Question 3: Are the Company s Prices and Costs Competitive

1. 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 Question 3: Are the Company’sPrices and Costs Competitive?

2. 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 ofthe value for customers is created) Support activities that facilitateperformance of the primary activities Concept: Company Value Chain

3. Fig. 4.3: A Representative Company Value Chain

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

5. Example: Value Chain Activitiesfor a Department Store Retailer Primary Activities Merchandise selection and purchasing Store layout and product display Advertising Customer service Support Activities Site selection Hiring and training Store maintenance Administrative activities

6. Example: Value ChainActivities for a Hotel Chain Primary Activities Site selection and construction Reservations Operation of hotel properties Managing lineupof hotel locations Support Activities Accounting Hiring and training Advertising Building a brand and reputation Generaladministration

7. Combined costs of all activities in a company’s value chain define the company’s internal cost structure Compares a firm’s costs activityby activity against costs of key rivals From raw materials purchase to Price paid by ultimate customer Pinpoints which internal activities are asource of cost advantage or disadvantage Characteristics of Value Chain Analysis

8. Several factors give rise to differencesin 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 assessingrivals’ relative cost positions Why Do Value Chains of Rivals Differ?

9. 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 inputsprovided by suppliers influence a firm’s own costsand product performance Value chains of distributors and retailers arerelevant 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 The Value Chain Systemfor an Entire Industry

10. Fig. 4.4: Representative Value Chain for an Entire Industry

11. Example: Value Chain Activities

12. Example: Value Chain Activities Parts and components manufacture Assembly Wholesale distribution Retail sales

13. Processing of basic ingredients Syrup manufacture Bottling and can filling Wholesale distribution Advertising Retailing Example: Value Chain Activities

14. Example: Value Chain Activities

15. 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 definedversus broadly defined activities Guideline – Develop separate costestimates for activities Having different economics Representing a significant or growing proportion of costs

16. 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 costof each value chain activity Activity-based costing entails Defining expense categories accordingto specific activities performed and Assigning costs to the activityresponsible for creating the cost Activity-Based Costing: A KeyTool in Analyzing Costs

18. 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 Benchmarking Costs ofKey Value Chain Activities

19. Identify best 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 Figure out what actions to take to improve a company’s own cost competitiveness Objectives of Benchmarking

20. Ethical Principles in Benchmarking Avoid actions implying an interest in Restraint of trade Market and/or customer allocation schemes Price fixing Bribery Refrain from acquiring trade secrets by any means viewed as improper Be willing to provide same type of information to a benchmarking partner Communicate early to clarify expectations and avoid misunderstandings Be honest and complete Treat benchmarking interchange as confidential Use information obtained only for stated purposes Respect corporate culture of partner companies Use benchmarking contacts designated by partner company Be fully prepared for each exchange Provide partners with agenda and questionnaire prior to exchange Follow through with commitments to partner in a timely manner Understand how partner wants information provided used

21. 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 What Determines If aCompany Is Cost Competitive?

22. 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 performedcheaper 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 Options to CorrectInternal Cost Disadvantages

23. 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 businessof high-cost suppliers Options to Correct aSupplier-Related Cost Disadvantage

24. Pressure dealer-distributors and other forward channel allies to reduce their costs to makethe final price to buyers more competitivewith prices of rivals Work closely with forward channel allies toidentify 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 Options to Correct a Cost Disadvantage Associated With Activities of Forward Channel Allies

25. 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. Answer: AAnswer: A

26. 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 capabilitiesthat rivals don’t have or can’t match Option 2: Do an overall better job than rivals oflowering combined costs of performingall the value chain activities Translating Performance of Value Chain Activities into Competitive Advantage

27. Fig. 4.5: Translating Company Performance of Value Chain Activities into Competitive Advantage

28. Overall competitive position involvesanswering two questions How does a company rank relativeto competitors on each importantfactor that determines market success? Does a company have a netcompetitive advantage or disadvantagevis-à-vis major competitors? Question 4: Is the Company Strongeror Weaker than Key Rivals?

29. 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 Assessing a Company’sCompetitive Strength vs. Key Rivals

32. 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) Why Do a CompetitiveStrength Assessment ?

33. 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. Answer: BAnswer: B

34. Based on results of both industry and competitive analysis and an evaluation of a company’s competitiveness, what items should beon a company’s “worry list”? Requires thinking strategically about Pluses and minuses in the industryand competitive situation Company’s resource strengths and weaknesses and attractiveness of its competitive position Question 5: What Strategic IssuesMerit Managerial Attention?

35. Stating the Issues Clearly and Precisely A well-stated issue involves such phrases as “How to . . . ?” “Whether to . . . ?” “What should be done about . . . ?” Issues need 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

36. 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 growthin 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? Identifying the Strategic Issues: Some Possibilities

37. 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? The purpose of the “worry list” is to identify the specific issues/problems that management needs to address, not to figure out what specific actions to take. Deciding what to do – which strategic actions to take and which strategic moves to make – comes later, i.e. when it is time to craft a company’s strategy and choose from among the various strategic alternatives.The purpose of the “worry list” is to identify the specific issues/problems that management needs to address, not to figure out what specific actions to take. Deciding what to do – which strategic actions to take and which strategic moves to make – comes later, i.e. when it is time to craft a company’s strategy and choose from among the various strategic alternatives.