Key Questions in Situation Analysis
 Question 1: How well is the company’s
strategy working?
 Question 2: What are the company’s resource
strengths and weaknesses and its external
opportunities and threats?
 Question 3: Are the company’s prices and
costs competitive?
 Question 4: Is the company competitively
stronger or weaker than key rivals?
 Question 5: What strategic issues and
problems merit front-burner managerial
attention?
5-1
Situation Analysis Question 1: How
Well is the Company’s Strategy
Working?
1. Is the company achieving its
financial and strategic objectives?
2. Is the company an above-average
industry performer?
5-2
Performance Indicators
 Trends in sales and earnings growth
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Trends in the company’s stock price
The company’s overall financial strength
The rate at which new customers are acquired
Image and reputation with customers
 Evidence of improvement in internal processes
such as defect rate, order fulfillment, and days
of inventory
5-3
Situation Analysis Question 2: The
Company’s Strengths, Weaknesses,
Opportunities and Threats
 S W O T represents the first letter in
 Strengths
 Weaknesses
 Opportunities
 Threats
 For a company’s strategy to be wellconceived, it must be
 Matched to its resource strengths and
weaknesses
 Aimed at capturing its best market opportunities
and defending against external threats to its wellbeing
5-4
Identifying Resource Strengths
and Competitive Capabilities
 Common types of resource strengths
include
 Skills or specialized expertise in a
competitively important capability
 Valuable physical assets
 Valuable human assets or intellectual capital
 Valuable organizational assets
 Valuable intangible assets
 Competitively valuable alliances or
cooperative ventures
5-5
Identifying Resource Weaknesses
and Competitive Deficiencies
 A weakness is something a firm lacks,
does poorly, or a condition placing it at a
disadvantage in the marketplace
 Resource weaknesses relate to
 Inferior or unproven skills,
expertise, or intellectual capital
 Deficiencies in competitively important
physical, organizational, or intangible assets
 Missing or competitive inferior capabilities in
key areas
5-6
Identifying a Company’s
Market Opportunities
 Opportunities most relevant to
a company are those offering
 Good match with its
financial and
organizational resource
capabilities
 Best prospects for growth
and profitability
 Most potential for
competitive advantage
5-7
Identifying External Threats to
Profitability and Competitiveness
 Entry of lower-cost foreign competitors

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Burdensome regulations
Rise in interest rates
Potential of a hostile takeover
Unfavorable demographic shifts
 Adverse shifts in foreign exchange rates
5-8
SWOT Analysis
Potential
Resource
Strengths
• Powerful
strategy
Resource
Company
Weaknesse Opportunitie
s
• No clear s
strategic
• Serving additional
Potential
External
Threats
• Entry
of potent new
• Strong financial
condition
• Strong brand name
image/reputation
• Widely recognized
market leader
• Proprietary
technology
• Cost advantages
• Strong advertising
• Product innovation
skills
• Good customer
service
• Better product
quality
• Alliances or JVs
direction
• Obsolete facilities
• Weak balance sheet;
excess debt
• Higher overall costs
than rivals
• Missing some key
skills/competencies
• Subpar profits
• Internal operating
problems . . .
• Falling behind in
R&D
• Too narrow product
line
• Weak marketing
skills
competitors
• Loss of sales to
substitutes
• Slowing market
growth
• Adverse shifts in
exchange rates &
trade policies
• Costly new
regulations
• Vulnerability to
business cycle
• Growing leverage of
customers or
suppliers
• Reduced buyer
needs for product
• Demographic
changes
customer groups
• Expanding to new
geographic areas
• Expanding product
line
• Transferring skills to
new products
• Vertical integration
• Take market share
from rivals
• Acquisition of rivals
• Alliances or JVs to
expand coverage
• Openings to exploit
new technologies
• Openings to extend
brand name/image
5-9
Situation Analysis Question 3: How
Competitive Are the Company’s
Prices and Costs?
 Assessing whether a firm’s costs are
competitive with those of rivals is a
crucial part of company situation analysis
 Key analytical tools
 Value chain analysis
 Benchmarking
5-10
Company Value Chain
5-11
Developing Data to Measure a
Company’s Cost Competitiveness
 After identifying key value
chain activities, the next step
involves determining costs
of value chain activities using
activity-based costing
 Appropriate degree of disaggregation
 Depends on the number of broad categories
of primary and support activities
 Requires finer classifications if problematic
cost disadvantages exist
5-12
Activity-Based Costing
5-13
Benchmarking Costs of
Key Value Chain Activities
 Focuses on cross-company
comparisons of how certain activities
are performed and costs associated with
these activities
 Purchase of materials
 Payment of suppliers
 Getting new products to market
 Performance of quality control
 Filling and shipping of customer orders
5-14
Industry Value Chain
5-15
Vertical Integration: Operating
Across More Industry Value Chain
Segments
 Extend a firm’s competitive scope
within the same industry
Backward into sources of supply
Forward toward end-users of final
product
 Can aim at either full or partial
integration
5-16
Advantages of a Vertical Integration
Strategy
 Strengthen the firm’s competitive
position
 Boost profitability
Must achieve same scale economies
as outside suppliers
Match or beat suppliers’ production
efficiency with no drop-off in quality
5-17
Integrating Forward to Enhance
Competitiveness
 Gain better access to
end users
 Improve market
visibility
 Include the purchasing
experience as a
differentiating feature
5-18
Disadvantages of a Vertical
Integration Strategy
 Boosts capital investment in
the industry
 Increases business risk if
industry growth and profits sour
 May slow technological
advances if the vertically
integrated company is saddled
with older technology
 Poses all types of capacitymatching problems
 May require radically different
skills and business capabilities
5-19
The Case for Outsourcing
 Activity can be performed better or
more cheaply by outside specialists
 Activity is not crucial to achieve a
sustainable competitive advantage
 It improves firm’s ability to innovate
 Firm can concentrate on core value
chain activities and leverage its
resource strengths
5-20
Building a Competitively Superior
Value Chain
 There are three main areas of a
company’s overall value chain where
cost differences occur
1. Activities performed by
suppliers
2. A company’s own internal
activities
3. Activities performed by
forward channel allies
5-21
Correcting Internal Cost
Disadvantages
 Implement best practices throughout
the company
 Try to eliminate some cost-producing
activities altogether by revamping value
chain
 Relocate high-cost activities to lowercost geographic areas
 See if high-cost activities can be
outsourced
5-22
Correcting Internal Cost
Disadvantages
 Invest in productivity enhancing, costsaving technology
 Find ways to detour around activities or
items where costs are high
 Redesign the product or its
components to reduce manufacturing
costs
 Make up difference by achieving
savings in backward or forward
portions of value chain system
5-23
Correcting Supplier-Related Cost
Disadvantages
 Pressure suppliers for lower prices
 Switch to lower-priced substitutes
 Collaborate closely with suppliers to
identify mutual
cost-saving opportunities
 Integrate backward
into business of
high-cost suppliers
5-24
Correcting Cost Disadvantages
Associated With Forward Channel
Allies
 Pressure dealer-distributors to reduce
their costs
 Work closely with forward channel
allies to identify win-win opportunities to
reduce costs
 Change to a more economical
distribution strategy
 Switch to cheaper distribution channels
 Integrate forward into company-owned retail
outlets
5-25
Developing a Best Cost Advantage
 Companies that do a first rate job of
managing value chain activities
relative to competitors can achieve
a Best Cost Advantage
5-26
Developing a Best Cost Advantage
 Best Cost Provider Strategies yield
unique industry positioning by exceeding
buyers’ expectations for differentiating
features and low prices
 Contingent on
A superior value chain
configuration
Unmatched efficiency in managing
value chain activities
5-27
Situation Analysis Question 4: What
Is the Company’s Competitive
Strength?
 Overall competitive position involve
answering two questions
 How does a company rank relative
to competitors on each industry key
success factor?
 Does a company have a net
competitive advantage or disadvantage
vis-à-vis major competitors?
5-28
Competitive Strength Assessments
5-29
Interpreting the Competitive
Strength Assessments
 Shows how firm stacks up against rivals,
measure-by-measure
 Indicates whether firm is at a
competitive advantage or
disadvantage against each rival
 Identifies possible offensive strategies
that can be waged against rivals’
weaknesses
 Identifies the need for defensive
actions to correct competitive
weaknesses
5-30
Situation Analysis Question 5: What
Strategic Issues Must be Addressed
by Management?
 Final and most
important analytical step
in assessing
“Where are we now?”
 Based on results of both industry and
competitive analysis
 Pinpointing the precise things that should
be on management’s “worry list”?
5-31