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A company’s resources and capabilities are integral to achieving a sustainable competitive advantage. For this assignment, consider a Apple Inc. Develop your analysis by responding to the following questions: What are the company’s most important resources and why? What are the company’s most important capabilities and why? How do the company’s most important resources and capabilities create lasting competitive advantage? Relate your response to each of the above to our coursework (attached PPTs) from this week. This paper should be at least 300 words. chapter 5 The Five Generic Competitive Strategies PART 1 Concepts and Techniques for Crafting and Executing Strategy © 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill. Copyright Image Source/Getty Images Chapter 5 describes the five basic competitive strategy options—which of the five to employ is a company’s first and foremost choice in crafting overall strategy and beginning its quest for competitive advantage. © McGraw-Hill Education Learning Objectives After reading this chapter, you should be able to: Understand what distinguishes each of the five generic strategies and explain why some of these strategies work better in certain kinds of competitive conditions than in others. Recognize the major avenues for achieving a competitive advantage based on lower costs. Identify the major avenues to a competitive advantage-based on differentiating a company’s product or service offering from the offerings of rivals. Explain the attributes of a best-cost strategy—a hybrid of low-cost and differentiation strategies. © McGraw Hill This chapter presents the concepts and analytical tools for zeroing in on a single-business company’s external environment. © McGraw-Hill Education 3–2 Chapter Overview This chapter describes the five generic competitive strategy options: How well is the company’s present strategy working? What are the company’s strengths and weaknesses in relation to the market opportunities and external threats? What are the company’s most important resources and capabilities, and will they give the company a lasting competitive advantage over rival companies? How do a company’s value chain activities impact its cost structure and customer value proposition? Is the company competitively stronger or weaker than key rivals? What strategic issues and problems merit front-burner managerial attention? © McGraw Hill Why Do Strategies Differ? A firm’s competitive strategy deals exclusively with the specifics of its efforts to position itself in the market-place, please customers, ward off competitive threats, and achieve a particular kind of competitive advantage. Key factors that distinguish one strategy from another: Is the firm’s market target broad or narrow? Is the competitive advantage being pursued linked to low costs or product differentiation? © McGraw Hill A company’s competitive strategy deals exclusively with the specifics of management’s game plan for competing successfully— its specific efforts to please customers, strengthen its market position, counter the maneuvers of rivals, respond to shifting market conditions, and achieve a particular kind of competitive advantage. The biggest and most important differences among competitive strategies boil down to: Whether a company’s market target is broad or narrow Whether the company is pursuing a competitive advantage linked to low costs or product differentiation © McGraw-Hill Education Types of Generic Competitive Strategies Types GENERIC COMPETITIVE STRATEGIES Broad, Low-cost Strategy: Striving to achieve broad lower overall costs than rivals on comparable products that attract a broad spectrum of buyers, usually by underpricing rivals. Broad Differentiation Strategy: Seeking to differentiate the firm’s product offering from its rivals’ with attributes that will appeal to a broad spectrum of buyers. Focused Low-cost Strategy: Concentrating on a narrow buyer segment (or market niche striving to meet these needs at lower costs than rivals (thereby being able to serve niche members at a lower price). Focused Differentiation Strategy: Concentrating on a narrow buyer segment (or market niche) by offering its members customized attributes that meet their specific tastes and requirements of niche members better than rivals. Best-cost (Hybrid) Strategy: Striving to incorporate upscale product attributes at a lower cost than rivals. Being the “best-cost” producer of an upscale, multifeatured product allows a firm to give customers more value for their money by underpricing rivals whose products have similar upscale, multifeatured attributes. © McGraw Hill Five distinct competitive strategy approaches stand out: A low-cost strategy: striving to achieve lower overall costs than rivals and appealing to a broad spectrum of customers, usually by under pricing rivals. A broad differentiation strategy: seeking to differentiate the company’s product/ service offering from rivals’ in ways that will appeal to a broad spectrum of buyers A focused low-cost strategy: concentrating on a narrow buyer segment and outcompeting rivals by serving niche members at a lower cost than rivals A focused differentiation strategy: concentrating on a narrow buyer segment and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals products A best-cost producer strategy: giving customers more value for the money by incorporating good-to-excellent product attributes at a lower cost than rivals; the target is to have the lowest (best) costs and prices compared to rivals offering products with comparable attributes © McGraw-Hill Education FIGURE 5.1 The Five Generic Competitive Strategies Access the text alternative for slide images. © McGraw Hill Figure 5.1 The Five Generic Competitive Strategies examines how each of the five strategies stake out a different market position. © McGraw-Hill Education Broad Low-Cost Strategies Effective low-cost approaches: Pursue cost savings that are difficult to imitate. Avoid reducing product quality to unacceptable levels. Competitive advantages and risks: Greater total profits and increased market share gained from underpricing competitors. Larger profit margins when selling products at prices comparable to and competitive with rivals. Low pricing does not attract enough new buyers. Rival’s retaliatory price-cutting sets off a price war. © McGraw Hill A low-cost producer’s basis for competitive advantage is lower overall costs than competitors. Successful low-cost leaders, who have the lowest industry costs, are exceptionally good at finding ways to drive costs out of their businesses and still provide a product or service that buyers find acceptable. © McGraw-Hill Education The Two Major Avenues for Achieving a Cost Advantage Low-cost advantage: Cumulative costs across the overall value chain must be lower than competitors’ cumulative costs. Options for translating a low-cost advantage over rivals into attractive profit performance: Perform value-chain activities more cost-effectively than rivals. Revamp the firm’s overall value chain to eliminate or bypass cost-producing activities. © McGraw Hill A company has two options for translating a low-cost advantage over rivals into attractive profit performance. © McGraw-Hill Education Cost-Efficient Management of Value Chain Activities Cost driver: A factor with a strong influence on a firm’s costs. Can be asset-based or activity-based. Securing a cost advantage: Use lower-cost inputs and hold minimal assets. Offer only “essential” product features or services. Offer only limited product lines. Use low-cost distribution channels. Use the most economical delivery methods. © McGraw Hill A cost driver is a factor that has a strong influence on a firm’s costs. A low-cost advantage over rivals can translate into better profitability than rivals attain. © McGraw-Hill Education FIGURE 5.2 Cost Drivers: The Keys to Driving Down Company Costs Access the text alternative for slides images. Source: Adapted from Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press, 1985). © McGraw Hill Figure 5.2 shows the most important cost drivers. © McGraw-Hill Education Cost-Cutting Methods 1 Capturing all available economies of scale. Taking full advantage of experience and learning-curve effects. Operating facilities at full or near-full capacity. Improving supply chain efficiency. Substituting lower-cost inputs wherever there is little or no sacrifice in product quality or performance. Using the firm’s bargaining power vis-à-vis suppliers or others in the value chain system to gain concessions. © McGraw Hill Particular attention must be paid to a set of factors known as cost drivers that have a strong effect on a company’s costs and can be used as levers to lower costs. © McGraw-Hill Education Cost-Cutting Methods 2 Using online systems and sophisticated software to achieve operating efficiencies. Improving process design and employing advanced production technology. Being alert to the cost advantages of outsourcing or vertical integration. Motivating employees through incentives and company culture. © McGraw Hill Particular attention must be paid to a set of factors known as cost drivers that have a strong effect on a company’s costs and can be used as levers to lower costs. © McGraw-Hill Education Revamping the Value Chain System to Lower Costs Selling direct to consumers and bypassing the activities and costs of distributors and dealers by using a direct sales force and a company website. Streamlining operations to eliminate low value-added or unnecessary work steps and activities. Reduce materials-handling and shipping costs by having suppliers locate their plants or warehouses close to the firm’s own facilities. © McGraw Hill Dramatic cost advantages can often emerge from redesigning the company’s value chain system in ways that eliminate costly work steps and entirely bypass certain cost-producing value chain activities. © McGraw-Hill Education Vanguard’s Path to Becoming the Low-Cost Leader in Investment Management Describe Vanguard’s business segment. How well are its competitive strengths matched to the five forces in its competitive environment? Which of its value chain activities would be most easily overcome by rivals? most difficult to overcome? Assume you have been tasked to revamp a rival’s value chain activities to better compete with Vanguard. In what order of expected payoff should you attempt to revamp its value chain activities? © McGraw Hill Illustration Capsule 5.1 shows how Vanguard managed its value chain to achieve a huge low-cost advantage over rival supermarket chains. © McGraw-Hill Education The Keys to a Successful Low-Cost Strategy Success in achieving a low-cost edge over rivals comes from out-managing rivals in finding ways to perform value chain activities faster, more accurately, and more cost-effectively by: Spending aggressively on resources and capabilities that promise to drive costs out of the business. Carefully estimating the cost savings of new technologies before investing in them. Constantly reviewing cost-saving resources to ensure they remain competitively superior. © McGraw Hill Success in achieving a low-cost edge over rivals comes from out-managing rivals in finding ways to perform value chain activities faster, more accurately, and more cost-effectively. A low-cost producer is in the best position to win the business of price-sensitive buyers, set the floor on market price, and still earn a profit. © McGraw-Hill Education When a Low-Cost Strategy Works Best Price competition among rival sellers is vigorous. Identical products are readily available from many sellers. There are few ways to differentiate industry products to add buyer value. Buyers incur low costs in switching among sellers. Buyers are price-sensitive or have the power to bargain down prices. © McGraw Hill A low-cost producer strategy becomes increasingly appealing and competitively powerful when the forces of competition are favorable to a particular competitor’s market position. © McGraw-Hill Education Pitfalls to Avoid in Pursuing a Low-Cost Strategy Engaging in overly aggressive price cutting that does not result in unit sales gains sufficient to recoup forgone profits. Relying on a cost advantage that is not sustainable because rival firms can easily copy or overcome it. Becoming so fixated on cost reduction such that the firm’s offerings lack the primary features that attract buyers. Having a rival discover a new lower-cost value chain approach or develop a cost-saving technological breakthrough. © McGraw Hill Reducing price does not lead to higher total profits unless the added gains in unit sales are large enough to bring in a bigger total profit despite lower margins per unit sold. A low-cost producer’s product offering must always contain enough attributes to be attractive to prospective buyers. Low price, by itself, is not always appealing to buyers. © McGraw-Hill Education Broad Differentiation Strategies Effective Differentiation Approaches: Carefully study buyer needs and behaviors, values, and willingness to pay for a unique product or service. Incorporate features that both appeal to buyers and create a sustainably distinctive product offering. Use higher prices to recoup differentiation costs. Advantages of Differentiation: Command premium prices for the firm’s products. Increased unit sales due to attractive differentiation. Brand loyalty that bonds buyers to the differentiating features of the firm’s products. © McGraw Hill Differentiation enhances profitability whenever a company’s product can command a sufficiently higher price or produce sufficiently greater unit sales to more than cover the added costs of achieving the differentiation. The essence of a broad differentiation strategy is to offer unique product attributes that a wide range of buyers find appealing and worth paying for. © McGraw-Hill Education Cost-Efficient Management of Value Chain Activities 2 A value driver can: Have a strong differentiating effect. Be based on physical as well as functional attributes of a firm’s products. Be the result of superior performance capabilities of the firm’s human capital. Have an effect on more than one of the firm’s value chain activities. Create a perception of value (brand loyalty) in buyers where there is little reason for it to exist. © McGraw Hill A value driver is a factor that can have a strong differentiating effect. © McGraw-Hill Education FIGURE 5.3 Value Drivers: The Keys to Creating a Differentiation Advantage Source: Adapted from Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press, 1985). Access the text alternative for slide images. © McGraw Hill Figure 5.3 contains a list of important value drivers. © McGraw-Hill Education Managing the Value Chain to Create the Differentiating Attributes Create product features and performance attributes that appeal to a wide range of buyers. Improve customer service or add extra services. Invest in production-related R&D activities. Strive for innovation and technological advances. Pursue continuous quality improvement. Increase marketing and brand-building activities. Seek out high-quality inputs. Emphasize HRM activities that improve the skills, expertise, and knowledge of company personnel. © McGraw Hill Differentiation is not something hatched in marketing and advertising departments, nor is it limited to the catchalls of quality and service. Differentiation opportunities can exist in activities all along an industry’s value chain. The most systematic approach that managers can take, however, involves focusing on the value drivers, a set of factors—analogous to cost drivers—that are particularly effective in creating differentiation. © McGraw-Hill Education Revamping the Value Chain System to Increase Differentiation Approaches to enhancing differentiation through changes in the value chain system: Coordinating with downstream channel allies to enhance customer perceptions of value. Coordinating with upstream suppliers to better address customer needs. © McGraw Hill Just as pursuing a cost advantage can involve the entire value chain system, the same is true for a differentiation advantage. Activities performed upstream by suppliers or downstream by distributors and retailers can have a meaningful effect on customers’ perceptions of a company’s offerings and its value proposition © McGraw-Hill Education Delivering Superior Value via a Broad Differentiation Strategy Broad Differentiation: Offering Customers Something That Rivals Cannot or Do Not Incorporate product attributes and user features that lower the buyer’s overall costs of using the firm’s product. Incorporate tangible features (e.g., styling) that increase customer satisfaction with the product. Incorporate intangible features (e.g., buyer image) that enhance buyer satisfaction in noneconomic ways. Signal the value of the firm’s product offering to buyers (e.g., price, packaging, placement, advertising). © McGraw Hill Differentiation strategies depend on meeting customer needs in unique ways or creating new needs through activities such as innovation or persuasive advertising. The objective is to offer customers something that rivals can’t—at least in terms of the level of satisfaction. The four basic routes to achieving this aim are listed in the slide content. © McGraw-Hill Education Differentiation: Signaling Value Signaling value is important when: The nature of differentiation is based on intangible features and is therefore subjective or hard to quantify by the buyer. Buyers are making a first-time purchase and are unsure what their experience will be with the product. Product or service repurchase by buyers is infrequent. Buyers are unsophisticated. © McGraw Hill Differentiation can be based on tangible or intangible attributes. Easy-to-copy differentiating features cannot produce a sustainable competitive advantage. The value of certain differentiating features is rather easy for buyers to detect, but in some instances, buyers may have trouble assessing what their experience with the product will be. Successful differentiators go to great lengths to make buyers knowledgeable about a product’s value and employ various signals of value. © McGraw-Hill Education Successful Approaches to Sustainable Differentiation Differentiation that is difficult for rivals to duplicate or imitate: Company reputation. Long-standing relationships with buyers. A unique product or service image. Differentiation that creates substantial switching costs that lock in buyers: Patent-protected product innovation. Relationship-based customer service. © McGraw Hill The most successful approaches to differentiation are those that are difficult for rivals to duplicate. Indeed, this is the route to a sustainable competitive advantage. While resourceful competitors can, in time, clone almost any tangible product attribute, socially complex intangible attributes such as company reputation, long-standing relationships with buyers, and image are much harder to imitate. Differentiation that creates switching costs that lock in buyers also provides a route to sustainable advantage. © McGraw-Hill Education When a Differentiation Strategy Works Best Market Circumstances Favoring Differentiation Buyer needs and uses for the product are diverse. There are many ways that differentiation can have value to buyers. Few rival firms are following a similar differentiation approach. There is rapid change in the product’s technology and features. © McGraw Hill Differentiation strategies tend to work best in market circumstances where differentiation yields a longer-lasting and more profitable competitive edge that is based on a well-established brand image, patent-protected product innovation, complex technical superiority, a reputation for superior product quality and reliability, relationship-based customer service, and unique competitive capabilities. © McGraw-Hill Education Pitfalls to Avoid in Pursuing a Differentiation Strategy Relying on product attributes easily copied by rivals. Introducing product attributes that do not evoke an enthusiastic buyer response. Eroding profitability by overspending on efforts to differentiate the firm’s product offering. Offering only trivial improvements in quality, service, or performance features vis-à-vis the products of rivals. Over-differentiating the product quality, features, or service levels exceeds the needs of most buyers. Charging too high a price premium. © McGraw Hill Any differentiating feature that works well is a magnet for imitators. This is why a firm must seek out sources of value creation that are time-consuming or burdensome for rivals to match if it hopes to use differentiation to win a sustainable competitive edge. Overdifferentiating and overcharging are fatal strategy mistakes. © McGraw-Hill Education Focused (or Market Niche) Strategies Focused Strategy Approaches: Focused Low-Cost Strategy Focused Market Niche Strategy © McGraw Hill What sets focused strategies apart from broad low-cost and broad differentiation strategies is their concentrated attention on a narrow piece of the total market. © McGraw-Hill Education Clinícas del Azúcar’s Focused Low-Cost Strategy Which uniqueness drivers are responsible for the success of Clinícas del Azúcar? Which competitive conditions would mitigate against successful entry of the Clinícas del Azúcar into the U.S. diabetes care market? What part do customer expectations about patient-doctor relationships play in the delivery of health care in the United States? © McGraw Hill Illustration Capsule 5.2 describes how Clinícas del Azúcar’s focus on lowering the costs of diabetes care is allowing to address a major health issue in Mexico. © McGraw-Hill Education When a Focused Low-Cost or Focused Differentiation Strategy Is Attractive The target market niche is big enough to be profitable and offers good growth potential. Industry leaders chose not to compete in the niche; focusers avoid competing against strong competitors. It is costly or difficult for multi-segment competitors to meet the specialized needs of niche buyers. The industry has many different niches and segments. Rivals have little or no entry interest in the target segment. © McGraw Hill A focused strategy aimed at securing a competitive edge based on either low costs or differentiation becomes increasingly attractive as more of the following favorable conditions listed in the slide are met. © McGraw-Hill Education The Risks of a Focused Low-Cost or Focused Differentiation Strategy Competitors will find ways to match the focused firm’s capabilities in serving the target niche. The specialized preferences and needs of niche members shift over time toward the product attributes desired by the majority of buyers. As attractiveness of the segment increases, it draws in more competitors, intensifying rivalry and splintering segment profits. © McGraw Hill There are several inherent risks related to increased attractiveness of the focuser’s segment, changes in competitor capabilities and changes in the characteristics of the segment’s customers. © McGraw-Hill Education Canada Goose’s Focused Differentiation Strategy Which decisions did CEO Dani Reiss make that set Canada Goods on its chosen strategic path? Which uniqueness drivers are responsible for the success of Canada Goose? Which of Canada Goose’s uniqueness drivers are competitors likely to attempt to copy first? © McGraw Hill Illustration Capsule 5.3 describes how Canada Goose has been gaining attention with its focused differentiation strategy. © McGraw-Hill Education Best-Cost (Hybrid) Strategies Differentiation: Providing desired quality, features, performance, service attributes. Low Cost Producer: Charging a lower price than rivals with similar caliber product offerings. Best-Cost Hybrid Approach. Value-Conscious Buyer. © McGraw Hill Best-cost strategies are a hybrid of low cost and differentiation strategies, incorporating features of both simultaneously. They may target either a broad or narrow (focused) base of value-conscious customers. © McGraw-Hill Education When a Best-Cost Strategy Works Best Product differentiation is the market norm. There are a large number of value-conscious buyers who prefer mid-range products. There is competitive space near the middle of the market for a competitor with either a medium-quality product at a below-average price or a high-quality product at an average or slightly higher price. Economic conditions have caused more buyers to become value-conscious. © McGraw Hill The target market for a best-cost strategy is value-conscious middle-market buyers who are looking for appealing extras and functionality at a comparatively low price, regardless of whether they represent a broad or more focused segment of the market. © McGraw-Hill Education The Risk of a Best-Cost Strategy Best-Cost Strategy Squeeze Low-Cost Producers High-End Differentiators © McGraw Hill A company’s biggest vulnerability in employing a best-cost strategy is getting squeezed between the strategies of firms using low-cost and high-end differentiation strategies. © McGraw-Hill Education Trader Joe’s Focused Best-Cost Strategy How can higher product quality lower product costs? In which stages of an industry life cycle are low-cost leadership, differentiation, focused niche, and best-cost provider strategies most appropriate? Could the lower-selling prices of its groceries versus its competitors be used as a proxy for measuring the strength of its focused best-cost strategy? © McGraw Hill Illustration Capsule 5.4 describes how Trader Joe’s has applied the principles of a focused best-cost strategy to thrive in the competitive grocery store industry. © McGraw-Hill Education The Contrasting Features of the Generic Competitive Strategies Each generic strategy: Positions the firm differently in its market. Establishes a central theme for how the firm intends to outcompete rivals. Creates boundaries or guidelines for strategic change as market circumstances unfold. Entails different ways and means of maintaining the basic strategy. © McGraw Hill The choice of which generic strategy to employ spills over to affect many aspects of how the business will be operated and the manner in which value chain activities must be managed. Deciding which generic strategy to employ is perhaps the most important strategic commitment a company makes—it tends to drive the rest of the strategic actions a company decides to undertake. © McGraw-Hill Education Table 5.1 Distinguishing Features of the Five Generic Competitive Strategies 1 FEATURE Low-Cost Broad Differentiation Focused Low-Cost Focused Differentiation Best-Cost Strategic target: A broad cross-section of the market. A broad cross-section of the market. A narrow market niche where buyer needs and preferences are distinctively different. A narrow market niche where buyer needs and preferences are distinctively different. Value-conscious buyers. Or, a middle-market range. Basis of competitive strategy: Lower overall costs than competitors. Ability to offer buyers something attractively different from competitors’ offerings. Lower overall cost than rivals in serving niche members. Attributes that appeal specifically to niche members. Ability to offer better goods at attractive prices. Product line: A good basic product with few frills (acceptable quality and limited selection). Many product variations, wide selection, emphasis on differentiating features. Features and attributes tailored to the tastes and requirements of niche members. Features and attributes tailored to the tastes and requirements of niche members. Items with appealing attributes and assorted features; better quality, not best. Production emphasis: A continuous search for cost reduction without sacrificing acceptable quality and essential features. Build in whatever differentiating features buyers are willing to pay for; strive for product superiority. A continuous search for cost reduction for products that meet basic needs of niche members. Small-scale production or custom-made products that match the tastes and requirements of niche members. Build in appealing features and better quality at lower cost than rivals. © McGraw Hill Deciding which generic competitive strategy to employ is not a trivial matter. Each of the five generic competitive strategies positions the company differently in its market and competitive environment. Each establishes a central theme for how the company will endeavor to outcompete rivals. Each creates some boundaries or guidelines for maneuvering as market circumstances unfold and as ideas for improving the strategy are debated. Each entails differences in terms of product line, production emphasis, marketing emphasis, and means of maintaining the strategy, as shown in Table 5.1. © McGraw-Hill Education Table 5.1 Distinguishing Features of the Five Generic Competitive … chapter 4 Evaluating a Company’s Resources, Capabilities, and Competitiveness © 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill. Copyright Image Source/Getty Images Chapter 4 discusses techniques for evaluating a company’s internal situation, including its collection of resources and capabilities and the activities it performs along its value chain. © McGraw-Hill Education 3–1 Learning Objectives After reading this chapter, you should be able to: Evaluate how well a company’s strategy is working. Assess the company’s strengths and weaknesses in light of market opportunities and external threats. Explain why a company’s resources and capabilities are critical for gaining a competitive edge over rivals. Understand how value chain activities affect a company’s cost structure and customer value proposition. Explain how a comprehensive evaluation of a company’s competitive situation can assist managers in making critical decisions about their next strategic moves. © McGraw Hill This chapter presents the concepts and analytical tools for zeroing in on a single-business company’s external environment. © McGraw-Hill Education 3–2 Chapter Overview This chapter focuses on six strategic questions: How well is the company’s present strategy working? What are the company’s strengths and weaknesses in relation to the market opportunities and external threats? What are the company’s most important resources and capabilities, and will they give the company a lasting competitive advantage over rival companies? How do a company’s value chain activities impact its cost structure and customer value proposition? Is the company competitively stronger or weaker than key rivals? What strategic issues and problems merit front-burner managerial attention? 3 © McGraw Hill 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: Resource and capability analysis. SWOT analysis. Value chain analysis. Benchmarking. Competitive strength assessment. 4 © McGraw Hill 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: Whether it is achieving its stated financial and strategic objectives. Whether its financial performance is above the industry average. Whether it is gaining customers and gaining market share. © McGraw Hill Strategic success in a firm’s present competitive approach requires asking: Has the firm been successful actions in attracting customers and improving its market position? Has the firm gained a sustainable competitive advantage based on low product costs or better product offerings? Is the firm appropriately concentrating its resources on serving a broad spectrum of customers or a narrow market niche? Are the firm’s functional strategies in R&D, production, marketing, finance, human resources, information technology strengthening its competitive position? Has the firm been successful in its efforts to establish alliances with other enterprises? Persistent shortfalls in meeting its performance targets and weak marketplace performance relative to rivals are reliable warning signs that the firm has a weak strategy, suffers from poor strategy execution, or both. FIGURE 4.1 Identifying the Components of a Single-Business Company’s Strategy Access the text alternative for slide images. © McGraw Hill FIGURE 4.1 Identifying the Components of a Single-Business Company’s Strategy Single business strategic action plan components include: Moves to respond to changing conditions in the macro-environment or in industry and competitive conditions Basing competitive advantage on lower costs, better products, superior service of a market niche or specific buyers Expanding or narrowing geographic coverage Partnering to build valuable partnerships and strategic alliances with other enterprises in the same industry Key functional strategies of the overall business strategy: R&D, technology, product design; supply chain management; production; sales, marketing, and distribution; information technology; human resources; and finance. Specific Indicators of Strategic Success Sales and earnings growth trends. Firm’s overall financial strength. Stock price trends. Rate of new customers acquired. Customer retention rate. Evidence of improvement in internal processes: defect rate, order fulfillment, delivery times, days of inventory, and employee productivity. © McGraw Hill Specific indicators of how well a firm’s strategy is working include: Trends in the company’s sales and earnings growth. Trends in the company’s stock price. The company’s overall financial strength. The company’s customer retention rate. The rate at which new customers are acquired. Evidence of improvement in internal processes such as defect rate, order fulfillment, delivery times, days of inventory, and employee productivity. Strategic Management Principle Sluggish financial performance and second-rate market accomplishments almost always signal weak strategy, weak execution, or both. 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 Sales revenues Shows the percentage of revenues available to cover operating expenses and yield a profit. Operating profit margin (or return on sales). Sales revenues − Operating expenses Sales revenues or Operating income Sales revenues Shows the profitability of current operations without regard to interest charges and income taxes. Earnings before interest and taxes is known as EBIT in financial and business accounting. Net profit margin (or net return on sales). Profits after taxes Sales revenues Shows after-tax profits per dollar of sales. Total return on assets. Profits after taxes + Interest Total assets Shows after-tax profits per dollar of sales. © McGraw Hill The stronger a company’s current overall performance, the more likely it has a well-conceived, well-executed strategy. The weaker a company’s financial performance and market standing, the more its current strategy must be questioned and the more likely the need for radical changes. Table 4.1 provides a compilation of the profitability ratios most commonly used to evaluate a company’s financial performance and balance sheet strength. 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 (ROA). Profits after taxes Total assets A measure of the return earned by stockholders on the firm’s total assets. Return on stockholders’ equity (ROE). Profits after taxes Total stockholders’ equity The return stockholders are earning on their capital investment in the enterprise. A return in the 12% to 15% range is average. Return on invested capital (ROIC)—sometimes referred to as return on capital employed (ROCE)​. Profits after taxes Long-term debt + Total stockholders’ equity A measure of the return that shareholders are earning on the monetary capital invested in the enterprise. A higher return reflects greater bottom-line effectiveness in the use of long-term capital. © McGraw Hill The stronger a company’s current overall performance, the more likely it has a well-conceived, well-executed strategy. The weaker a company’s financial performance and market standing, the more its current strategy must be questioned and the more likely the need for radical changes. Table 4.1 provides a compilation of the financial profitability ratios most commonly used to evaluate a company’s financial performance and balance sheet strength. 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 Current liabilities Shows a firm’s ability to pay 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. © McGraw Hill The stronger a company’s current overall performance, the more likely it has a well-conceived, well-executed strategy. The weaker a company’s financial performance and market standing, the more its current strategy must be questioned and the more likely the need for radical changes. Table 4.1 provides a compilation of the assets-to-liabilities liquidity ratios most commonly used to evaluate a company’s financial performance and balance sheet strength. 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 ratio. Total debt Total assets Measures the extent to which 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-capital ratio. Long-term debt Long-term debt + Total stockholders’ equity A measure of creditworthiness and balance-sheet strength. It indicates 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. © McGraw Hill The stronger a company’s current overall performance, the more likely it has a well-conceived, well-executed strategy. The weaker a company’s financial performance and market standing, the more its current strategy must be questioned and the more likely the need for radical changes. Table 4.1 provides a compilation of the financial leverage ratios most commonly used to evaluate a company’s financial performance and balance sheet strength. 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 Total stockholders’ equity Shows the balance between debt (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 Total stockholders’ equity Shows the balance between long-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 coverage) ratio. Operating income Interest expenses Measures the ability to pay annual interest charges. Lenders usually insist on a minimum ratio of 2.0, but ratios above 3.0 signal increasing creditworthiness. © McGraw Hill The stronger a company’s current overall performance, the more likely it has a well-conceived, well-executed strategy. The weaker a company’s financial performance and market standing, the more its current strategy must be questioned and the more likely the need for radical changes. Table 4.1 provides a compilation of the debt-to-equity leverage ratios and income-to-expenses coverage ratio most commonly used to evaluate a company’s financial performance and balance sheet strength. 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______ Cost of goods sold ÷ 365 Measures inventory management efficiency. Fewer days of inventory are better. Inventory turnover. Cost of goods sold Inventory Measures the number of inventory turns per year. Higher is better. Average collection period. Accounts receivable Total sales ÷ 365 or Accounts receivable Average daily sales Indicates the average length of time the firm must wait after making a sale to receive cash payment. A shorter collection time is better. © McGraw Hill The stronger a company’s current overall performance, the more likely it has a well-conceived, well-executed strategy. The weaker a company’s financial performance and market standing, the more its current strategy must be questioned and the more likely the need for radical changes. Table 4.1 provides a compilation of the inventory and accounts receivable collection activity ratios most commonly used to evaluate a company’s financial performance and balance sheet strength. 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 stock. Annual dividends per share Current market price per share A measure of the return that shareholders receive in the form 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 Earnings per share P/E ratios above 20 indicate 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 Earnings per share Indicates the percentage of after-tax profits paid out as dividends. © McGraw Hill The stronger a company’s current overall performance, the more likely it has a well-conceived, well-executed strategy. The weaker a company’s financial performance and market standing, the more its current strategy must be questioned and the more likely the need for radical changes. Table 4.1 provides a compilation of dividend yield, price-to-earnings, and dividend payout ratios most commonly used to evaluate a company’s financial performance and balance sheet strength. 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 – Capital expenditures – Dividends A rough estimate of the cash a 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. © McGraw Hill The stronger a company’s current overall performance, the more likely it has a well-conceived, well-executed strategy. The weaker a company’s financial performance and market standing, the more its current strategy must be questioned and the more likely the need for radical changes. Table 4.1 provides a compilation of cash flow ratios most commonly used to evaluate a company’s financial performance and balance sheet strength. 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). © McGraw Hill SWOT can help explain why a strategy is working well (or not) by taking a close look a company's strengths in relation to its weaknesses and in relation to the strengths and weaknesses of competitors. Are the firm’s strengths enough to make up for its weaknesses? Has the firm’s strategy built on these strengths and shielded the firm from its weaknesses? Do the firm's strengths exceed those of its rivals? Similarly, a SWOT analysis can help determine whether a strategy has been effective in fending off external threats and positioning the firm to take advantage of market opportunities. SWOT analysis is a widely used diagnostic tool popular for its ease of use, also because it can be used to evaluate the efficacy of a strategy and as the basis for crafting a strategy from the outset to determine whether the firm is positioned to pursue new market opportunities and to defend against emerging threats to its future well-being. Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically. 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. © McGraw Hill A firm’s strengths represent its competitive assets. Basing a firm’s strategy on its most competitively valuable strengths gives the firm its best chance for market success. When a company’s proficiency rises from that of mere ability to perform an activity to the point of being able to perform it consistently well and at acceptable cost, it is said to have a competence—a true capability, in other words. If a firm’s competence level in some activity domain is superior to that of its rivals it is known as a distinctive competence. A core competence is a proficiently performed internal activity that is central to a firm’s strategy and is typically distinctive as well. A core competence is a more competitively valuable strength than a competence because of the activity’s key role in the firm’s strategy and the contribution it makes to the firm’s market success and profitability 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. © McGraw Hill A firm’s weaknesses are shortcomings that constitute competitive liabilities, weakness, or competitive deficiency, and 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. A firm’s internal weaknesses can relate to (1) inferior or unproven skills, expertise, capabilities, or intellectual capital in competitively important areas of the business; (2) deficiencies in competitively important physical, organizational, or intangible assets. 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. © McGraw Hill Depending on the prevailing circumstances, a firm’s opportunities can be plentiful or scarce, fleeting or lasting, and can range from wildly attractive to marginally interesting to unsuitable. A firm is well advised to pass on a particular market opportunity unless it has or can acquire the competencies needed to capture it. 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. © McGraw Hill Simply making lists of a firm’s strengths, weaknesses, opportunities, and threats is not enough. The payoff from SWOT analysis comes from the conclusions about a firm’s situation and the implications for strategy improvement that flow from the four lists. TABLE 4.2 What to Look for in Identifying a Company’s Strengths, Weaknesses, Opportunities, and Threats 1 Strengths and Competitive Assets Weaknesses and Competitive Deficiencies Ample financial resources to grow the business. No distinctive core competencies. Strong brand-name image or company reputation. Lack of attention to customer needs. Cost advantages over rivals. Weak balance sheet, too much debt. Attractive customer base. Higher costs than competitors. Proprietary technology, superior technological skills, important patents. Too narrow a product line relative to rivals. Strong bargaining power over suppliers or buyers. Weak brand image or reputation. © McGraw Hill Table 4.2-1 lists many of the things to consider in compiling a company’s strengths and weaknesses. Sizing up a company’s complement of strengths and deficiencies is akin to constructing a strategic balance sheet, where strengths represent competitive assets and weaknesses represent competitive liabilities. Ideally, the company’s competitive assets should outweigh its competitive liabilities by an ample margin. TABLE 4.2 What to Look for in Identifying a Company’s Strengths, Weaknesses, Opportunities, and Threats 2 Strengths and Competitive Assets (continued) Weaknesses and Competitive Deficiencies (continued) Superior product quality. Lack of adequate distribution capability. Wide geographic coverage or strong global distribution capability. Lack of management depth. Alliances or joint ventures that provide access to valuable technology competencies, or attractive geographic markets. A plague of internal operating problems or obsolete facilities Too much underutilized plan capacity. © McGraw Hill Table 4.2-2 lists many of the things to consider in compiling a company’s strengths and weaknesses. Sizing up a company’s complement of strengths and deficiencies is akin to constructing a strategic balance sheet, where strengths represent competitive assets and weaknesses represent competitive liabilities. Ideally, the company’s competitive assets should outweigh its competitive liabilities by an ample margin. 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 the industry’s product. Increasing intensity of competition. Serve additional customer groups or market segments. Slowdowns in market growth. Expand into new geographic markets. Likely entry of potent new competitions. Expand the company’s product line to meet a broader range of customer needs. Growing bargaining power of customers or suppliers. Enter new product lines or new businesses. A shift in buyer needs and tastes away from the industry’s product. Take advantage of failing trade barriers in attractive foreign markets. Adverse demographic changes that threaten to curtail demand for the industry’s product. © McGraw Hill Table 4.2-3 displays a sampling of potential threats and market opportunities. Sizing up a company’s complement of strengths and deficiencies is akin to constructing a strategic balance sheet, where strengths represent competitive assets and weaknesses represent competitive liabilities. Ideally, the company’s competitive assets should outweigh its competitive liabilities by an ample margin. TABLE 4.2 What to Look for in Identifying a Company’s Strengths, Weaknesses, Opportunities, and Threats 4 Market Opportunities (continued) External Threats (continued) Take advantage of an adverse change in the fortunes of rival firms. Adverse economic conditions that threaten critical suppliers or distributors. Acquire rival firms or companies with attractive technological expertise or competencies. Changes in technology—particularly disruptive technology that can undermine the company’s distinctive competencies. Take advantage of emerging technological developments to innovate. Enter into alliances or other cooperative ventures. Restrictive foreign trade policies. Costly new regulatory requirements. Tight credit conditions. Rising prices on energy or other key inputs. © McGraw Hill Table 4.2-4 displays a sampling of potential threats and market opportunities. Sizing up a company’s complement of strengths and deficiencies is akin to constructing a strategic balance sheet, where strengths represent competitive assets and weaknesses represent competitive liabilities. Ideally, the company’s competitive assets should outweigh its competitive liabilities by an ample margin. 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. © McGraw Hill The SWOT analysis process involves more than making four lists. In crafting a new strategy, it offers a strong foundation for understanding how to position the firm to build on its strengths in seizing new business opportunities and how to mitigate external threats by shoring up its competitive deficiencies. In assessing the effectiveness of an existing strategy, it can be used to glean insights regarding the firm's overall business situation (thus the name Situational Analysis); and it can help translate these insights into recommended strategic actions. 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. © McGraw Hill Figure 4.2 shows the steps involved in gleaning insights from SWOT analysis. 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. © McGraw Hill A firm’s resources and capabilities are its competitive assets and they determine whether its competitive power in the marketplace will be impressively strong or disappointingly weak. Companies with second-rate competitive assets nearly always are relegated to a trailing position in the industry. Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically. 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). © McGraw Hill A resource is a competitive asset that is owned or controlled by a firm. A capability or competence is the capacity of a firm to perform an internal activity competently through deployment of a firm’s resources. A firm’s resources and capabilities represent its competitive assets and are determinants of its competitiveness and ability to succeed in the marketplace. Resource and capability analysis is a powerful tool for sizing up a firm’s competitive assets and determining if they can support a sustainable competitive advantage over market rivals. 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, …