borrow additional funds.
Ratios above 1.0 put creditors at
greater risk, signal weaker balance
sheet strength, and often result in
lower credit ratings.
Long-term debt-to-equity ratio. Long-term debt Shows the balance between long-
Total stockholders’ equity term debt and stockholders’ equity
in the firm’s long-term capital
structure. Low ratios indicate a
greater capacity to borrow
additional funds if needed.
Times-interest-earned (or Operating income Measures the ability to pay annual
coverage) ratio. Interest expenses interest charges. Lenders usually
insist on a minimum ratio of 2.0,
but ratios above 3.0 signal
increasing creditworthiness.

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 TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean 6

Activity Ratios How Calculated What It Shows

Days of inventory. ______ Inventory______ Measures inventory
Cost of goods sold ÷ 365 management efficiency.
Fewer days of inventory are
better.
Inventory turnover. Cost of goods sold Measures the number of
Inventory inventory turns per year.
Higher is better.
Average collection period. Accounts receivable Indicates the average length
Total sales ÷ 365 of time the firm must wait
or after making a sale to
Accounts receivable receive cash payment. A
Average daily sales shorter collection time is
better.

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 TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean 7

Other Ratios How Calculated What It Shows

Dividend yield on common Annual dividends per share A measure of the return that
stock. Current market price shareholders receive in the form
per share of dividends. A “typical” dividend
yield is 2% to 3%. The dividend
yield for fast-growth firms is
often below 1%; the dividend
yield for slow-growth firms can
run 4% to 5%.
Price-to-earnings (P/E) ratio. Current market price per share P/E ratios above 20 indicate
Earnings per share strong investor confidence in a
firm’s outlook and earnings
growth; firms whose future
earnings are at risk or likely to
grow slowly typically have ratios
below 12.
Dividend payout ratio. Annual dividends per share Indicates the percentage of
Earnings per share after-tax profits paid out as
dividends.

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 TABLE 4.1 Key Financial Ratios: How to Calculate Them and What They Mean 8

Other Ratios How Calculated What It Shows

Internal cash flow. After-tax profits + Depreciation A rough estimate of the cash a
firm’s business is generating
after payment of operating
expenses, interest, and taxes.
Such amounts can be used for
dividend payments or funding
capital expenditures.
Free cash flow. After-tax profits + Depreciation – A rough estimate of the cash a
Capital expenditures – Dividends firm’s business is generating
after payment of operating
expenses, interest, taxes,
dividends, and desirable
reinvestments in the business.
The larger a firm’s free cash
flow, the greater its ability to
internally fund new strategic
initiatives, repay debt, make new
acquisitions, repurchase shares
of stock, or increase dividend
payments.

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 QUESTION 2: What Are the Company’s Strengths and
Weaknesses in Relation to the Market
Opportunities and External Threats?

SWOT analysis is a tool for identifying situational

reasons underlying a firm’s performance.
• Internal strengths (the basis for strategy).
• Internal weaknesses (deficient capabilities).
• Market opportunities (strategic objectives).
• External threats (strategic defenses).

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 SWOT analysis

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 Identifying a Company’s Internal Strengths

A competence is an activity that a firm has learned

to perform with proficiency and at an acceptable
cost—a true capability, in other words.
A core competence is an activity that a firm
performs proficiently and that is also central to its
strategy and competitive success.
A distinctive competence is a competitively
important activity that a firm performs better than its
rivals—it represents a competitively superior internal
strength.

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 Identifying a Company’s Internal Weaknesses

A weakness:
• 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 or unproven skills, expertise, or intellectual capital
in competitively important areas of the business.
• Deficiencies in physical, organizational, or intangible
assets.

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 Identifying a Company’s Market Opportunities

Characteristics of market opportunities:

• Newly emerging and fast-changing markets may
represent “golden opportunities” but are often hidden in
“fog of the future.”
• Opportunities can evolve in mature markets.
• Opportunities with market factors aligned with the firm’s
strengths offer the most potential for the firm to gain
competitive advantage.

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 Identifying External Threats

Types of threats:
• Normal course-of-business.
• Sudden-death (survival).
Considering threats:
• Identify threats to the firm’s future prospects.
• Evaluate strategic actions to be taken to neutralize or
lessen impact.

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 TABLE 4.2 What to Look for in Identifying a Company’s Strengths,
Weaknesses, Opportunities, and Threats 1

Strengths and Competitive Weaknesses and Competitive

Assets Deficiencies
• Ample financial resources to grow the • No distinctive core competencies.
business.
• Strong brand-name image or company • Lack of attention to customer needs.
reputation.
• Cost advantages over rivals. • Weak balance sheet, too much debt.
• Attractive customer base. • Higher costs than competitors.
• Proprietary technology, superior • Too narrow a product line relative to rivals.
technological skills, important patents.
• Strong bargaining power over • Weak brand image or reputation.
suppliers or buyers.

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 TABLE 4.2 What to Look for in Identifying a Company’s Strengths,
Weaknesses, Opportunities, and Threats 2

Strengths and Competitive Weaknesses and Competitive

Assets (continued) Deficiencies (continued)
• Superior product quality. • Lack of adequate distribution
capability.
• Wide geographic coverage or • Lack of management depth.
strong global distribution capability.
• Alliances or joint ventures that • A plague of internal operating
provide access to valuable problems or obsolete facilities
technology competencies, or • Too much underutilized plan
attractive geographic markets. capacity.

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 TABLE 4.2 What to Look for in Identifying a Company’s Strengths,
Weaknesses, Opportunities, and Threats 3

Market Opportunities External Threats

• Meet sharply rising buyer demand for • Increasing intensity of
the industry’s product. competition.
• Serve additional customer groups or • Slowdowns in market growth.
market segments.
• Expand into new geographic markets. • Likely entry of potent new
competitions.
• Expand the company’s product line to • Growing bargaining power of
meet a broader range of customer customers or suppliers.
needs.
• Enter new product lines or new • A shift in buyer needs and tastes
businesses. away from the industry’s product.
• Take advantage of failing trade barriers • Adverse demographic changes
in attractive foreign markets. that threaten to curtail demand for
the industry’s product.

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 TABLE 4.2 What to Look for in Identifying a Company’s Strengths,
Weaknesses, Opportunities, and Threats 4
Market Opportunities External Threats
(continued) (continued)
• Take advantage of an adverse • Adverse economic conditions that
change in the fortunes of rival firms. threaten critical suppliers or
distributors.
• Acquire rival firms or companies with • Changes in technology—particularly
attractive technological expertise or disruptive technology that can
competencies. undermine the company’s
distinctive competencies.
• Take advantage of emerging • Restrictive foreign trade policies.
technological developments to • Costly new regulatory requirements.
innovate. • Tight credit conditions.
• Enter into alliances or other • Rising prices on energy or other key
cooperative ventures. inputs.

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 For Individuals

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 What Do SWOT Listings Reveal?

New strategy:
• SWOT is the foundation for positioning the firm to use
its strengths to seize opportunities and to shore up its
competitive deficiencies to mitigate external threats.
Existing strategy:
• SWOT insights into the firm’s overall business situation
can translate into recommended strategic actions.

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 FIGURE 4.2 The Steps Involved in SWOT Analysis: Identify the Four
Components of SWOT, Draw Conclusions, Translate
Implications into Strategic Actions

Access the text alternative for slide images.

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 QUESTION 3: What Are the Company’s Most Important
Resources and Capabilities, and Will They
Give the Company a Lasting Competitive
Advantage?

Competitive assets:
• Resources and capabilities:
• They determine competitiveness and the ability to succeed in
the marketplace.
• A firm’s strategy depends on these to develop sustainable
competitive advantage over its rivals.

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 Identifying the Company’s Resources and
Capabilities

A resource:
• A productive input or competitive asset that is owned or
controlled by a firm (e.g., a fleet of oil tankers).
A capability:
• The capacity of a firm to perform some activity proficiently
(e.g., superior skills in marketing).

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 TABLE 4.3 Types of Company Resources 1
Tangible resources
• Physical resources: land and real estate; manufacturing plants, equipment,
or distribution facilities; the locations of stores, plants, or distribution centers,
including the overall pattern of their physical locations; ownership of or
access rights to natural resources (such as mineral deposits).
• Financial resources: cash and cash equivalents; marketable securities;
other financial assets such as a company’s credit rating and borrowing
capacity.
• Technological assets: patents, copyrights, production technology,
innovation technologies, technological processes.

• Organizational resources: IT and communication systems (satellites,

servers, workstations, etc.); other planning, coordination, and control
systems; the company’s organizational design and reporting structure.

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 TABLE 4.3 Types of Company Resources 2
Intangible resources
• Human assets and intellectual capital: the education, experience, knowledge,
and talent of the workforce, cumulative learning, and tacit knowledge of employees;
collective learning embedded in the organization, the intellectual capital and know-
how of specialized teams and work groups; the knowledge of key personnel
concerning important business functions; managerial talent and leadership skill; the
creativity and innovativeness of certain personnel.
• Brands, company image, and reputational assets: brand names,
trademarks, product or company image, buyer loyalty and goodwill; company
reputation for quality, service, and reliability; reputation with suppliers and partners for
fair dealing.
• Relationships: alliances, joint ventures, or partnerships that provide access to
technologies, specialized know-how, or geographic markets; networks of dealers or
distributors; the trust established with various partners.
• Company culture and incentive system: the norms of behavior, business
principles, and ingrained beliefs within the company; the attachment of personnel to
the company’s ideals; the compensation system and the motivation level of company
personnel.

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 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
systems, embodying tacit knowledge.
A resource bundle:
• Is a linked and closely integrated set of competitive
assets centered around one or more cross-functional
capabilities.

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 Assessing the Competitive Power of a
Company’s Resources and Capabilities

The Total Economic Value produced by a firm is

equal to V-C. It is the difference between the
buyer's perceived value (V) regarding a product or
service and what it costs (C) the firm to produce it.

Competitively superior resources and capabilities

are strategic assets capable of producing a
sustainable competitive advantage with far greater
profit potential.

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 VRIN: Four Tests of a Resource’s
Competitive Power

The VRIN Test for sustainable competitive

advantage asks if a resource or capability is
Valuable, Rare, Inimitable, and Non-substitutable.
• V: Is the resource (or capability) competitively
valuable?
• R: Is it rare—is it something rivals lack?
• I: Is it hard to copy (inimitable)?
• N: Is it invulnerable to the threat of substitution of
different types of resources and capabilities (non-
substitutable)?

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 Social Complexity and Causal Ambiguity

Two factors that inhibit the ability of rivals to imitate

a firm’s most valuable resources and capabilities.
• Social complexity refers to factors in a firm’s culture,
the interpersonal relationships among managers or R&D
teams, its trust-based relations with customers or
suppliers that contribute to its competitive advantage.
• Causal ambiguity about the how the firm uses its
resources and relationships puts competitors at a loss in
understanding how to imitate these complex resources.

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 Managing Resources and Capabilities
Dynamically

Threats to resources and capabilities:

• Rivals develop better substitutes over time.
• Current capabilities decay from benign neglect.
• Disruptive changes in the competitive environment.
Manage capabilities dynamically:
• Attend to the ongoing modification of existing competitive
assets.
• Take advantage of opportunities to develop totally new
kinds of capabilities.

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 The Role of Dynamic Capabilities

To sustain its competitiveness and help drive

improvements in its performance, a firm requires a
dynamically evolving portfolio of resources and
capabilities.
A dynamic capability is the ongoing capacity of a
firm to modify its existing resources and capabilities
or create new ones.
• Improve on existing resources and capabilities
incrementally.
• Add new resources and capabilities to the firm’s
competitive asset portfolio.

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 QUESTION 4: How Do Value Chain Activities
Impact a Company’s Cost
Structure and Its Customer Value
Proposition?
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.

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 The Concept of a Company Value Chain

The value chain:

• Identifies the primary activities and related support
activities that create customer value.
• Identifies the inner workings of the firm's customer value
proposition and business model.
• Permits a deep look at the firm’s cost structure and its
ability to profitably offer low prices.
• Reveals the emphasis that a firm places on activities that
enhance differentiation and support higher prices.

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 FIGURE 4.3 A Representative Company Value Chain

Source: Based on the discussion in Michael E. Porter,

Competitive Advantage (New York: Free Press, 1985),
pp. 37-43.

Access the text alternative for slide images.

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 Comparing Value Chains of Rival Companies

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:
• Segregates a firm’s operations into different types of
primary and secondary activities to identify major
components of its internal cost structure.
• Uses activity-based costing to evaluate activities.
• Same for significant competitors.

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 The Value Chain System

An industry value chain includes:

• Internal value chain.
• Value chains of upstream industry suppliers.
• Value chains of forward channel intermediaries.
Effects of the industry value chain:
• Costs and profit margins of suppliers and channel
partners can affect prices to end consumers.
• Activities of channel partners can affect industry sales
volumes and customer satisfaction.

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 FIGURE 4.4 A Representative Value Chain System

Source: Based in part on the single-industry value chain

display in Michael E. Porter, Competitive Advantage
(New York: Free Press, 1985), p. 35.

Access the text alternative for slide images.

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 ILLUSTRATION CAPSULE 4.1 The Value Chain for Everlane, Inc.

Source: Everlane.com/about (accessed 2/08/20). Access the text alternative for these images.

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 The Value Chain for Everlane

Which activities in the value chain are primary

activities? Which are secondary activities?
Which activities are linked to the value chain for the
entire industry?
Where in the industry activity chain could Everlane
possibly reduce cost(s) without reducing its
competitive strength?

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 Benchmarking: A Tool for Assessing the Cost
and Effectiveness of Value Chain Activities

Benchmarking:
• Involves improving internal activities based on learning
from other companies’ “best practices.”
• Assesses whether the cost competitiveness and
effectiveness of a company’s value chain activities are in
line with its competitors’ activities.
Sources of benchmarking information:
• Market data reports from consulting companies and
market analysts, publications of industry trade groups and
government agencies, and customers.
• Visits to benchmark firms.

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 ILLUSTRATION CAPSULE 4.2 Benchmarking in the
Solar Industry

What benchmarks does the solar industry use in

comparing costs among industry competitors?

How has SunPower responded to the continued

downward pricing pressure in the industry?

Why is the collection of competitive intelligence to

accurately benchmark delivered costs of such
importance in the solar industry?

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 ILLUSTRATION CAPSULE 4.3 Benchmarking and Ethical
Conduct

A code of ethical and proper business behavior is

based on the following principles:
• Principle of Legality.
• Principle of Exchange.
• Principle of Confidentiality.
• Principle of Use.
• Principle of First Party Contact.
• Principle of Third Party Contact.
• Principle of Preparation.

Source: BPIR.com (Business Performance Improvement Resource), https://www.bpir.com/benchmarking-code-of-conduct-bpir.com/menu-id-56.html

(accessed 2/08/20).

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 Strategic Options for Remedying a Cost or
Value Disadvantage

Areas in the total value chain system assess ways

to improve efficiency and effectiveness.
• Internal activity segments.
• Suppliers’ part of the value chain system.
• Forward-channel portion of the value chain system.

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 Improving Internally Performed
Value Chain Activities
Implement best practices throughout the firm, particularly for
high-value activities.
Redesign products, components and activities to facilitate
speedier and more economical manufacture or assembly.
Relocate high-cost activities to external value chains to be
performed more cheaply by vendors or contractors.
Reallocate resources to activities that address buyers’ most
important purchase criteria.
Adopt productivity-enhancing, cost-saving technological
improvements that spur innovation, improve design, and
enhance creativity.

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 Improving Supplier-Related
Value Chain Activities
Pressure suppliers for lower prices.
Switch to lower-priced substitute inputs.
Collaborate closely with suppliers to identify mutual cost-
saving opportunities.
Work with suppliers to enhance the firm’s differentiation.
Select and retain suppliers who meet higher-quality
standards.
Coordinate with suppliers to enhance design or other
features desired by customers.
Provide incentives to suppliers to meet higher-quality
standards, and assist suppliers in their efforts to improve.
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 Improving Value Chain Activities of
Distribution Partners

Achieving cost-based competitiveness:

• Pressure forward-channel allies to reduce their costs and
markups.
• Collaborate with forward-channel allies to identify win-win
opportunities to reduce costs.
• Change to a more economical distribution strategy,
including switching to cheaper distribution channels.

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 Enhancing Differentiation Through Activities at
the Forward End of the Value Chain System

Engage in cooperative advertising and promotions

with forward-channel allies.
Use exclusive arrangements with downstream
sellers or other mechanisms that increase their
incentives to enhance delivered customer value.
Create and enforce standards for downstream
activities and assist in training channel partners in
business practices.

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 Translating Proficient Performance of Value Chain
Activities into Competitive Advantage 1

Option 1: Beat rivals by creating more customer value from value chain
activities, for a differentiation-based competitive advantage

1. Managers decide to perform value chain activities in ways that drive improvements
in quality, features, performance, and other differentiation-enhancing aspects.

2. Competencies gradually emerge in performing value chain activities that drive

improvements in quality, features, and performance.

3. Company proficiency in performing some of these differentiation-enhancing

activities rises to the level of a core competence.

4. Company proficiency in performing the core competence continues to build and

evolves into a distinctive competence.

5. Company gains a competitive advantage based on superior differentiation

capabilities.

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 Translating Proficient Performance of Value Chain
Activities into Competitive Advantage 2
Option 2: Beat rivals by conducting value chain activities more efficiently,
for a cost-based competitive advantage

1. Company managers decide to perform value chain activities in the most

cost-efficient manner.

2. Competencies gradually emerge in driving down the cost of value chain

activities (such as production, inventory management, etc.).

3. Company capabilities in performing certain value chain activities more

efficiently rise to the level of a core competence.

4. Company proficiency in performing the core competence continues to

build and evolves into a distinctive competence.

5. Company gains a competitive advantage based on superior

differentiation capabilities.

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 QUESTION 5: Is the Company Competitively Stronger or
Weaker Than Key Rivals?

Assessing 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?

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 Steps in the Competitive Strength
Assessment Process
1. Make a list of the industry’s key success factors and
measures of competitive strength or weakness.
2. Assign weights to each competitive strength measure
based on its perceived importance.
3. Score competitors on each competitive strength measure
and multiply by each measure by its corresponding weight.
4. Sum the weighted strength ratings on each factor to get an
overall measure of competitive strength for each firm.
5. Use overall strength ratings to draw conclusions about the
firm’s net competitive advantage or disadvantage and to
take specific note of areas of strength and weakness.

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 TABLE 4.4
A Representative
Weighted
Competitive Strength
Assessment

Access the text alternative

for these images.

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 Strategic Implications of a 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.

© McGraw Hill
 QUESTION 6: What Strategic Issues and Problems Merit
Front-Burner Managerial Attention?

Which and how serious are the strategic issues that

managers must address—and resolve—for the firm
to be more financially and competitively successful
in the years ahead.
A good strategy must contain ways to deal with all
the strategic issues and obstacles that stand in the
way of the firm’s financial and competitive success
in the years ahead.

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 Strategic Priority “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.

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 Strategic Priority “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 the firm’s product line?
Correct the firm’s competitive deficiencies by
acquiring a rival firm with the missing strengths?

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 Assignment 1

Review the information in Illustration Capsule 4.I

(slide 46)concerning Everlane's average costs of
producing and selling a pair of denim jeans, and
compare this with the representative value chain
depicted in Figure 4.3(slide 42). Then answer the
following questions:
• Which of the company's costs correspond to the primary value chain
activities depicted in Figure 4.3?
• Which of the company's costs correspond to the support activities
described in Figure 4.3?
• What value chain activities might be important in securing or
maintaining Everlane's advantage? (Using LO4-4, slide 3)

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 Assignment 2

Using the methodology illustrated in Table 4.3 (slide42-

43)and your knowledge as an automobile owner, prepare a
competitive strength assessment for General Motors and its
rivals Ford, Chrysler, Toyota, and Honda. Each of the five
automobile manufacturers should be evaluated on the key
success factors and strength measures of cost-
competitiveness, product-line breadth, product quality and
reliability, financial resources and profitability, and customer
service. What does your competitive strength assessment
disclose about the overall competitiveness of each
automobile manufacturer? What factors account most for
Toyota's competitive success? Does Toyota have competitive
weaknesses that were disclosed by your analysis? (Using
LO4-5, slide3)

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 Exercises for Simulation Participants
1. Using the formulas in Table 4.1 and the data in your company's latest financial statements, calculate
the following measures of financial performance for your company: a. Operating profit margin; b. Total
return on total assets; c. Current ratio; d. Working capital; e. Long-term debt-to-capital ratio f. Price-to-
earnings ratio.

2. On the basis of your company's latest financial statements and all the other avail able data regarding
your company's performance that appear in the industry report, list the three measures of financial
performance on which your company did best and the three measures on which your company's
financial performance was worst.

3. What hard evidence can you cite that indicates your company's strategy is working fairly well (or
perhaps not working so well, if your company's performance is lagging that of rival companies)?

4.What internal strengths and weaknesses does your company have? What external market
opportunities for growth and increased profitability exist for your company? What external threats to your
company's future well-being and profitability do you and your co-managers see? What does the
preceding SWOT analysis indicate about your company's present situation and future prospects-where
on the scale from “exceptionally strong” to “alarmingly weak” does the attractiveness of your company's
situation rank?

5.Does your company have any core competencies? If so, what are they?

6. What are the key elements of your company's value chain? Refer to Figure 4.3 in developing your
answer.

7. Using the methodology presented in Table 4.4, do a weighted competitive strength assessment for
your company and two other companies that you and your co-managers consider to be very close
competitors.
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