The Core Competence LEARNING OBJECTIVES After reading this chapter, you should be able to understand: + Explanation of the Concept +. Examples of Core Competencies Characteristics of Core Competence + Relationship between Core Competence and Competitive Advantage ‘+ Where do Core Competencies Reside? Developing Core Competencies + Technological Core Competence + Strengthening Core Competencies Scanned with CamScanner|ON : ee jan of a strategy is core competence, Core competenciet® smth By Se " ; he aa wir an organization. They reflect the collective learning strengt “ reg selinate processes and integrate technologies. Core of the organization erpeialy fi mean are at the root of a firm’s competitive advantage, An competencies are unique t0 & HA TAN tgs technology, a product, a process or the way it onganization’s core competene’ XN example of technical core competence is the creation isc a Ap mya ese in marketing, with its ability © access Ce er a example of core competence is an organization * i rastr Scene cise mone operations in a uniquely efficient and effective way. Core ip lan knowledge or skill of an organization’s employees. EXPLANATION OF THE CONCEPT : Hamel (1990)! who introduced the concept of core competence aa eieridein ee Fer ee re and later in their book “Competing forthe Future” After studying a number of globally successful firms and their world-class products, they concluded that it is not a particular product that gives these firms the dominant Position, but a unique strength in technology/process/expertise that lies behind these products. It is this unique strength that they call core competence which gives rise to core products and then toa number of end-user products. Prahalad and Hamel (1990) have defined the core competence of an organization as “the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies”. ‘They have used a number of case studies to illustrate that competence is about the harmonization of technology as well as about the organization of work and the delivery of value. fa Core Cornpetence poration a, See A fundamental concept in # are the unique resources and ie End products: Leaves and Fruits Business units: ong] i ofe prosuci: Small Branches. Corporate competencies: Root System Scanned with CamScanner aité y ' ; Chapter 14 The Core Competence As already noted, the core competencies of an organization are usualy convened ito ar prods, which in tarn may be embod in one ot more nd product. The end products link (Ve organization to its customers. For example, integrate circuits ar core products hat 0 used in a wide array of electronic end-products, The perceived value of an end Prod increases when the organization relates the product to its unique ot specific comps i il tree. ‘The concept of core competence can be better explained with the analogy of a In the above figure, the rots ae the core competencies of the frm, the trunk represenss core prelucts the smal branches represen the business units and the leaves and fri are re end products ust asthe rots ofthe tree provide nourishment and keep the eee ale competencies provide a competitive advantage to the firm and sustain it for a long Emphasizing the importance of core competence, Prahalad and Hamel observe in their book “Competiting for the Future” as follows: i ie i ths, and not just as a ‘We hate to lak atthe organization as a porfoi of competencies or underbying strength, and not just porflo of business units... We mest identity the core competencies which make us sucessful in existing business. We must ao identify thse core competences that would allow us oeeate new products; and we must ask ourselves sat we can leverage as we move into the futur, and what we can do that other companies might find dificult” EXAMPLES OF CORE COMPETENCIES : A number of prominent companies have succeeded in establishing core competencies that have been instrumental in making them winners in the marketplace. For example: ud ) Honda has a core competence in gasoline engine technology and small engine design. This competence helped Honda to produce superior end-products like motorcycles, cars, generators, lawn-mowers, etc. i) Intel has a core competence in the design of complex chips for PCs and servers. ii) Procter & Gamble’s core competence reside in its superb marketing/distribution skills and its R&D capabilities in core technologies ~ fats, oils, etc. iv) Sony's core competencies are in its expertise in clectronic technology and innovative products eg, cutting-edge video game hardware, miniaturized radios, video cameras, TVs and DVD with unique features etc. ¥) Philips has a core competence in optical media. vi) Canon has core competence in optics, imagery and microprocessors. ‘The core competencies of these corporations have enabled them to operate in diverse markets offering different products. For example, Canon has dominated diverse markets such as copiers, laser printers, cameras, and image scanners. Several Indian companies have taken to the idea of core competence in right earnest. Many companies shed businesses that are not in line with their perceived core competencies and focused upon those that are. AV Birla group’s core competencies are in a wide array of skills related to process industries, project management, raw material sourcing, distribution and logistics, commodity branding etc. S. Kumar sees its core competence in textile processing, Escorts in light engineering and Reliance industries in skilful project management and execution, Similacly, HLL and ITC have a core competence in marketing and distribution channels, Scanned with CamScannerov ines policy &g ) stuatele Managemen ane CHARACTERISTICS OF CORE COMPETENCE ra, unique strengths of the firm. Its therefore inn anzaion’s core competences, The following help an organization to distinguish tiv Core competencies are fundame upon management to identify the on " characteristics of core competencies may competencies from the multitude of other 4 ben ™Mon Teas of advantage for the firm, 1. Core competencies provide the distin tc cl imitate. 2. They are difficult for the competitors to imital anake a significant contribution to customer value and the end products offered by 4. They provide access to a wide variety of markets. RELATIONSHIP BETWEEN CORE COMPETENCE AND, COMPETITIVE ADVANTAGE A competitive advantage does not necessarily imply a core competence, while a core competence does imply a competitive advantage. That is why Johnson and Sholes (2002) define core competencies as activities or processes that critically underpin an organization's competitive advantage. The main points of difference between core competence and competitive advantage can be summarized as follows: Core Competence ® Competitive Advantage 1. Underlying strengths of a firm that 1. Anything that a firm does especially give it a competitive advantage ‘well compared to its rival firms gives it an advantage in a given business/product. 2. Core competence is fundamental and : F | uae ee 2, Competitive advantage is not unique to any firm over the long term. 3. Core competence leads to the 3. development of core products, which in ‘turn can be used in an array of end . Competitive advantage can come from many other sources, such as a ‘strong brand, exclusive patent or a products. Superior geographical location etc., which are not connected with core competencies, 4. Afirm can have core competence in its 4. Competitive advantage may arise j technology/process/expertise etc. from a number of sources, especially When a firm is able to differentiate its Producis or sell them at a lower cost. WHERE DO CORE COMPETENCIES RESIDE ? Core competencies may be embedded deep in un organization at an operational level in the work routines of the organization. ‘They are hidden even to the extent the managers themselves may not explicidy understand them, Indeed, if they are difficult to imitate, this i likely to bean Scanned with CamScannerimportant attribute, ‘Product features’, (good service’ oF ‘reliable delivery’ are all critical success factors, But core competencies are the activities that provide the ability to meet these critical success factors, not the factors themselves?. Core competence is difficult to imitate for one of four main reasons: 3) The competence is rar. i) ‘The competence is concerned with managing comple activities oF processes. ii) Competitors are not clear which resources or competences have caused the success of the firm, This is known as causal ambiguity. iy) The competence is embedded in the cultures Core competence can lead to many end-user products as illustrated below: Design and manufacture of Motorcycles, cars, generators Engines lawn-mowers etc., Pocket TVs, miniature card 2. Sony Miniaturization calculators, cam-corders etc. 3. Canon Optics ‘Cameras, fax machine, image scanners etc. Since development of core competencies is knowledge-based, its contribution towards sustained competitive advantage should not be taken for granted. As Leonard — Burton (1995) observes, the core competencies of a firm may sometimes become “Core rigidities”. When firms and managers become blind to changes in the market ie. changes in consumer preferences, technology changes or competitors actions, and therefore, not respond to change, there is a possibility that core competencies might become core rigidities. DEVELOPING CORE COMPETENCIES Building core competencies is a time consuming and challenging exercise. It takes a series of deliberate and well-orchestrated organizational steps to achieve proficiency in performing an activity: The core competency building process has three stages: 3) Developing the ability to do something by upgrading or expanding the skill. i) Learning to perform the activity consistent well, so that it transforms into a competence or capability, iil) Sharpening performance such that it becomes better than rivals at performing the activity, thus raising the competence to the rank of a distinctive competence (or competitively superior capability). "This opens an avenue to competitive advantage. Core skills are fundamental resources of an organization. Prahalad and Hamel describe the example of Sharp (Japan) and ‘Toshiba (Japan). Both these companies identified flat-screen electronic technology. Both companies invested hundreds of millions of dollars in developing their technology and skills. The idea was to use this technology to produce miniature television, Scanned with CamScannerortable computers, digital watches, electronic video recorders , = es ee companies invested before It ie possible to build a prog, "hy arkel these areas wor Mee ty etencies i is ATCAS. IS, jen ind build core competencies in the Petencies need ays ma development. a Phang, netence creates and sustains the ability to meet the Critical gy in other competitors in ways tha FUSess Fy ys that are difficute 2%, ° imine Core comy particular customer groups better thai Tn onder to achieve this advantage, core competencies must Fulfill the followin ‘ ree eine. ) Ability to provide best value to customers Criteria, i) Ability to perform significantly better than competitors ii) Difficult for competitors to imitate. A core competence may be the bass on which new strategies ate bul eg, entering in new markets). Iemay also be the basis on which opportunites in new areas ean be eesti breaking the established rules of the game. (2g. dot. com companies inthe early 20003) 7 TECHNOLOGICAL CORE COMPETENCE Technologies are fast altering the existing boundaries of business. Technological excellence ie capacity t0 integrate multiple streams of technologies and the expertise to harness diverse production skills can be one of the best routes for acquiring core competence. Obviously, for building core competence in technology, firms may have to invest heavily in technology and R&D, They have to look for relevant technologies in the field and build competencies in them, They have to develop human skills that would use the technologies as building blocks and work on them. Itis through this route that manufacturing firms bring out proprietary products which give them a core competence. Similarly in service industries, quality, customer care, timely delivery etc. can be considered as providers of core competence. Technology in a company (or in a product) consists of three layers as shown in the figure. ao Distinctive technologies Scanned with CamScannerChapter 4 The Core Competence 1, Distinctive technologies: ‘Those technologies in which the company’s standing gives ita distinctive competence. , . : ons 2. Basic technologies: Those survival technologies on which the company’s operations depend and without whieh it would be excluded fom its markets. Basic technologies 2f¢ necessary for a company to stay in business, but do not differentiate or distinguisl competitors. 3, External technologies: ‘Those technologies which are supplied by other companies. ‘These types of technologies ate available to the market at large. Distinctive technology is what gives an organization its unique competitive advantage in the marketplace, Onguizations ia prota them, nourish them and capitalize on = because of the fact that they have something desirable that others do not have. However, distinctive technologies may not be in a form that permits commercialization. For example, a company holding a patent for a product design that constitutes a distinct technology has no way of reaching a consumer without the support of basic technologies, such as production technologies or logistic technologies like transportation and delivery. Manufacturing technology, in this case, is a survival technology, without which the company’s product cannot be produced and cannot reach the market. Extemal technologies provide a third level of technological need, but they are not critical to company’s survival. They have a much lower impact on the company's competitive standing, STRENGTHENING CORE COMPETENCIESS Even after building core competencies and acquiring competitive advantage through them, company managers cannot relax. Core competencies may grow stale and impair competitiveness unless they are refreshed, modified, or even replaced in response to ongoing market changes and shifts in company strategy. So managers face the challenge of deciding when and how to recalibrate the existing core competencies, and when and how to develop new ones, Although the task is formidable, some important measures to strengthen core competencies are discussed below: In-house Manufacture of Core Products Companies who make it a policy to manufacture the critical components of their products in-house instead of outsourcing them, retain the scope for core competence building, whereas firms who decide to outsource their crucial components, deny themselves the opportunity to build core competencies in their business. ‘The latter may enjoy some cost advantage, which ‘may give them a competing edge in the short term, Bat, in the long term, such a corporation could be foregoing an opportunity for buikling core competence in its chosen business, by viewing the manufacture of crucial components as just an issue of cost. Prahalad and Hamelilustrate this aspect by citing the contrasting examples of Chrysler and Honda. Chrysler, the American auto giant, opted to outsource the manufacture of its engines to Mitsubishi and Hyundai, It viewed engines as just one m assembly. It is obvious that an automobile company would find it difficult to compete in the Jong run when it does not command the core skill to make some toa car as its engine. In contrast, Honda would never give up the responsibility for manufacturing its engines, component of its car Scanned with CamScannerstrategie Management and BUSES policy X nic video recorders i athe Proden i duct spec possible to build a pro PECIFIC busi, st would prow in future and they neegey vencies need assiduous planning aay atches, elect portable computers, cigital watches cs these companies invested before 1 k se a because they expected that markets fOr, ie 2 build core competencies in these areas. Thus, development. Core competence creates and sustains the abi particular customer groups better than other compen" In order to achieve this advantage, core competenc }) Ability to provide best value to customers i) Ability to perform significantly better than competitors ii) Difficult for competitors to imitate. hhich new strategies are built (e.g, entering into s can be created, by ility to meet the critical success factors of cuitors in ways that are difficult to imitate the following three criteria: ‘A core competence may be the basis on w trateg new markets), It may also be the basis on which opportunities in new area: breaking the established rules of the game. (eg, dot. com companies in the early 2000s) TECHNOLOGICAL CORE COMPETENCE Technologies are fast altering the existing boundaries of business. Technological excellence capacity to integrate multiple streams of technologies and the expertise to harness diverse production skills can be one of the best routes for acquiring core competence. Obviously, for building core competence in technology, firms may have to invest heavily in technology and R&D, They have to look for relevant technologies in the field and build competencies in them. They have to develop human skills that would use the technologies as building blocks and work on them. Itis through this route that manufacturing firms bring out proprietary products which give them a core competence. Similarly in service industries, quality, customer care, timely delivery etc. can be considered as providers of core competence. ‘Technology in a company (or in a product) consists of three layers as shown in the figure. Extemal technologies nila Basic technologies Distinctive technologies Scanned with CamScannerone rir eee ' emen ; o 1. Distinctive technologies: Those technologies in which the company’s standing 8 ita distinctive competence. ; ; ions 2. Basic technologies: Those survival technologies on which the company’s operations Aependl ancl without which it would be excluded from its markets. Basic technologies necessary for a company to stay in business, but do not differentiate or distinguis competitors, a 5 ies. 3, External technologies: Those technologies which are supplied by other companies These types of technologies are available to the market at large, Chapter 4 The Core Compete Distinctive technology is what gives an organization its unique competitive advange in the markerplace. Organizations must protect them, nourish them and capitalize on thers Pecate of the fact that they have something desirable that others do not have. However, distin« technologies may not be in a form that permits commercialization. For example, a company holding a patent for a product design that constitutes a distinct technology has no way o! reaching a consumer without the support of basic technologies, such as production technologies of logistic technologies like transportation and delivery. Manufacturing technology, in this case, is a survival technology, without which the company's product cannot be produced and cannot reach the market. External technologies provide a third level of technological need, but they are not critical to company’s survival. They have a much lower impact on the company’s competitive standing, STRENGTHENING CORE COMPETENCIES® Even after building core competencies and acquiring competitive advantage through them, company managers cannot relax. Core competencies may grow stale and impair competitiveness unless they are refreshed, modified, or even replaced in response to ongoing market changes and shifts in company strategy. So managers face the challenge of deciding when and how to recalibrate the existing core competencies, and when and how to develop new ones. Although the task is formidable, some important measures to strengthen core competencies are discussed below: In-house Manufacture of Core Products Companies who make it a policy to manufacture the critical components of their products in-house instead of outsourcing them, retain the scope for core competence building, whereas firms who decide to outsource their crucial components, deny themselves the opportunity to build core competencies in their business, The latter may enjoy some cost advantage, which may give them a competing edge in the short term, But, in the long term, such a corporation could be foregoing an opportunity for building core competence in its chosen business, by viewing the manufacture of crucial components as just an issue of cost. Prahalad and Hamel illustrate this aspect by citing the contrasting examples of Chrysler and Honda Chrysler, the American auto giant, opted to outsource the manufacture of its engines to Mitsubishi and Hyundai, It viewed engines as just one more component of its car assembly. It is obvious that an automobile company would find it difficult to compete in the Jong run when it does not command the core skill to make something as basic to a car as its engine. In contrast, Honda would never give up the responsibility for manufacturing its engines, Scanned with CamScanner* 1. It has nurtured it as its core Competence. Its sia, designing and improving engines has been the basis of its move into a vast atray of products ‘cars, tors and lawn mowers. Honda has also centralized all its critical engine-related R&D in Japan, while it docs not mind outsourcing body parts overseas and sharing responsibility for body design with its affiliates worldwide. No wonder, Honda could build up a core competence in engines, and use it as the back-up for gaining competitive advantage in several product categories, besides motorcycles. much less the responsibility for its des like cars, motorcycles, Focus Focus is yet another requirement in building core competence. The firm has to concentrate on one ot two core skills which it should develop. Only by focusing its energy on one or two core capabilities can a firm develop core competencies. Focus in developing a core skill does not limit the number of businesses. It merely signifies the importance of creating a core competence and building multiple businesses based on that core competence. Focus actually helps develop the competence needed for operating in multiple businesses. A Conscious and Long-term Process What is true of competitive advantage is all the more true of core competence. It takes years of well-planned and sustained effort to endow the corporation with a core competence. The core competencies mentioned in the examples quoted earlier in this chapter, were all created through decades of effort by the respective corporations. Prime Challenge for Indian Firms For Indian firms, building core competencies is one of the biggest tasks to remain competitive. With liberalization and globalization, Indian firms are. being forced to compete with global firms according to global rules of the game. Naturally their attention would have to focus on core competencies. REFERENCES Prahlad C.K. and Hamel, The Cote competence of the corporation, Harvard Business Review, May-June, 1990. 2 Gregory G. Dess, GT Lumpkin and ML Taylor, Strategic Management. Creating Competitive Advantage McGraw-Hill, Irwin, NY, 2003, 3. Johnson Gerry and Sholes Kevan, Exploring Corporate Strategy, 6th edition, Person Education Ltd. 2002. 4. Ibid. 5. VS Ramaswamy and $.Namakumari, Srateelc Planning, Macmillan, New Delhi, 1999. REVIEW QUESTIONS 1. Discuss the concept of core competence in detail. 2. Distinguish between core competence and competitive advantage. Scanned with CamScanner(*)— — Strategie Management and Business Policy INTRODUCTION, 985 in his | The concept of value chain analysis was introduced by Michael Porter in 1 a seminal book “Competitive Advantage”. This concept is derived from an established soe practice that calculates the value added to a product by individual stages in a manufactel on or service process. Porter Ins applied this idea to the activities of an organiza Te | whole, arguing that it is necessary to examine activities separately in order £0 | sources of competitive adv WHAT IS A VALUE CHAIN ? Every organization consists of a chain of activities that the business. They are basically purchasing of raw mater and marketing of goods and services. These activities taken together for The value chain identifies where the value is added in the process and li main functional parts of the ofganization. It is used for developing competitive advantage . It then attempts to make an because such chains tend to be unique to an organization, an assessment of the contribution that each part makes to the overall added value of the business. Essentially, Porter linked two areas together: 2) the added value that each part of the organization contributes to the whole organization; and b) the contribution that each part makes to the competitive advantage of the whole organization. In a company with more than one product area, the analysis should be conducted at the level of product groups, not at corporate strategy level. ‘Value Chain thus views the organization as a chain of value-creating activities. Value is the amount that buyers are willing to pay for what a product provides them. A firm is profitable to the extent the value it receives exceeds the total cost involved in creating its products. Creating value for buyers that exceeds the cost of production (i.e. margin) is a key concept used in analyzing a firm’s competitive position. According to Porter, customer value is derived from three basic sources. ') Activities that differentiate the product il) Activities that lower its costs iil) Activities that meet the customer's need quickly. Competitive advantage, argues Michael Porter (1985), can be understood only by looking ata firm as a whole, and cost advantages and successful differentiation are found in the chain of activities that a firm performs to deliver value to its customers. ntage. link together to develop the value of tials, manufacturing, distribution, i im its value chain inks it with the VALUE CHAIN ANALYSIS According to Porter, value chain activities are divided into two broad categories, as shown in the figure. 1. | Primary activities 2. Support activities Scanned with CamScannery Chapter 13 The Value Chain Analysis eC) Pmary aetvtes conteibute to the physical creation of the product or service, ig t Sale transfor to the buyer and its service after the sale. Sppor acne include suc actives as procurement, HR ete which either add vay saives or add value through primary activities and other support activites, Advantage of disadvantage can occur at any one ofthe five primary and four secon tivities, which together form the value chain for every firm. Firm infrastructure HRM Technology Development Procurement Operations] Outbound Market and logistics sales Primary Activities Inbound Logistics ‘These activities focus on inputs. They include material handling, warchousing, inventory control, vehicle scheduling, and returns to suppliers of inputs and raw materials. Operations ‘These include all activities associated with transforming inputs into the final product, such as production, machining, packaging, assembly, testing, equipment maintenance etc, Outbound Logistics “These activities are associated with collecting, storing, physically distributing the finished products to the customers, They include finished goods warehousing, material handling and delivery, vehicle operation, order processing and scheduling, Marketing and Sales ‘These activities are associated with purchase of finished goods by the customers and the inducement used to get them buy the products of the company. They include advertising, Promotion, sales force, channel selection, channel relations and pricing. \ Scanned with CamScannerress Policy jc Management and jing the value of the Services ed with enhancing and maintain ¢ some of | activities ass raining, parts supply and product adjustment ar der serv ‘This includes all rodduct. Installation, rep: ivities that come © H the acti Support Activities Procurement | Activities associated with purchasing and providing raw materials, supplies and other anjeumable items as well as machinery, laboratory equipment, office equipment secondary activity, although many purchasing ded are such activities fs to procurement as ) it is cat least partly) a primary activity. Incl ese ervicing, supplies, negotiating contracts ‘7! and $0 on. Porter refe gurus would argue that i as purchasing raw mat th suppliers, securing building | Technology Development oduct R&D, process R&D, process design improvements, Activities relating to pr ter software development etc. equipment design, compu Human Resource Management fh recruiting, hiring, training, development, £ knowledge-based skills etc. compensation, labour ‘Activities associated wit relations, development o Firm Infrastructure ment, organizational structure, strategic planning, ‘management information s ations undertake all activities from Activities relating to general manage! ystems etc. financial and quality control systems, Johnson and Sholes (2002) observe that few organiz production of raw materials to the point-of-sale of finished products themselves. But, the eve chain exercise must incorporate the whole process, that is, the entre value system. This vecans, for example, that even if an organization does not produce its own fist materials, it naet nevertheless seek to identify the role and impact of its supply sources on the final product. Similadly, even if itis not responsible for after-sales service, it must consider how the performance se hsce who deliver the service contribute to overall product/service cost and quality CONDUCTING A VALUE CHAIN ANALYSIS Value chain analysis involves the following s Identify Activities “The first step in value chain a and group them into primary and secondary activities performs a number of discrete activities that may reflect its key strengths and sis is to divide a company’s operations into specific activities Within each category, a firm typically nesses, Scanned with CamScannerChapter 13 the Value Chain Analysis =~ — Allocate Costs The nest step is to allocate costs ¢osts and ties up time and asset ‘ind assets to each activity. Ht view methods. The different method is to each activity, Hach activity in the value chain incur Value chain analysis requires managers to assign costs costs in a way different from traditional cost accoun alledartintly-hased costing ting "Identify the Activities that Differentiate the Firm Serutinizing the firm's value chain not only reveals cost advantages or disadvantages, but the sources of differentiation advantages relative to competitors. also identitie Examine the Value Chain Once the value chain has been determined, managers need to identify the activities that are critical to buyer satisfaction and market success. This is essential at this stage of the value chain analysis for the following reasons: 1. If the company focuses on low-cost leadership, then managers should keep a strict vigil on costs in each activity. If the company focuses on differentiation, advantage given by cach activity must be carefully evaluated. ‘The nature of value chain and the relative importance of each activity within it, vary from industry to industry. : we The relative importance of value chain can also vary by a company’s position in a broader value system that includes value chains of upstream suppliers and downstream distributors and retailers. 4. The interrelationships among value-creating activities also need to be evaluated. ‘The final basic consideration in applying value chain analysis is the need to use a comparison when evaluating a value activity as a strength or weakness. In this connection, RBV and SWOT analysis will supplement the value chain analysis. To get the most out of the value-chain analysis, as already noted, one needs to view the concept in a broader context. The value chain must also include the firm’s suppliers, customers and alliance partners, Thus, in addition to thoroughly understanding how value is created within the organization, one must also know how value is created for other organizations involved in the overall supply chain or distribution channel in which the firm participates. Therefore, in assessing the valuc chains there are two levels that must be addressed. 1. Interrelationships among the activities within the firm, 2. Relationships among the activities within the firm and with other organizations that are a part of the firm's expanded value chain. USEFULNESS OF THE VALUE CHAIN ANALYSIS The value chain analysis is useful to recognize that individual activities in the overall production process play an important role in determining the cost, quality and image of the end- product or service. That is, each activity in the value chain can ‘contribute to a Scanned with CamScannerss Polity Strategic Management and Busines rie Manag firm's relative cost position sources of competitive advantage. value chain activities, management ¢ se create a basis for differentiation, which are the two main While a basic level of competence is necessary in all needs to identify the core competences that the organization has or needs to have to compete effectively Analyzing the separate activities eetie aalye chain helps management to adress the following issues: Ip activities are the most critical in reducing cost oF adding value? If quality is lity of supplies would be a critical success i) Whi ‘a key consumer value, then ensuring qua factor. flue drivers in the value chain? ii) What are the key cost oF v’ iit) What linkages help to reduce cost, enhance value or discourage imitation? How do these linkages Porter identified the followin, late to the cost and value drivers? ix) 1g as the most important cost and value drivers: Cost Drivers j) Economies of scale utilization (including the efficiency of production processes ii) Pattern of capaci and labour productivity) es (for example, timing of deliveries affect storage costs, iii) Linkages between acti justin time system minimizes inventory costs) Interrelationships (for example, joint purchasing by two units reduces input costs) Geographical location (for example, proximity to supplies reduces input costs) Policy choices (such as the choices on the product mix, the number of suppliers used, wage costs, skills requirements and other human resource policies affect costs) vil) Institutional factors (which include political ‘and legal factors, each of which can have a significant impact on costs). Value Drivers Value diner are similar to cost drivers, but they relate to other features (other than low price) valued by buyers. Identifying value derivers comes from understanding customer requirements, which may include: iY Policy choices (choices such as product features, quality of input materials, provision of customer services and skills and experience of staff. ii in i ‘ i) Linkages between activities (for example, between suppliers and buyers; sales and after-sales staff), " The co value ace and value drivers vary between industries, ‘The value chain concept shows that companies can gain competitive advantage by eontoling cost oF value drivers and/ or reconfiguring i wale chain, that is, a better way of designing, producing, distributing a ing & product or service, Por example, Ryanair has become one of the most fable aitlines in Europe through concentrating on the parts of its value chain, such as ticket transaction costs, no frills etc. Scanned with CamScannerChapter 13. The Value Chain Analysis \ + CONCLUSION © ince Porter introduced his value chain in the mid-1980s, strategic planners and consultants ‘used it extensively to map out a company’s strengths and sh _ In analyzing strategic alliances and merger and acquisition deals, the value chain is of view ff the possible match: one company is strong in logistics, the oth they would make an agile, highly commercial enterpri Measuring or rating competitive strengths is difficult. Especially when trying to map the entire value chain and apply quantitative measurements or ratings, many companies usually femploy a large number of strategic analysts, planners and consultants. prtcominy fren used to get a quick ove ‘erin sales and service, together REFERENCE Michael Porter, Competitive Advantage, Free Press, New Yor REVIEW QUESTION 1. Explain the vaiue chain appr k, 1985 coach for analyzing a firm’s internal strengths and weaknesses. 2 Write short notes on: (@ Primary Activities () Secondary Activities Scanned with CamScanner