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Core competence


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Core competence

  1. 1. Competitive Advantage
  2. 2. COMETITVE ADVANTAGES • When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable competitive advantage.
  3. 3. Competitive Advantage Defined A business (or business unit) has a competitive advantage when it earns a higher rate of economic profit than the average rate of economic profit of other firms competing in the same market Market economics Benefit position relative to competitors Cost position relative to competitors Economic profitability Value Created relative to competitors
  4. 4. • Michael Porter identified two basic types of competitive advantage:  Cost advantage  Differentiation advantage Cost and differentiation advantages are known as positional advantages since they describe the firm’s position in the industry as a leader in either cost or differentiation.
  5. 5. A Model of Competitive Advantage Resources Distinctive Competencies Capabilities Cost Advantage Or Differentiation Advantage Value Creation
  6. 6. • A competitive advantages is essentially a position of superiority on the part of the firm in some function/factor/activity in relation to its competition. it is through this superiority that the firm attempts to carve out a comfortable position for itself in the relevant industry. In developing a competitive advantages, a firm is basically trying to see how it can perform a particular function or a grouped of functions in a superior/distinctive way compared to competition
  7. 7. Way to win a competitive advantage • • • • • • • • Become the low-cost producer Make the best made product Provide customer more value for the money Save customer money Provide superior customer service Enhance performance buyer gets Provide more convenient locations Make a more reliable & durable product
  8. 8. Examples of competitive advantage Toshiba of Japan, variety in production serves as a competitive advantage. As a contrast to the flexibility of Toshiba, Sony enjoys the advantage of low cost in personal stereo players. Caterpillar has built a competitive advantage in its business of earth moving equipment through after- sales service.
  9. 9. Types of competitive advantage • Cost advantage – A strategy to seek out and secure a cost advantage of some kind - lower average costs, lower labour costs, etc. prices lower than competitor. • Differentiation:- products with same quality that makes them more attractive than the competitor.
  10. 10. Competitive advantage factors (sources of competitive advantage)
  11. 11. In Marketing Market standing Market share Innovation in marketing New product leadership Price leadership Advertising effectiveness Market research capability Product mix and product lines
  12. 12. In finance Assets Liquidity Leverage Cash flow Profitability Costs Cost of capital Knowledge and dynamics in tax planning
  13. 13. In R&D Nature and depth and quality of R&D capability Resources allocation to R&D Quality, expertise and experience of R&D personnel Engineering capability for pursuing R&D suggestions Speed of R&D
  14. 14. In human resources Quality, knowledge and expertise and experiences of personnel Personnel turnover Labour costs Industrial relations
  15. 15. In Corporate factors and overall resources Company size Corporate image Quality of management in general The CEO Corporate performance record Innovation record Quality of strategic planning Organizational culture/ structure
  17. 17. Core competence • Core competencies lead to the development of core products. Core products are not directly sold to end users; rather , they are used to build a large number of end user products.
  18. 18. End Products 1 2 3 Business 1 4 5 7 8 9 6 Business 3 Business 2 10 11 12 Business 4 Core product 1 Core Product 2 Competence 1 Competence 2 Competence 3 Competence 4
  19. 19. Developing core competencies • According to Prahalad and Hamel, core competencies arise from the integration of multiple technologies and the coordination of diverse production skills. Core competencies tend to be rooted in the ability to integrate and coordinate various groups in the organization. Core competencies serve as the glue that bonds the business units together into a coherent portfolio.
  20. 20. There are three tests useful for identifying a core competencies. A core competencies should:  Provide access to wide Variety of markets, and  Contribute significantly to the end- product benefits, and  Be difficult for competitors to imitate.
  21. 21. Examples of core competence • Sony has a core competence in miniaturization; it can make any product tiny. • Honda has a core competence in engines, which gives it an advantages in diverse products like cars, motorcycles, lawn-mowers and generators. • Conan in optics, imaging and microprocessor controls; they together lend canon advantage in products as diverse as copier,leser printer, cameras and image scanners.
  22. 22. Distinction between competitive advantage and core competence
  23. 23. • A competitive advantage does not constitute a sure success formula for a firm; a core competence usually does. • A competitive advantage helps a firm in a specific and limited way ; core competence helps it in a far- reaching and multifaceted manner. • A competitive adv. Provides competitive strength to the firm in a given business/product. A core competence helps a firm to play a variety of business/products.
  24. 24. • A competitive adv. Can be easily imitated; competitors do catch up fast with a firm in competitive adv. A core competence is an exclusive and inimitable preserve of a firm. It is long –lasting ; competitors cannot easily catch up with the firm in core competence. • A core competence is fundamental and unique to a firm; competitive advantages are not unique to any firm over the longterm.
  25. 25. The value chain • To analyze the specific activities through which firms can create a competitive advantage, it is useful to model the firm as a chain of value- creating activities. • Micheal Porter identified a set of interrelated generic activities common to a wide range of firms.
  26. 26. Primary value chain activities Inbound Logistics Operations Outbound Logistics Marketing & Sales Service
  27. 27. The goal of these activities is to create value that exceeds the cost of providing the product or service, thus generating a profit margin. Inbound logistics:- include the receiving, warehousing, and inventory control of input materials. Operation:- are the value – creating activities that transform the inputs into the final product.
  28. 28. Outbound logistics:- are the activities required to get the finished product to the customer, including warehousing, order fulfillment,etc. Marketing & sales:-are those activities associated with getting buyers to purchase the product, including channel selection, advertisement , pricing, etc. Service :- activities are those that maintain and enhance the product’s value including customer support, repair services, etc.
  29. 29. Porter’s Generic Strategies
  30. 30. Advantage Target scope Low cost Broad (Industry Wide) Cost Leadership strategy Narrow (Market Segment) Focus Strategy (Low cost) Product Uniqueness Differentiation strategy Focus Strategy (Differentiation)
  31. 31. • Cost Leadership strategy:- this generic strategy calls for begin the low cost producer in an industry for a given level of quality. The firm sells its products either at average industry prices to earn a profit higher than that of rivals, or below the average industry prices to gain market share. Firms that succeed in cost leadership often have the following internal strengths:  Access to the capital required to make a significant investment in production assets; this investment represents a barrier to entry that many firms may not overcome.
  32. 32.  Skill in designing products for efficient manufacturing, for example, having a small component count to shorten the assembly process.  Efficient distribution channels.  High level of expertise in manufacturing process engineering.
  33. 33. • Differentiation strategy:- a differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition. The value added by the uniqueness of the product may allow the firm to charge a premium price for it. Firms that succeed in a differentiation strategy often have the following internal strength:
  34. 34. Firms that succeed in a differentiation strategy often have the following internal strength:  Access to leading scientific research.  Strong sales team with the ability to successful communicate the perceived strength of the product.  Corporate reputation for quality and innovation.  Highly skilled and creative product development team.
  35. 35. • Focus strategy :- The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation. A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing directly. because of their narrow market focus, firm pursuing a focus strategy have lower volume and therefore less bargaining power with their suppliers. However, firms pursuing a differentiation focus-strategy may be able to pass higher costs on to customers since close substitute products do not exist.
  36. 36. TURNAROUND STRATEGIES Reversing a negative trend Retrenchment - internal/external - improve internal efficiency - Divestment/liquidation Danger signs: •Persistent negative cash flows •Negative profits •Declining market share •Deterioration in physical facilities •High turnover, low morale, Mismanagement •Uncompetitive products, sick company