Advantage and Disadvantage Major Form of Business

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Advantage and Disadvantage Major Form of Business Powered By Docstoc
					        Question 3: Are the Company’s
        Prices and Costs Competitive?

 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
                                                      4-1
         Concept: Company Value Chain

   A company’s business consists of all activities
    undertaken in designing, producing, marketing, delivering,
    and supporting its product or service
   All these activities that a company performs internally
    combine to form a value chain—so-called because the
    underlying intent of a company’s activities is to do things
    that ultimately create value for buyers
   The value chain contains two types of activities
       Primary activities (where most of
        the value for customers is created)
       Support activities that facilitate
        performance of the primary activities
                                                                  4-2
Fig. 4.3: A Representative Company Value Chain




                                                 4-3
         Example: Value Chain Activities
           for a Bakery Goods Maker
     Primary Activities            Support Activities
   Supply chain management      Quality control
   Recipe development and       Human resource
    testing                       management
   Mixing and baking
                                 Administration
   Packaging
   Sales and marketing
   Distribution




                                                        4-4
        Example: Value Chain Activities
        for a Department Store Retailer
     Primary Activities              Support Activities
   Merchandise selection and      Site selection
    purchasing                     Hiring and training
   Store layout and product       Store maintenance
    display
                                   Administrative activities
   Advertising
   Customer service




                                                                4-5
              Example: Value Chain
            Activities for a Hotel Chain
     Primary Activities        Support Activities
   Site selection and       Accounting
    construction
                             Hiring and training
   Reservations
                             Advertising
   Operation of hotel
    properties               Building a brand and
   Managing lineup           reputation
    of hotel locations       General
                              administration



                                                     4-6
 Characteristics of Value Chain Analysis

 Combined  costs of all activities in a company’s
 value chain define the company’s internal cost
 structure

 Compares    a firm’s costs activity
 by activity against costs of key rivals

     From raw materials purchase to

     Price paid by ultimate customer

 Pinpoints which internal activities are a
 source of cost advantage or disadvantage
                                                     4-7
Why Do Value Chains of Rivals Differ?
   Several factors give rise to differences
    in value chains of rival companies
       Different strategies

       Different operating practices

       Different technologies

       Different degrees of vertical integration

       Some companies may perform particular activities internally
        while others outsource them

   Differences among the value chains of competing
    companies complicate task of assessing
    rivals’ relative cost positions
                                                                      4-8
            The Value Chain System
             for an Entire Industry
 Assessing  a company’s cost competitiveness
  involves comparing costs all along the industry’s
  value chain
 Suppliers’ value chains are relevant because
     Costs, performance features, and quality of inputs
      provided by suppliers influence a firm’s own costs
      and product performance
 Value chains of distributors and retailers are
  relevant because
   Their costs and profit margins represent ―value added‖
    and are part of the price paid by ultimate end-user
   The activities they perform affect end-user satisfaction
                                                               4-9
Fig. 4.4: Representative Value Chain for an Entire Industry




                                                              4-10
Example: Value Chain Activities

     Pulp & Paper Industry

        Timber farming

           Logging

          Pulp mills

         Papermaking

         Distribution
                                  4-11
Example: Value Chain Activities

    Home Appliance Industry


Parts and components manufacture

           Assembly

     Wholesale distribution

          Retail sales
                                   4-12
Example: Value Chain Activities

       Soft Drink Industry

Processing of basic ingredients
      Syrup manufacture
     Bottling and can filling
     Wholesale distribution
          Advertising        Albertson’s

            Retailing
                                           4-13
Example: Value Chain Activities

  Computer Software Industry

         Programming

         Disk loading

          Marketing

         Distribution
                                  4-14
         Developing Data to Measure a
        Company’s Cost Competitiveness
   After identifying key value chain activities, the next
    step involves determining costs of performing specific
    value chain activities using activity-based costing
   Appropriate degree of disaggregation depends on
       Economics of activities
       Value of comparing narrowly defined
        versus broadly defined activities
   Guideline – Develop separate cost
    estimates for activities
       Having different economics
       Representing a significant or growing proportion of costs
                                                                    4-15
        Activity-Based Costing: A Key
           Tool in Analyzing Costs
 Determining  whether a company’s costs are in line
  with those of rivals requires
     Measuring how a company’s costs compare with those
      of rivals activity-by-activity
 Requires having accounting data to measure cost
  of each value chain activity
 Activity-based    costing entails
     Defining expense categories according
      to specific activities performed and
     Assigning costs to the activity
      responsible for creating the cost
                                                           4-16
4-17
          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
   Management of inventories
   Getting new products to market
   Performance of quality control
   Filling and shipping of customer orders
   Training of employees
   Processing of payrolls

                                                4-18
          Objectives of Benchmarking

 Identifybest and most efficient means of
  performing various value chain activities
 Learn   what is the ―best‖ way to perform a particular
  activity from those companies who have
  demonstrated that they are ―best-in-industry‖ or
  ―best-in-world‖ at performing the activity
 Learn  what other firms do to perform
  an activity at lower cost
 Figureout what actions to take to improve a
  company’s own cost competitiveness
                                                           4-19
       Ethical Principles in Benchmarking
 Avoid   actions implying an interest    Treat benchmarking interchange
  in                                       as confidential
    Restraint of trade                   Use information obtained only for
    Market and/or customer                stated purposes
     allocation schemes
                                          Respect corporate culture of
    Price fixing
                                           partner companies
    Bribery
                                          Use benchmarking contacts
 Refrain  from acquiring trade
                                           designated by partner company
  secrets by any means viewed as
  improper                                Be fully prepared for each

 Be willing to provide same type of
                                           exchange
  information to a benchmarking           Provide partners with agenda and
  partner                                  questionnaire prior to exchange
 Communicate early to clarify            Follow through with commitments
  expectations and avoid                   to partner in a timely manner
  misunderstandings                       Understand how partner wants
 Be honest and complete                   information provided used
                                                                               4-20
           What Determines If a
        Company Is Cost Competitive?
 Cost   competitiveness depends on how well a
  company manages its value chain relative to how
  well competitors manage their value chains
 When a company’s costs are out-of-line, the
  activities responsible for the higher costs may be
  due to any of three parts of industry value chain
   1. Activities performed by suppliers
   2. A company’s own internal activities
   3. Activities performed by forward channel allies
                   Internally     Activities,
     Activities,
                   Performed       Costs, &       Buyer/User
      Costs, &
                   Activities,    Margins of        Value
     Margins of
                    Costs, &       Forward         Chains
     Suppliers
                    Margins      Channel Allies

                                                               4-21
                 Options to Correct
            Internal Cost Disadvantages
   Implement use of best practices throughout company
   Eliminate some cost-producing activities altogether by
    revamping value chain system
   Relocate high-cost activities to lower-cost geographic areas
   See if high-cost activities can be performed
    cheaper by outside vendors/suppliers
   Invest in cost-saving technology
   Innovate around troublesome cost components
   Simplify product design
   Make up difference by achieving savings in backward or
    forward portions of value chain system
                                                                   4-22
           Options to Correct a
    Supplier-Related Cost Disadvantage
 Pressure    suppliers for lower prices

 Switch   to lower-priced substitutes

 Collaborate closely with suppliers to identify mutual
  cost-saving opportunities

 Arrange  for just-in-time deliveries from suppliers to
  lower inventory and internal logistics costs

 Integrate backward into business
  of high-cost suppliers
                                                           4-23
Options to Correct a Cost Disadvantage Associated
     With Activities of Forward Channel Allies

 Pressure  dealer-distributors and other forward
 channel allies to reduce their costs to make
 the final price to buyers more competitive
 with prices of rivals

 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
                                                            4-24
               Test Your Knowledge

For a company to translate performance of value chain
activities into competitive advantage, it
  A. must (1) develop core competencies and maybe a
     distinctive competence that rivals don’t have or can’t
     quite match and that are instrumental in helping it deliver
     attractive value to customers or (2) be more cost efficient
     in how it performs value chain activities such that it has a
     low-cost advantage.
  B. has to develop more core competencies than rivals.
  C. must be more adept than rivals in using benchmarking
     and activity-based costing.
  D. has to position itself in the strategic group where profit
     margins are highest.
  E. Must adopt more best practices than rival firms.
                                                                    4-25
 Translating Performance of Value Chain
  Activities into Competitive Advantage
A company can create competitive advantage by
 out-managing rivals in performing value chain
 activities in either/both of two ways


 Option 1: Develop competencies and capabilities
           that rivals don’t have or can’t match


 Option 2: Do an overall better job than rivals of
           lowering combined costs of performing
           all the value chain activities


                                                     4-26
 Fig. 4.5: Translating Company Performance of
Value Chain Activities into Competitive Advantage




                                                    4-27
  Question 4: Is the Company Stronger
      or Weaker than Key Rivals?

 Overallcompetitive position involves
  answering two questions


     How does a company rank relative
      to competitors on each important
      factor that determines market success?


     Does a company have a net
      competitive advantage or disadvantage
      vis-à-vis major competitors?

                                               4-28
       Assessing a Company’s
   Competitive Strength vs. Key Rivals
1. List industry key success factors and other relevant
   measures of competitive strength
2. Rate firm and key rivals on each factor using rating
   scale of 1 to 10 (1 = very weak; 5 = average; 10 = very
   strong)
3. Decide whether to use a weighted or unweighted
   rating system (a weighted system is superior
   because chosen strength measures are unlikely to
   be equally important)
4. Sum individual ratings to get an overall measure of
   competitive strength for each rival
5. Based on overall strength ratings, determine overall
   competitive position of firm
                                                             4-29
4-30
4-31
            Why Do a Competitive
            Strength Assessment ?
 Reveals   strength of firm’s competitive position
  vis-à-vis key rivals
 Shows how firm stacks up against rivals, measure-
  by-measure – pinpoints firm’s competitive strengths
  and competitive weaknesses
 Indicates whether firm is at a competitive
  advantage / disadvantage against each rival
 Identifies possible offensive attacks (pit company
  strengths against rivals’ weaknesses)
 Identifies possible defensive actions (a need to
  correct competitive weaknesses)
                                                        4-32
                 Test Your Knowledge
Which of the following statements is false?
  A. The higher a company’s costs are above those of close rivals, the
     more competitively vulnerable it becomes.
  B. Because the value chains of rival companies tend to be quite
     similar, costs outside a company’s own value chain do not affect
     whether it is at a cost advantage or disadvantage vis-à-vis key
     rivals.
  C. A company’s cost competitiveness depends not only on the costs
     of internally performed value chain activities but also on the costs
     of activities performed by its suppliers and forward channel allies.
  D. The stronger a company’s financial performance and market
     position, the more likely it has a well-conceived, well-executed
     strategy.
  E. A competence is something a company is good at doing whereas a
     core competence is a proficiently performed internal activity that is
     central to a company’s strategy and competitiveness.
                                                                             4-33
      Question 5: What Strategic Issues
        Merit Managerial Attention?
 Based on results of both industry and competitive
 analysis and an evaluation of a company’s
 competitiveness, what items should be
 on a company’s “worry list”?
 Requires   thinking strategically about
   Pluses and minuses in the industry
    and competitive situation
   Company’s resource strengths and weaknesses and
    attractiveness of its competitive position

   A “good” strategy must address “what to do”
       about each and every strategic issue!
                                                      4-34
Stating the Issues Clearly and Precisely

A   well-stated issue involves such phrases as
     “How to . . . ?”
     “Whether to . . . ?”
     “What should be done about . . . ?”
 Issuesneed to be precise, specific,
  and “cut straight to the chase”
 Issues on the “the worry list”
  raise questions about
     What actions need to be considered
     What to think about doing
                                                  4-35
      Identifying the Strategic Issues:
              Some Possibilities
 How to stave off market challenges from new foreign
  competitors?
 How to combat price discounting of rivals?
 How to reduce a company’s high costs?
 How to sustain a company’s present growth
  in light of slowing buyer demand?
 Whether to expand a company’s product line?
 Whether to acquire a rival firm?
 Whether to expand into foreign markets rapidly or
  cautiously?
 What to do about aging demographics of a company’s
  customer base?
                                                        4-36
        For Discussion: Your Opinion

Why is it important for company managers to develop
a ―worry list‖ of strategic issues and problems that
they need to address and to resolve? Why can’t
managers just skip this step and go directly to the
task of choosing what strategy to employ?




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