question

 

1. What are the factors affecting the intensity of rivalry in the industry in which your company is competing? Would you characterize the rivalry and jockeying for better market position, increased sales, and market share among the companies in your industry as fierce, very strong, strong, moderate, or relatively weak? Why?
2. Are there any driving forces in the industry in which your company is competing? What impact will these driving forces have? Will they cause competition to be more or less intense? Will they act to boost or squeeze profit margins? List at least two actions your company should consider taking in order to combat any negative impacts of the driving forces

 

MLO 2. Examine and analyze company and industry value chains. CLO 1, CLO 2, CLO 3, CLO 5, CLO 6

MLO 3. Identify, analyze, and prioritize a firm’s resources and capabilities. CLO 1, CLO 2, CLO 3, CLO 5, CLO 6

 Overview: 

1. Analyzing the Macroenvironment
2. Industry Analysis
3. The Five Competitive Forces That Shape Strategy
4. Video of Dr. Michael Porter explaining his Five Forces mode

71Chapter 4 Evaluating a Company’s Resources, Capability, and Ability to Compete Successfully

71

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Strategy: Core Concepts and Analytical Approaches

An e-book marketed by McGraw Hill LLC

Arthur A. Thompson, The University of Alabama 8th Edition, 2025–2026

71

Chapter 4
Evaluating a Company’s Resources,
Capability, and Ability to Compete
Successfully

Before executives can chart a new strategy, they must reach common understanding of the company’s
current position.
—W. Chan Kim and Renée Mauborgne

Organizations succeed in a competitive marketplace over the long run because they can do certain things
their customers value better than can their competitors.
—Robert Hayes, Gary Pisano, and David Upton

A new strategy nearly always involves acquiring new resources and capabilities.
—Laurence Capron and Will Mitchell

Chapter 3 described how to use the tools of industry and competitive analysis to assess a company’s
external environment and lay the groundwork for matching a company’s strategy to its external situation.
This chapter discusses techniques for evaluating a company’s internal situation, with emphasis on its

collection of resources and capabilities, the competitiveness of its prices and internal operating costs, and its
competitive strength versus rivals. The analytical spotlight is trained on six questions:

1. How well is the company’s present strategy working?

2. What are the company’s important resources and capabilities, and do they have enough competitive
power to produce a competitive advantage over rival companies?

3. What are the company’s competitively important strengths and weaknesses and how well-suited are
they to capturing its best market opportunities and defending against the external threats to its future
well-being?

4. Are the company’s prices and costs competitive with those of key rivals, and does it have an appealing
customer value proposition?

5. Is the company competitively stronger or weaker than key rivals?

6. What strategic issues and problems does top management need to address in crafting a strategy to fit the
situation?

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In probing for answers to these questions, five analytical tools—resource and capability analysis, SWOT analysis,
value chain analysis, benchmarking, and competitive strength assessment—are used. All five are valuable
techniques for revealing a company’s ability to compete successfully and for helping company managers match
their strategy to the company’s particular circumstances.

Question 1: How Well Is the Company’s Present Strategy Working?
In evaluating how well a company’s present strategy is working, one must start with a clear view of what
the strategy is. Figure 4.1 shows the key components of a single-business company’s strategy. The first thing
to examine is the company’s competitive approach. What moves has the company made recently to attract
customers and improve its market position—for instance, has it cut prices, improved the design of its product,
added new features, stepped up advertising, entered a new foreign or domestic geographic market, or merged
with a competitor? Is it striving for a competitive advantage based on low costs or an appealingly different or
better product offering? Is it concentrating on serving a broad spectrum of customers or a narrow market niche?
The company’s functional strategies in R&D, production, marketing, finance, human resources, information
technology, and so on further characterize company strategy, as do any efforts to establish competitively valuable
alliances or partnerships with other enterprises.

Figure 4.1 Identifying the Components of a Single-Business Company’s Strategy

Actions to respond to important
changes in the macro-environment
or in industry and competitive
conditions

Planned, proactive moves to attract
customers and out-compete rivals via
more appealing product attributes,
better product quality, wider selection,
lower prices, superior service, and so on

Initiatives to build competitive
advantage based on:
• Lower costs and prices

relative to rivals?
• A different or better

product offering?
• Superior ability to serve

a market niche or specific
group of buyers?

Efforts to expand or
narrow geographic
coverage

Efforts to build competitively
valuable partnerships and
strategic alliances with other
enterprises

R&D, technology,
product design
strategy

Supply chain
management
strategy

Production
strategy

Sales, marketing,
and distribution
strategies

Information
technology
strategy Human

resources
strategy

Finance
strategy

BUSINESS
STRATEGY

The actions and
approaches crafted

to compete successfully
in a particular

business

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 the company is an above-average industry performer,
and (3) whether the company is gaining customers and gaining market share. Persistent shortfalls in meeting
company performance targets and mediocre performance in the marketplace relative to rivals are reliable warning

Chapter 4 • Evaluating a Company’s Resources, Capability, and Ability to Compete Successfully 73

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signs that the company has a weak strategy, suffers from poor strategy execution, or both. Specific indicators of
how well a company’s strategy is working include:

l Whether the firm’s sales are growing faster, slower, or at about the same pace as the market as a whole,
thus resulting in a rising, eroding, or stable market share.

l How well the company stacks up against rivals on product innovation, product quality, price, customer
service, and other relevant factors on which buyers base their choice of brands.

l Whether the firm’s brand image and reputation are growing stronger or weaker.

l Whether the firm’s profit margins are increasing or decreasing.

l Trends in the firm’s net profits, return on investment, and stock price and how these compare to the same
trends for other companies in the industry.

l Whether the company’s overall financial strength, credit rating, key financial and operating ratios, and
cash flows from operations are improving, remaining steady, or deteriorating.

l Evidence of internal operating improvements (fewer product defects, faster delivery times, increases in
employee productivity, a growing stream of successful product innovations, and ongoing cost savings).

The bigger the improvements in a company’s market standing and competitive strength and the stronger its
financial and operating performance, the more likely it has a well-conceived, well-executed strategy. Run-of-
the-mill market results, mediocre financial performance,
and sparse operating improvements are red flags that raise
questions about a company’s strategy and whether radical
changes in strategy or internal operations are needed.

Table 4.1 provides a compilation of the financial ratios most
commonly used to evaluate a company’s financial performance and balance sheet strength.

Table 4.1 Key Financial Ratios: How to Calculate Them and What They Mean

Ratio How Calculated What It Shows

Profitability Ratios
1. Gross profit margin Sales revenues—Cost of goods sold

Sales revenues

Shows the percentage of revenues available to cover
operating expenses and yield a profit. Higher is better
and the trend should be upward.

2. Operating profit margin
(or return on sales)

Sales revenues—Operating expenses
Sales revenues

or
Operating income

Sales revenues

Shows the profitability of current operations without
regard to interest charges and income taxes. Earnings
before interest and taxes is commonly referred to as
EBIT. Higher is better and the trend should be upward.

3. Net profit margin (or
net return on sales)

Profits after taxes
Sales revenues

Shows after-tax profits per dollar of sales. Higher is
better and the trend should be upward.

4. Total return on assets Profits after taxes + Interest
Total assets

A measure of the return on total monetary 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. Higher is better
and the trend should be upward.

5. Net return on total
assets (ROA)

Profits after taxes
Total assets

A measure of the return earned by stockholders on the
firm’s total assets. Higher is better and the trend should
be upward.

Sluggish financial performance and second-rate
market accomplishments almost always signal
weak strategy, weak execution, or both.

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Ratio How Calculated What It Shows
6. Return on stockholders’

equity (ROE)
Profits after taxes

Total stockholders’ equity

Shows the return stockholders are earning on their
capital investment in the enterprise. A return in the
12–15% range is “average,” and the trend should be
upward.

7. Return on invested
capital (ROIC)—
sometimes referred
to as return on capital
employed (ROCE)

Profits after taxes
Long-term debt +

Total stockholders’ equity

A measure of the return shareholders are earning
on the long-term monetary capital invested in the
enterprise. A higher return reflects greater bottom-line
effectiveness in the use of long-term capital, and the
trend should be upward.

8. Earnings per share
(EPS)

Profits after taxes
Number of shares of

common stock outstanding

Shows the earnings for each share of common stock
outstanding. The trend should be upward, and the
bigger the annual percentage gains, the better.

Liquidity Ratios
1. Current ratio Current assets

Current liabilities
Shows a firm’s ability to pay current liabilities using
assets that can be converted to cash in the near term.
Ratio should definitely be higher than 1.0; ratios of 2 or
higher are better still.

2. Working capital Current assets – Current liabilities Bigger amounts are better because the company
has more internal funds available 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.

Leverage Ratios
1. Total debt-to-assets

ratio
Total liabilities
Total assets

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

2. Long-term debt-to-
capital ratio

Long-term debt
Long-term debt +

Total stockholders’ equity

An important measure of creditworthiness and balance
sheet strength. It indicates the percentage of capital
investment in the enterprise that has been financed
by both long-term lenders and stockholders. A ratio
below 0.25 is usually preferable since monies invested
by stockholders account for 75% or more of the
company’s total capital. The lower the ratio, the greater
the capacity to borrow additional funds. Debt-to-capital
ratios above 0.50 and certainly above 0.75 indicate a
heavy and perhaps excessive reliance on long-term
borrowing, lower creditworthiness, and weak balance
sheet strength.

3. Debt-to-equity ratio Total liabilities
Total stockholders’ equity

Shows the balance between debt (funds borrowed
both short term and long term) 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 and
definitely above 2.0 put creditors at greater risk, signal
weaker balance sheet strength, and often result in
lower credit ratings.

4. Long-term debt-to-
equity ratio

Long-term debt
Total stockholders’ equity

Shows the balance between long-term debt and
stockholders’ equity in the firm’s long-term capital
structure. Low ratios indicate greater capacity to
borrow additional funds if needed.

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Ratio How Calculated What It Shows

5. Times-interest-earned
(or coverage) ratio

Operating income
Interest expenses

Measures the ability to pay annual interest charges.
Lenders usually insist on a minimum ratio of 2.0, but
ratios progressively above 3.0 signal progressively
better creditworthiness.

Activity Ratios

1. Days of inventory Inventory
Cost of goods sold ÷ 365

Measures inventory management efficiency. Fewer
days of inventory are usually better.

2. Inventory turnover Cost of goods sold
Inventory

Measures the number of inventory turns per year.
Higher is better.

3. Average collection
period

Accounts receivable
Total sales ÷ 365

or
Accounts receivable
Average daily sales

Indicates the average length of time the firm must wait
after making a sale to receive cash payment. A shorter
collection time is better.

Other Important Measures of Financial Performance

1. Dividend yield on
common stock

Annual dividends per share
Current market price per share

A measure of the return that shareholders receive
in the form of dividends. A “typical” dividend yield is
2–3%. The dividend yield for fast-growth companies is
often below 1% (maybe even 0); the dividend yield for
slow-growth companies can run 4–5%.

2. Price-earnings ratio Current market price per share
Earnings per share

P-E ratios above 20 indicate strong investor
confidence in a firm’s outlook and earnings growth;
firms whose future earnings are at risk or likely to grow
slowly typically have ratios below 12.

3. Dividend payout ratio Annual dividends per share
Earnings per share

Indicates the percentage of after-tax profits paid out
as dividends.

4. Internal cash flow After-tax profits + Depreciation A quick and rough estimate of the cash a company’s
business is generating after payment of operating
expenses, interest, and taxes. Such amounts can
be used for dividend payments or funding capital
expenditures.

5. Free cash flow After-tax profits + Depreciation –
Capital expenditures – Dividends

A quick and rough estimate of the cash a company’s
business is generating after payment of operating
expenses, interest, taxes, 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.

Question 2: What Are the Company’s Important Resources and
Capabilities and Do They Have Enough Competitive Power to
Produce a Competitive Advantage Over Rivals?

An essential element of deciding whether a company’s internal situation is fundamentally healthy or unhealthy
entails examining the attractiveness of its resources and capabilities. A company’s resources and capabilities are
competitive assets and determine whether its competitive power in the marketplace will be impressively strong
or disappointingly weak. Companies with second-rate competitive assets are nearly always relegated to a trailing
position in the industry.

Chapter 4 • Evaluating a Company’s Resources, Capability, and Ability to Compete Successfully 76

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Resource and capability analysis provides managers with a powerful tool for sizing up the company’s
competitive assets and determining whether they can provide the foundation necessary for competitive success
in the marketplace. This is a two-step process. The first step is to identify the company’s competitively important
resources and capabilities. The second step is to examine them more closely to ascertain which are the most
competitively important and whether they can support a sustainable competitive advantage over rival firms. This
second step involves applying four tests of the competitive power of a resource or capability.

Identifying a Company’s Competitively Important Resources and Capabilities
A company’s competitively important resources and capabilities are fundamental building blocks in crafting a
competitive strategy.1 Broadly speaking, any asset or productive input that a firm owns or controls qualifies as
a resource. Most firms have many kinds and types of resources, and these tend to vary widely in quality and
competitive value. For example, a company’s brand name is a resource, whose value varies widely. Some brands
like Coca-Cola, Nike, and Google are quite valuable because they are well-known globally while others are
virtually unknown and have little competitive value (Turtle Beach, Kumho, Asus). Our interest here is not in
cataloging every resource a company has but rather in identifying those resources that have competitive value
and can enhance its competitiveness.

Identifying Valuable Company Resources. Valuable or competitively relevant resources can relate to any
of the following:

l Physical resources: valuable land and real estate, state-of-the-art manufacturing plants, equipment,
distribution facilities, and/or well-equipped R&D facilities, the locations of retail stores, plants, and
distribution centers (including the overall pattern of their physical locations), and ownership of or access
rights to valuable natural-resource deposits.

l Human assets and intellectual capital: an educated, well-trained, talented and experienced workforce,
the cumulative learning and know-how of key personnel and work groups regarding important business
functions and/or technologies; proven managerial and leadership skills, proven skills in operating key
parts of the business efficiently and effectively.2

l Organizational and technological resources: proprietary technology and production capabilities,
patents, proven R&D capabilities, strong e-commerce capabilities, proven quality control systems,
state-of-the-art information and data management systems (systems for monitoring various operating
activities in real-time, just-in-time inventory management systems, and business analytics capabilities),
and proven software development capabilities.

l Financial resources: cash and marketable securities, a strong balance sheet and credit rating (thus giving
the company added borrowing capacity and access to additional financial capital).

l Intangible assets: brand names, trademarks, copyrights, company image, reputational assets (for
technological leadership or excellent product quality or customer service or honesty and fair dealing),
buyer loyalty and goodwill, a strong work ethic and motivational drive that is embedded in the company’s
workforce, a tradition of close teamwork and coordination across the company’s organizational units,
the creativity and innovativeness of certain personnel and work groups, the trust and effective working
relationships established with various external partners, and cultural norms and behaviors that promote
responding quickly to changing circumstances, fast organizational learning, and continuously striving
to achieve operating excellence in the performance of internal activities.

l Relationships: alliances, joint ventures or partnerships that provide access to valuable technologies,
specialized know-how, or attractive geographic markets; fruitful partnerships with suppliers that reduce
costs and/or enhance product quality and performance; a strong network of distributors and/or retail
dealers.

Chapter 4 • Evaluating a Company’s Resources, Capability, and Ability to Compete Successfully 77

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Identifying Valuable Company Capabilities. A capability concerns the proficiency with which a company
can perform an activity. A company’s skill or proficiency in performing different facets of its operations can range
from one of minimal capability (perhaps having just struggled to perform an activity for the first time) to the
other extreme of being able to perform the activity with a level of competence that exceeds any other company in
the industry. In general, the competitive value of a capability depends on two factors: the competence a company
has achieved in performing the activity and the role of the activity in the company’s strategy, as explained below:

1. A company’s proficiency rises from that of mere ability to perform an activity to the level of a
competence when it learns to perform the activity consistently well and at acceptable cost. Usually,
competence in performing an activity originates
with deliberate efforts to simply develop the ability
to do it, however imperfectly or inefficiently.
Then, as experience builds and the company gains
proficiency to perform the activity consistently
well and at an acceptable cost, its ability evolves
into a true competence and capability. Whether
a competence has competitive value depends
on whether it relates directly to a company’s strategy or competitive success or whether it concerns
an activity that has minimal competitive bearing (like administering employee benefit programs or
accuracy in preparing financial statements).

Some competitively valuable competencies relate to fairly specific skills and expertise (like just-in-time
inventory control, low-cost manufacturing efficiency, picking locations for new stores, or designing
an unusually appealing and user-friendly website for online sales). They spring from proficiency in
a single discipline or function and may be performed in a single department or organizational unit.
Other competencies, however, are inherently multidisciplinary and cross-functional. They are the result
of effective collaboration among people with different expertise working in different organizational
units. A competence in continuous product innovation, for example, comes from teaming the efforts of
people and groups with expertise in market research, new product R&D, design and engineering, cost-
effective manufacturing, and market testing.3 Virtually all organizational competences are knowledge
based, residing in the intellectual capital of company employees and not in assets on its balance sheet.

2. A core competence is a proficiently performed internal activity that is central to a company’s strategy
and competitiveness.4 A core competence is a more competitively valuable capability than a competence
because of the well-performed activity’s key role in the company’s strategy and the contribution it
makes to the company’s market success, competitiveness, and profitability. A core competence can
relate to any of several aspects of a company’s
business: expertise in integrating multiple
technologies to create families of new products,
skills in manufacturing a high-quality product at a
low cost, or the capability to fill customer orders
accurately and swiftly. Most core competencies
are grounded in cross-department combinations
of knowledge and expertise rather than being the
product of a single department or work group.
Amazon.com has a core competence in online
retailing and website operations. Kellogg’s has
a core competence in developing, producing, and marketing breakfast cereals. Microsoft has a core
competence in developing operating systems for computers and user software like Microsoft Office®,
plus it has recently developed a core competence in creating new artificial intelligence software and
solutions. L’Oréal, the world’s largest beauty products company with 18 dermatologic and cosmetic
research centers, a large accumulation of scientific knowledge concerning skin and hair care, patents
and secret formulas for hair and skin care products, and robotic techniques for testing the safety of

CORE CONCEPT
A company has a competence in performing an
activity when, over time, it gains the experience
and know-how to perform the activity consistently
well and at acceptable cost.

CORE CONCEPT
A core competence is an activity that a company
performs quite well and that is also central to its
strategy and competitiveness. A core competence
is a more important capability than a competence
because it adds power to a company’s strategy
and has a bigger positive impact on its competitive
success.

Chapter 4 • Evaluating a Company’s Resources, Capability, and Ability to Compete Successfully 78

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hair and skin care products, has developed a strong and competitively successful core competence in
developing hair care products, skin care products, cosmetics, and fragrances.

3. A distinctive competence is a competitively valuable activity that a company performs better than its
rivals.5 A distinctive competence thus signifies greater proficiency than a core competence. Because
a distinctive competence represents a level of
proficiency that rivals do not have, it qualifies as a
competitively superior capability with competitive
advantage potential. It is always easier for a
company to build competitive advantage when
it has a distinctive competence in performing an
activity important to market success, when rival
companies do not have offsetting competencies,
and when it is costly and time-consuming for rivals to imitate the competence. Companies that have a
distinctive competence include Google, which has a distinctive competence in search engine technology,
and Walt Disney Co., which has a distinctive competence in creating and operating theme parks.

In determining whether a company has a competitively attractive collection of resources and capabilities, it
is important to identify which of its skills and proficiencies qualify as a competence, which represent a core
competence, and whether it may enjoy a distinctive competence in one or more activities it performs.6 Both core
competencies and distinctive competencies are valuable because they enhance a company’s competitiveness.
But mere ability to perform an activity well does not necessarily give a company competitive clout. Some
competencies merely enable market survival because most rivals also have them—indeed, not having
a competence or competitive capability that rivals have can result in competitive disadvantage. An apparel
manufacturer cannot survive without the capability to produce its apparel items cost efficiently, given the intensely
price-competitive nature of the apparel industry. A cell-phone maker cannot survive without the capability to
introduce next-generation cell phones with appealing new features and functions that attract a profitable number
of buyers. A provider of subscription-based streamed entertainment cannot prosper without the capabilities to
create appealing original content.

Astute Bundling of a Company’s Resources and Capabilities Can Result in Added Competitive
Power. In identifying company resources and capabilities with competitive value, it is important to understand
that a particular resource or capability which may not seem to have much competitive value by itself can be
much more valuable when bundled with certain other company resources and/or capabilities (that also, taken
singly, appear to lack important competitive value). There are numerous instances when resource/capability
bundles have important competitive power even when
individual components of the bundle do not. For example,
Nike’s resource bundle of styling expertise, professional
endorsements, well-regarded brand name and image,
marketing and brand-building skills, network of distributors/
retailers, and managerial know-how has provided sufficient
competitive power for Nike to remain the dominant global
leader in athletic footwear and sports apparel for over 20
years.

It is equally important to understand that the value of a
company resource/capability is often also a function of
the company’s proficiency in using the resource/capability
to perform an activity.7 For instance, the degree to which
a company’s manufacturing plants are a competitively valuable resource hinges, in part, upon whether the
products being manufactured are of poor quality, lower-than-average quality, better-than-average quality, or
superior quality. A company’s manufacturing capabilities thus matter. Moreover, in most cases, a company’s
manufacturing capabilities are enhanced or weakened by its product R&D capabilities and its product design
capabilities.

CORE CONCEPT
A distinctive competence is a competitively
important activity that a company performs better
than its rivals—it thus represents a competitively
superior capability.

CORE CONCEPT
A resource/capability bundle is a group of
resources and/or capabilities that, when linked
and integrated into a functioning whole, has
greater competitive value than the summed value
of the individual components—in other words,
combining individual resources and capabilities
into an integrated bundle produces a 1 + 1 = 3 gain
in competitive power versus just a 1 + 1 = 2 gain
when the same resources and capabilities are
unbundled.

Chapter 4 • Evaluating a Company’s Resources, Capability, and Ability to Compete Successfully 79

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Four Ways to Test the Competitive Power of a Resource or Capability
What is most telling about the importance and value of a company’s resources and capabilities, individually and
collectively, is how powerful they are in the marketplace. The competitive power of a resource or capability is
measured by how many of the following four tests it can pass:8

1. Does the resource or capability have competitive value? The competitive value of a resource or capability
is determined by how much it helps a company improve its customer value proposition (and thereby
better attract and please customers), the degree to which it enables a company to compete effectively
against rivals, and its role in the company’s profit proposition. Unless a resource or capability contributes
to the power of a company’s strategy and helps maintain or enhance the company’s competitiveness
vis-à-vis rivals, it cannot pass the test of being competitively valuable. Companies must guard against
contending that most any kind of expertise or know-how or well-performed activity qualifies as a core or
a distinctive competence or gives them substantial competitive clout. Apple’s iOS operating system for
its PCs is by most accounts a world beater (compared to Windows 11), but Apple has failed to convert its
know-how and capability in operating system design into competitive success in the global PC market—
its global market share in PCs has lagged well behind HP, Dell, and Lenovo for over two decades.
Moreover, it is important to recognize that a resource or capability can quickly lose its competitive
value because of rapid changes in technology or customer preferences or the importance of certain
distribution channels or other market-related factors. For example, a company’s ability to benefit from
strong capabilities in product innovation is governed by how quickly rivals can introduce their own new
products with many of the same features. The branch offices of commercial banks are becoming a less
valuable competitive asset because of growing use of direct deposits, automated teller machines, debit
cards, and telephone and online banking options that reduce the need to “go to the bank.”

2. Do many or most rivals have much the same resource or capability? A resource or capability that most
of a company’s rivals also possess cannot be a basis for outcompeting rivals or achieving competitive
advantage. Indeed, when most companies in an industry can legitimately lay claim to having a particular
resource or capability, then that resource or capability is valuable only from the standpoint of helping
industry members maintain competitive parity in the marketplace and perhaps indicating the resource
or capability is an industry key success factor. A resource or capability achieves its greatest competitive
value only if (1) it is rare (in the sense of being possessed by one, or at most two, companies competing
in the same market arena) and (2) has sufficient competitive power (like a distinctive competence) to
enable a firm to outcompete rivals and gain a sustainable competitive advantage.

3. Is the resource or capability hard to copy? The more difficult and more expensive it is for rivals to
imitate a competitively valuable resource or capability, the greater its potential for enabling a company
to outcompete rivals and win a competitive advantage. Resources tend to be difficult to copy when
they are unique (a fantastic real estate location, patent-protected technology or product features, an
unusually talented and motivated labor force), when they must be built over time in ways that are
difficult to imitate (a well-known brand name, mastery of a complex production process, a global
network of dealers and distributors), and when they entail financial outlays or large-scale operations
that few industry members can undertake. Capabilities can be hard to copy and take considerable time
for rivals to develop when they have high skill or knowledge-based requirements, involve complicated
technology, and/or entail extensive cross-functional collaboration. Valuable resources and capabilities
that are also hard-to-copy can often significantly boost a company’s competitive strength and sustain
good-to-excellent profitability.

4. Can the value of a resource or capability be trumped by substitute resources and capabilities of rivals?
Resources that are valuable, not widely possessed by rivals, and hard to copy, lose much of their
competitive power if rivals have substitute resources or capabilities of equal or greater competitive
power.9 For instance, manufacturers relying on robotics and automated production processes to gain
a cost advantage in production activities may find their technology-based cost advantage completely
nullified by rivals who also can implement robot-assisted production techniques but who also move

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their production operations to countries having both low wages and an adequately skilled labor force,
and thereby can achieve even lower production costs.

The vast majority of companies are not well endowed with standout resources or capabilities capable of passing
all four tests with high marks. Most firms have a mixed bag of resources and capabilities—one or two quite
valuable, some good, many satisfactory (on a par with
rivals), and others mediocre. Resources and capabilities
that are competitively valuable pass the first of the four
tests, but not necessarily the other three. As contributors to
the competitiveness of a company’s strategy, competitively
valuable resources/capabilities are mainly important in
gaining parity with many (maybe most) rivals; but such
resources/capabilities may or may not have the competitive
power to produce significant competitive advantage without the presence of important bundling effects or other
qualities that greatly boost buyer appeal for a company’s product offering.

For a company to have resources/capabilities that can pass the first two tests entails a much higher hurdle—having
a resource or capability that is valuable, likely not possessed by rivals (rare), and potentially has significant
competitive power because it is competitively superior in some important respect. Companies in the top tier of
their industry may have as many as two or three core competencies but only a very few companies, usually the
strongest industry leaders or up-and-coming challengers, have a capability that truly qualifies as a distinctive
competence. A standout resource that delivers competitive superiority is as rare as having a resource/capability
that qualifies as a distinctive competence. This is why, absent important resource/capability bundling effects,
it is so hard for a company to achieve a sustainable competitive advantage over rivals. Achieving sustainable
competitive advantage usually requires a company to have at least one resource/capability that can pass the first
three tests (except in those instances where important resource/capability bundling effects are present).

However, as discussed earlier, a company that lacks a standout resource or distinctive competence and only has
resources/capabilities that can pass the first test can still integrate a group of good-to-adequate resources and
capabilities into a competitively effective bundle that yields adequate to good profitability. Fast-food chains
like Wendy’s, Shake Shack, and Burger King, despite having only satisfactory resources and capabilities, have
nonetheless achieved respectable market positions and profitability competing against McDonald’s. Discount
retailers Target and Kohl’s have bundled good enough resources and capabilities to profitably compete against
Walmart and its richer, deeper resources/capabilities. Lululemon, an up-and-coming performance sport apparel
retailer whose chief competitors include Nike, Adidas, and Under Armour—all with arguably broader and
deeper collections of competitively valuable resources and capabilities, has in the past six years put together an
increasingly potent collection of resources and capabilities that have enabled it to surpass Under Armour in sales
in North America, increase its global revenues by 147 percent and net profits by 77 percent during 2018–2023.

A Company’s Important Resources and Capabilities Must Be Dynamic and
Freshly-Honed to Sustain Its Competitiveness
For a company’s important resources and capabilities to remain competitively valuable over time, they must be
continually polished, updated, and sometimes augmented
with altogether new kinds of resources and expertise.10
It takes freshly honed and sometimes totally refurbished
or completely new resources/capabilities for a company
to effectively respond to ongoing changes in customer
needs and expectations. Diligent managerial attention to
sharpening and recalibrating company competencies and
capabilities protects a company’s long-term competitiveness
against the improving capabilities of rivals and their
strategic maneuvering to win bigger sales and market shares. Absent such attention, a company’s competencies
and capabilities risk becoming stale over time and eroding company performance.11

CORE CONCEPT
The degree of success a company enjoys in
the marketplace is governed by the combined
competitive power of its resources and
capabilities.

CORE CONCEPT
A company requires a dynamically evolving
portfolio of competitively valuable resources
and capabilities to sustain its competitiveness
and help drive improvements in its performance.
Otherwise, the power of its competitive assets
grows stale.

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The Role of Dynamic Capabilities. Management’s challenge in creating and maintaining a dynamic
and competitively effective portfolio of resources and capabilities has two elements: (1) attending to ongoing
recalibration and refurbishment of the company’s competitive assets and (2) casting a watchful eye for
opportunities to develop totally new resources and capabilities for delivering better customer value and/or
outcompeting rivals. Companies that succeed in meeting both challenges are likely to be in the enviable position
of having an ever stronger and competitively potent arsenal
of resources and capabilities.

Company executives that grasp the strategic importance of
incrementally improving the company’s existing competitive
assets and from time-to-time adding new resources/
capabilities make a point of ensuring that these actions are
an ongoing, high-priority activity. By making proactive
oversight of these activities a routine managerial function, they gain the experience and know-how to do a
consistently good job of dynamically managing the company’s important competitive assets. At that point, their
ability to freshen and augment the company’s resource/capability portfolio becomes what is known as a dynamic
capability.12 This dynamic capability also includes an ongoing top management search for opportunities to
create new resources and capabilities to increase the company’s competitiveness. When a company’s executive
management team achieves proficient dynamic capability to modify, deepen, and augment the company’s
competitively important resources and capabilities, the company is better able to maintain, if not enhance, its
competitiveness in the marketplace and significantly improve its chances for long-term competitive success.

Question 3: What Are the Company’s Competitively Important
Strengths and Weaknesses and Are They Well-Suited
to Capturing Its Best Market Opportunities and
Defending Against External Threats?
One of the simplest and most powerful tools for assessing a company’s overall situation is widely known as SWOT
analysis, so named because it zeros in on a company’s competitively important Strengths and Weaknesses,
its market Opportunities, and those external Threats that
can adversely impact the company’s well-being. Doing a
first-rate SWOT analysis has considerable managerial value
because it helps company managers single out and focus
on all the factors needed to craft a winning strategy that
fits the company’s overall internal and external situation.
To achieve good fit with the company’s situation, managers
must devise a strategy that capitalizes on the company’s most potent competitive strengths, corrects important
competitive weaknesses, aims squarely at capturing the company’s best market opportunities, and helps defend
against the external threats to its future well-being and business prospects.

Identifying a Company’s Competitively Important Strengths
A strength can relate to something a company is good at doing (a competitively important capability or a
core competence), a competitively valuable resource
(like a well-known brand name or a reputation for award-
winning customer service or large numbers of high-traffic
store locations), and certain kinds of competitively relevant
achievements or attributes that contribute to a company’s
competitiveness in the marketplace (like having low overall
costs relative to competitors, being a market share leader,
having a wider product line than rivals, and having wider geographic market coverage than rivals).

Executive attention to making sure a company
always has competitively valuable resources
and capabilities that dynamically evolve and
help sustain the company’s competitiveness is a
strategically important top management task.

SWOT analysis is a simple but powerful
tool for sizing up a company’s competitively
relevant strengths and weaknesses, its market
opportunities, and the external threats to its future
well-being.

CORE CONCEPT
A company’s competitively important strengths
are competitive assets that positively impact its
competitiveness and ability to succeed in the
marketplace.

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Most usually, a company’s strengths stem from the caliber and competitive power of its resources and capabilities;
managers can draw on resource and capability analysis to make objective assessments of the potency of the
company’s resources and capabilities. While individual resources and capabilities that can pass one or more of
the four tests of competitive power typically represent the company’s greatest strengths, managers should be
careful not to overlook the competitive strength that results from bundling less potent resources and capabilities.
Further, a resource or capability that lacks much competitive power may still be useful for successfully gaining
entry into a new market or market segment. A resource bundle that fails to match those of top-tier companies
may, nonetheless, allow a company to compete quite successfully against second-tier rivals.

Identifying a Company’s Competitively Important Weaknesses
A weakness, or competitive deficiency, is something a company lacks or does poorly (in comparison to others)
or a condition that puts it at a disadvantage in the marketplace. A company’s weaknesses can relate to (1) inferior
or unproven skills, expertise, capabilities, or intellectual
capital in competitively important areas of the business;
(2) deficiencies in competitively important physical,
organizational, or intangible resources; or (3) weak or
missing capabilities in key areas. Company weaknesses are
thus internal shortcomings or deficiencies that constitute
competitive liabilities. Nearly all companies have competitive liabilities of one kind or another. Whether a
company’s weaknesses make it competitively vulnerable depends on how much they matter in the marketplace
and whether they are mostly offset or minimized by the company’s strengths.

Table 4.2 contains a representative sample of things to consider in identifying a company’s competitively
relevant strengths and weaknesses. Sizing up a company’s complement of strengths and weaknesses is akin to
constructing a strategic balance sheet, where strengths represent competitive assets and weaknesses represent
competitive liabilities. Obviously, the ideal outcome is for a company’s competitive assets to outweigh its
competitive liabilities by a healthy margin—a 50-50 balance (or worse) is ominous.

CORE CONCEPT
A company’s weaknesses are internal
shortcomings that constitute competitive liabilities.

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Table 4.2 What to Look for in Identifying a Company’s Strengths,
Weaknesses, Opportunities, and Threats

Potential Competitive Strengths
l Core competencies in _______
l A distinctive competence in _______
l A product strongly differentiated from those of rivals
l Resources and capabilities well matched to industry

key success factors
l A strong financial condition; ample financial resources

to grow the business
l Strong brand name/company reputation
l Strong customer loyalty
l Proven technological capabilities, proprietary

technology/important patents
l Strong bargaining power over suppliers or buyers
l Cost advantages over rivals
l Proven skills in advertising and promotion
l Proven product innovation capabilities
l Proven capabilities in improving production processes
l Good supply chain management capabilities
l Strong customer service capabilities
l Better product quality relative to rivals
l Wide geographic coverage and/or strong global

distribution capability
l Alliances/joint ventures with firms that provide access

to valuable technology, expertise and/or attractive
geographic markets

Potential Market Opportunities
l Openings to win market share from rivals
l Sharply rising buyer demand for the industry’s product
l Serving additional customer groups or market

segments
l Expanding into new geographic markets
l Expanding the company’s product line to meet a

broader range of customer needs
l Utilizing existing company skills or technological

know-how to enter new product lines or new
businesses

l Growing online sales (often because more buyers
have shifted to making purchases online)

l Integrating forward or backward
l Falling trade barriers in attractive foreign markets
l Acquiring rival firms or companies with attractive

capabilities
l Entering into alliances or joint ventures to expand the

firm’s market coverage or boost its competitiveness
l Openings to exploit emerging new technologies

Potential Competitive Weaknesses
l Core competencies that are weaker or less well-

developed than key rivals
l Resources and capabilities that are not well matched to

an industry’s key success factors
l Heavy debt burden; a weak credit rating
l Short on financial resources to grow the business and

pursue promising initiatives
l Higher overall unit costs relative to key rivals
l Weaker product innovation capabilities than key rivals
l A product/service with attributes or features inferior to

those of rivals
l Too narrow a product line relative to rivals
l Weaker brand name/reputation than rivals
l Weaker dealer network than key rivals
l Weak global distribution capability
l Weaker product quality, R&D, and/or technological

know-how than key rivals
l In an overcrowded strategic group
l Losing market share because _________
l Competitive disadvantages in ________
l Inferior intellectual capital relative to rivals
l Subpar profitability because _________
l Plagued with internal operating problems or obsolete

facilities
l Too much underutilized plant capacity

Potential External Threats to a Company’s
Well-Being and Future Profitability
l More intense competitive pressures from industry rivals

and/or sellers of substitute products—may squeeze
profit

margins

l The entry (or likely entry) of new competitors into the
company’s market stronghold (especially lower-cost
foreign competitors)

l Growing bargaining power of buyers and/or suppliers
l Slowing or declining market demand for the industry’s

product
l A shift in buyer needs and tastes away from the

industry’s product
l Adverse demographic changes that threaten to curtail

demand for the industry’s product
l Technological changes that weaken buyer demand or

weaken the company’s competitiveness
l Restrictive trade policies or tariffs; disruptive trade wars
l Costly new regulatory requirements
l Tighter credit conditions
l Rising prices for energy or other key inputs

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Identifying a Company’s Best Market Opportunities
Market opportunity is a big factor in shaping a company’s strategy. Indeed, managers can’t properly tailor strategy
to the company’s external situation without first identifying its market opportunities and appraising the growth
and profit potential each one holds. Depending on the prevailing circumstances, a company’s opportunities can
be plentiful or scarce, fleeting or lasting, and can range from wildly attractive (an absolute “must” to pursue)
to marginally interesting (because of the high risks, large capital requirements, or unappealing revenue growth
and profit potentials) to unsuitable (because the company’s resource strengths and capabilities are ill-suited to
successfully capitalize on some opportunities). Typical market opportunities are shown in Table 4.2.

Newly emerging and fast-changing markets sometimes present stunningly big or “golden” opportunities, but it
is typically hard for managers at one company to peer into “the fog of the future” and spot them much ahead of
managers at other companies.13 But as the fog begins to clear, golden opportunities are nearly always pursued
rapidly. And the companies that seize them are usually those that have been actively waiting, staying alert with
diligent market reconnaissance, and preparing themselves to capitalize on shifting market conditions by patiently
assembling an arsenal of competitively valuable resources and a war chest of cash to finance aggressive action
when the time comes.14 In mature markets, unusually attractive market opportunities emerge sporadically, often
after long periods of relative calm—but future market conditions may be less foggy, thus facilitating good
market reconnaissance and making emerging opportunities easier for industry members to detect.

In evaluating a company’s market opportunities and ranking their attractiveness, managers have to guard
against viewing every industry opportunity as a company opportunity. Rarely does a company have sufficient
resources and capabilities to pursue all available market opportunities simultaneously without spreading itself
too thin. More importantly, a company’s resource strengths
and competitively valuable capabilities are almost always
better-suited for pursuing and capturing some opportunities
than others; indeed, few companies have the resources
and capabilities needed to be competitively successful
in pursuing every one of an industry’s opportunities. A
company is always well advised to pass on a particular
market opportunity unless it has or can readily acquire potent
enough resources and capabilities to compete successfully
and profitably in pursuing the opportunity. Competitive
weak companies—because they lack the requisite resource
strengths and capabilities—can find themselves hopelessly
outclassed if they unwisely try to pursue an industry’s
biggest and best market opportunities in head-to-head competition with rivals having much stronger resources and
competitive capabilities. Consequently, in choosing which market opportunities to pursue, company strategists
should concentrate their attention on those opportunities where the requirements for competitive success match
up well with the company’s resource strengths and most potent capabilities—it is precisely these opportunities
where the company is most likely to enjoy competitive success, attractive profitability, and good potential for
achieving a sustainable competitive advantage over rivals.

Identifying the External Threats to a Company’s Future Profitability
Often, certain factors in a company’s external environment pose threats to its competitive well-being and future
profitability. External threats can stem from such factors as the growing intensity of one or more of the five
competitive forces, the emergence of cheaper or better technologies, the entry of lower-cost foreign competitors
into a company’s market stronghold, new regulations that are more burdensome to a company than to its
competitors, unfavorable demographic shifts, and political upheaval in a foreign country where the company has
facilities. Table 4.2 lists representative potential threats.

External threats may pose no more than a moderate degree of adversity (all companies confront some threatening
elements in the course of doing business), or they may be so ominous they put a company’s future survival at

CORE CONCEPT
The most appealing market opportunities for a
company to pursue are those where its resource
strengths and valuable capabilities will be
competitively powerful in the marketplace and
generate the greatest competitive success. The
pursuit of opportunities with good resource/
capability fit offer a company its best prospects for
both attractive profitability and the achievement of
a sustainable competitive advantage over rivals.

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risk. On rare occasions, market shocks can give birth to a sudden-death threat that throws a company into an
immediate crisis and battle to survive. In 2017–2019, many companies engaged in international trade faced
threats stemming from trade disputes between the United States and numerous other countries and the imposition
of higher tariffs on the goods the companies were exporting or importing. In 2020, the sudden emergence of
the Covid-19 pandemic posed a significant threat to the worldwide airline industry, cruise lines, the tourist
industry, restaurants (due to restrictions on indoor dining), many retailers (due to stay-at-home orders and the
reluctance of people to go shopping), and the owners of metropolitan downtown commercial office buildings
(due to tenants either allowing or mandating that their employees work from home.) The pandemic-related
threat to many of these businesses extended into 2021. When the COVID-19 threat ended in 2021–2022, a
number of employers unexpectedly decided that many of their workers could continue to work from home and
cancelled their leases of office space; the resulting explosion in vacant office spaces in downtown buildings in
many metropolitan cities posed a long-term threat to the owners of these buildings who were dependent on rental
income to pay the mortgages they took out to purchase the buildings. The expected increases in the demand for
electric vehicles over the long-term threatens the businesses of oil producers across the world due to the resulting
weaker demand for gasoline. Concerns about climate change were prompting governments in many countries to
impose new rules and regulations restricting oil and natural gas drilling and production and to offer subsidies for
the installation of solar roofs and the construction of solar farms and wind turbines. Plainly, it is management’s
job to identify the threats to the company’s future prospects and to evaluate what strategic actions can be taken
to neutralize or lessen their impact.

What Do the SWOT Listings Reveal?
SWOT analysis involves more than making four lists. The two most important parts of SWOT analysis are drawing
conclusions from the SWOT listings about the company’s overall situation, and translating these conclusions
into strategic actions to create an overall strategy well-
matched to the company’s overall situation—as indicated
by its strengths and weaknesses, its market opportunities,
and its external threats. Figure 4.2 shows the steps involved
in gleaning insights from SWOT analysis.

The answers to the following questions often reveal just
what story the SWOT listings tell about the company’s
overall situation:

l What are the attractive aspects of the company’s situation?

l What aspects are of the most concern?

l Do the company’s strengths give it sufficient competitive power to compete successfully?

l Are the company’s weaknesses/deficiencies of major or minor consequence? Must remedial action be
taken immediately? Or, are the weaknesses/deficiencies sufficiently negated by the company’s strengths
that corrective action is probably not the best use of company resources?

l Does the company have resources and capabilities that are especially well-suited to successfully pursuing
and capturing its most attractive market opportunities? Is the company lacking certain resources or
capabilities that make it inadvisable to pursue any particular market opportunities?

l Are the external threats alarming, or are they something the company appears able to deal with and
defend against?

l All things considered, where on a scale of 1 to 10 (where 1 is alarmingly weak and 10 is exceptionally
strong), does the company’s overall situation and future prospects rank?

Simply making lists of a company’s strengths,
weaknesses, opportunities, and threats is not
enough. The payoff from SWOT analysis comes
from the conclusions that can be drawn about the
company’s overall situation and the implications
for strategy improvement that flow from the four
lists.

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Figure 4.2 The Three Steps of SWOT Analysis: Identify, Draw Conclusions,
Translate into Strategic Action

Identify the company’s
competitively important
strengths and competitive
assets

Identify the company’s
competitively important
weaknesses and
deficiencies

Identify the
company’s market
opportunities

Identify external threats
to the company’s
future well-being

Conclusions concerning the company’s overall business
situation:
l Where on the scale from “alarmingly weak” to

“exceptionally strong” does the attractiveness of the
company’s situation rank?

l What are the attractive and unattractive aspects of the
company’s situation?

Implications for improving company strategy:
l Use company strengths and capabilities as

corner stones for strategy.
l Pursue those market opportunities best suited to

company strengths and capabilities.
l Correct weaknesses and deficiencies that impair

pursuit of important market opportunities or heighten
vulnerability to external threats.

l Use company strengths to lessen the impact of
important external threats.

What Can Be Gleaned from the
SWOT Listings?

The final piece of SWOT analysis is to translate the diagnosis of the company’s internal and external circumstances
into actions for improving the company’s strategy and business prospects.

Translating the SWOT Analysis Results into Effective Strategic Action. The SWOT analysis results
provide excellent guidance to managers in crafting a strategy (or improving an existing strategy) in ways that
may enable the strategy to pass the three tests of a winning strategy. As you should recall, a winning strategy
must fit the company’s internal and external situation, help build competitive advantage, and boost company
performance. Four conditions are necessary for a company’s strategy to be a good to excellent fit with its overall
situation:

1. The foundation and centerpiece of a company’s strategy to profitably compete against rivals must be its
most competitively powerful resources and capabilities. Using a company’s most potent resources and
capabilities to power its strategy gives the company
its best chance for market success, competitive
advantage, and better performance.15 Should the
power of the company’s resources and capabilities
prove competitively stronger than those of some
or many rivals, its future business performance
should be good. And, in the best-case outcome, if
certain of the company’s most potent resources and
capabilities are hard for rivals to copy or trump,
then achieving a sustainable competitive advantage
can be within reach. Strategies that place heavy demands on areas and activities where the company is
comparatively weak or has unproven competitive capability should be avoided.

CORE CONCEPT
Relying on a company’s strongest resources and
capabilities to power its strategy produces the
best fit with the company’s internal and external
situation, thereby making such an approach
to crafting strategy the surest route to market
success and good business results.

Chapter 4 • Evaluating a Company’s Resources, Capability, and Ability to Compete Successfully 87

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2. The strategy must include actions to correct those competitive weaknesses that make the company
vulnerable to attack from rivals, depress profitability, or disqualify it from pursuing a particularly
attractive opportunity. However, there is scant reason to devote much attention to correcting those
weaknesses or deficiencies that are well defended by other company resources and capabilities.

3. The company’s strategy must include strategic initiatives aimed squarely at capturing those market
opportunities best suited to the company’s strengths and competitive assets. Management should almost
always deploy some of the company’s most potent resources and capabilities to spearhead such initiatives.
Indeed, what makes a market opportunity attractive to pursue is that the company has competitively
powerful resources and capabilities that can be used to seize opportunities to grow the business, boost
performance, and potentially achieve competitive advantage. However, there are instances where some
market opportunities can be pursued with resource/capability bundles having sufficient competitive
power to get the job done.

4. The strategy should include efforts to defend against those external threats that can adversely impact
the company’s long-term business prospects or put its survival at risk. How much attention to devote
to defending against external threats hinges on how vulnerable the company is, whether attractive
defensive moves can be taken to lessen their impact, and whether the costs of undertaking such moves
represent the best use of company resources. Some external threats are often beyond a firm’s ability
to influence or defend against; in such cases, the best course of action can be to wait until the threat
materializes and try to offset its impact with actions in other parts of the business.

Question 4: Are the Company’s Prices and Costs Competitive
with Those of Key Rivals, and Does It Have an Appealing
Customer Value Proposition?

Company managers are often stunned when a competitor cuts its price to “unbelievably low” levels or when a
new market entrant comes on strong with a very low price. Such rivals may not, however, be “dumping” (an
economic term for selling at prices below cost) or buying market share with a super-low price or waging a
desperate move to gain sales—they may simply have substantially lower costs. Then there are occasions when
a competitor storms the market with a new product that ratchets the quality level up so high some customers
will call an immediate halt to their purchases and refuse to pay the substantially higher asking price for the new
product.

Regardless of where on the price-quality-performance spectrum a company competes, it must remain competitive
in terms of its customer value proposition to stay in the game. Two telling signs of whether a company’s business
position is strong or precarious are (1) whether its prices are justified by the value it delivers to customers and
(2) whether its costs are competitive with industry rivals delivering similar customer value at a similar price. The
greater the amount of customer value a company can offer profitably compared to its rivals, the less vulnerable it
is to competitive attack. And if it can deliver the same amount of value at lower costs (or more value at the same
cost), it will enjoy a competitive edge.

Two analytical tools are particularly useful in determining whether a company’s customer value proposition,
prices, and costs are competitive: value chain analysis and benchmarking.

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The Concept of a Company Value Chain
Every company’s business consists of a collection of activities undertaken in the course of designing, producing,
marketing, delivering, and supporting its product or service. All of the various activities a company performs
internally combine to form a value chain—so-called because creating value for customers is what chains a
company’s various activities into a purposeful group of functions and tasks. A company’s value chain consists
of two broad categories of activities: the primary activities
foremost in the company’s scheme for creating and
delivering value to customers and the requisite support
activities that facilitate and enhance the performance of the
primary activities.16 The kinds of primary and secondary
activities that comprise a company’s value chain vary
according to the specifics of its business—hence, the
primary and secondary activities shown in Figure 4.3 are
illustrative rather than definitive.

For example, the primary activities at hotel operators
like Marriott include site selection and construction,
reservations, the operation of hotel properties (check-in
and check-out, maintenance and housekeeping, dining and room service, and conventions and meetings), and
management of its portfolio of hotel property locations. Its principal support activities include accounting, hiring
and training, advertising, building a recognized and reputable brand name, and general administration. The
primary activities for retailers like Best Buy or Home Depot involve merchandise selection and buying, supply
chain management, store layout and product display, sales floor operations, website operations for online sales,
and customer service, whereas its support activities include site selection, hiring and training, store maintenance,
advertising, and general administration. Supply chain management is a crucial activity for Toyota, Costco, and
Apple but is not a value chain component at Facebook or PayPal or Visa. Sales and marketing are dominant
activities at Procter & Gamble and Nike but have far lesser roles at oil drilling companies and natural gas
pipeline companies. Order delivery is a crucial activity at Domino’s Pizza but is currently not an internal value
chain activity at McDonald’s, Walgreens, and TJMaxx.

With its focus on value-creating activities, the value chain is an ideal tool for examining tworkings of a company’s
business model—its customer value proposition and profit proposition. It permits a deep look at the company’s
cost structure and ability to charge low or at least competitive prices. It can reveal the costs a company is
spending on product differentiation efforts to deliver greater customer value and support higher prices, such as
product quality and customer service. Company value chains necessarily include a profit margin component,
since profits are necessary to compensate owners/shareholders who bear risks and provide capital. When the
revenues generated from a company’s value-creating activities are sufficient to cover operating costs and yield
an attractive profit, then the organization has an appealing
value chain—its customer value proposition and its profit
proposition are well aligned and signal a successful business
model. Absent the ability to create a value chain capable of
delivering sufficient customer value and producing adequate
profitability, a company is competitively vulnerable and its
survival open to question.

Comparing the Value Chains of Rival Companies
Value chain analysis facilitates a comparison of how rivals,
activity-by-activity, deliver value to customers. Typically,
there are important differences in the value chains of rival companies. A company that makes a no-frills product
and provides minimal customer services has a value chain with activities and costs that are different from a
competitor that produces a full-featured, high-performance product and has a full range of customer service
offerings. The “operations” component of the value chain for a manufacturer that makes all of its own parts and
components and assembles them into a finished product differs from the “operations” of a rival producer that

CORE CONCEPT
A company’s value chain identifies the primary
activities it performs that create customer value
and the related support activities. The “outputs”
of an organization’s value chain activities are the
value delivered to customers and the resulting
revenues it collects. The “inputs” are all of the
resources required to conduct the various value
chain activities; use of these resources create
costs.

CORE CONCEPT
The greater the value a company can profitably
deliver to its customers relative to the value close
rivals deliver, the less competitively vulnerable
it becomes. The higher a company’s costs
relative to those of rivals delivering comparable
customer value at a comparable price, the more
competitively vulnerable it becomes.

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buys the needed parts and components from outside suppliers and only performs assembly operations. Movie
theaters that show the new releases of movie studios and derive a big portion of their revenues from concession
sales employ different value-creating activities and have different costs from Netflix and other providers of
movies streamed over the Internet directly to viewers’ TVs and mobile devices.

Differences in the value chains of close competitors raise two very important questions. One, whose value chain
delivers the best customer value relative to the prices being charged? Two, which company has the lowest cost
value chain? When one competitor employs a value chain approach that delivers greater value to customers
relative to the price it charges, it gains competitive advantage even if its costs are equivalent to (or maybe slightly
higher than) those of its close rivals. When close competitors deliver much the same value to customers, charge
comparable prices, and employ similar value chains, then competitive advantage accrues to the company that
operates its value chain most cost efficiently. Consequently, it is incumbent on company managers to vigilantly
monitor how effectively and efficiently the company delivers value to customers relative to rival companies—
gaining a competitive edge over rivals hinges on being able to deliver equivalent customer value at lower cost
or greater customer value at the same cost.

Figure 4.3 A Representative Company Value Chain

PRIMARY ACTIVITIES
l Supply Chain Management—Activities, costs, and assets associated with purchasing fuel, energy, raw

materials, parts and components, merchandise, and consumable items from vendors; receiving, storing and
disseminating inputs from suppliers; inspection; and inventory management.

l Operations —Activities, costs, and assets associated with converting inputs into final product from (producing,
assembly, packaging, equipment maintenance, facilities, operations, quality assurance, environmental protection).

l Distribution—Activities, costs, and assets dealing with physically distributing the product to buyers (finished
goods warehousing, order processing, order picking and packing, shipping, delivery vehicle operations,
establishing and maintaining a network of dealers and distributors).

l Sales and Marketing—Activities, costs, and assets related to sales force efforts, advertising and promotion,
market research and planning, and dealer/distributor support.

l Service—Activities, costs, and assets associated with providing assistance to buyers, such as installations,
spare parts delivery, maintenance and repair, technical assistance, buyer inquiries, and complaints.

SUPPORT ACTIVITIES
l Product R&D, Technology, and Systems Development—Activities, costs, and assets relating to product R&D, process

R&D, process design improvement, equipment design, computer software development, telecommunications
systems, computer-assisted design and engineering, database capabilities, and
development of computerized support systems.

l Human Resource Management—Activities, costs, and assets associated with the recruitment, hiring, training,
development, and compensation of all types of personnel; labor relations activities; and development of
knowledge-based skills and core competencies.

l General Administration—Activities, costs, and assets relating to general management, accounting and finance, legal
regulatory affairs, safety and security, management information systems, forming strategic alliances and collaborating
with strategic partners, and other overhead functions.

Supply
Chain

Manage-
ment

Operations Distribution Sales and
Marketing

Service Profit
Margin

Product R&D, Technology, and Systems Development

Human Resources Management

General Administration

Primary
Activities

and
Costs

Support
Activities

and
Costs

Source: Based on the discussion in Michael E. Porter, Competitive Advantage (New York: Free Press, 1985), pp. 37–43.

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A Company’s Primary and Support Activities Identify the Major Components of Its Internal
Cost Structure The combined costs of all the various primary and support activities comprising a company’s
value chain define its internal cost structure. Further, the cost of each activity contributes to whether the
company’s overall cost position relative to rivals is
favorable or unfavorable. The roles of value chain analysis
and benchmarking are to develop the data for comparing
a company’s costs activity-by-activity against the costs of
key rivals and to learn which internal activities are a source of cost advantage or disadvantage.

Evaluating a company’s cost-competitiveness involves using what accountants call activity-based costing to
determine the costs of performing each value chain activity.17 The degree to which a company’s total costs should
be broken down into costs for specific activities depends on how valuable it is to know the costs of specific
activities versus broadly defined activities. At the very least, cost estimates are needed for each broad category
of primary and support activities, but cost estimates for more specific activities within each broad category may
be needed if a company discovers it has a cost disadvantage vis-à-vis rivals and wants to pin down the exact
source or activity causing the cost disadvantage. However, a company’s own internal costs are insufficient to
assess whether its product offering and customer value proposition are competitive with those of rivals. Cost and
price differences among competing companies can have their origins in activities performed by suppliers or by
distribution allies involved in getting the product to the final customers or end users of the product, in which case
the company’s entire value chain system becomes relevant.

The Value Chain System for an Entire Industry
A company’s value chain is embedded in a larger system of activities that includes the value chains of its suppliers
and the value chains of whatever wholesale distributors and retailers it utilizes in getting its product or service to
end users.18 Suppliers’ value chains are relevant because suppliers perform activities and incur costs in creating
and delivering the purchased inputs used in a company’s own value-creating activities. The costs, performance
features, and quality of these inputs influence a company’s own costs and product differentiation capabilities.
Anything a company can do to help its suppliers drive
down the costs of their value chain activities or improve
the quality and performance of the items being supplied
can enhance its own competitiveness—a powerful reason
for working collaboratively with suppliers in managing
supply chain activities.19 Automakers, for example, have
encouraged their automotive parts suppliers to build plants
near the auto assembly plants to facilitate just-in-time deliveries, reduce warehousing and shipping costs, and
better enable close collaboration on parts design and production scheduling.

Similarly, the value chains of a company’s distribution channel partners are relevant because (1) the costs and
margins of a company’s distributors and retail dealers are part of the price the ultimate consumer pays, and (2)
the activities that distribution allies perform affect sales volumes and customer satisfaction. For these reasons,
companies normally work closely with their distribution allies (who are their direct customers) to perform value
chain activities in mutually beneficial ways. For instance, motor vehicle manufacturers have a competitive
interest in working closely with their automobile dealers to (1) promote better customer satisfaction with dealers’
repair and maintenance services and (2) develop sales and marketing programs to achieve higher sales volumes.
Producers of bathroom and kitchen faucets are heavily dependent on whether the sales and promotional activities
of their distributors and building supply retailers are effective in attracting the interest of homebuilders and do-
it-yourselfers, and whether distributors/retailers operate their value chains cost effectively enough to be able to
sell at prices that lead to attractive sales volumes.

As a consequence, accurately assessing a company’s competitiveness entails scrutinizing the nature and costs of
value chain activities across an industry’s entire value chain system for delivering a product or service to end-
use customers. A typical industry value chain that incorporates the value chains of suppliers and forward channel
allies (if any) is shown in Figure 4.4. As was the case with company value chains, the specific activities comprising

Each activity in a company’s value chain gives rise
to costs and ties up assets.

A company’s cost-competitiveness depends not
only on the costs of internally performed activities
(its own value chain) but also on costs in the value
chains of its suppliers and distribution channel
allies.

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industry value chains vary significantly from industry to industry. The primary value chain activities in the pulp
and paper industry (timber farming, logging, pulp mills, paper making, and distribution) differ from the primary
value chain activities in the home appliance industry (product design, parts and components manufacture,
assembly, wholesale distribution, retail sales) and differ yet again for the soft drink industry (processing of
basic ingredients and syrup manufacture, bottling and can filling, wholesale distribution, advertising, and retail
merchandising).

Figure 4.4 A Representative Value Chain System for an Entire Industry

Supplier-Related
Value Chains

A Company’s
Own Value Chain

Forward Channel
Value Chains

Activities,
costs, and
margins of
suppliers

Internally
performed
activities,

costs,
and

margins

Activities,
costs, and
margins

of forward
channel

allies and
strategic
partners

Buyer or
end-user

value
chains

Source: Based in part on the single-industry value chain displayed in Michael E. Porter, Competitive Advantage (New York: Free Press,
1985), p. 35.

Once a company has developed good cost estimates for each major activity in its own value chain, has a good
grasp of the value chains its close rivals employ, and has sufficient cost data relating to the value chain activities
of suppliers and distribution allies, it is ready to explore whether its costs compare favorably or unfavorably with
those of key rivals. This is where benchmarking comes in.

Benchmarking: A Tool for Assessing Whether the Costs and Effectiveness
of a Company’s Value Chain Activities Are in Line
Benchmarking entails comparing how different companies (both inside and outside the industry) perform
various value chain activities—how inventories are managed, how products are assembled, how fast the
company can get new products to market, how customer orders are filled and shipped—and then making cross-
company comparisons of the costs of these activities.20 The
objectives of benchmarking are to identify the best means of
performing an activity, to learn how other companies have
actually achieved lower costs or better results in performing
benchmarked activities, and to take action to emulate those
best practices whenever benchmarking reveals that its costs
and results of performing an activity are not on a par with
what other companies have achieved. A best practice is a
method or technique of performing an activity or business
process that produces results superior to those achieved with other methods/techniques. To qualify as a legitimate
best practice, the method must have been employed by at least one enterprise and shown to be consistently
effective in lowering costs, improving quality or performance, shortening time requirements, enhancing safety,
or achieving some other highly positive operating outcome(s).

Xerox pioneered the use of benchmarking to become more cost competitive, quickly deciding not to restrict
its benchmarking efforts to its office equipment rivals but to extend them to any company regarded as “world
class” in performing any activity relevant to Xerox’s business.21 Other companies quickly picked up on Xerox’s

CORE CONCEPT
Benchmarking is a potent tool for learning which
companies are best at performing particular
activities and emulating their techniques (or “best
practices”) to improve the cost and effectiveness
of a company’s own internal activities.

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approach. Toyota managers got their idea for just-in-time inventory deliveries by studying how U.S. supermarkets
replenished their shelves. Southwest Airlines reduced the turnaround time of its aircraft at each scheduled stop
by studying pit crews on the auto racing circuit. More than 80 percent of Fortune 500 companies reportedly use
benchmarking for comparing themselves against rivals in performing activities in ways that produce superior
outcomes.

The tough part of benchmarking is not whether to do it but rather how to gain access to information about other
companies’ practices and costs. Sometimes benchmarking can be accomplished by collecting information from
published reports, trade groups, and industry research firms and by talking to knowledgeable industry analysts,
customers, and suppliers. Sometimes field trips to the facilities of competing or noncompeting companies
can be arranged to observe how things are done, ask questions, compare practices and processes, and perhaps
exchange data on various cost components—but the problem here is that most companies, even if they agree
to host facilities tours and answer questions, are unlikely to share competitively sensitive cost information.
Furthermore, comparing one company’s costs to another’s costs may not involve comparing apples to apples
if the two companies employ different cost accounting principles to calculate the costs of particular activities.

However, a third and fairly reliable source of benchmarking information has emerged. The explosive interest
of companies in benchmarking costs and identifying best practices has prompted consulting organizations
(Accenture, A.T. Kearney, Benchnet—The Benchmarking Exchange, and Best Practices, LLC) and several
trade associations (the Qualserve Benchmarking Clearinghouse and the Strategic Planning Institute’s Council
on Benchmarking) to gather benchmarking data, distribute information about best practices, and provide
comparative cost data without identifying the names of particular companies. Having an independent group
gather the information and report it in a manner that disguises the names of individual companies protects
competitively sensitive data and lessens the potential for unethical behavior by company personnel in gathering
their own data about competitors.

Strategic Options for Creating an Advantage or Remedying a Disadvantage
as Concerns Cost or the Value Delivered to Customers
Examining the costs of a company’s own value chain activities and comparing them to rivals indicates who
has how much of a cost advantage or disadvantage and which cost components are responsible. Value chain
analysis and benchmarking can also disclose whether a company has an advantage or disadvantage vis-à-vis
rivals in delivering value to customers. Such information is vital in strategic actions to create a cost or value
advantage or eliminate a cost/value disadvantage. The three main areas in a company’s total value chain system
where company managers can try to create a cost/value advantage or remedy a cost/value disadvantage are (1) a
company’s own activity segments, (2) suppliers’ part of the overall value chain, and (3) the distribution channel
portion of the chain.

Improving the Performance of Internally Performed Activities Managers can pursue any of several
strategic approaches to reduce the costs of internally performed value chain activities and improve a company’s
cost competitiveness:22

l Implement best practices throughout the company, particularly for high-cost activities.

l Redesign the product and/or some of its components to eliminate high-cost components or facilitate
speedier and more economical manufacture or assembly.

l Relocate high-cost activities to geographic areas where they can be performed more cheaply.

l Outsource certain internally performed activities to vendors or contractors that can perform them more
cheaply than they can be performed in-house.

l Shift to lower-cost production technologies and/or invest in productivity-enhancing equipment (robotics,
flexible manufacturing techniques, real-time process monitoring).

l Stop performing activities of minimal value to customers (like seldom-used customer services).

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A second approach to eliminating a competitive disadvantage or creating a competitive advantage in how internal
activities are performed is by improving the performance of those activities capable of delivering added value to
customers. Efforts to deliver higher customer value at the same or lower cost can include:

l Adopting best practice approaches for activities affecting quality and customer service and activities
known to affect buyer brand preferences.

l Implementing new design innovations and/or investing in production methods that improve quality,
curtail maintenance requirements, extend product life, or reduce after-the-sale repair costs incurred by
customers.

l Emphasizing better performance of activities most responsible for creating those product/service
attributes known to impact buyer preferences for one brand versus another brand. The goal here should
be to revamp those activities that result in attributes that cause buyers to dislike the company’s brand
and to do an even better job of performing activities that can further enhance the attributes that buyers
like about the company’s brand.

l Outsourcing activities to vendors/contractors with the resources/capabilities to help deliver higher
customer value at the same or lower cost.

In searching for cost-reducing opportunities or value-enhancing opportunities, it is important to recognize that the
manner in which one activity is done spills over to impact the costs/value of how other activities are performed.
For instance, how a television or washing machine is designed impacts the number of parts and components,
their respective manufacturing costs, the time and expense of assembling the various parts and components into
a finished product, and, from a customer value perspective, how well the product performs, repair frequencies,
maintenance costs, and product life.

Improving the Performance of Supplier-Related Value Chain Activities A company can gain cost
savings in supplier-related value chain activities by pressuring suppliers for lower prices, switching to lower-
priced substitute inputs, and collaborating closely with suppliers to identify mutual cost-saving opportunities.23
For example, collaborating with suppliers to achieve just-in-time deliveries from suppliers can lower a company’s
inventory and internal logistics costs and may also allow suppliers to economize on their warehousing, shipping,
and production scheduling costs—a win–win outcome for both. In a few instances, companies may find it is
cheaper to integrate backward into the business of high-cost suppliers and make the item in-house instead of
buying it from outsiders.

A company can enhance the value it delivers to customers through its supplier relationships by selecting/retaining
only those suppliers that meet higher-quality standards, bringing in suppliers to partner in the design process, and
providing quality-based incentives to suppliers, particularly as concerns reducing parts defects. Fewer defects
not only improve quality throughout the value chain system but also can curtail the annoyance customers have
when a recently purchased product fails shortly after purchase (due to parts failures) and has to be repaired or
replaced under warranty. In addition, fewer defects lower warranty costs and lower the costs of product testing
and replacement of defective parts/components prior to shipment.

Improving the Performance of Distribution-Related Value Chain Activities Any of three means can
be used to achieve better cost-competitiveness in the distribution portion of an industry value chain:24

1. Pressure distributors, dealers, and other forward channel allies to reduce their costs and markups to
make the final price to buyers more competitive with the prices of rival brands.

2. Collaborate with forward channel allies to identify win–win opportunities to reduce costs. For example,
a chocolate manufacturer learned that by shipping its bulk chocolate in liquid form in tank cars instead
of in 10-pound molded bars, it could save its candy bar manufacturing customers the costs associated
with unpacking and melting and also eliminate its own costs of molding and packing bars.

Chapter 4 • Evaluating a Company’s Resources, Capability, and Ability to Compete Successfully 94

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3. Change to a more economical distribution strategy, including switching to cheaper distribution channels
(selling direct to consumers via the online sales at the company’s website) or possibly integrating
forward into company-owned retail outlets.

The means of enhancing differentiation through the activities of distribution-related allies include (1) engaging
in cooperative advertising and promotion campaigns, (2) creating exclusive distribution arrangements or using
other incentives to boost the efforts of distribution allies to deliver enhanced value to end-use customers, (3)
creating and enforcing higher standards for distribution allies to observe in performing their activities, and (4)
providing training to forward channel partners in using best practices to perform their activities.

Translating Proficient Performance of Value Chain Activities into Competitive
Advantage
A company that does a first-rate job of managing its value chain activities relative to competitors stands a good
chance of achieving sustainable competitive advantage.
As shown in Figure 4.5, competitive advantage can be
achieved by out-managing rivals in either of two ways: (1)
by performing value chain activities more efficiently and
cost effectively, thereby gaining a low-cost advantage over
rivals or (2) by performing certain value chain activities in
ways that drive value-creating improvements in quality,
features, performance, and other attributes, thereby gaining a differentiation-based competitive advantage keyed
to what customers perceive as a superior product offering.

Achieving Proficient Performance of Value Chain Activities Depends on Having the Right
Resources and Capabilities As laid out in Figure 4.5, either approach requires focused management attention
on building and nurturing resources and capabilities that enable the value chain activities to be performed
proficiently enough to produce the desired outcome—lower costs or greater value-creating differentiation. A
company’s value chain is all about performing activities, and proficient performance of key activities requires
having not just the right resources and capabilities but developing and constantly improving them so they become
ever more competitively valuable.

Achieving a cost-based competitive advantage requires determined efforts to be cost-efficient in performing
value chain activities. Such efforts must be ongoing and persistent, and they have to involve each and every
value chain activity. The goal must be continuous cost reduction, not on-again/off-again efforts. This requires
a frugal culture where all company personnel not only exhibit cost-conscious behavior but also where they
are diligent in discovering and implementing operating practices that lower costs. Cost-benchmarking and
aggressive implementation of cost-lowering best practices must be the norm. Companies whose managers are
truly committed to low-cost performance of value chain activities and succeed in engaging company personnel
to discover innovative ways to drive costs out of the business have a real chance of gaining a durable low-cost
edge over rivals. It is not as easy as it seems to imitate a company’s low-cost practices. Walmart, Nucor Steel,
Dollar General, Irish airline Ryanair, Toyota, and French discount retailer Carrefour have been highly successful
in preserving a low-cost advantage by out-managing their rivals in how cost efficiently company value chain
activities are performed.

On the other hand, companies that succeed in achieving a differentiation-based competitive advantage do
so because of a strong commitment to proficiently performing those value chain activities that add value for
customers and more strongly differentiate their product offering from rivals. For example, uniquely good customer
service capabilities are crucial at such high-end hotel properties as Ritz-Carlton, Four Seasons, and St. Regis.
First-rate product innovation capabilities are paramount at Google, Microsoft, the makers of high performance
fabrics, and the developers of cybersecurity software. Product design capabilities underlie a company’s success
in the furniture business, high-fashion apparel, smartphones, exercise equipment, and the household appliance
buisness. Standout engineering design and manufacturing/assembly capabilities are essential at Mercedes,
BMW, Toyota, and Tesla. To the extent that a company continues to invest resources in building greater and

Performing value chain activities in ways that
give a company either a lower-cost advantage or
a value-creating differentiation advantage over
rivals are two surefire ways to secure competitive
advantage.

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greater proficiency in performing the targeted value chain activities, and top management makes the associated
resources and capabilities cornerstones of the company’s
strategy to attract and please customers, then, over time,
its proficiencies rise to the level of a core competence.
Later, with further organizational learning and gains in
proficiency, a core competence may evolve into a distinctive
competence. Such superiority over rivals in performing one
(or possibly several) differentiation-enhancing value chain
activities can prove unusually difficult for rivals to match
or offset. As a general rule, it is substantially harder for
rivals to achieve “best in industry” proficiency in performing a key value chain activity than it is for them to
clone the features and attributes of a hot-selling product or service.25 This is especially true when a company
with a distinctive competence avoids becoming complacent and works diligently to maintain its industry-leading
expertise and capability.

Figure 4.5 Translating Company Performance of Value Chain Activities
into Competitive Advantage

Company
managers decide
to perform value
chain activities in
ways that drive

improvements in
quality, features,

performance,
and other

differentiation-
enhancing

aspects

Competencies
and

capabilities
gradually
emerge in
performing

certain
differentiation-

enhancing
value chain

activities

Company
proficiency in

performing
some of these
differentiation-

enhancing
value chain

activities
rises to the

level of a core

competence

Company
proficiency in

performing
one or more

differentiation-
enhancing
value chain

activities
continues to

build and
evolves into
a distinctive
competence

Company
gains a

competitive
advantage
based on
superior

differentiation-
enhancing
capabilities
that deliver

added value to
customers

Option 2: Beat rivals by performing certain differentiation-enhancing value chain activities more
proficiently, thus creating a differentiation-based competitive advantage keyed to delivering what
customers perceive as a superior product offering.

Option 1: Beat rivals by performing value chain activities more cheaply, thus achieving a cost-based
competitive advantage

Company
managers decide
to perform value
chain activities

in the most
cost-efficient

manner—every
value chain
activity is

examined for
possible cost

savings

Competencies
and

capabilities
gradually
emerge in
performing

many
value chain

activities
very cost
efficiently

Company
proficiency in
cost-efficient
performance

of value chain
activities

rises to the
level of
a core

competence

Company
proficiency in
cost-efficient
performance

of value chain
activities

continues to
build and

evolves into
a distinctive
competence

Company
gains a

competitive
advantage
based on
superior

cost-lowering
capabilities

Source: Based in part on the single-industry value chain displayed in Michael E. Porter, Competitive Advantage (New York: Free
Press, 1985), p. 35.

Becoming more cost efficient than rivals in
performing value chain activities entails building
and nurturing resources and capabilities that
differ substantially from those needed to
achieve a value-enhancing, differentiation-based
competitive advantage.

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Question 5: Is the Company Competitively Stronger
Or Weaker Than Key Rivals?

Using value chain analysis and benchmarking to determine a company’s competitiveness on price, cost, and
delivering value to customers is necessary but not sufficient. A more comprehensive assessment of the company’s
overall competitive strength is needed. The answers to two questions are of particular interest: First, how does
the company rank relative to competitors on each important factor that determines market success? Second, all
things considered, does the company have a net competitive advantage or disadvantage versus its closest rivals?

An easy-to-use method for answering these two questions involves developing quantitative strength ratings for
the company and its key competitors on each industry key success factor and each competitive trait or capability
that impacts a company’s competitiveness and determines whether it is competitively strong or weak. Much of
the information needed for doing a competitive strength assessment comes from previous analyses. Industry and
competitive analysis reveal the key success factors and competitive capabilities that separate industry winners
from losers. Benchmarking data and scouting key competitors provide a basis for judging the competitive strength
of rivals on such factors as cost, key product attributes (quality, styling, performance features), customer service,
image and reputation, financial strength, technological capability, distribution capability, and other competitively
important traits. SWOT analysis reveals how the company in question stacks up on these same strength measures.

Step 1 in doing a competitive strength assessment is to make a list of the industry’s key success factors and the
most telling measures of competitive strength or weakness (six to ten measures usually suffice). Step 2 is to
assign weights to each of the measures of competitive strength based on their perceived importance—it is highly
unlikely that all the different measures are equally important. For instance, in an industry where the products/
services of rivals are virtually identical, having low unit costs relative to rivals is nearly always the most important
determinant of competitive strength. Importance weights can be as high as 0.50 in situations where one particular
competitive strength measure is overwhelmingly decisive, or the high weights might be only 0.20 or 0.25 when
two or three strength measures are more important than the rest. Lesser competitive strength indicators can carry
weights of 0.05 or 0.10. The sum of the weights for each measure must add up to 1.0.

Step 3 is to rate the firm and its rivals on each competitive strength measure, using a rating scale of 1 to 10 (where
1 is competitively very weak and 10 is competitively very strong). Step 4 is to multiply each strength rating by its
importance weight to obtain weighted strength scores (a strength rating of 4 multiplied by an importance weight
of 0.20 gives a weighted strength score of 0.80). Step 5 is to sum each company’s weighted strength ratings
to obtain an overall weighted competitive strength rating. Step 6 is to use the overall weighted competitive
strength ratings to draw conclusions about the size and extent of the company’s net competitive advantage or
disadvantage vis-à-vis its rivals and to take specific note of areas of strength and weakness.

Table 4.3 provides an example of competitive strength assessment in which a hypothetical company (ABC
Company) competes against two rivals. In the example,
relative cost is the most telling measure of competitive
strength and the other strength measures are of lesser
importance. The company with the highest rating on a given
measure has an implied competitive edge on that measure,
with the size of its edge reflected in the difference between
its weighted rating and rivals’ weighted ratings. For
instance, Rival 1’s 3.00 weighted strength rating on relative
cost signals a considerable cost advantage versus ABC
Company (with a 1.50 weighted score on relative cost) and
an even bigger cost advantage against Rival 2 (with a weighted score of 0.30). The measure-by-measure ratings
reveal the competitive areas where a company is strongest and weakest, and against whom.

The weighted overall competitive strength scores indicate how all the different strength measures add up—
whether the company has a net overall competitive advantage or disadvantage versus each rival. The more a

The sizes of the differences between a company’s
weighted overall competitive strength score
and that of a lower-rated rival signals both their
differing degrees of competitive strength and the
size of the higher-rated company’s net competitive
advantage and the lower-rated company’s net
disadvantage.

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company’s weighted overall competitive strength rating exceeds the scores of lower-rated rivals, the stronger
is its overall competitiveness versus those rivals; the further a company’s score is below those of higher-rated
rivals, the weaker is its ability to compete successfully. The bigger the difference between a company’s overall
weighted rating and the scores of lower-rated rivals, the bigger is its implied net competitive advantage over
these rivals. Thus, Rival 1’s overall weighted score of 7.70 indicates a greater net competitive advantage over
Rival 2 (with a score of 2.10) than over ABC Company (with a score of 5.95). Conversely, the bigger the
difference between a company’s overall rating and the scores of higher-rated rivals, the greater its implied net
competitive disadvantage. Rival 2’s score of 2.10 gives it a smaller net competitive disadvantage against ABC
Company (with an overall score of 5.95) than against Rival 1 (with an overall score of 7.70).

Table 4.3 A Representative Weighted Competitive Strength Assessment

Competitive Strength Assessments
[Rating scale: 1 = Very weak; 10 = Very strong]

ABC Co. Rival 1 Rival 2
Key Success Factors and Strength
Measures

Importance
Weight

Strength
Rating

Weighted
Score

Strength
Rating

Weighted
Score

Strength
Rating

Weighted
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 capabilities 0.10 2 0.20 10 1.00 5 0.50
Technological skills 0.05 10 0.50 1 0.05 3 0.15
Ability to access buyers via
distributors/retailers 0.05 9 0.45 4 0.20 5 0.25

New product innovation
capability 0.05 9 0.45 4 0.20 5 0.25

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
Weighted overall competitive
strength rating 5.95 7.70 2.10

Strategic Implications of the Competitive Strength Assessments
In addition to showing how competitively strong or weak a company is relative to its rivals, the strength ratings
provide guidelines for designing wise offensive and defensive strategies. For example, if ABC Co. wants to
go on the offensive to win additional sales and market share, such an offensive probably needs to be aimed
directly at winning customers away from Rival 2 (which has a lower overall strength score) rather than Rival
1 (which has a higher overall strength score). Moreover, while ABC has high ratings for technological skills (a
10 rating), dealer network/distribution capability (a 9 rating), new product innovation capability (a 9 rating),
quality/product performance (an 8 rating), and reputation/image (an 8 rating), these strength measures have low
importance weights—meaning that ABC has strengths in areas that don’t translate into much competitive clout in
the marketplace. Even so, it outclasses Rival 2 in all five areas, plus it enjoys substantially lower costs than Rival
2 (ABC has a 5 rating on relative cost position versus a 1 rating for Rival 2)—and relative cost position carries
the highest importance weight of all the strength measures. ABC also has greater competitive strength than Rival
2 regarding customer service capabilities (which carries the second-highest importance weight). Hence, because
ABC’s strengths are in the very areas where Rival 2 is weak, ABC is in good position to attack Rival 2. Indeed,
ABC may well be able to persuade a number of Rival 2’s customers to switch their purchases over to its product.

But ABC should be cautious about cutting prices aggressively to win customers away from Rival 2, because
Rival 1 could interpret that as an attack by ABC to win away Rival 1’s customers as well. And Rival 1 is in

Chapter 4 • Evaluating a Company’s Resources, Capability, and Ability to Compete Successfully 98

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Reproduction and distribution of the contents are expressly prohibited without the author’s written permission.

far and away the best position to compete on the basis of low price, given its high rating on relative cost in an
industry where low costs are competitively important (relative cost carries an importance weight of 0.30). Rival
1’s very strong relative cost position vis-à-vis both ABC and Rival 2 arms it with the ability to use its lower-cost
advantage to thwart any price-cutting on ABC’s part. Clearly ABC is vulnerable to any retaliatory price cuts by
Rival 1—Rival 1 can easily defeat both ABC and Rival 2
in a price-based battle for sales and market share. If ABC
wants to defend against its vulnerability to potential price-
cutting by Rival 1, it needs to aim a portion of its strategy at
lowering its costs.

The point here is that a competitively astute company
should take both the individual and overall strength scores
into account in deciding what strategic moves to make.
When a company has important competitive strengths in areas where one or more rivals are weak, it makes sense
to consider offensive moves based on these strengths 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.

Question 6: What Strategic Issues and Problems Does
Top Management Need to Address in Crafting a Strategy
to Fit the Situation?
The final and most important analytical step is to zero in on exactly which strategic issues company managers
need to worry about and consider in crafting a strategy well-suited to the company’s specific circumstances.
Compiling a “worry list” involves drawing heavily on the results of the analysis of both the company’s external
and internal environments. The task here is to get a clear fix on exactly what competitive challenges the company
confronts on the road ahead, which of the company’s competitive shortcomings need to be remedied, what
obstacles stand in the way of improving the company’s competitive position in the marketplace and boosting
its financial performance, what combination of strategic actions offers the best path to competitive advantage,
and what specific problems/issues merit front-burner attention by company managers in crafting future strategic
actions.

The “worry list” of significant strategic issues and problems that need to be dealt with in forthcoming strategic
initiatives can include things such as how to stave off market challenges from new foreign competitors, how to
combat the price discounting of rivals, how to reduce the
company’s high costs and pave the way for price reductions,
how to sustain the company’s present rate of growth in light
of slowing buyer demand, whether to expand the company’s
product line, whether to correct the company’s competitive
deficiencies by acquiring a rival company with the missing
strengths, whether to expand into foreign markets rapidly or
cautiously, whether to reposition the company and move to
a different strategic group, what to do about growing buyer
interest in substitute products, and what to do to combat the
aging demographics of the company’s customer base. The
worry list thus relies on such language as “how to…,” “what to do about…,” and “whether to…” to precisely
identify the specific issues/problems that management needs to address and try to resolve in deciding what
upcoming strategic actions to take. The worry list thus serves as an agenda of strategically relevant issues/
problems that managers need to focus on in crafting a refurbished strategy that fits the particulars of the company’s
external and internal situation.

A company’s competitive strength scores
pinpoint its strengths and weaknesses against
rivals and point directly to the kinds of offensive/
defensive actions it can use to exploit its
competitive strengths and reduce its competitive
vulnerabilities.

Compiling a “worry list” that sets forth the
strategic issues and problems a company faces
should embrace such language as “how to…,”
“whether to …” and “what to do about….” The
purpose of compiling a worry list is to create
an agenda of items that need to be addressed
in crafting a set of strategic actions that fit the
company’s overall situation.

Chapter 4 • Evaluating a Company’s Resources, Capability, and Ability to Compete Successfully 99

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Reproduction and distribution of the contents are expressly prohibited without the author’s written permission.

Only after managers have first done serious strategic thinking about how to deal with the items on the worry list
are they truly prepared to pick and choose among the alternative strategic actions and initiatives in fashioning
an overall strategy that suits the company’s situation—the
items on the worry list are most definitely a relevant and
important part of the company’s situation.26 If the items
on the worry list are relatively minor—which suggests the
company’s present 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 to arrive at a strategy suitable for the road
ahead. If, however, the issues and problems confronting the company signal that the present strategy requires
significant overhaul, the task of crafting a revamped strategy better suited to the company’s internal and external
situation needs to be right at the top of management’s action agenda.

Key Points
There are six key questions to consider in evaluating a company’s resources and ability to compete successfully:

1. How well is the company’s present strategy working? This involves evaluating the strategy from a
qualitative standpoint (completeness, internal consistency, rationale, and suitability to the situation) and
also from a quantitative standpoint (the strategic and financial results the strategy is producing). 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 situation, the more its
current strategy must be questioned.

2. What are the company’s important resources and capabilities, and do they have the competitive power
to enable the company to produce a competitive advantage over rival companies? The task here is
to identify the company’s most valuable resources and capabilities and to assess their competitive
power using four tests. The degree of success a company enjoys in the marketplace is governed by the
combined competitive power of its resources and capabilities. Executive attention to making sure a
company always has competitively valuable resources and capabilities that dynamically evolve and help
sustain the company’s competitiveness is a strategically important top management task.

3. What are the company’s competitively important strengths and weaknesses and how well-suited are
they to capturing its best market opportunities and defending against the external threats to its future
well-being? A SWOT analysis provides an overview of a firm’s situation and is an essential component
of crafting a strategy that is well-suited to the company’s internal and external circumstances. The two
most important parts of a SWOT analysis are (1) drawing conclusions about what story the compilation
of strengths, weaknesses, opportunities, and threats tell about the company’s overall situation, and (2)
acting on those conclusions to better develop a strategy that satisfies the three requirements of a winning
strategy: (1) fit the company’s internal and external situation, (2) help build competitive advantage, and
(3) improve performance. A company’s most competitively potent resources and capabilities should
be the foundation of its strategy. Using a company’s most potent resources and capabilities to power
its strategy gives the company its best chance for market success, competitive advantage, and better
performance. A well-conceived strategy must include actions to correct those competitive weaknesses
that make the company vulnerable to attack from rivals, depress profitability, or disqualify it from
pursuing a particularly attractive opportunity. Market opportunities and external threats come into play
because fitting a company’s strategy to a company’s situation requires aiming an important portion of
the company’s strategy at pursuing attractive market opportunities and defending against threats to its
future profitability and well-being.

4. Are the company’s prices and costs competitive with those of key rivals, and does it have an appealing
customer value proposition? The greater the value a company can profitably deliver to its customers

CORE CONCEPT
A strategy is neither complete nor well matched to
the company’s situation unless it contains actions
and initiatives to address each issue or problem
on the “worry list.”

Chapter 4 • Evaluating a Company’s Resources, Capability, and Ability to Compete Successfully 100

Copyright © 2025 by Arthur A. Thompson. All rights reserved.
Reproduction and distribution of the contents are expressly prohibited without the author’s written permission.

relative to the value delivered by close rivals, the less competitively vulnerable it becomes. The higher a
company’s costs relative to those of rivals delivering comparable customer value at a comparable price,
the more competitively vulnerable it becomes. Value chain analysis and benchmarking are essential tools
in determining how well a company is performing particular functions and activities, learning whether
its costs are in line with competitors, and deciding which internal activities and business processes need
to be scrutinized for improvement. Performing value chain activities in ways that give a company either
a lower-cost advantage or a value-creating differentiation advantage over rivals are two surefire ways
to create competitive advantage.

5. 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.

6. What strategic issues and problems does top management need to address in crafting a strategy to fit
the situation? This analytical step zeros in on the strategic issues and problems that stand in the way of
the company’s success. It involves drawing on the results of both the analysis of the company’s external
environment and the evaluations of the company’s overall internal situation to compile a “worry list”
of issues and problems that managers need to address and try to resolve in refurbishing the company’s
strategy to better fit its overall situation. The worry list uses such language as “how to…,” “whether
to…” and ‘what to do about…” to single out the specific strategy-related concerns that merit front-burner
management attention. A company’s strategy is neither complete nor well matched to the particulars of
its situation unless it contains actions and initiatives to address every issue or problem on the worry list.

Accurate appraisal of a company’s internal situation, like penetrating analysis of its external environment, is a
valuable precondition for good strategy making. Absent such analysis, company managers are unlikely to craft
a strategy that is well suited to the company’s resources, competitive capabilities, and best market opportunities.

• What Is Strategy
  and Why Is It Important?

What Do We Mean by “Strategy”?

Strategy and the Quest for Competitive Advantage

A Company’s Strategy is Partly Proactive and Partly Reactive

Strategy and Ethics: Passing the Test
of Moral Scrutiny

The Relationship Between a Company’s Strategy and Its Business Model

What Makes a Strategy a Winner?

Why Crafting and Executing Strategy Are Important Tasks

The Road Ahead

Key Points

• Charting a Company’s Long-Term Direction: Vision, Mission,
  Objectives, and Strategy

What Does the Strategy-Making,
Strategy-Executing Process Entail?

Task 1: Developing a Strategic Vision, Mission Statement, and Set of Core Values

Task 2: Setting Objectives

Task 3: Crafting A Strategy

Task 4: Implementing and Executing the Strategy

Task 5: Evaluating Performance and Initiating Corrective Adjustments

Corporate Governance: The Role of the Board of Directors in the Strategy-Making, Strategy-Executing Process

Key Points

• Evaluating a Company’s
  External Environment

THE STRATEGICALLY RELEVANT FACTORS
INFLUENCING A COMPANY’S EXTERNAL ENVIRONMENT

Assessing a Company’s Industry and Competitive Environment

Question 1: What Competitive Forces Do Industry
Members Face and How Strong Are They?

Question 2: What Factors Are Driving Industry Change and What Impact Will They Have?

Question 3: What Market Positions Do Rivals Occupy—Who Is Strongly Positioned and Who Is Not?

Question 4: What Strategic Moves Are Rivals Likely to Make Next?

Question 5: What Are the Key Factors for Future Competitive Success?

Question 6: Is the Industry Outlook Conducive to Good Profitability?

Key Points

• Evaluating a Company’s Resources and Ability to Compete Successfully

QUESTION 1: HOW WELL IS THE COMPANY’S PRESENT STRATEGY WORKING?

QUESTION 2: WHAT ARE THE COMPANY’S IMPORTANT RESOURCES AND CAPABILITIES AND DO THEY HAVE ENOUGH COMPETITIVE POWER TO PRODUCE A COMPETITIVE ADVANTAGE OVER RIVALS?

QUESTION 3: WHAT ARE THE COMPANY’S COMPETITIVELY IMPORTANT STRENGTHS AND WEAKNESSES AND ARE THEY WELL-SUITED TO CAPTURING ITS BEST MARKET OPPORTUNITIES AND DEFENDING AGAINST EXTERNAL THREATS?

QUESTION 4: ARE THE COMPANY’S PRICES AND COSTS COMPETITIVE WITH THOSE OF KEY RIVALS, AND DOES IT HAVE AN APPEALING CUSTOMER VALUE PROPOSITION?

QUESTION 5: IS THE COMPANY COMPETITIVELY STRONGER OR WEAKER THAN KEY RIVALS?

QUESTION 6: WHAT STRATEGIC ISSUES AND PROBLEMS DOES TOP MANAGEMENT NEED TO ADDRESS IN CRAFTING A STRATEGY TO FIT THE SITUATION?

KEY POINTS

• The Five Generic Competitive Strategy Options: Which One to Employ?

THE FIVE GENERIC COMPETITIVE STRATEGIES

BROAD LOW-COST PROVIDER STRATEGIES

BROAD DIFFERENTIATION STRATEGIES

FOCUSED (OR MARKET NICHE) STRATEGIES

BEST-COST PROVIDER STRATEGIES

SUCCESSFUL COMPETITIVE STRATEGIES ARE ALWAYS UNDERPINNED BY RESOURCES AND CAPABILITIES THAT ALLOW THE STRATEGY TO BE WELL-EXECUTED

KEY POINTS

• Supplementing the Chosen Competitive Strategy—
  Other Important Strategy Choices

GOING ON THE OFFENSIVE—STRATEGIC OPTIONS TO IMPROVE A COMPANY’S MARKET POSITION

DEFENSIVE STRATEGIES—PROTECTING MARKET POSITION AND COMPETITIVE ADVANTAGE

WEBSITE STRATEGIES

OUTSOURCING STRATEGIES

VERTICAL INTEGRATION STRATEGIES:
OPERATING ACROSS MORE STAGES
OF THE INDUSTRY VALUE CHAIN

STRATEGIC ALLIANCES AND PARTNERSHIPS

MERGER AND ACQUISITION STRATEGIES

CHOOSING APPROPRIATE FUNCTIONAL-AREA STRATEGIES

TIMING A COMPANY’S STRATEGIC MOVES

KEY POINTS

• Strategies for Competing
  Internationally or Globally

WHY COMPANIES DECIDE TO ENTER FOREIGN MARKETS

WHY COMPETING ACROSS NATIONAL BORDERS CAUSES STRATEGY MAKING TO BE MORE COMPLEX

THE CONCEPTS OF MULTICOUNTRY COMPETITION AND GLOBAL COMPETITION

STRATEGY OPTIONS FOR ESTABLISHING A COMPETITIVE PRESENCE IN FOREIGN MARKETS

COMPETING IN FOREIGN MARKETS: THE THREE COMPETITIVE STRATEGY APPROACHES

BUILDING CROSS-BORDER COMPETITIVE ADVANTAGE

PROFIT SANCTUARIES AND GLOBAL STRATEGIC OFFENSIVES

Key Points

• Diversification Strategies

What Does Crafting a Diversification Strategy Entail?

CHOOSING THE DIVERSIFICATION PATH:
RELATED VS. UNRELATED BUSINESSES

EVALUATING THE STRATEGY OF A DIVERSIFIED COMPANY

KEY POINTS

• Strategy, Ethics, and Social Responsibility

What Do We Mean by Business Ethics?

where do Ethical standards come from?

THE THREE CATEGORIES OF MANAGEMENT MORALITY

WHAT ARE THE DRIVERS OF UNETHICAL STRATEGIES AND BUSINESS BEHAVIOR?

WHY SHOULD COMPANY STRATEGIES BE ETHICAL?

Strategy, Social Responsibility, and Corporate Citizenship

KEY POINTS

• Building an Organization
  Capable of Good Strategy Execution

A FRAMEWORK FOR EXECUTING STRATEGY

BUILDING AN ORGANIZATION CAPABLE OF GOOD STRATEGY EXECUTION: THREE KEY ACTIONS

STAFFING THE ORGANIZATION

DEVELOPING AND STRENGTHENING EXECUTION-CRITICAL RESOURCES AND CAPABILITIES

STRUCTURING THE ORGANIZATION AND WORK EFFORT

KEY POINTS

• Managing Internal Operations:
  Actions That Promote
  Good Strategy Execution

Allocating Needed Resources to Execution-Critical Activities

ENSURING THAT POLICIES AND PROCEDURES FACILITATE STRATEGY EXECUTION

ADOPTING BEST PRACTICES AND EMPLOYING PROCESS MANAGEMENT TOOLS TO IMPROVE EXECUTION

INSTALLING INFORMATION AND OPERATING SYSTEMS

TYING REWARDS AND INCENTIVES DIRECTLY TO ACHIEVING GOOD PERFORMANCE OUTCOMES

KEY POINTS

• Corporate Culture and Leadership—Keys to Good Strategy Execution

INSTILLING A CORPORATE CULTURE THAT PROMOTES GOOD STRATEGY EXECUTION

LEADING THE STRATEGY EXECUTION PROCESS

KEY POINTS