the firm’s strategic goal of 25 percent annual increase in store space profitably. Core competencies that are difficult for competitors to imitate create sustainable competitive advantage and are key drivers of superior investment returns. Examples of core competencies are Wal-Mart’s logistics and inventory management, Honda’s ability in new product innovation, Sony’s skills at miniaturization, and Pixar’s skills at computer-based animation. The competitive advantage that these core competencies create is generated from resources within the firm and does not rely on external resources; this competitive advantage is sustainable when current and potential competitors cannot or will not attempt to duplicate it.
COMPETITIVE POSITION Strength of position is also correlated with investment returns: the stronger the position, the higher the returns. For instance, a monopolist can extract higher returns than can a marginal player in a highly competitive industry. It is not only one’s own share of market that matters, but also the distribution of shares among other players. In the abstract, a stronger competitive position should result in higher returns to investors. This is what Shoeffler, Buzzell, and Heaney (1974) found in their analysis of returns on investment by market position. Exhibit 6.2 gives their results: Return on investment rises with market share.
The relationship between a stronger market position and returns to investors has been the focus of considerable research. Shapiro (1999) summarized the sources of economic value as barriers to entry, economies of scale, product differentiation, access to special distribution channels, and advantageous government policy. He argues that “the essence of corporate strategy [is] creating and then taking advantage of imperfections in product and factor markets…. More important, a good understanding of corporate strategy should help uncover new and potentially profitable projects.” (Pages 105, 106)
The aim of strategic assessment is to draw a profile of the strengths, weaknesses, opportunities, and threats of the business. Exhibit 6.3 presents a SWOT table such as confronted Chrysler Corporation and Daimler-Benz A.G. as they began merger negotiations in early 1998—this shows important areas of strategic fit of the two firms. Notice especially the complementary positions in products (luxury sedans versus SUVs, minivans, pickup trucks), cost leadership versus quality leadership, financial strength, and market presence. SWOT analysis is invaluable for preparing negotiators, deal designers, due diligence researchers, and integration planners.
EXHIBIT 6.2 Relationship between Market Share and Return on Investment
| Market Share | Return on Investment |
|---|---|
| Over 36% | 30.2% |
| 22–36% | 17.9% |
| 14–22% | 13.5% |
| 7–14% | 12.0% |
| 0–7% | 9.6% |
Source of data: Schoeffler, Buzzell, and Heany (1974), page 141.
EXHIBIT 6.3 SWOT Analysis of Chrysler and Daimler-Benz Just before the Announcement of Their Merger in 1998
| Daimler-Benz A.G. | Chrysler Corporation | |
|---|---|---|
| Strengths | Dominates “quality” niche; protected from trough of auto cycle. Strong international brand. New plant in Brazil, hot market. Strong new products: SLK, M-class, A-class, Smart Car. High share price; good acquisition currency. Good access to capital: Deutsche Bank is key stakeholder. | Strength in specific product segments such as minivans, trucks, SUVs. Manufacturing advantages: short product cycle; low supplier cost. Good position for Jeep worldwide and for Chrysler in Latin America. Cash and unused debt capacity. Engineering culture. |
| Weaknesses | High labor costs. High labor content: 60–80 hours/car (vs. 20 for Lexus). Declining unit volume in big luxury cars. Labor union on supervisory board may limit flexibility to change work practices. Losing large tax shields from operating loss carryforwards. | As third-largest North American player, very sensitive to economic cycle. Chronic financial weakness; near-demise in 1980. Products: not as much attention to detail and image. The least vertically integrated big manufacturer. Possibly undervalued in stock market. |
| Opportunities | Implement a shareholder value orientation (the so-called “Anglo-Saxon” perspective). Enter faster-growth product segments (e.g., SUVs) and geographic markets (e.g., Asia, Latin America). Distinguish the brand through distinct model platforms. Manufacture outside of Germany. Exploit synergies of $1.4– $3 billion. | “Long-term upside with no negative impact.” A deal that is good for shareholders. Enter faster-growth product segments (e.g., SUVs) and geographic markets (e.g., Asia, Latin America). Get out from under the shadow of Ford and GM. Manufacture outside of United States. Exploit synergies of $1.4–$3 billion. |
| Threats | Industry overcapacity. Saturation of European market. Entry of other firms into key segments such as luxury sedans. European/North American trade war. | Industry overcapacity. Saturation of North American market. Entry of other firms into key segments such as minivans, SUVs, pickup trucks. Next recession. |
Assessing Competitive Position
Determining the firm’s position in its competitive environment and its internal resources and capabilities is the foundation for setting strategy. This assessment aims to profile the industry, and the firm’s position in it, along several dimensions:
Structure of the industry and intensity of rivalry.
Sources of change and turbulence that may trigger a shift in industry structure. Chapter 4 highlights a number of the classic forces of change.
Dimensions of relative strength and weakness among players in the industry.
Propensity of individual players to take action, exploit change forces, and alter the industry structure.
Drivers of competitive strength and weakness in the industry.
Outlook for profitability of investment in the industry.
To prepare the executive for strategic planning, a number of analytic tools are worth noting because of their practical popularity and usefulness. As Exhibit 6.4 illustrates,
