Strategic Management Chapter 4

Chapter 4: Evaluating a Company’s Resources, Capabilities, and Competitiveness
QUESTION 1: HOW WELL IS THE COMPANY’S PRESENT STRATEGY WORKING?
Before evaluating how well a company’s present strategy is working, it is best to

start with a clear view of what the strategy entails. The first thing to examine is
the company’s competitive approach. What moves has the company made
recently to attract customers and improve its market position. The three best
indicators of how well a company’s strategy is working are
(1) whether the company is achieving its stated financial and strategic objectives,
(2) whether its financial performance is above the industry average, and
(3) whether it is gaining customers and gaining market share.
QUESTION 2: WHAT ARE THE COMPANY’S MOST IMPORTANT RESOURCES AND

CAPABILITIES, AND WILL THEY GIVE THE COMPANY A LASTING COMPETITIVE
ADVANTAGE?
Competitive Assets
 Are the firms resources and capabilities

 Are the determinants of its competitiveness and ability to succeed in the
marketplace.
 Are what a firms strategy depends on to develop sustainable competitive
advantage over its rivals.
 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 through the deployment of a company’s
resources.
 A company’s resources and capabilities represent its competitive assets and
are determinants of its competitiveness and ability to succeed in the
marketplace.
Identifying the Company’s Resources and Capabilities
A resource is a productive input or competitive asset that is owned or controlled

by the firm (e.g., a fleet of oil tankers).
A capability or competence is the capacity of a firm to perform some internal
activity competently (e.g., superior skills in marketing).
 Types of Company Resources
Tangible resources
• Physical resources: land and real estate; manufacturing plants, equipment.
• Financial resources: cash and cash equivalents; marketable securities; other

financial assets.
• Technological assets: patents, copyrights, production technology, innovation

technologies.
• Organizational resources: IT and communication systems, other planning,

coordination, and control systems.
Intangible resources
• Human assets and intellectual capital: the education, experience, knowledge,

and talent of the workforce etc.
• Brands, company image, and reputational assets: brand names, trademarks,

product or company image, buyer loyalty and goodwill.
• Relationships: alliances, joint ventures, or partnerships that provide access to

technologies.
• Company culture and incentive system: the norms of behavior, business

principles, and ingrained beliefs within the company.
VRIN Test
The competitive power of a resource or capability is measured by how many of

four specific tests it can pass. These tests are referred to as the VRIN tests for
sustainable competitive advantage—VRIN is a shorthand reminder standing for
Valuable, Rare, Inimitable, and No substitutable.
1. Is the resource or capability competitively Valuable? To be competitively

valuable, a resource or capability must be directly relevant to the
company’s strategy, making the company a more effective competitor.
2. Is the resource or capability Rare—is it something rivals lack? Resources and
capabilities that are common among firms and widely available cannot be a
source of competitive advantage.
3. Is the resource or capability Inimitable—is it hard to copy? The more
difficult and more costly it is for competitors to imitate a company’s
resource or capability, the more likely that it can also provide a sustainable
competitive advantage.
4. Is the resource or capability Non substitutable—is it invulnerable to the
threat of substitution from different types of resources and capabilities?
Even resources that are competitively valuable, rare, and costly to imitate
may lose much of their ability to offer competitive advantage if rivals
possess equivalent substitute resources.
Managing Resources and Capabilities Dynamically:
Threats to Resources and Capabilities
 Rivals providing better substitutes over time.

 Capabilities decaying from benign neglect.
 Disruptive competitive environment change.
Managing capabilities Dynamically
 Attending to the ongoing modification of existing competitive assets.

 Taking advantage of any opportunities to develop totally new kinds of
capabilities.
QUESTION 3: WHAT ARE THE COMPANY’S STRENGTHS AND WEAKNESSES IN
RELATION TO THE MARKET OPPORTUNITIES AND EXTERNAL THREATS?
SWOT analysis, or Situational Analysis is a popular, easy to use tool for sizing up a
company’s strengths and weaknesses, its market opportunities, and external
threats. SWOT is an acronym that stands for a company’s internal Strengths and
Weaknesses, market Opportunities, and external Threats. Another name for
SWOT analysis is Situational Analysis.
Identifying a Company’s Internal Strengths
An internal strength is something a company is good at doing or an attribute that

enhances its competitiveness in the marketplace. 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. A distinctive competence is a capability that enables a
company to perform a particular set of activities better than its rivals. A core
competence is an activity that a company performs proficiently and that is also
central to its strategy and competitive success.
Identifying Company Internal Weaknesses
An internal weakness is something a company lacks or does poorly or a condition

that puts it at a disadvantage in the marketplace. A company’s internal
weaknesses can relate to (1) inferior or unproven skills, expertise, or intellectual
capital in competitively important areas of the business, or (2) deficiencies in
competitively important physical, organizational, or intangible assets.
Identifying a Company’s Market Opportunities
Market opportunity is a big factor in shaping a company’s strategy. Indeed,

managers can’t properly tailor strategy to the company’s situation without first
identifying its market opportunities and appraising the growth and profit potential
each one holds.
Identifying External Threats
External threats may pose no more than a moderate degree of adversity or they
may be imposing enough to make a company’s situation look tenuous.
What Do the SWOT Listings Reveal?
 it offers a strong foundation for understanding how to position the

company to build on its strengths in seizing new business opportunities,
 how to mitigate external threats by shoring up its competitive deficiencies.
QUESTION 4: HOW DO VALUE CHAIN ACTIVITIES IMPACT A COMPANY’S COST

STRUCTURE AND CUSTOMER VALUE PROPOSITION?
The higher a company’s costs are above those of close rivals, the more
competitively vulnerable the company becomes. Two analytic tools are
particularly useful in determining whether a company’s costs and customer value
proposition are competitive: value chain analysis and benchmarking.
The Concept of a Company Value Chain
A company’s value chain identifies the primary activities and related support
activities that create customer value. A company’s value chain consists of two
broad categories of activities: the primary activities foremost in creating value for
customers and the requisite support activities that facilitate and enhance the
performance of the primary activities.
PRIMARY ACTIVITIES
 Supply Chain Management—Activities, costs, and assets associated with

purchasing fuel, energy, raw materials, parts and components, and
inventory management.
 Operations—Activities, costs, and assets associated with converting inputs
into final product form.
 Distribution—Activities, costs, and assets dealing with physically
distributing the product to buyers.
 Sales and Marketing—Activities, costs, and assets related to sales force
efforts, advertising and promotion, market research and planning.
 Service—Activities, costs, and assets associated with providing assistance
to buyers, such as installation, spare parts delivery, maintenance and repair
and complaints.
SUPPORT ACTIVITIES
 Product R&D, Technology, and Systems Development—Activities, costs, and

assets relating to product R&D, process R&D, process design improvement,
equipment design, computer software development etc.
 Human Resource Management—Activities, costs, and assets associated
with the recruitment, hiring, training, development, and compensation of
all types of personnel.
 General Administration—Activities, costs, and assets relating to general
management, accounting and finance, legal and regulatory affairs, safety
and security.
Comparing the Value Chains of Rival Companies: Value chain analysis facilitates a
comparison of how rivals, activity by activity, deliver value to customers. Even
rivals in the same industry may differ significantly in terms of the activities they
perform. Thus, even a simple comparison of how the activities of rivals’ value
chains differ can reveal competitive differences.
VALUE CHAIN ANALYSIS
Value chain analysis is a means of evaluating each of the activities in a company’s

value chain to understand where opportunities for improvement lie.
Process of Value Chain analysis
1. Identify Value Chain Activities: The first step in conducting a value chain
analysis is to understand all of the primary and secondary activities that go
into your product or service’s creation.
2. Determine the Cost and Value of Activities: Once the primary and secondary
activities have been identified, the next step is to determine the value that
each activity adds to the process, along with the costs involved.
3. Identify Opportunities for Competitive Advantage: Once you’ve compiled
your value chain and understand the cost and value associated with each step,
you can analyze it through the lens of whatever competitive advantage you’re
trying to achieve.
Benchmarking: Benchmarking is a process where you measure your company’s

success against other similar companies to discover if there is a gap in
performance that can be closed by improving your performance.
QUESTION 5: IS THE COMPANY COMPETITIVELY STRONGER OR WEAKER THAN

KEY RIVALS?
High-weighted competitive strength ratings signal a strong competitive position

and possession of competitive advantage; low ratings signal a weak position and
competitive disadvantage.
Strategic Implications of Competitive Strength Assessments: A competitively
astute company should utilize the strength scores in deciding what strategic
moves to make. When a company has important competitive strengths in areas
where one or more rivals are weak, it makes sense to consider offensive moves to
exploit rivals’ competitive weaknesses. When a company has important
competitive weaknesses in areas where one or more rivals are strong, it makes
sense to consider defensive moves to curtail its vulnerability.
QUESTION 6: WHAT STRATEGIC ISSUES AND PROBLEMS MERIT FRONT-BURNER

MANAGERIAL ATTENTION?
A good strategy must contain ways to deal with all the strategic issues and
obstacles that stand in the way of the company’s financial and competitive
success in the years ahead.
Important Figure and Table:

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Chapter 4: Evaluating a Company’s Resources, Capabilities, and Competitiveness

QUESTION 1: HOW WELL IS THE COMPANY’S PRESENT STRATEGY WORKING?

Before evaluating how well a company’s present strategy is working, it is best to

(3) whether it is gaining customers and gaining market share.

QUESTION 2: WHAT ARE THE COMPANY’S MOST IMPORTANT RESOURCES AND

 Are the firms resources and capabilities

A resource is a productive input or competitive asset that is owned or controlled

A capability or competence is the capacity of a firm to perform some internal

activity competently (e.g., superior skills in marketing).

 Types of Company Resources

• Physical resources: land and real estate; manufacturing plants, equipment.

• Financial resources: cash and cash equivalents; marketable securities; other

• Technological assets: patents, copyrights, production technology, innovation

• Organizational resources: IT and communication systems, other planning,

• Human assets and intellectual capital: the education, experience, knowledge,

• Brands, company image, and reputational assets: brand names, trademarks,

• Relationships: alliances, joint ventures, or partnerships that provide access to

• Company culture and incentive system: the norms of behavior, business

The competitive power of a resource or capability is measured by how many of

1. Is the resource or capability competitively Valuable? To be competitively

Managing Resources and Capabilities Dynamically:

Threats to Resources and Capabilities

 Rivals providing better substitutes over time.

Managing capabilities Dynamically

 Attending to the ongoing modification of existing competitive assets.

SWOT analysis is Situational Analysis.

Identifying a Company’s Internal Strengths

An internal strength is something a company is good at doing or an attribute that

Identifying Company Internal Weaknesses

An internal weakness is something a company lacks or does poorly or a condition

Identifying a Company’s Market Opportunities

Market opportunity is a big factor in shaping a company’s strategy. Indeed,

What Do the SWOT Listings Reveal?

 it offers a strong foundation for understanding how to position the

QUESTION 4: HOW DO VALUE CHAIN ACTIVITIES IMPACT A COMPANY’S COST

The Concept of a Company Value Chain

 Supply Chain Management—Activities, costs, and assets associated with

 Product R&D, Technology, and Systems Development—Activities, costs, and

VALUE CHAIN ANALYSIS

Value chain analysis is a means of evaluating each of the activities in a company’s

Process of Value Chain analysis

Benchmarking: Benchmarking is a process where you measure your company’s

QUESTION 5: IS THE COMPANY COMPETITIVELY STRONGER OR WEAKER THAN

High-weighted competitive strength ratings signal a strong competitive position

QUESTION 6: WHAT STRATEGIC ISSUES AND PROBLEMS MERIT FRONT-BURNER

Important Figure and Table:

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