19e Section6 LN Chapter04

Chapter 4 Evaluating a Companys Resources, Capabilities, and Competitiveness
CHAPTER 4
EVALUATING A COMPANYS
RESOURCES, CAPABILITIES,
AND COMPETITIVENESS
CHAPTER SUMMARY
Chapter 4 discusses the techniques of evaluating a companys internal circumstancesits resource capabilities,
relative cost position, and competitive strength versus rivals. The analytical spotlight will be trained on five
questions: (1) How well is the companys present strategy working? (2) What are the companys competitively
important resources and capabilities? (3) Is the company able to take advantage of market opportunities and
overcome external threats to its external well-being? (4) Are the companys prices and costs competitive with
those of key rivals, and does it have an appealing 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? In probing for answers to these questions, four analytical toolsSWOT analysis, value chain analysis,
benchmarking, and competitive strength assessment will be used. All four are valuable techniques for revealing
a companys competitiveness and for helping company managers match their strategy to the companys own
particular circumstances.
LECTURE OUTLINE
I. Question 1: How Well is the Companys Present Strategy Working?
1. In evaluating how well a companys 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 Companys Strategy, shows the key
components of a single-business companys strategy.
3. The first thing to pin down is the companys competitive approach.
4. Another strategy-defining consideration is the firms competitive scope within the industry
5. Another good indication of the companys strategy is whether the company has made moves recently to
improve its competitive position and performance.
6. While there is merit in evaluating the strategy from a qualitative standpoint (its completeness, internal
consistency, rationale, and relevance), the best quantitative evidence of how well a companys strategy
is working comes from its results.
7. The two best empirical indicators are:
a. Whether the company is achieving its stated financial and strategic objectives
b. Whether the company is an above-average industry performer
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8. Other indicators of how well a companys strategy is working include:

a. Whether the firms sales are growing faster, slower, or about the same pace as the market as a whole.
b. Whether the company is acquiring new customers at an attractive rate as well as retaining existing
customers.
c. Whether the firms image and reputation with its customers are growing stronger or weaker.
d. Whether the firms profit margins are increasing or decreasing and how well its margins compare to
rival firms margins
d. Trends in the firms net profits and returns on investment and how these compare to the same trends
for other companies in the industry.
e. Whether the companys overall financial strength and credit rating are improving or declining.
f. How well the company stacks up against rivals on technology, product innovation, customer
service, product quality, delivery time, getting newly developed products to market quickly, and
other relevant factors on which buyers base their choices.
g. Whether key measures of operating performance are improving, remaining steady, or deteriorating.
9. The stronger a companys current overall performance, the less likely the need for radical changes
in strategy. The weaker a companys financial performance and market standing, the more its current
strategy must be questioned. Weak performance is almost always a sign of weak strategy, weak execution,
or both.
10. Table 4.1 Key Financial Ratios: How to Calculate Them and What They Mean, provides a detailed
list of profitability ratios, liquidity ratios, leverage ratios, activity ratios, and other important measures
of financial performance. The stronger a companys financial performance and market position, the
more likely it has a well-conceived, well-executed strategy.
II. Question 2: What are the Companys Competitively Important Resources and Capabilities?
CORE CONCEPT
A companys resources and capabilities represent its competitive assets and are
big determinants of its competitiveness and ability to succeed in the marketplace.
A. Identifying the Companys Resources and Capabilities
1. It is essential that managers be able to identify the companys resources and capabilities in order to
craft strategy. Resource and capability analysis is a powerful tool for sizing up a companys 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 companys
competitive assets and determining if they can support a sustainable competitive
advantage over market rivals.
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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
companys resources.
2. Table 4.2 Types of Company Resources, provides a detailed list of both tangible and intangible
resources found in most firms.
3. Identifying Capabilities Organizational capabilities are more complex than resources and are
harder to categorize and search out. Two methods for identifying capabilities are available (1) start
with a list of resources since capabilities are built from resources and look for clues about the types
of capabilities the firm is likely to have accumulated and (2) start with a list of functions within the
organization as capabilities are largely derived from key functional components of the organization.
CORE CONCEPT
A resource bundle is a linked and closely integrated set of competitive assets
centered around one or more cross-functional capabilities.
4. Assessing the Competitive Power of a Companys Resources and Capabilities - Determining
if a companys 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 market rivals that persists despite efforts of the rivals to overcome it.
CORE CONCEPT
The VRIN tests for sustainable competitive advantage ask if a resource is
Valuable, Rare, Inimitable, and Non-substitutable.
5. The Four Tests of a Resources Competitive Power:
a. Is the resource or capability competitively valuable Is it directly relevant to the companys
strategy.
b. Is the resource or capability rare Is it something rivals lack.
c. Is the resource or capability hard to copy Inimitable
d. Is the resource invulnerable to the threat of substitution from different types of resources and
capabilities Non-sustainable
CORE CONCEPT
Social complexity and casual ambiguity are two factors that inhibit the ability of
rivals to imitate a firms 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.
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6. A companys resources and capabilities must be managed dynamically. This requires a constantly
evolving portfolio to sustain its competitiveness and help drive improvements in its performance.
CORE CONCEPT
A dynamic capability is the capacity of a company to modify its existing resources
and capabilities to create new ones.
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 itselfa dynamic capability.
III. Question 3: Is the Company Able to Seize Market Opportunities and Nullify External Threats?
1. Appraising a companys 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 companys resources, aims squarely at a capturing the companys best
opportunities, and defends against the threats to its well-being.
CORE CONCEPT
SWOT analysis is a simple but powerful tool for sizing up a companys resource
capabilities and deficiencies, its market opportunities, and the external threats to its
future well-being.
2. Identifying a Companys 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
appraising a companys resource strengths has to do with its competence level in performing key pieces
of its business. Company competencies can range from merely a competence in performing an activity
to a core competence to a distinctive competence.
3. Assessing a Companys CompetenciesWhat Activities Does It Perform Well?
a. A competence is something an organization is good at doing. It is nearly always the product of
experience, representing an accumulation of learning and the buildup of proficiency in performing
an internal activity.
b. A core competence is a proficiently performed internal activity that is central to a companys
strategy and competitiveness. A core competence is a more valuable resource strength than a
competence because of the well-performed activitys core role in the companys strategy and the
contributions it makes to the companys success in the marketplace.
c. A distinctive competence is a competitively important activity that a company performs better than
its rivals.
CORE CONCEPT
A competence is an activity that a company has learned to perform with
proficiencya capability, in other words.
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CORE CONCEPT
A core competence is a competitively important activity that a company performs
better than other internal activities.
CORE CONCEPT
A distinctive competence is a competitively important activity that a company
performs better than its rivalsit thus represents a competitively superior internal
strength.
d. The conceptual differences between a competence, a core competence, and a distinctive competence
draw attention to the fact that competitive capabilities are not all equal.
e. Core competencies are competitively more important than simple competencies because they add
power to the companys strategy and have a bigger positive impact on its market position and
profitability.
f. The importance of a distinctive competence to strategy-making rests with (1) the competitively
valuable capability it gives a company, (2) its potential for being the cornerstone of strategy, and (3)
the competitive edge it can produce in the marketplace
4. Identifying a Companys Weaknesses and Competitive Deficiencies - A weakness or competitive
deficiency is something a company lacks or does poorly in comparison to others or a condition that puts
it at a disadvantage in the marketplace.
CORE CONCEPT
A companys strengths represent its competitive assets; its weaknesses are
shortcomings that constitute competitive liabilities.
5. Identifying a Companys Market Opportunities - Seeking out attractive opportunities is a critical
management function. However, a company is well advised to pass on a particular market opportunity
unless it has or can acquire the resources to capture it.
6. Identifying the External Threats to Profitability - Certain factors in a companys external environment
pose threats to its profitability and competitive well-being.
7. Table 4.3 What to Look for in Identifying a Companys Strengths, Weaknesses, Opportunities, and
Threats, provides a detailed list of potential strengths and competitive assets, potential weaknesses and
competitive deficiencies, potential market opportunities, and potential external threats to a companys
future profitability.
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. The final piece of SWOT analysis is to translate the diagnosis of the companys situation into actions
for improving the companys strategy and business prospects. A companys internal strengths should
always serve as the basis of its strategyplacing heavy reliance on a companys best competitive
assets is the soundest route to attracting customers and competing successfully against rivals.
b. As a rule, strategies that place heavy demands on areas where the company is weakest or has
unproven competencies should be avoided.
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c. Figure 4.2 The Steps Involved in SWOT Analysis, details the process and results of a comprehensive
SWOT analysis.
IV. Question 4: Are the Companys Cost Structure and Customer Value Proposition Competitive?
1. One of the most telling signs of whether a companys business position is strong or precarious is
whether its prices and costs are competitive with industry rivals.
2. Regardless of where on the quality spectrum a company competes, it must remain competitive in
terms of its customer value proposition in order to stay in the game.
3. Two analytical tools are particularly useful in determining whether a companys prices and costs
are competitive and thus conducive to winning in the marketplace: value chain analysis and
benchmarking.
A. The Concept of a Companys Value Chain
CORE CONCEPT
A companys 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. A companys cost competitiveness depends not only on the costs of internally performed
activities (its own value chain) but also on costs in the value chain of its suppliers and forward
channel allies.
2. The value chain consists of two broad categories of activities:
a. Primary activities: foremost in creating value for customers
b. Support activities: facilitate and enhance the performance of primary activities
3. Illustration Capsule 4.1, The Value Chain for KP MacLane, a Producer of Polo Shirts, shows
representative costs for various activities performed by the producers and marketers of apparel.
ILLUSTRATION CAPSULE 4.1
The Value Chain for KP MacLane, a Producer of Polo Shirts

Discussion Question: What are the total costs associated with production and shiping a polo shirt
to the retailer? Why is having this knowledge important to such a company?
Answer: According to the information provided in the table, the total costs to deliver a mens polo
shirt to the retailer is $29.57 with a whole sale price of $65.00. This provides the producer with an
operating profit of $35.43. With this information, the producer can establish a competitive price
point with the wholesaler with the intention of increasing market share. The producer can also
carefully examine each cost category and determine if further cost reductions can be found to
include outsourcing opportunities or vender selection.
4. Comparing the Value Chains of Rival Companies The primary purpose of value chain analysis is
to facilitate a comparison, activity-by-activity, of how effectively and efficiently a company delivers
value to its customers, relative to its competitors.
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5. A Companys Primary and Secondary Activities Identify the Major Components of Its Internal
Cost Structure The combined costs of all the various primary and support activities comprising a
companys value chain define its internal cost structure.
B. The Value Chain System
1. A companys value chain is embedded in a larger system of activities that includes the value chains
of its suppliers and the value chains of whatever wholesale distributors and retailers it utilizes in
getting its product or service to end users.
2. Accurately assessing a companys competitiveness in end-use markets requires that company
managers understand the entire value chain system for delivering a product or service to end-users,
not just the companys own value chain.
3. Figure 4.4, A Representative Value Chain for an Entire Industry, explores a value chain for an
entire industry.
3. The value chains of a companys distribution channel partners are relevant because:
a. The costs and margins of a companys distributors and retail dealers are part of the price the
ultimate consumer pays.
b. The activities that distribution allies perform affect sales volumes and customer satisfaction.
For these reasons, companies normally work closely with their distribution allies to perform
value chain activities in mutually beneficial ways.
C. Benchmarking: A Tool for Assessing Whether the Costs and Effectiveness of a Companys Value Chain
Activities Are in Line
1. Benchmarking is a tool that allows a company to determine whether the manner in which it
performs particular functions and activities represent industry best practices when both cost and
effectiveness are taken into account.
CORE CONCEPT
Benchmarking is a potent tool for improving a companys own internal activities that
is based on learning how other companies perform them and borrowing their best
practices.
2. Benchmarking entails comparing how different companies perform various value chain activities.
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 consulting organizations and several associations to gather benchmarking data, distribute
information about best practices, and provide comparative cost data without identifying the names
of particular companies.
5. Illustration Capsule 4.2, Benchmarking and Ethical Conduct, lists some guidelines with regard
to benchmarking and ethical conduct.
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ILLUSTRATION CAPSULE 4.2
Benchmarking and Ethical Conduct

Discussion Question: Identify why ethical conduct is important in benchmarking.
Answer: In a benchmarking situation, ethical conduct is important because the discussion between
benchmarking partners can involve competitively sensitive data that can conceivably raise questions
about possible restraint of trade or improper business conduct.
D. Strategic Options for Remedying a Cost Disadvantage
1. Value chain analysis and benchmarking can reveal a great deal about a firms cost competitiveness.
2. There are three main areas in a companys overall value chain where important differences in the
costs of competing firms can occur: a companys own activity segments, suppliers part of the in
dustry value chain, and the forward channel portion of the industry chain.
E. Improving Internally Performed Value Chain Activities
1. When the source of a firms cost disadvantage is internal, managers can use any of the following
eight strategic approaches to restore cost parity:
a. Implement the use of best practices throughout the company, particularly for high-cost activities
b. Try to eliminate some cost-producing activities altogether by revamping the value chain
c. Relocate high-cost activities (such as manufacturing) to more favorable geographic locations.
d. Outsource activities from vendors or contractors if they can perform them more cheaply than
can be done in-house.
e. Invest in productivity enhancing, cost-saving technological improvements.
f. Find ways to detour around the activities or items where costs are high
g. Redesign the product and/or some of its components to eliminate high cost components so that
it can be manufactured or assembled more economically.
2. To improve the effectiveness of the companys value proposition there are several steps the company
may take:
a. Implement the use of best practices for quality throughout the company.
b. Adopt best practices and technologies that spur innovation, improve design, and enhance
creativity.
c. Implement the use of best practices in customer service.
d. Reallocate resources towards activities that have the biggest impact of value delivered to the
customer.
e. Gain a deep understanding of how company activities impact the buyers value chain and
improve those that have the most significant impact.
f. Adopt best practices for signaling value to the customer.
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3. Improving Suppler Related Value Chain Activities: Supplier-related cost disadvantages can be
attacked by pressuring suppliers for lower prices, switching to lower-priced substitute inputs, and
collaborating closely with suppliers to identify mutual cost-saving opportunities.
4. Improving Value Chain Activities of Forward Channel Allies: There are three main ways to combat
a cost disadvantage in the forward portion of the industry value chain:
a. Pressure dealer-distributors and other forward channel allies to reduce their costs and markups
so as to make the final price to buyers more competitive with the prices of rivals.
b. Collaborate with forward channel allies to identify win-win opportunities to reduce costs.
c. Change to a more economical distribution strategy, including switching to cheaper distribution
channels or perhaps integrating forward into company-owned retail outlets.
F. Translating Proficient Performance of Value Chain Activities into Competitive Advantage
1. A companys value-creating activities can offer a competitive advantage in one of two ways:
a. They can contribute to greater efficiency and lower costs relative to competitors
b. They can provide a basis for differentiation, so customers are willing to pay relatively more for
the companys goods and services.
2. How Activities Relate to Resources and Capabilities
a. An organizational capability or competence implies a capacity for action; in contrast, a valuecreating activity initiates the action.
b. There is a dynamic relationship between a companys activities and its resources and capabilities;
they contribute to the formation and development of capabilities.
3. Figure 4.5, Translating Company Performance of Value Chain Activities into Competitive
Advantage, shows the process of translating proficient company performance into competitive
advantage.
V. Question 5: Is the Company Competitively Stronger or Weaker Than Key Rivals?
1. Competitive Strength Assessment - Using value chain analysis and benchmarking to determine a
companys competitiveness on price and cost is necessary but not sufficient.
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
ratings for the company and its key competitors on each industry key success factor and each
competitively decisive resource capability.
4. The followings are steps for compiling a competitive strength assessment:
a. Step 1: make a list of the industrys key success factors and most telling measures of competitive
strength or weakness
b. Step 2: assign weights to each of the measures based upon perceived importance
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c. Step 3: rate the firm and its rivals on each factor and multiply the rating by the weight to obtain the
score for each measure
d. Step 4: sum the weighted scores for measure to get an overall measure of competitive strength for
each company being rated
e. Step 5: use the overall strength ratings to draw conclusions about the size and extent of the
companys net competitive advantage or disadvantage and to take specific note of areas of strengths
and weaknesses
5. Table 4.4, A Representative Weighted Competitive Strength Assessment, provides an examples of
a weighted competitive strength assessment.
6. Using a weighted rating system is more effective because the different measures of competitive strength
are unlikely to be equally important.
7. Summing a companys weighted strength ratings for all the measures yields an overall strength rating.
Comparisons of the weighted overall strength scores indicate which competitors are in the strongest and
weakest competitive positions and who has how big a net competitive advantage over whom.
VI. Question 6: What Strategic Issues and Problems Merit Front-Burner Managerial Attention?
1. The final and most important analytical step is to zero in on exactly what strategic issues that company
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
of the companys own competitiveness.
3. Zeroing in on the strategic issues a company faces and compiling a worry list of problems and
roadblocks creates a strategic agenda of problems that merit prompt managerial attention.
4. A good strategy must contain ways to deal with all the strategic issues and obstacles that stand in the
way of the companys financial and competitive success in the years ahead.
ASSURANCE OF LEARNING EXERCISES

1. Using the financial ratios provided in the Appendix and the financial statement information for Avon Products
below, calculate the following ratios for Avon for both 2009 and 2010:
a. Gross profit margin
b. Operating profit margin
c. Net profit margin.
d. Times interest earned coverage
e. Return on shareholders equity
f. Return on assets
g. Debt-to-equity ratio
h. Days of inventory
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i. Inventory turnover ratio

j. Average collection period
Based on these ratios, did the Avons financial performance improve, weaken, or remain about the same
from 2009 to 2010?
Answer The student should prepare the following analysis:
a. Gross profit margin Gross profit margin equals (sales cost of goods sold) divided by (sales). For
Avon, this is represented in the following equations:

2009 ($10,205M $3,825m) / ($10,205M) = 0.6251 or 62.51%
2010 ($10,862M $4,041M) / ($10,862M) = 0.6279 or 62.79 % [favorable, increase but slight]
b. Operating profit margin Operating profit margin equals (operating income) divided by (sales). For

2009 ($1.005M) / ($10,205M) = 0.0984 or 9.84%
2010 ($1,073M) / ($10,862M) = 0.0987 or 9.87% [favorable, increase but slight]
c. Net profit margin Net profit margin equals (profits after taxes) divided by (sales). For Avon, this is
represented in the following equations:

2008 ($628.2M) / ($10,205M) = 0.615 or 6.15 %
2009 ($609.3M) / ($10,862M) = 0.0560 or 5.60 % [unfavorable decrease]
d. Times-interest-earned (coverage) ratio Times-interest-earned equals (operating income) divided by

(interest expense). For Avon, this is represented in the following equations:

2009 ($1.005M) / ($104.8M) = 9.59
2010 ($1,073M) / ($87.1M) = 12.32 [upward trend is favorable]
e. Return on shareholders equity Return on stockholders equity equals (profits after taxes) divided by
(total stockholders equity). For Avon, this is represented in the following equations:

2009 ($619.2M) / ($1,312M) = 0.4719 or 47.19%
2010 ($595.2M) / ($1,672M) = 0.3559 or 35.59% [unfavorable decrease, but above average]
f. Return on assets - Return on total assets equals (profits after taxes + interest) divided by (sales). For

2009 ($619.2M + $104.8M) / ($10,205M) = 0.0709 or 7.09%
2010 ($595.2M + $87.1M) / ($10,862M) = 0.0628 or 6.28 %[unfavorable decrease]
g. Debt-to-equity ratio Debt-to-equity equals (total debt) divided by (total stockholders equity). For

2009 ($5,510M) / ($1,312M) = 4.199
2010 ($6,201) / ($1,672) = 3.708 [favorable decrease]
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h. Days of inventory Days of inventory equals (inventory) divided by (Cost of goods sold divided by
365). For Avon, this is represented in the following equations:

2009 ($1,049M) / ($3,825M/365 days) = 100.10 days
2010 ($1,152M) / ($4,041M/365 days) = 104.05 days [unfavorable increase; trend of fewer days of
inventory is better]
i. Inventory turnover ratio - Inventory turnover ratio equals (Cost of goods sold) divided by (inventory).
For Avon, this is represented in the following equations:

2009 ($3,825M) / ($1,049M) = 3.64 turns per year
2010 ($4,041M m) / ($1,152M) = 3.50 turns per year [unfavorable decrease]
j. Average collection period - Average collection period equals (accounts receivable) divided by (total
sales divided by 365). For Avon, this is represented in the following equations:

2008 ($765.7M) / ($10,205M /365 days) = 27.36 days
2009 ($826.3M) / ($10,862M /365 days) = 27.76 days [roughly the same; shorter is better]
Performance Analysis The student should identify that overall, Avons financial performance is down
from 2009. The most significant changes are the net profits as they indicate problems with the profit formula
(roughly same sales with lower profitability). Another potential problem area is the increase in inventory
and the extended time inventory is held. These measures then impact all of the profitability measures for the
organization.
2. Starbucks operates more than 17,000 stores in more than 50 countries. How many of the four tests of the
competitive power of a resource does the store network pass? Explain your answer.
Answer The student should identify the following:
1. Is the resource or capability competitively valuable Is it directly relevant to the companys strategy.
The experience provided by the store is the most essential component of Starbucks value proposition.
2. Is the resource or capability rare Is it something rivals lack. Other companies are able to copy the
features of the store but few have the quantity of stores. Mc Caf is an exception here.
3. Is the resource or capability hard to copy Is it built over time or unique As stated, the experience
provided by the store can be copied.
4. Can the resource or capability be trumped by different types of resources or capabilities. Are good
substitutes available for the resource or capability. For someone looking for a predictable specialty
coffee shop experience few substitutes exist.
3. Using your general knowledge of the coffee take-out industry, perform a SWOT analysis for Starbucks.
Answer The student should prepare a table with clearly stated facts. These could include but are not
limited to:
Strengths
Continuous Profits with a strong balance sheet.
Strong global brand recognition.
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Weaknesses
Strong presence in the US (profit sanctuary) slow and sporadic global expansion.
Dependency on the retail coffee industry for competitive advantage. A market shift away from coffee could
be damaging.
Opportunites
Expansion into the global marketplace
Global business cultural shift from Tea to Coffee in historically tea drinking countries such as India and the
UK.
Threats
Rising competition in from emerging coffee experience retailers such as Dunkin Donuts and McCafe
(competitive products).
Increasing consumption of energy drinks among critical 20-25 year age demographic (substitute products).
4. Review the information in Illustration Capsule 4.1 concerning the value chain average costs of producing
and selling an upscale polo shirt and compare this with the representative value chain depicted in Figure 4.3.
Then answer the following questions:
a. Which of the companys primary value chain activities account for the largest percentage of its operating
expenses?
b. What support activities described in Figure 4.3 would be necessary at KP MacLane?
c. What value chain activities might be important in securing or maintaining a competitive advantage for
a producer of upscale, branded shirts like KP MacLane?
Answer:
a. The example provided illustrates a complex value chain which includes a separate manufacturer and
retailer. From the perspective of the manufacturer with a wholesale price of $65.00, the costs are:
Cost of Good Sold (Operations) 33%
Shiping and Packaging (Distribution) 13%
However, when the perspective is changed to focus on the final retail price of $155.00, the cost allocations
change:
Cost of Good Sold (Operations) 14%
Shiping and Packaging (Distribution) 5%
Retailer Markup (Sales & Marketing) 58%
So, when the entire value chain is analyzed, the retailer presents the highest percentage of operating
expenses at 58%. This extended analysis might point to a weakness in the firms business model that
would not come to light if the focus was only on internal operations.
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b. The company examined would require all of the support activities identified in the value chain diagram
to include:
Research & Development for new products
Human Resource Management for employees
General Administration
c. Certainly strong research and development are critical to keeping the right products in the marketing
mix. Secondly, a strong marketing plan will be necessary in order to maintain and grow brand equity.
The cost analysis above might point to issues in the distribution and sales chain that should be examined
further.
5. Using the methodology illustrated in Table 4.3 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/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 Toyotas competitive
success? Does Toyota have competitive weaknesses that were disclosed by your analysis? Explain.
Answer:
1. The student should identify Key Success Factors in the automotive industry:

Quality / Product Performance
Reputation / Image
Manufacturing Capability
Technological Skills
Dealer Network / Distribution Capability
New Product Innovation Capability
Financial Resources
Relative Cost Position
2. The Key Success Factors should be assigned weights based on how important they feel the factor is
relative to other factors. The total of all weights should equal 1 (100%).
3. Each company should be graded from 0- 10 for each factor and that grade should be multiplied by the
weight for the factor score.
4. The total of all weighted scores will be the relative Competitive Strength of the company.
5. The student should use published data included annual reports and industry watchdog reports to develop
their grades in each factor. The grading must be consistent for each company in order for the results
to have validity. The student should be provided with latitude in determining factors and weights that
they feel are relevant to success in the industry. The condition should be that they can substantiate their
selections.
6. Table 4.3 provides an example of what an automotive industry Competitive Strength Assessment should
look like.
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19e Section6 LN Chapter04

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Chapter 4 Evaluating a Companys Resources, Capabilities, and Competitiveness

Chapter 4 Evaluating a Companys Resources, Capabilities, and Competitiveness

8. Other indicators of how well a companys strategy is working include:

Chapter 4 Evaluating a Companys Resources, Capabilities, and Competitiveness

Chapter 4 Evaluating a Companys Resources, Capabilities, and Competitiveness

Chapter 4 Evaluating a Companys Resources, Capabilities, and Competitiveness

Chapter 4 Evaluating a Companys Resources, Capabilities, and Competitiveness

ILLUSTRATION CAPSULE 4.1

The Value Chain for KP MacLane, a Producer of Polo Shirts

Chapter 4 Evaluating a Companys Resources, Capabilities, and Competitiveness

Chapter 4 Evaluating a Companys Resources, Capabilities, and Competitiveness

ILLUSTRATION CAPSULE 4.2

Benchmarking and Ethical Conduct

Chapter 4 Evaluating a Companys Resources, Capabilities, and Competitiveness

Chapter 4 Evaluating a Companys Resources, Capabilities, and Competitiveness

ASSURANCE OF LEARNING EXERCISES

Chapter 4 Evaluating a Companys Resources, Capabilities, and Competitiveness

i. Inventory turnover ratio

2009 ($10,205M $3,825m) / ($10,205M) = 0.6251 or 62.51%

2009 ($1.005M) / ($10,205M) = 0.0984 or 9.84%

2010 ($1,073M) / ($10,862M) = 0.0987 or 9.87% [favorable, increase but slight]

2008 ($628.2M) / ($10,205M) = 0.615 or 6.15 %

2009 ($609.3M) / ($10,862M) = 0.0560 or 5.60 % [unfavorable decrease]

d. Times-interest-earned (coverage) ratio Times-interest-earned equals (operating income) divided by

2009 ($1.005M) / ($104.8M) = 9.59

2010 ($1,073M) / ($87.1M) = 12.32 [upward trend is favorable]

2009 ($619.2M) / ($1,312M) = 0.4719 or 47.19%

2009 ($619.2M + $104.8M) / ($10,205M) = 0.0709 or 7.09%

2010 ($595.2M + $87.1M) / ($10,862M) = 0.0628 or 6.28 %[unfavorable decrease]

2009 ($5,510M) / ($1,312M) = 4.199

2010 ($6,201) / ($1,672) = 3.708 [favorable decrease]

Chapter 4 Evaluating a Companys Resources, Capabilities, and Competitiveness

2009 ($1,049M) / ($3,825M/365 days) = 100.10 days

2009 ($3,825M) / ($1,049M) = 3.64 turns per year

2010 ($4,041M m) / ($1,152M) = 3.50 turns per year [unfavorable decrease]

2008 ($765.7M) / ($10,205M /365 days) = 27.36 days

Chapter 4 Evaluating a Companys Resources, Capabilities, and Competitiveness

Chapter 4 Evaluating a Companys Resources, Capabilities, and Competitiveness

Quality / Product Performance

Dealer Network / Distribution Capability

New Product Innovation Capability

Relative Cost Position

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