Chapter-Four

(Evaluating Company Resources & Competitive Capabilities)

Competitive advantage:

Competitive advantage refers to a condition or circumstance that puts a company in a favourable

or superior business position.

 Competitive advantage means superior performance relative to other competitors in the

same industry or superior performance relative to the industry average.
 It can mean anything that an organization does better compare to its competitors.

Competitive advantage is an advantage that a firm has over its competitors, allowing it to
generate greater sales or margins and/or retains more customers than its competition. There can
be many types of competitive advantages including the firm's cost structure, product offerings,
distribution network and customer support. Before you can determine your competitive
advantage, you've got to know these three determinants:

 What you produce: Whether it's a good or service, you've got to be very clear on what
you are providing. New technology can redefine that for you, so you've got to constantly
stay on top of how trends affect the benefits you provide. For example, the Internet meant
that newspapers had to redefine how they delivered the news.
 Target market: Who are your customers? You've got to know exactly who buys from
you, and how you can make them happier. Newspapers found out their target market
started to become older people, who weren't as comfortable getting their news online.
 Competition: This is not just other similar companies or products, but anything else your
customer does to meet their needs. Newspapers thought their competition was other
newspapers, until they realized it was the Internet. How could they compete with a news
provider that was instant and free?

Competitive strategies/advantages:

 Cost leadership strategy: The goal of cost leadership strategy is to offer products or
services at the lowest cost in the industry. The challenge of this strategy is to earn a
suitable profit for the company, rather than operating at a loss and draining profitability
from all market players. Companies such as Walmart succeed with this strategy by
featuring low prices on key items on which customers are price-aware, while selling other
merchandise at less aggressive discounts. Products are to be created at the lowest cost in
the industry. An example is to use space in stores for sales and not for storing excess
product.
 Differentiation strategy: The goal of differentiation strategy is to provide a variety of
products, services, or features to consumers that competitors are not yet offering or are
unable to offer. This gives a direct advantage to the company which is able to provide a
unique product or service that none of its competitors is able to offer. An example is Dell
which launched mass-customizations on computers to fit consumers' needs. This allows
the company to make its first product to be the star of its sales.
  Innovation strategy: The goal of innovation strategy is to leapfrog other market players
by the introduction of completely new or notably better products or services. This
strategy is typical of technology start-up companies which often intend to "disrupt" the
existing marketplace, obsoleting the current market entries with a breakthrough product
offering. It is harder for more established companies to pursue this strategy because their
product offering has achieved market acceptance. Apple has been a notable example of
using this strategy with its introduction of iPod personal music players, and iPad tablets.
Many companies invest heavily in their research and development department to achieve
such statuses with their innovations.

How a company can achieve it?

An organization can achieve an edge over its competitors in the following two ways:

 Through external changes. When PEST factors change, many opportunities can appear
that, if seized upon, could provide many benefits for an organization. A company can
also gain an upper hand over its competitors when its capable to respond to external
changes faster than other organizations.
 By developing them inside the company. A firm can achieve cost or differentiation
advantage when it develops VRIO (Value, Rarity, Imitability, Organization) resources,
unique competences or through innovative processes and products.

The following diagram illustrates the basic competitive advantage model, which is explained
below in the article:
Core Competencies:

A core competence is a bundle of skills that enables an organization to provide a particular

benefit to customers or the organization. A core competence is not product or service specific.
Core competencies contribute to the development of a range of products and services which is
why understanding and exploiting them is important for successful growth. Examples:

 Sony- customer benefit is pocket ability and core competence is miniaturization.

 Federal Express- benefit is on time parcel delivery and core competence is logistics
management.
 Rosecrans- benefit is freedom from addictive behavior and core competence is adult and
adolescent education.
 Carpenters Place- benefit is a changed lifestyle and the core competency is customized
client case management.

These core competencies are not product or service specific. They enable these organizations
develop a number of products and services which explains why they are important in developing
their competitive strategy.

Organizational competencies must pass three tests to be considered core competencies:

The competency must make a significant contribution to customer perceived value or to the
financial health of the organization.
1. The competency must be unique or performed in a way that is substantially superior to its
peers.
2. The competency must be capable of being applied to a range of new products and
services.

Sources or Fundamental organizational competencies:

Business and nonprofit organizations require many competencies covering a range of functional
activities (production, marketing, distribution, etc.) in order to function. Certain fundamental
competencies are required by all organizations in order to operate effectively and carry out their
mission. These competencies are called “table stakes” and define the standard level of
competency the organization needs to sustain operations. Some examples of these fundamental
competencies and skill sets all organizations require are:

 Marketing: All organizations produce a product or service for a client and marketing is the
function that creates the paying client. Without some competency in this function the
organization would not have any clients. The marketing function includes the following
skills:

 Identifying the product characteristics and service attributes to provide the desired
client benefit and how to package these into the product or service offering.
 Determining the price for the products and services offered including discounts,
sliding scale fees, etc. and how payment will be accepted.
  Determining how and where the products and services will be offered and by whom.
 Promoting the products and services, communicating with the prospective clients, and
selling.

 Production or operations: This function includes all the skills required to produce the
product or service to the requirements and specifications determined by the organization’s
marketing effort and making them available for purchase or delivery. This function is the
most likely source of core competency if the organization provides a unique product or
service.

 In service organizations this function consists of the development and delivery of the
service to the client.
 For organizations that produce or sell a product this function may include purchasing
and inventory management skills. Depending upon the scope of purchasing required
these activities may be separated into separate functions.
 For distribution, retail, and food service type organizations this function should
include procurement and inventory management skills.

 Human resources: The work of the organization is accomplished by people and competency
in hiring and training employees is needed by all organizations employing more than one
person. This function may be a source of core competency if the organization is consistently
able to develop and retain exceptional employees. This function includes the following
skills.

 Interviewing prospective employees and managers.

 Hiring and indoctrinating employees and managers.
 Determining the compensation for employees and managers and establishing the
process to pay employees and managers.
 Determining the employee and manager training requirements needed to perform
their jobs and providing or making arrangements to provide this training.
 Reviewing employee and manager performance and discharging ineffective
personnel.

 Fund raising: All nonprofit organizations need to raise funds. This function can be a source
of core competency if the organization is consistently able to obtain sufficient contributions
to fund its activities. This function includes skills in developing the Case for Giving,
cultivating prospective donors and contributors, making “the ask”, planning and
implementing fund raising events, donor recognition, etc.

 Administrative: This is a catch all function that includes customer service, invoicing and bill
paying, answering the phones, facility maintenance and repair, etc. Since these functions
tend to be relatively routine they are not likely to be a source of core competence unless their
facilities and customer service make a significant contribution to customer perceived
benefits. Examples are hospitals, schools, and marketing organizations. In these cases these
activities may be expanded into separate functions.
 Accounting and Bookkeeping: All organizations must record and monitor the
organization’s income and expenses and most must prepare financial reports periodically. As
a minimum all organizations must be able to record and categorize these transactions
consistently. It is common for nonprofit organizations to contract these tasks to specialists
and these competencies are not likely to be a source of core competency.
 Payroll: Businesses need people to do the work and these people must be paid. All
businesses must record the hours that workers provide to the business, the wages they are
entitled to receive for their work and the salaries due to the salaried workers. This function
includes paying these wages and salaries and the payroll taxes that are required by law.
Usually nonprofit organizations contract this function to specialists and it is not likely to be a
source of core competency.

Developing core competencies:

Developing core competencies requires time and resources. They do not happen accidently.
They must be planned and cultivated. This requires a strong management commitment to their
planning and development. Core competency development must address the following issues.

 Determining the core competencies desired. Most organizations do not have the resources
to develop core competencies in a multitude of areas. They must select the competencies
needed to pursue the organization’s competitive strategy and growth goals.
 Acquire people with the needed skills. The least expensive way to do this is to develop
and train existing personnel. The alternative is to recruit people that have the needed
skills. This could be a more expensive option but may be needed when the core
competency must be developed quickly.
 The integration of these skills is usually a function of management to create the
environment needed. The organization’s management must recognize this need and plan
how it will be accomplished.
 The core competency must be institutionalized through the organization’s processes and
procedures to become the natural way the organization acts.
Core competencies become one of the hallmarks of the organization. They are the driving forces
of its competitive strategy and competitive advantage.

Value chain:

A value chain is a chain of activities that a firm operating in a specific industry performs in
order to deliver a valuable product or service for the market. The concept comes from business
management and was first described and popularized by Michael Porter.

How to Use the Value Chain:

Value Chain Analysis is a three-step process:

1. Activity Analysis: First, you identify the activities you undertake to deliver your product
or service;
 2. Value Analysis: Second, for each activity, you think through what you would do to add
the greatest value for your customer; and
3. Evaluation and Planning: Thirdly, you evaluate whether it is worth making changes,
and then plan for action.

Step 1 – Activity Analysis: The first step to take is to brainstorm the activities that you, your
team or your company undertakes that in some way contribute towards your customer's
experience.

 How you recruit people with the skills to give the best service.
 How you motivate yourself or your team to perform well.
 How you keep up-to-date with the most efficient and effective techniques.
 How you select and develop the technologies that give you the edge.
 How you get feedback from your customer on how you're doing, and how you can
improve further.

Step 2 – Value Analysis: Now, for each activity you've identified, list the "Value Factors" – the
things that your customers' value in the way that each activity is conducted.

 How you quickly response your customers

 How you can provide desired information
 How you keep satisfies to your customers

Step 3 – Evaluate Changes and Plan for Action: By the time you've completed your Value
Analysis, you'll probably be fired up for action: you'll have generated plenty of ideas for
increasing the value you deliver to customers. And if you could deliver all of these, your service
could be fabulous!

 How you make sprit among your employees

 How you ensure managerial improvements
 How you make your firm capable to achieve its desired goal

Value Chain Analysis: Value Chain Analysis is the process of how much and at which stage value
is added to its goods or services, and how it can be increased to enhance the product differentiation.
EDI- Electric Data Interchange

Example

Lakshmi is a software development manager for a software house. She and her team handle short
software enhancements for many clients. As part of a team development day, she and her team
use Value Chain Analysis to think about how they can deliver excellent service to their clients.

During the Activity Analysis part of the session, they identify the following activities that create
value for clients:

 Order taking
 Enhancement specification
 Scheduling
 Software development
 Programmer testing
 Secondary testing
 Delivery
 Support