141
Evaluating a Company’s Resources,
Capabilities, and Competitiveness
Chapter Summary
Chapter 4 discusses the techniques of evaluating a company’s internal circumstances—its resource capabilities,
relative cost position, and competitive strength versus rivals. The analytical spotlight will be trained on six
questions: 1) How well is the company’s present strategy working? 2) What are the company’s most important
resources and capabilities, and will they give the company a lasting competitive advantage over rival companies?
3) What are the company’s strengths and weaknesses in relation to the market opportunities and external threats?
4)Howdoacompany’svaluechainactivitiesimpactitscoststructureandcustomervalueproposition?5)Isthe
company competitively stronger or weaker than key rivals? 6) What strategic issues and problems merit front-
burner managerial attention?
Lecture Outline
I. Question 1: How Well is the Company’s Present Strategy Working?
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.
1. In evaluating how well a company’s present strategy is working, a manager has to start with what the
strategy is.
2. Figure 4.1, Identifying the Components of a Single-Business Company’s Strategy, shows the key
components of a single-business company’s strategy.
3. Thefirstthingtopindownisthecompany’scompetitiveapproach.
4. The three best indicators of how well a company’s strategy is working are:
c. Whether it is gaining customers and increasing its market share
5. Otherindicatorsofhowwellacompany’sstrategyisworkinginclude:
a. Trends in the company’s sales and earnings growth
c. Thecompany’soverallfinancialstrength
141
CHAPTER 4
Chapter 4 Evaluating a Company’s Resources, Capabilities, and Competitiveness
142
days of inventory, and employee productivity.
6. The stronger a company’s current overall performance, the less likely the need for radical changes
instrategy.Theweakeracompany’sfinancialperformanceandmarketstanding,themoreitscurrent
or both.
7. Table 4.1 Key Financial Ratios: How to Calculate Them and What They Mean, provides a detailed
listofprofitabilityratios,liquidityratios,leverageratios,activityratios,andotherimportantmeasures
II. Question 2: What are the Company’s Most Important Resources and Capabilities and will they give
the Company a Lasting Competitive Advantage?
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.
CORE CONCEPT
A company’s resources and capabilities represent its competitive assets and are big
determinants of its competitiveness and ability to succeed in the marketplace.
A. Identifying the Company’s Resources and Capabilities
1. It is essential that managers be able to identify the company’s resources and capabilities in order to
craft strategy. Resource and capability analysis is a powerful tool for sizing up a company’s com petitive
assets and determining if they can support a sustainable competitive advantage over market rivals.
CORE CONCEPT
Resource and capability analysis is a powerful tool for sizing up a company’s
competitive assets and determining if they can support a sustainable competitive
advantage over market rivals.
CORE CONCEPT
A resource is a competitive asset that is owned or controlled by a company; a
capability or competence is the capacity of a firm to perform some internal activity
competently. Capabilities are developed and enabled through the deployment of a
company’s resources.
2. Table 4.2 Types of Company Resources, provides a detailed list of both tangible and intangible
resourcesfoundinmostfirms.
Chapter 4 Evaluating a Company’s Resources, Capabilities, and Competitiveness
143
3. Identifying Capabilities—Organizational capabilities are more complex than resources and are harder
to categorize and search out.
4. Two methods for identifying capabilities are available:
CORE CONCEPT
A resource bundle is a linked and closely integrated set of competitive assets centered
around one or more cross-functional capabilities.
B. Assessing the Competitive Power of a Company’s Resources and Capabilities—Determining if a
company’s resources and capabilities are potent enough to produce a sustainable competitive advantage
is based upon four tests of competitive power. A sustainable competitive advantage is an advantage over
marketrivalsthatpersistsdespiteeffortsoftherivalstoovercomeit.
CORE CONCEPT
The VRIN tests for sustainable competitive advantage ask if a resource is Valuable,
Rare, Inimitable, and Non-substitutable.
1. The Four Tests of a Resource’s Competitive Power:
CORE CONCEPT
Social complexity and casual ambiguity are two factors that inhibit the ability of rivals
to imitate a firm’s most valuable resources and capabilities. Casual ambiguity makes it
very hard to figure out how a complex resource or capability contributes to competitive
advantage and therefore exactly what to imitate.
6. A company’s resources and capabilities must be managed dynamically. This requires a constantly
evolving portfolio to sustain its competitiveness and help drive improvements in its performance.
Chapter 4 Evaluating a Company’s Resources, Capabilities, and Competitiveness
144
7. The Role of Dynamic Capabilities—Companies that know the importance of recalibrating and upgrading
their most valuable resources and capabilities ensure that these activities are done on a continual basis.
At that point, their ability to freshen and renew their competitive assets becomes a capability in itself—a
dynamic capability.
III. Question 3: What are the Company’s Strengths and Weaknesses in Relation to the Market
Opportunities and Nullify External Threats?
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.
1. Appraising a company’s resource strengths and weaknesses and its external opportunities and threats,
commonly known as SWOT analysis, provides a good overview of whether its overall situation
is fundamentally healthy or unhealthy.A first-rate SWOT analysis provides the basis for crafting a
strategy that capitalizes on the company’s resources, aims squarely at a capturing the company’s best
opportunities, and defends against competitive and macro-environmental threats.
CORE CONCEPT
SWOT analysis is a simple but powerful tool for sizing up a company’s resource
capabilities and deficiencies, its market opportunities, and the external threats to its
future well-being.
2. Identifying a Company’s Internal Strengths—A strength is something a company is good at doing or
an attribute that enhances its competitiveness in the marketplace. One of the most important aspects of
3. Assessing a Company’s Competencies—What Activities Does It Perform Well?
a. A competence is something an organization is good at doing. It is nearly always the product of
experience,representinganaccumulationoflearningandthebuildupofproficiencyinperforming
an internal activity.
CORE CONCEPT
A competence is an activity that a company has learned to perform with proficiency—a
capability, in other words.
CORE CONCEPT
A core competence is a competitively important activity that a company performs
better than other internal activities.
Chapter 4 Evaluating a Company’s Resources, Capabilities, and Competitiveness
145
4. Identifying a Company’s Weaknesses and Competitive Deficiencies—A weakness or competitive
deficiencyissomethingacompanylacksordoespoorlyincomparisontoothersoraconditionthatputs
it at a disadvantage in the marketplace.
CORE CONCEPT
A company’s strengths represent its competitive assets; its weaknesses are
shortcomings that constitute competitive liabilities.
5. Identifying a Company’s Market Opportunities—Seeking out attractive opportunities is a critical
6. Identifying the External Threats to a Company’s Future Profitability—Certain factors in a
7. Table 4.3 What to Look for in Identifying a Company’s Strengths, Weaknesses, Opportunities, and
Threats, provides a detailed list of potential strengths and competitive assets, potential weaknesses and
futureprofitability.
8. What do the SWOT listings Reveal—SWOT analysis involves more than making four lists. The two
most important parts of SWOT analysis are:
a. ThefinalpieceofSWOTanalysisistotranslatethediagnosisofthecompany’ssituationintoactions
for improving the company’s strategy and business prospects. A company’s internal strengths should
IV. Question 4: How do a Company’s Value Chain Activities Impact its Cost Structure and Customer
Value Proposition?
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.
1. One of the most telling signs of whether a company’s business position is strong or precarious is whether
its prices and costs are competitive with industry rivals.
Chapter 4 Evaluating a Company’s Resources, Capabilities, and Competitiveness
146
2. Regardless of where on the quality spectrum a company competes, it must remain competitive in terms
A. The Concept of a Company’s Value Chain
CORE CONCEPT
A company’s value chain identifies the primary activities that create customer value
and the related support activities.
1. Figure 4.3, A Representative Company Value Chain, depicts the linked set of value creating activities.
2. The value chain consists of two broad categories of activities:
b. Support activities: facilitate and enhance the performance of primary activities
3. Illustration Capsule 4.1, American Giant: Using the Value Chain to Compare Costs of Producing a
Hoodie in the U.S. and Asia, shows representative costs for various activities performed by the producers
and marketers of apparel.
ILLUSTRATION CAPSULE 4.1
The Value Chain for Boll & Branch
Discussion Question: What are the total costs associated with producing and shipping a king
size set of sheets to the end customer? How their ‘direct to customer’ market strategy translate
into competitive advantage Boll & Branch? In what way can the company utilize this advantage?
Answer: According to the information provided in the table, the total cost to the company for a
king size set of sheets is $154.38, resulting in a profit of $95.62 given a retail price of $250.00. By
4. Comparing the Value Chains of Rival Companies—The primary purpose of value chain analysis is to
5. ACompany’sPrimaryandSecondaryActivitiesIdentifytheMajorComponentsofItsInternalCost
Chapter 4 Evaluating a Company’s Resources, Capabilities, and Competitiveness
147
B. The Value Chain System
1. A company’s value chain is embedded in a larger system of activities that includes the value chains of
2. Thevaluechainsofthedistributionchannelpartnersarealsorelevantbecausetheyimpactthefinal
retail price the consumer sees and impact sales volume and customer satisfaction.
3. Accurately assessing a company’s competitiveness in end-use markets requires that company managers
4. Figure 4.4, A Representative Value Chain for an Entire Industry, explores a value chain for an entire
industry.
C. Benchmarking: A Tool for Assessing Whether the Costs and Effectiveness of a Company’s Value Chain
Activities Are in Line
1. Benchmarkingentailscomparinghowdifferentcompaniesperformvariousvaluechainactivities.
CORE CONCEPT
Benchmarking is a potent tool for improving a company’s own internal activities that
is based on learning how other companies perform them and borrowing their “best
practices.”
3. The tough part of benchmarking is not whether to do it but rather how to gain access to information
about other companies’ practices and costs.
4. The explosive interest of companies in benchmarking costs and identifying best practices has prompted
Chapter 4 Evaluating a Company’s Resources, Capabilities, and Competitiveness
148
ILLUSTRATION CAPSULE 4.2
Delivered-Cost Benchmarking in the Cement Industry
Discussion Question: Delivered-Cost Benchmarking in the Cement Industry can be broken
down into five elements: fixed-bin, variable-bin, freight-to-terminal, terminal operating, and
freight-to-customer costs. Where can Cement Companies find opportunities for improvement or
competitive advantage within these five elements of cost?
Answer: The first two categories of cost are company internal and consequently difficult to estimate
while the logistics costs are relatively easy to estimate when based upon common carrier data.
Companies can find opportunities to improve in any area where their costs are higher than Industry
ACTIVITY
Consider adding a File Attachment assignment requiring the student to develop a graphic showing the
elements of Delivered Cost in the Cement Industry and CEMEX in particular. Have the student include
details on the costs of each element relative to industry averages as well as a discussion of how the
analysis informs competitive advantage. You can post instructions for the student within the assignment
and collect their attachments for grading.
D. Strategic Options for Remedying a Cost Disadvantage
1. Valuechainanalysisandbenchmarkingcanrevealagreatdealaboutafirm’scostcompetitiveness.
3. Improving Internally Performed Value Chain Activities – Managers can pursue any of several strategic
approaches to reduce the costs of internally performed value chain activities and improve a company’s
cost competitiveness:
4. Toimprovetheeffectivenessofthecompany’scustomervaluepropositionandenhancedifferentiation,
managers can take several approaches:
Chapter 4 Evaluating a Company’s Resources, Capabilities, and Competitiveness
149
5. ImprovingSupplier-RelatedValueChainActivitiescanbeapproachedinthreeways:
6. Improving Value Chain Activities of Distribution Partners: There are three main ways to combat a cost
disadvantage in the forward portion of the industry value chain:
F. Translating Proficient Performance of Value Chain Activities into Competitive Advantage
1. Acompany’svalue-creatingactivitiescanofferacompetitiveadvantageinoneoftwoways:
2. How Value Chain Activities Relate to Resources and Capabilities:
V. Question 5: Is the Company Competitively Stronger or Weaker Than Key Rivals?
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.
2. The answers to two questions are of particular interest:
a. How does the company rank relative to competitors on each of the important factors that determine
market success?
b. Does the company have a net competitive advantage or disadvantage to major competitors?
3. An easy method for answering the questions posed above involves developing quantitative strength
4. The followings are steps for compiling a competitive strength assessment:
a. Step 1: make a list of the industry’s key success factors and most telling measures of competitive
strength or weakness
Chapter 4 Evaluating a Company’s Resources, Capabilities, and Competitiveness
150
e. Step 5: use the overall strength ratings to draw conclusions about the size and extent of the
company’snetcompetitiveadvantageordisadvantageandtotakespecificnoteofareasofstrengths
and weaknesses
5. Table 4.4, A Representative Weighted Competitive Strength Assessment, provides an example of a
weighted competitive strength assessment.
6. Usingaweightedratingsystemismoreeffectivebecausethedifferentmeasuresofcompetitivestrength
are unlikely to be equally important.
VI. Question 6: What Strategic Issues and Problems Merit Front-Burner Managerial Attention?
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.
1. Thefinalandmostimportantanalyticalstepistozeroinonexactlywhatstrategicissuesthatcompany
managers need to address and resolve for the company to be more financially and competitively
successful in the years ahead.
2. This step involves drawing on the results of both industry and competitive analysis and the evaluations