Interpreting the Competitive Strength Assessments
Question 5: What Strategic Issues and Problems Must Be Addressed by Management?
Compiling a “worry list” of problems and issues creates an agenda for managerial strategy making.
Understand how a comprehensive evaluation of a company’s external and internal situations can assist managers in making critical decisions about their next strategic moves.
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The final and most important analytical step is to zero in on exactly what strategic issues company managers need to address. This step involves drawing on the results of both industry and competitive analysis and the evaluations of the company’s internal situation.
The task here is to get a clear fix on exactly what industry and competitive challenges confront the company, which of the company’s internal weaknesses need fixing, and what specific problems merit front-burner attention by company managers. Pinpointing the precise things that management needs to worry about sets the agenda for deciding what actions to take next to improve the company’s performance and business outlook.
If the items on management’s “worry list” are relatively minor, which suggests the company’s strategy is mostly on track and reasonably well matched to the company’s overall situation, company managers seldom need to go much beyond fine-tuning the present strategy. If, however, the issues and problems confronting the company are serious and indicate the present strategy is not well suited for the road ahead, the task of crafting a better strategy has got to go to the top of management’s action agenda.
KEY POINTS
In analyzing a company’s own particular competitive circumstances and its competitive position vis-à-vis key rivals, consider five key questions:
1. How well is the present strategy working? This involves evaluating the strategy in terms of the company’s financial performance and competitive strength and market standing. The stronger a company’s current overall performance, the less likely the need for radical strategy changes. The weaker a company’s performance and/or the faster the changes in its external
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situation (which can be gleaned from industry and competitive analysis), the more its current strategy must be questioned.
2. Do the company’s resources and capabilities have sufficient competitive power to give it a sustainable advantage over competitors? The answer to this question comes from conducting the four tests of a resource’s competitive power—the VRIN tests. If a company has resources and capabilities that are competitively valuable and rare, the firm will have the potential for a competitive advantage over market rivals. If its resources and capabilities are also hard to copy (inimitable) with no good substitutes (nonsubstitutable), then the firm may be able to sustain this advantage even in the face of active efforts by rivals to overcome it.
SWOT analysis can be used to assess if a company’s resources and capabilities are sufficient to seize market opportunities and overcome external threats to its future well-being. The two most important parts of SWOT analysis are (1) drawing conclusions about what story the com- pilation of strengths, weaknesses, opportunities, and threats tells about the company’s overall sit- uation, and (2) acting on the conclusions to better match the company’s strategy to its internal strengths and market opportunities, to correct the important internal weaknesses, and to defend against external threats. A company’s strengths and competitive assets are strategically relevant because they are the most logical and appealing building blocks for strategy; internal weak- nesses are important because they may represent vulnerabilities that need correction. External opportunities and threats come into play because a good strategy necessarily aims at capturing a company’s most attractive opportunities and at defending against threats to its well-being.
3. Are the company’s cost structure and customer value proposition competitive? One telling sign of whether a company’s situation is strong or precarious is whether its costs are competitive with those of industry rivals. Another sign is how it compares with rivals in terms of its customer value proposition. Value chain analysis and benchmarking are essential tools in determining whether the company is performing particular functions and activities well, whether its costs are in line with competitors, whether it is able to offer an attractive value proposition to customers, and whether particular internal activities and business processes need improvement. Value chain analysis complements resource and capability analysis because of the tight linkage between activities and enabling resources and capabilities.
4. Is the company competitively stronger or weaker than key rivals? The key appraisals here involve how the company matches up against key rivals on industry key success factors and other chief determinants of competitive success and whether and why the company has a competitive advantage or disadvantage. Quantitative competitive strength assessments, using the method presented in Table 4.3, indicate where a company is competitively strong and weak and provide insight into the company’s ability to defend or enhance its market position. As a rule, a company’s competitive strategy should be built around its competitive strengths and should aim at shoring up areas where it is competitively vulnerable. 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.
5. What strategic issues and problems merit front-burner managerial attention? This analytical step zeros in on the strategic issues and problems that stand in the way of the company’s success. It involves using the results of both industry and competitive analysis and company situation analysis to identify a “worry list” of issues to be resolved for the company to be financially and competitively successful in the years ahead. Actually deciding upon a strategy and what specific actions to take comes after the list of strategic issues and problems that merit front-burner management attention has been developed.
Good company situation analysis, like good industry and competitive analysis, is a valuable precondition for good strategy making.
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ASSURANCE OF LEARNING EXERCISES
1. Using the financial ratios provided in the Appendix and the following financial statement information for Macy’s, Inc., calculate the following ratios for Macy’s for both 2017 and 2018.
1. Gross profit margin 2. Operating profit margin 3. Net profit margin
4. Times interest earned coverage 5. Return on shareholders’ equity 6. Return on assets
7. Long-term debt-to-equity ratio 8. Days of inventory
9. Inventory turnover ratio 10. Average collection period
Based on these ratios, did Macy’s financial performance improve, weaken, or remain about the same from 2015 to 2016?
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Consolidated Statements of Income for Macy’s, Inc., 2017–2018 (in millions, except per share amounts)
2018 2017
Net sales $24,971 $ 24,939
Credit Card Revenues, Net 768 702
Cost of sales (15,215) (15,181)
Selling, general and administrative expenses (9,039) (8,954)
Gains on sale of real estate 389 544
Restructuring, impairment, store closing and other costs (136) (186)
Operating income (loss) 1,738 1,864
Benefit plan income, net 39 57
Settlement charges (88) (105)
Interest expense (261) (321)
Gains (losses) on early retirement of debt (33) 10
Interest income 25 11
Income (loss) before income taxes 1,420 1,516
Federal, state and local income tax benefit (expense) (322) 39
Net income (loss) 1,098 1,555
Net loss attributable to noncontrolling interest 10 11
Net income attributable to Macy’s, Inc. shareholders $ 1,108 $ 1,566 Basic earnings per share attributable to Macy’s, Inc. shareholders $3.60 $5.13 Diluted earnings per share attributable to Macy’s, Inc. shareholders $3.56 $5.10 Macy’s Inc., 2018 Annual Report, February 26, 2019, https://www.macysinc.com/news-media/press-releases/detail/
1548/macys-inc-reports-fourth-quarter-and-fiscal-year-2018.
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Consolidated Balance Sheets for Macy’s, Inc., 2017–2018 (in millions)
2018 2017
ASSETS Current Assets:
Cash and cash equivalents $ 1,162 $ 1,455
Receivables 400 363
Merchandise Inventories 5,263 5,178
Prepaid expenses and other current assets 620 650
Total Current Assets 7,445 7,646
Property and Equipment – net 6,637 6,672
Goodwill 3,908 3,897
Other Intangible Assets – net 478 488
Other Assets 726 880
Total Assets 19,194 9,583
LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilties:
Short-term debt 43 22
Merchandise accounts payable 1,655 1,590
Accounts payable and accrued liabilities 3,366 3,271
Income taxes 168 296
Total Current Liabilities 5,232 5,179
Long-Term Debt 4,708 5,861
Deferred Income Taxes 1,238 1,148
Other Liabilities 1,580 1,662
Shareholders’ Equity:
Common stock (307.5 and 304.8 shares outstanding) 3 3
Additional paid-in capital 652 676
Accumulated equity 8,050 7,246
Treasury stock (1,318) (1,456)
Accumulated other comprehensive loss (951) (724)
Total Macy’s, Inc., Shareholders’ Equity 6,436 5,745
Noncontrolling interest 0 (21)
Total Shareholders’ Equity 6,436 5,733
Total Liabilities and Shareholders’ Equity $19,194 $19,583
Macy’s Inc., 2018 Annual Report, February 26, 2019, https://www.macysinc.com/news-media/press-releases/detail/
1548/macys-inc-reports-fourth-quarter-and-fiscal-year-2018.
2. REI operates more than 140 sporting goods and outdoor recreation stores in 36 states.
How many of the four tests of the competitive power of a resource does the retail store net- work pass? Explain your answer.
3. Review the information in Concepts & Connections 4.1 concerning Boll & Branch’s aver- age costs of producing and selling a king-sized sheet set, and compare this with the repre- sentative value chain depicted in Figure 4.1. Then answer the following questions:
(a) Which of the company’s costs correspond to the primary value chain activities depicted in Figure 4.1?
(b) Which of the company’s costs correspond to the support activities described in Figure 4.1?
(c) What value chain activities might be important in securing or maintaining Boll &
Branch’s competitive advantage? Explain your answer.
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4. 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 evalu- ated 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 com- petitiveness of each automobile manufacturer? What factors account most for Toyota’s competitive success? Does Toyota have competitive weaknesses that were disclosed by your analysis? Explain.
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1. Birger Wernerfelt, “A Resource- Based View of the Firm,” Strategic Management Journal 5, no. 5 (September–October 1984); Jay
Cornerstones of Competitive Advantage: A Resource-Based View,”
Strategic Management Journal 14, no. 3 (March 1993).
Barney, “Firm Resources and Sustained Competitive Advantage,”
Journal of Management 17, no. 1 (1991); Margaret A. Peteraf, “The
ENDNOTES
EXERCISES FOR SIMULATION PARTICIPANTS
1. Using the formulas in the Appendix and the data in your company’s latest financial state- ments, calculate the following measures of financial performance for your company:
1. Operating profit margin 2. Return on total assets 3. Current ratio 4. Working capital
5. Long-term debt-to-capital ratio 6. Price-earnings ratio
2. Based on your company’s latest financial statements and all of the other available data regarding your company’s performance that appear in the Industry Report, list the three measures of financial performance on which your company did “best” and the three mea- sures on which your company’s financial performance was “worst.”
3. What hard evidence can you cite that indicates your company’s strategy is working fairly well (or perhaps not working so well, if your company’s performance is lagging that of rival companies)?
4. What internal strengths and weaknesses does your company have? What external market opportunities for growth and increased profitability exist for your company? What external threats to your company’s future well-being and profitability do you and your co-managers see? What does the SWOT analysis indicate about your company’s present situation and future prospects—where on the scale from “exceptionally strong” to “alarmingly weak”
does the attractiveness of your company’s situation rank?
5. Does your company have any core competencies? If so, what are they?
6. What are the key elements of your company’s value chain? Refer to Figure 4.1 in develop- ing your answer.
7. Using the methodology illustrated in Table 4.3, do a weighted competitive strength assess- ment for your company and two other companies that you and your co-managers consider to be very close competitors.
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2. Birger Wernerfelt, “A Resource-Based View of the Firm,” Strategic Management Journal 5, no. 5 (September–October 1984), pp.
171–180; Jay Barney, “Firm Resources and Sustained Competitive Advantage,”
Journal of Management 17, no. 1 (1991);
Margaret A. Peteraf, “The Cornerstones of Competitive Advantage: A Resource-Based View,” Strategic Management Journal 14, no. 3 (March 1993).
3. R. Amit and P. Schoemaker, “Strategic Assets and Organizational Rent,”
Strategic Management Journal 14, no. 1 (1993).
4. David J. Collis and Cynthia A.
Montgomery, “Competing on Resources: Strategy in the 1990s,”
Harvard Business Review 73, no. 4 (July–
August 1995).
5. Margaret A. Peteraf and Mark E. Bergen, “Scanning Dynamic Competitive Landscapes: A Market- Based and Resource-Based Framework,”
Strategic Management Journal 24 (2003), pp. 1027–1042.
6. David J. Teece, Gary Pisano, and Amy Shuen, “Dynamic Capabilities and Strategic Management,” Strategic Management Journal 18, no. 7 (1997); Constance E. Helfat and Margaret A. Peteraf, “The Dynamic Resource-Based View: Capability Lifecycles,” Strategic Management Journal 24, no. 10 (2003).
7. C. Montgomery, “Of Diamonds and Rust: A New Look at Resources,”
in Resource-Based and Evolutionary Theories of the Firm, ed. C. Montgomery (Boston: Kluwer Academic Publishers, 1995), pp. 251–268.
8. D. Teece, G. Pisano, and A. Shuen,
“Dynamic Capabilities and Strategic Management,” Strategic Management Journal 18, no. 7 (1997); K. Eisenhardt and J. Martin, “Dynamic Capabilities:
What Are They?” Strategic Management Journal 21, nos. 10–11 (2000); M. Zollo and S. Winter, “Deliberate Learning and the Evolution of Dynamic Capabilities,”
Organization Science 13 (2002); C. Helfat et al., Dynamic Capabilities: Understanding Strategic Change in Organizations (Malden, MA: Blackwell, 2007).
9. W. Powell, K. Koput, and L. Smith- Doerr, “Interorganizational Collaboration and the Locus of Innovation,” Administrative Science Quarterly 41, no. 1 (1996).
10. M. Peteraf, “The Cornerstones of Competitive Advantage: A Resource- Based View,” Strategic Management Journal, March 1993, pp. 179–191.
11. Michael E. Porter, Competitive Advantage (New York: Free Press, 1985).
12. Gregory H. Watson, Strategic Benchmarking: How to Rate Your Company’s Performance Against the
World’s Best (New York: John Wiley
& Sons, 1993); Robert C. Camp, Benchmarking: The Search for Industry Best Practices That Lead to Superior Performance (Milwaukee: ASQC Quality Press, 1989); Christopher E. Bogan and Michael J. English, Benchmarking for Best Practices: Winning through Innovative Adaptation (New York:
McGraw-Hill, 1994); Dawn Iacobucci and Christie Nordhielm, “Creative Benchmarking,” Harvard Business Review 78, no. 6 (November–December 2000).
13. www.businessdictionary.com/definition/
best-practice.html (accessed June 5, 2017).
14. M. Hegert and D. Morris, “Accounting Data for Value Chain Analysis,”
Strategic Management Journal 10 (1989);
Robin Cooper and Robert S. Kaplan,
“Measure Costs Right: Make the Right Decisions,” Harvard Business Review 66, no. 5 (September–October 1988);
John K. Shank and Vijay Govindarajan, Strategic Cost Management (New York:
Free Press, 1993).
15. Michael E. Porter, “Clusters and the New Economics of Competition,”
Harvard Business Review 76, no. 6 (November–December 1998).
16. Reuben E. Stone, “Leading a Supply Chain Turnaround,” Harvard Business Review 82, no. 10 (October 2004).
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