Evaluating A Company’s

Resources, Capabilities,
And Competitiveness
Chapter 4
Evaluating A Firm’s Internal
Situation
1. How well is the firm’s present strategy working?
2. What are the firm’s competitively important resources and capabilities?
3. Is the firm able to take advantage of market opportunities and overcome external threats to its well-
being?
4. Are the firm’s prices and costs competitive with those of key rivals, and does it have an appealing
customer value proposition?
5. Is the firm competitively stronger or weaker than key rivals?
6. What strategic issues and problems merit front-burner managerial attention?
How Well Is The Firm’s Present
Strategy Working?
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
3. Whether it is gaining customers and increasing its market share
Identifying The Components Of
A Single-business Company’s Strategy
Key Financial Ratio
Gross profit margin Long-term debt-to-equity ratio
Operating profit margin Times-interest-earned ratio
Net profit margin Days of inventory
Total return on assets Inventory turnover
Net return on total assets (ROA) Average collection period
Return on stockholders’ equity (ROE) Dividend yield on common stock
Return on invested capital (ROIC) Price-to-earnings ratio
Current ratio Dividend payout ratio
Working capital Internal cash flow
Total debt-to-asset ratio Free cash flow
Long-term debt-to-capital ratio
Debt-to-equity ratio
What Are The Firm’s Most
Important Resources And Capabilities,
And Will They Give The Firm A Lasting
Competitive Advantage Over Rival
Companies?
Question 2
Definitions
• 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.
• Competitive assets:
– Are the firm’s resources and capabilities
– Are the determinants of its competitiveness and ability to succeed in the marketplace
– Are what a firm’s strategy depends on to develop sustainable competitive advantage over its
rivals
• A competence is an activity that a firm has learned to perform with proficiency—a true
capability
• A core competence is a proficiently performed internal activity that is central to a firm’s strategy
and competitiveness
• A distinctive competence is a competitively valuable activity that a firm performs better than its
rivals
Types Of Company Resources
(1 Of 2)
Tangible resources
• Physical resources: land and real estate; manufacturing plants, equipment, or
distribution facilities; the locations of stores, plants, or distribution centers, including
the overall pattern of their physical locations; ownership of or access rights to
natural resources (such as mineral deposits)
• Financial resources: cash and cash equivalents; marketable securities; other
financial assets such as a company’s credit rating and borrowing capacity
• Technological assets: patents, copyrights, production technology, innovation
technologies, technological processes
• Organizational resources: IT and communication systems (satellites, servers,
workstations, etc.); other planning, coordination, and control systems; the
company’s organizational design and reporting structure
Types Of Company Resources
(2 Of 2)
Intangible resources
• Human assets and intellectual capital: the education, experience, knowledge,
and talent of the workforce, cumulative learning, and tacit knowledge of employees;
collective learning embedded in the organization, the intellectual capital and know-
how of specialized teams and work groups; the knowledge of key personnel
concerning important business functions; managerial talent and leadership skill; the
creativity and innovativeness of certain personnel
• Brands, company image, and reputational assets: brand names, trademarks,
product or company image, buyer loyalty and goodwill; company reputation for
quality, service, and reliability; reputation with suppliers and partners for fair dealing
• Relationships: alliances, joint ventures, or partnerships that provide access to
technologies, specialized know-how, or geographic markets; networks of dealers or
distributors; the trust established with various partners
• Company culture and incentive system: the norms of behavior, business
principles, and ingrained beliefs within the company; the attachment of personnel to
the company’s ideals; the compensation system and the motivation level of company
personnel
The Four Criteria of Sustainable
Advantage
Valuable • Help a firm neutralize threats or exploit
Capabilities opportunities

Rare • Are not possessed by many others

Capabilities

Costly-to-Imitate • Historical: A unique and a valuable organizational

Capabilities culture or brand name
• Ambiguous cause: The causes and uses of a
competence are unclear
• Social complexity: Interpersonal relationships,
trust, and friendship among managers, suppliers,
and customers

Nonsubstitutable • No strategic equivalent

Capabilities
Outcomes from Combinations of the Four
Criteria for Sustainable Advantage
Dynamic Capabilities
• A dynamic capability is the ongoing capacity of a firm to modify its existing resources and capabilities or
create new ones by:
• Improving existing resources and capabilities incrementally
• Adding new resources and capabilities to the firm’s competitive asset portfolio
• A way to overcome core rigidity
https://www.youtube.com/watch?v=0kSI-Mt17mE
• Threats to resources and capabilities
– Rivals providing better substitutes over time
– Capabilities decaying from benign neglect
– Disruptive competitive environment change
• Manage capabilities dynamically by:
– Attending to the ongoing modification of existing competitive assets
– Taking advantage of any opportunities to develop totally new kinds of capabilities
What Are The Firm’s Strengths And
Weaknesses In Relation To Market
Opportunities And External Threats?
Question 3
SWOT Analysis
Is a powerful tool for sizing up a firm’s:
• Internal strengths (the basis for strategy)
• Internal weaknesses (deficient capabilities)
• Market opportunities (strategic objectives)
• External threats (strategic defenses)
Framework To Appraise Resource
And Capabilities
High Superfluous Key Strengths
Strength

Relative
Strengths Low Zone of Key Weaknesses
Irrelevance

Low High
Strategic Importance
Resource And Capability
Appraisal
1. Identify the key resources and capabilities
2. Appraise the firm’s resources and capabilities in
terms of POTENTIAL FOR SUSTAINABLE
a. Strategic importance COMPETITIVE ADVANTAGE
b. Relative strengths

3. Developing strategy implications

a. In relation to STRENGTHS
• How can these be exploited more
effectively and fully? STRATEGY
b. In relation to WEAKNESSES
• Identify opportunities to outsource
activities that can be better performed by
other organization?
• How can weaknesses be corrected
through acquiring and developing
resource and capabilities?
Competitive Deficiencies
Vs. Competitive Strength
Competitive Deficiencies Competitive Strengths

• A weakness (competitive deficiency): Signs of a firm’s competitive strength:

– Is something a firm lacks or does poorly (in • Its prices and costs are in line with rivals
comparison to others) or a condition that puts • Its customer-value proposition is competitive
it at a competitive disadvantage in the and cost effective
marketplace • Its bundled capabilities are yielding a
• Types of weaknesses sustainable competitive advantage
– Inferior skills, expertise, or intellectual capital
– Deficiencies in physical, organizational, or
intangible assets
– Missing or competitively inferior capabilities
in key areas
How Do A Firm’s Value Chain
Activities Impact Its Cost Structure And
Customer Value Proposition?
Question 4
A company’s value chain identifies the primary activities and related support activities that create customer
value.

The value chain:

• Identifies the inner workings of the firm's customer value proposition and business model
• Permits a deep look at the firm’s cost structure and its ability to profitably offer low prices
• Reveals the emphasis that a firm places on activities that enhance differentiation and support higher
prices
Value Chain Analysis
Primary activities are involved with:
• A product’s physical creation
• A product’s sale and distribution to buyers
• The product’s service after the sale
Support Activities
• Provide the assistance necessary for the
primary activities to take place.
Comparing The Value Chains
Of Rival Firms
Value chain analysis
• Facilitates a comparison, activity-by-activity, of how effectively and efficiently a firm delivers value to its
customers, relative to its competitors

The value chain analysis process:

• Segregates the firm’s operations into different types of primary and secondary activities to identify the
major components of its internal cost structure
• Uses activity-based costing (https://www.youtube.com/watch?v=ivlI0HvUPQo) to evaluate the activities
• Does the same for significant competitors
Value Chain System For
An Entire Industry

Effects of the industry value chain

• Costs and margins of suppliers and channel
partners can affect prices to end consumers
• Activities of channel partners can affect industry
sales volumes and customer satisfaction
Using Benchmarking To Assess
A Firm’s Value Chain Activities
• Benchmarking:
– Involves improving a firm’s internal activities based on learning from other firms’ “best practices”
– Assesses whether the cost competitiveness and effectiveness of a firm’s value chain activities are in
line with its competitors’ activities
• Sources of benchmarking information
– Reports, trade groups, analysts, and customers
– Visits to benchmark companies
– Data from consulting firms
Steps In The Competitive
Strength Assessment Process
1. Make a list of the industry’s key success factors and measures of competitive strength or weakness.
2. Assign weights to each competitive strength measure based on its perceived importance.
3. Score competitors on each competitive strength measure and multiply by each measure by its
corresponding weight.
4. Sum the weighted strength ratings on each factor to get an overall measure of competitive strength for
each company.
5. Use overall strength ratings to draw conclusions about the company’s net competitive advantage or
disadvantage and to take specific note of areas of strength and weakness.
TABLE 4.4 A REPRESENTATIVE WEIGHTED COMPETITIVE STRENGTH ASSESSMENT

Competitive Strength Assessment

(rating scale: 1 = very weak, 10 = very strong)
ABC Co. Rival 1 Rival 2

Key Success Factor/ Importance Strength Weighted Strength Weighted Strength Weighted
Strength Measure Weight Rating Score Rating Score Rating Score
Quality/product performance 0.10 8 0.80 5 0.50 1 0.10
Reputation/image 0.10 8 0.80 7 0.70 1 0.10
Manufacturing capability 0.10 2 0.20 10 1.00 5 0.50

Technological skills 0.05 10 0.50 1 0.05 3 0.15

Dealer network/distribution 0.05 9 0.45 4 0.20 5 0.25
capability
New product innovation
0.05 9 0.45 4 0.20 5 0.25
capability
Financial resources 0.10 5 0.50 10 1.00 3 0.30
Relative cost position 0.30 5 1.50 10 3.00 1 0.30

Customer service capabilities 0.15 5 0.75 7 1.05 1 0.15

Sum of importance weights 1.00

Overall weighted competitive strength rating 5.95 7.70 2.10

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© McGraw-Hill Education.
 ILLUSTRATION CAPSULE 4.1 THE VALUE CHAIN FOR BOLL &
BRANCH
A king-size set of sheets from Boll & Branch is made from 6 meters of
fabric, requiring 11 kilograms of raw cotton.
Raw Cotton $ 28.16
Spinning/Weaving/Dyeing 12.00
Cutting/Sewing/Finishing 9.50
Material Transportation 3.00
Factory Fee 15.80
Cost of Goods $68.46
Inspection Fees 5.48
Ocean Freight/Insurance 4.55
Import Duties 8.22
Warehouse/Packing 8.50
Packaging 15.15
Customer Shipping 14.00
Promotions/Donations 30.00
Total Cost $154.38
Boll & Brand Markup About 60%
Boll & Brand Retail Price $250.00
Gross Margin $ 95.62

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 TABLE 4.1 KEY FINANCIAL RATIOS: HOW TO CALCULATE THEM AND WHAT THEY
MEAN (1 OF 8)
Profitability Ratios How Calculated What It Shows

Gross profit Sales revenues − Cost of goods sold Shows the percentage of
margin Sales revenues revenues available to cover
operating expenses and yield a
profit.

Operating profit Sales revenues − Operating expenses Shows the profitability of current
margin (or return on Sales revenues operations without regard to
sales) or interest charges and income
taxes. Earnings before interest
Operating income and taxes is known as EBIT in
Sales revenues financial and business
accounting.

Net profit margin (or Profits after taxes Shows after-tax profits per dollar
net return on sales) Sales revenues of sales.

Total return on Profits after taxes + Interest A measure of the return on total
assets Total assets investment in the enterprise.
Interest is added to after-tax
profits to form the numerator,
since total assets are financed
by creditors as well as by
stockholders.

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 TABLE 4.1 KEY FINANCIAL RATIOS: HOW TO CALCULATE THEM AND WHAT THEY
MEAN (2 OF 8)

Profitability Ratios How Calculated What It Shows

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

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 TABLE 4.1 KEY FINANCIAL RATIOS: HOW TO CALCULATE THEM AND WHAT THEY
MEAN (3 OF 8)

Liquidity Ratios How Calculated What It Shows

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

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© McGraw-Hill Education.
 TABLE 4.1 KEY FINANCIAL RATIOS: HOW TO CALCULATE THEM AND WHAT THEY
MEAN (4 OF 8)

Leverage Ratios How Calculated What It Shows

Total debt-to-assets Total debt Measures the extent to which borrowed
ratio Total assets funds (both short-term loans and long-
term debt) have been used to finance
the firm’s operations. A low ratio is better
—a high fraction indicates overuse of
debt and greater risk of bankruptcy.

Long-term debt-to- Long-term debt A measure of creditworthiness and

capital ratio Long-term debt + balance-sheet strength. It indicates the
Total stockholders’ percentage of capital investment that
equity has been financed by both long-term
lenders and stockholders. A ratio below
0.25 is preferable since the lower the
ratio, the greater the capacity to borrow
additional funds. Debt-to-capital ratios
above 0.50 indicate an excessive
reliance on long-term borrowing, lower
creditworthiness, and weak balance-
sheet strength.

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 TABLE 4.1 KEY FINANCIAL RATIOS: HOW TO CALCULATE THEM AND WHAT THEY
MEAN (5 OF 8)
Leverage Ratios How Calculated What It Shows

Debt-to-equity Total debt Shows the balance between debt (funds

ratio Total stockholders’ borrowed, both short term and long term)
equity 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- Long-term debt Shows the balance between long-term

equity ratio Total stockholders’ debt and stockholders’ equity in the firm’s
equity long-term capital structure. Low ratios
indicate a greater capacity to borrow
additional funds if needed.
Times-interest- Operating income Measures the ability to pay annual interest
earned (or Interest expenses charges. Lenders usually insist on a
coverage) ratio minimum ratio of 2.0, but ratios above 3.0
signal progressively better
creditworthiness.
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© McGraw-Hill Education.
 TABLE 4.1 KEY FINANCIAL RATIOS: HOW TO CALCULATE THEM AND WHAT THEY
MEAN (6 OF 8)

Activity Ratios How Calculated What It Shows

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

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 TABLE 4.1 KEY FINANCIAL RATIOS: HOW TO CALCULATE THEM AND WHAT THEY
MEAN (7 OF 8)

Other Ratios How Calculated What It Shows

Dividend yield Annual dividends A measure of the return that shareholders
on common per share receive in the form of dividends. A “typical”
stock Current market price dividend yield is 2%–3%. The dividend yield
per share for fast-growth companies is often below
1%; the dividend yield for slow-growth
companies can run 4%–5%.

Price-to- Current market price P/E ratios above 20 indicate strong investor
earnings (P/E) per share confidence in a firm’s outlook and earnings
ratio Earnings per share growth; firms whose future earnings are at
risk or likely to grow slowly typically have
ratios below 12.

Dividend payout Annual dividends Indicates the percentage of after-tax profits

ratio per share paid out as dividends.
Earnings per share

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 TABLE 4.1 KEY FINANCIAL RATIOS: HOW TO CALCULATE THEM AND WHAT THEY
MEAN (8 OF 8)

Other Ratios How Calculated What It Shows

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

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© McGraw-Hill Education.
 TABLE 4.3 WHAT TO LOOK FOR IN IDENTIFYING A COMPANY’S STRENGTHS, WEAKNESSES,
OPPORTUNITIES, AND THREATS (1 OF 4)

Potential Strengths and Competitive Potential Weaknesses and Competitive

Assets Deficiencies
• Competencies that are well matched to • No clear strategic vision
industry key success factors
• Ample financial resources to grow the • No well-developed or proven core
business competencies
• Strong brand-name image or company • No distinctive competencies or competitively
reputation superior resources
• Economies of scale or learning- and • Lack of attention to customer needs
experience-curve advantages over rivals

• Other cost advantages over rivals • A product or service with features and
attributes that are inferior to those of rivals

• Attractive customer base • Weak balance sheet, few financial resources

to grow the firm, too much debt
• Proprietary technology, superior • Higher overall unit costs relative to those of
technological skills, important patents key competitors

© McGraw-Hill Education.
 TABLE 4.3 WHAT TO LOOK FOR IN IDENTIFYING A COMPANY’S STRENGTHS, WEAKNESSES,
OPPORTUNITIES, AND THREATS (2 OF 4)

Potential Strengths and Competitive Potential Weaknesses and Competitive

Assets (continued) Deficiencies (continued)
• Strong bargaining power over • Too narrow a product line relative to
suppliers or buyers rivals
• Resources and capabilities that are • Weak brand image or reputation
valuable and rare
• Resources and capabilities that are • Weaker dealer network than key rivals
hard to copy and for which there are or lack of adequate distribution
no good substitutes capability
• Superior product quality • Lack of management depth
• Wide geographic coverage or strong • A plague of internal operating problems
global distribution capability or obsolete facilities
• Alliances or joint ventures that provide • Too much underutilized plant capacity
access to valuable technology
competencies, or attractive geographic • Resources that are readily copied or for
markets which there are good substitutes

© McGraw-Hill Education.
 TABLE 4.3 WHAT TO LOOK FOR IN IDENTIFYING A COMPANY’S STRENGTHS, WEAKNESSES,
OPPORTUNITIES, AND THREATS (3 OF 4)

Potential External Threats to a

Potential Market Opportunities Company’s Future Profitability
• Meeting sharply rising buy demand for the • Increasing intensity of competition
industry’s product among industry rivals—may
squeeze profit margins
• Serving additional customer groups or • Slowdowns in market growth
market segments
• Expanding into new geographic markets • Likely entry of potent new
competitions
• Expanding the company’s product line to • Growing bargaining power of
meet a broader range of customer needs customers or suppliers

• Utilizing existing company skills or • A shift in buyer needs and tastes

technological know-how to enter new away from the industry’s product
product lines or new businesses
• Adverse demographic changes that
threaten to curtail demand for the
industry’s product
© McGraw-Hill Education.
 TABLE 4.3 WHAT TO LOOK FOR IN IDENTIFYING A COMPANY’S STRENGTHS, WEAKNESSES,
OPPORTUNITIES, AND THREATS (4 OF 4)

Potential External Threats to a

Potential Market Opportunities Company’s Future Profitability
(continued) (continued)
• Taking advantage of failing trade • Adverse economic conditions that
barriers in attractive foreign markets threaten critical suppliers or
distributors
• Acquiring rival firms or companies with • Changes in technology—particularly
attractive technological expertise or disruptive technology that can
capabilities undermine the company’s distinctive
competencies

• Taking advantage of emerging • Restrictive foreign trade policies

technological developments to innovate • Costly new regulatory requirements
• Entering into alliances or joint ventures • Tight credit conditions
to expand the firm’s market coverage or • Rising prices on energy or other key
boost its competitive capability inputs

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