CRAFTING BUSINESS STRATEGY (VII)
Evaluation of company’s resources and competitive position (Internal Analysis)
SWOT analysis is more than just make four lists. In fact the two most important parts are drawing conclusions from SWOT and translate these conclusions into strategic actions to fit the company’s overall strategy to its resource strengths and market opportunities, to correct the most important weaknesses and prepare to external threats. I want to remember our followers that the aim of all these series of articles is to explain how to define a company overall strategy which must be our Leitmotiv. All external and internal analysis and its respective strategic actions are done to craft our overall or main strategy.
Company’s prices and costs
Even a company is selling a product or a service one of the most important questions that company managers do is: are the company’s prices and costs competitive? As higher a company’s costs are above its rivals, the more vulnerable it becomes. If we cut costs we can cut prices as well. For that reason is really important for a company to have its costs in line of close rivals. Price-cost can be special critical depending the product we are selling. For those companies selling commodity products where the value provided to buyers is almost the same from seller to seller, price is the most important factor in order to sell more, in this case, lower-cost companies are the winners. In industries where products are differentiated and competition is focus much on different attributes rather than price is also really important to keep costs in line and crate extra value that buyers will be willing to pay extra money. There are two useful analytical tools to find if prices and costs are competitive for a specific company: value chain and benchmarking.
A value chain is a series of activities and costs related to those activities for a firm operating in a specific industry. Products pass through all activities of the chain in order and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of the independent activities’ values. The idea is that if we cut any activity we lower the cost, but the activity adds much of the value to the end product. Is more important to give more value but always getting in line with costs. All activities in value chain lead to profit margin.
Next diagram illustrates a typical company value chain:
Benchmarking is the method of comparing our company business operation and performance to the industry bests performers. Factors typically measured are quality, time and cost. In the process of benchmarking we must identify the best firms in our industry, or in another similar industry where similar processes exist, and compare the results and processes of those studied to our own results and processes. In this way we will learn how those companies perform and the most important, we’ll learn the business processes that explain why these firms are successful.