part

3
Building Competitive Advantage
11 CHAPTER

This chapter will help you understand:

Competitive advantage is an essential requisite for delivering superior value,

Competitive advantage and strategy are linked, two way
Nature and significance of competitive advantage
How firms diagnose/appraise their competitive advantages
H o w firms build their compeitive advantages? Through what all routes?
.The concept of core competenceL

Magg

N u t r l - l I c i o u s

Nestle
Brand Power
STARBUCKs
Unique Customer

Strength..
! Experiencee

This

FightOn
I

Google
Speed
Design Excellence
233
 In Chapter 7, we saw that as part of the strategic planning exercise, firms carty Outstrength-weakncss
alysis, business portfolio assessment, and competitive advantage appraisal. we covered there twa.

these elements-strength-weakness analysis and business portfolio assessment. In this chapter, we will
take up competitive advantage (CA) for detailed discussion. The chapter will explain the nature and
gnncance of competitive advantage, how firms diagnose/appraise their competitive advantages, and
how they build them. It will also explain the linkage between competitive advantage and strategy, and
how firms use competitive advantage for delivering superior value to the customers.

CA-A Requisite for Delivering Value

We have seen that as per the value philosgphy of marketing, marketing is all about delivering com-
petitively superior value to the custome It is by delivering superior value that a marketer satisfies the
Customer beats the competition, and succeeds in marketing.Competitive advantage (CA) is a vital
requisite for delivering such superior value. Without relevant CA, the firm cannot deliver such value to
the customer.

Bestows the Capability for Superior Value Delivery

It all boils down to the
capability for such delivery, In the absence of the capability, the question of
accomplishing such value delivery does not arise. Competitive advantage represents this capability. It
also be said that it is
can
competitive advantage that bestows this capability on the firm. This capability
manifests in the form of the value load that gets packed in the firm's offer. We saw that a firm
ing the value philosophy will fix the appropriate value load in a adopt-
business sequence. How does the firm product/brand right at the start of the
actually do this? It does so by using its competitive
Without relevant CA, the firm cannot
pack such value load in its offer.
advantages
We have also seen that it is around this
value load, which already got
marketing plays the competitive game in the marketplace. Obviously, the packed into the offer, that
to be superior to the ones in the
value load in the offer has
competitors' offers. If the firmm fails to pack such value in its offer and
sends it out to the market, merely
donning it with a bránd mantle and a promotion
cannot make a winner out of it. Put budget, marketers
differently,
in the offer, marketing cannot succeed in its without the needed
competitively superior value load
the firm has to have
task/For the superior value load to
get packed in the offer,
superior strengths
relative to competition in the relevant
activities.
strength of the firm relative to competition in any activity is a Such a superior
competitive advantage bestows on the firm the competitive advantage of the fim. And,
capability
for superior value delivery.
CA Confers the Ability for Value Delivery; CA is
Created by It as Well
Value delivery and CA are linked to each
other through a
fers the ability for value two-way On the one hand, CA con-
To quote Michael
delivery; on the other, it is out of the abilityprocess.
for value
Porter, delivery
that CA grows.

"Competitive advantage grows fundamentally out of the value a firm is

that exceeds the firm's able to create for its
for equivalent benefits orcostof creating it. It may take the
form of prices lower than buyers
the provision of competitors
unique benefits that more than offset a
premium price."
CA-A Requisite for
In
Executing Strategy
Chapters 4 and 7 that for value
we saw
require CA, which functions as the back-updelivery
for
we
require strategy. For executing the strategy
the most
imaginative and well-formulated strategy. We saw this
briefly in Chapter 8. Often, cv
the strategies fail at
CA needed for
sation through
executing them. It is not the strategy the ground level when the companies la
strategy that takes the firm to its per se, but the
remain elusive and objectives. acquisition of CA and is u
In the absence of
the firm. In fact, CA strategies remain hollow. A successful relevant CA, objecnv
enlarges or delimits the strategic strategy is always woven around the
choices available CAs
to a firm.
23

Marketing Managemen
 CHART 11. CA is the
Back-up for Strategy
here sacose inkage berween strategy and competitive advantage: they go hand in hand; a firm cannot have one without the other.
Competitive advantage serves as the backup for strategy or as the fit between the firm and the strategy it employs.
Without relevant competitive advantage, a firm cannot execute its chosen
t - competitive advantage; and it is strategy
is through strategy that a firm creates by putting its competitive advantage to use that a lirmn
actually operates/executes its strategy. Strategy, thus, creates and also uses competitive advantage.
Successful strategy is one that is woven around the competitive advantage of the firm.
Scoring over competition as well as defending against competition, hinge on solid and sustainable competitive advantage. In pursuing
opportunities as well as in deflecting threats and vulnerability, the firm banks on its competitive advantage.

Competitive advantage enlarges or delimits the strategic choices available to a firm.

Strategy is Toothless without CA
That for strategy to work CA is a must, is rather obvious. Strategy and CA are closely linked to each
other and go hand in hand. And, a firm cannot have one without the other. While formulating its strat-
egy, a firm makes these two assessments
) What all competitive advantages it has at its disposal?
(i) What all competitive advantages it needs to acquire for its strategy to succeed?
In a competitive market, all firms do have some strategy; it may be explicit or implicit; cogently
stated or just manifest through the activities of the firm. Whatever be the case, the strategy has to be
developed around the CA of the firm. Scoring over competition, as well as defending against competi-
tion, hinge on a solid and sustainable CA. In pursuing opportunities as well as in deflecting threats and
Vuherability, thefirm banks on its CA. In short, CA is the heart of strategyand for strategy to workthe
firm must have the relevant CA as the backup. Chart 11.1 sums up how CA serves as the backup for
strategy. Strategy is unimplementable without CA.

Relationship among Value Delivery, Strategy, and CA

First, value delivery and CA are linked directly; CA bestows the capability for superiorvaluedelivery.
Value delivery has a linkage to CA in another way as well-via strategy. Value delivery is not possible
without strategy; and strategy is not possible without CA. It would, thus, be clear that value delivery
needs CA.
Similarly, CA and strategy are linked in two ways. Strategy uses as well as creates CA. Firms
utilise strategy in creating CA and utilise CA in strategy-execution. Strategy is needed for building CA
and CA is needed for executing strategy Strategicactions cumulatively lead to competitive advantage
building.For example, corporate level strategic decisions on acquisitions, mergers, alliances, fresh
are all teps that wouldresult in CA building
investments, technology-upgradation, etc.,
CA helps Capture Above Industry-Average Rate of Return
Moreover, it is through competitive advantage that the firm also takes home above average rate of
return in the given industry. Superior return, after all, is the Outcome of delivering superior value at
competitive cost. In the previous chapter, we had talked of the firm's competitive position within the
Industry. Only with a competitive position within the industry, can a firm tun out above-average per-
Iormance within the industry and take home above average rate of return. The basis of above-average
performance in the long-run is sustainable competitive advantage. The key is whether the fim captures
the value back from the market, or whether this value is competed away to the others. In the absence of

relevant competitive advantage, the fim will be competing away the value to others.

CA Enables Converting "Good Products" into "Successful Products"

Not all good products sell. Normally, there are two types within good productsgood products and
Successful products. Successful products are the ones that sell. And, only competitively superior prod
ucts become successful products. Firms need to offer the customer some extra benefits in different
ways coupled with cost effectiveness, if they have to make their products successful ones. Converting
a good product into a successful product is the name of the game! And, only when the fim makes this

Buulding Competitive Advanlage

 wherewithal for Delivering Superior Value is the Test of a CA
l l understand the test of CA the moment we bring in the value-delivery idea. The guiding prin-
We wil
strength to qualify fora CA, it should carry the wherewithal for delivering value superior
ple is: for a
netition. Only a strength that leads the firm to giving 'customer value' that is superior to com-
10 Com
can be a CA.
etition
the larger sense, a strength can be counted as a competitive advantage if it can infiuence in the
any's favour one or the other of the forces shaping competition. We have seen in Chapter 10.
er's views that five distinct forces shape competition in an industry. If a particular strength of the
Port
can infuence any one of these five forces in the company's favour, then the strength becomes
A Let us take new entrants, one of the five forces shaping competition. If for example, a particular
srength of the fhrm can infiuence/block the new entrants, then it becomes a CA. The barrier to entry
w be economy of scale, brand dominance, absolute cost advantage, or something else. The barrier
may
a competitive advantage for the firm.
Constitutes
As far as CA in competing against current competitors is concerned, CA must pass two tests. First,
value that is important to the customer and second, the value must be superior to that car
it must carry
ried by competitors' offers. CA is unique feature
a set of unique features of
or a
company that leads
a

1ocustomers
productsto patronise
that perceived by
are the target market superior
as to the competition. The features
the firm's products in preference to the competition. Maruti building a strong
cause

service-infrastructure is an apt example of a CA. The details are given below. Chart 11.2 summarises
the distinction between CA and strength and what constitutes the real test of a CA.

Marut's Service Infrastructure an apt Example of a CA

Allalong, strong service infrastructure has been one of the principal CAs of Maruti Suzuki. Right from
the word 'go', it has concentrated on developing service centers across the country.
This is one of the CAs tht has helped the company to reach and then hold on for many years to a
market share of more than 80 per cent in the Indian passenger car industry. Though in recent years. its
market share has come down to around 50 per cent, the company has been maintaining till date its posi-
ion as the Numero Uno in the industry despite all the expansion and changes taking place in it over the
past three decades. This is no mean achievement. To a large extent, its CA in service infrastructure has
been responsible for the continued dominant position of the company in the industry.
Other players-there is more than a dozen of them-have also been paying a lot of attention to de-
velopment of service infrastructure, which is the sine qua non of prosperous existence in the industry.
But Maruti managed to keep it as its distinctive strength. It ensured that it had this strength in a larger

neasure than any of its competitors. This is the secret of strength

a becoming CA. Otherwise, it would
not sit on its laurels and allowed its CA to rest
uave remained just a strength. Moreover, Maruti did eroded and it would have become Yesterday's
wnere it was. If it had done so, the CA would have been infrastructure. It has 50
service per cent more service
A. Maruti has been continuously beefing up its
Apart from the superiority the extent of service
in
uerS than all the other car companies put together. of after-sales service. The combination
WOrk, Maruti also created an edge for itself in the quality in the small-car segment. It haz served as
ped Maruti in holding on to its distinctive lead position when the other manufacturers rolled out their
gCA for Maruti in fighting the market share war,
Small cars.

Sources of Competitive Advantage (CA Factors)

We t can emanate from any of the several functions that a firm
Seen that competitive advantage
E
o
perfon any of the sub-functions under them.
l marketing, production, R&D, and personnel-and sources of competitive advantage (competitive
that for any firm, there is a multitude of
advants factors). In fact, potential sources of competitive advantage are everywhere in a firm. It can
he g e possible strengths or weaknesses under the section
S the factors, listed
that practically all as

7, can be sources of competitive advantage. This is quite

natn-weakness to be analysed' Chapter
in
same array of sources. In
and competitive advantages from the
iden he firm looks for its strengths which of the
the competitive advantage, there is the additional task of examining strengths
wiying
ll
pass the test of a CA.
iting Competitive Advantage
 CHART I1.2
Strength, and the Test of a
CA
DIstinction between CA and

Strength and
competitive advantage are not the same, thougn ed.
re
O o e s not automatically amount to a competitive advantage; the latter is something more than a strengtn; having a strenor
ength
s anecessary, but not a sufficient condition for a firm to have a competitive advantage.
Oniy a strength that is superior/distinctive relative to competitioD can be a competitive advantege

ounted as a competitive advantage only if it is capable of influencing in the

company s tavOur, one or the other af
the
the five forces shaping competition. All strengths need not necessarily achieve tnis.

or a defence against the vulnerability posed by

e ice
Can be in the form of dominance over the forces shaping competition
che forces.
A COmpetitive advantage finally results in and manifests as either a cost advantage or a differentiation advantage for the firm. Every

That is why every strength does not

necessarily mean
e e a not necessarily result in a cost or a differentiation advantage. it must lead to a cost or a
differentiation
aCompetitive advantage. Put differenty, for a strength to be a competitive advantage,
advantage for the firm.
u e g u n s cannot automatically form the backup for strategy; only strengths that amount to a competitive advantage can serve this

purpose.
Competitive advantage appraisal needs a sharper focus than strength-weakness analysis.
Moreover, strengths can be discerned by internal appraisal; discerning of competitive advantage requires both internal appraisal and

industry-competition analysis; actually, discerning of competitive advantage draws heavily from industry-competition analysis.

Either-a 'Cost Differentiation'

Any CA, Finally Manifests as or a

Advantage
Whatever the source from which a firm derives its competitive advantage, ultimately, competitive ad

advantage or a differentiation advantage to the firm. To elabo-

vantage manifests itself as either a cost

rate, whether a competitive advantage emanates from production factors, or marketing factors, or some
other factors, the benefit shows up in the form of either a cost advantage or a differentiation advantag.
And, that is precisely why competitive strategies too finally fall under two broad categories-c0s
(price) based strategies and differentiation based strategies. We saw this in Chapter 8. The second pomt
is that both cost advantage and differentiation advantage can emanate from any of the compeitve
advantage factors. For example, a cost advantage may accrue via unique production facilities, efncie
Cu
distribution, better technology, or ingenious raw material handling. A differentiation advantage too,
arise from any of these factors.

Diagnosing and Appraising the Firm's CA

Firms have to systematically and periodically go through the exercise of identifying their compe
advantage and the factors that produce the advantage. It may be argued that firms will generally
aware of their competitive advantage and the factors that bring in the advantage. The point is that t
environment wherein ever so many changes are taking place and so many new forces of compel
are coming up all the time, a firm can maintain its competitive edge only through continuous appt
and monitoring of its competitive advantage. 1on
The first step a firm takes in diagnosing and appraising its competitive advantage is theidentinca
advantage factors.
of its competitive

S-W Analysis and I&<C Analysis together Lead to Diagnosing CA

and

Diagnosing competitive advantage needs the support of strength-weakness analysis (S-W anay
industry-competition analysis (I &C analysis). S-W analysis corresponds to internal appralslysis.

represents
one sWOT
half of SV analysis. I &C analysis corresponds to one part of environmet in
S-Wanalysis and 1&C analysis togetherhelp diagnosing CA. This is easy to understand. CA bCA
gth, S-W analysis becomes relevant in diagnosing
of one's strength
outcome existing/possible arcdustry
Similarly, CA being a relative matter, a firm can diagnose and appraise it only after analysing ind
M a r k e t i n g M a n a g
geen
menl

238
 Selects a Number of CA Factors
be sufficient
for cartying etitive battle. Therelg
the competitive k

factors may
not
Successful
firms A in several
enjoy CA fact
or two
en, CA
in just one CA. strategies thato r
firms pick up
for developing
several factors advantages,
are a b l e to forge that worK SO
competitive WE
firms, by virtue of their multiple companies.
it tries foor
high performing this matter. If
n the marketplace and

A caveat,
become

is in order. A
however,
firm has to make choices in

because achieving
ferent types of
differ compelitie
achieve none,
every means,
it may compeuive advantage through eu
vantage through inconsistent
actions. Trying for lts unwillingnese t
how to compete.
advan
vantage usually requires to make choices about
dimension in acquirino
mplies that the firm is unwilling is the cost
trouble. Moreover, there
how to compete will land it in
On off.
has to resolve the cost-benefit trade

Draws up the Firm's CA Profile draws its competitive advantagee profik

factors, the irm up
After spoting its competitive advantage
(CAP).

How do Firms Build CA?

Firms Utilise Strategy for Building CA

Built at Corporate, SBU, and Product/Brand Levels
Competitive Advantage is
We saw earlier that firms utilise strategy in creating CA and utilise CA in strategy-execution. Buildi
CA-at the corporate as well as business level-is a part of the task of strategy. We saw in the chapte
on strategic planning that competitive advantage and synergy is one of the five fundamental constite
ents of corporate strategy. It is, thus, the responsibility of strategy to endow the firnm with the comgc
tive advantages required for the survival and growth of the business. Firms incorporate in their cope
rate and competitive strategy, the moves that woiuld create the desired competitive advantages.

Corporate Level CA Spills Over to Business Level, and Vice Versa

The question is often raised as to whether a business unit contributes to the competitive advantage d
corporate level, or vice versa. It is actually a two way process. Corporate clout confers competie
advantage on the SBUs and strengths of SBUs contribute to competitive advantage at the corpu
level. Certain competitive advantages accrue to an SBU by virtue of its
being part of the parent co
tion, which has in its fold a lot of influence in different areas. The business unit
invariably araw
this corporate-clout. At the same time, the business unit too
develops its own competitive advaantages
Though, often, the latter would be unique to the particular business, it poration
as a whole. For example, a business unit
may be useful to the co
may have strength in new tributien

or brand equity. The corporation draws product development or dir

upon these competitive m a n n e r

it also makes them available to its other business

units. And the
advantages in an appropria advaniag

and the unit level competitive

advantages combine corporate-level competiuve a
to form one unified support system.
Firms Build CA Using a
Variety of Routes and Tools
Chart 11.3 lists the routes firms take in
building competitive
advantage.
CHART 11.3 Firms Build CA Using a
Variety of Routes
Lower Cost

Superior Resources
Strength in distribution channels
Technology and R&D Strength in Human resources
Excellence in design
Alliances
.Creation of entry
Integration
services, etc .Innovation in barriers
Qualityin products,
Product differentiation
processes,
variouscapabilities
Superior marketing functions
Speed in operations andr
response

Brand power and

expertise (lower input costs)
time compression of
of cycle
y
. Supply chain

Marketing lanag
 CA hrough Brand Power: Nestle
fore,
Such ny
MIn Mini Case
firms have made their brand power
10.3 in the
a
competitive advantage. Swiss giant Nestlé i1s an apt cA
ample. previous chapter, we had dealt with Nestlé's Maggi noodles. we
well t even en though new entrants offer competition to it, aw
Maggi straddles the Indian noodles market as tne
n In selling its Maggi Noodles, Nestlé has used its
brand power as a compctitive advantage.
itive initial times when competition was absent or fecble, Nestlé built n
the brand Maggi. The assurance ol
itive the
quick
food' was the hirst winning brand input, The welcome laste was the second. Retail support built
eans iduousty gave it further
strength. Nestlé had used all these winning points well and built
lear nd equity. When competing products like Brooke Bond's Indo-Nissin
brand
Foods Top Ramen Maggi
noodles
s. t
me into the Indian market, Nestlé nurtured the Maggi brand with effective brand inputs. Top
Ramen
rould not do much against Maggis brand power. Maggi Noodles continued to dominate the markel.
The brand had been built over the I5 years. Nestlé continued to nurtured the brand and made it a
household name enjoying a high brand equity. Even when the others--the stronger competitors entered
file
Subsequently, Maggi could stand 1ts ground. Brand Maggi was not to be dislodged easily.
An interesting side dimension, when we discuss Brand Power as CA is that while CA builds a
brand, the brand itselt becomes a CA after a while.)

CA through Design Excellence: Apple

All Apple products have become phenomenal success. The underlying CA with respect to all of them
is design excellence. SteveJobs had an obsessionfor design excellence. And, he transfered it on to all
ng Apple products. Steve concentrated on two key elements:

'Design sense
Aesthetic sense
He combined the two into a formidable CA and used it in all Apple prod
ucts. The CA got reinforced by strong consumer orientation that guided all
creations of Steve. It was because of strong 'customer orientation' that Apple
could make technology understandable, beautiful, and, accessible to people.
Steve had correctly sized up that the consumer community wanted products/
devices that combined utility, functionality, and elegance-products that com-
bined "taste" and "quality". Steve delivered these products. Apple products
weren't technical innovations; they represented "repackaged technology" de-
livered with taste" and "quality". Mini Case 15.2 in Chapter 15 gives more
details on Apple's CA in destg.

CA through Ability to Generate a Unique Experience

t has been widely recognised that Starbucks is an experience brand. It thrives by generating a unique
experience for its customers. Obviously, for such a brand, the ability to generate the 'experience' will
work as a CA. What lies at the bottom of this ability, according to Starbucks, is the ability for superior
Cngagement with the customers. So, the ability for superior engagement with the customers can be
described as the CA of Starbucks. Providing the unique Starbucks experience through superior engage
distinct edge to Starbucks. We have provided more details on
nent with the customers has given a

Starbucks in Mini Case 3.1 in Chapter 3.

CA through Speed-from Fast to Faster

the token, as CA. Tech- it can serve
"napter 3, we saw that speed can serve as value. By
same

and websites in particular, build a CA through ever

panies in general and Internet service providers to the customers. The quickest service
provider
seler speed. Speed leads to better 'value delivery'the service. These companies, of which
this CA provides quickest
CA and the one possessing to faster. For web users, even 400 millisec
is a leader, constantly try to move up from fast
Be
u-iterally the blink of an eye-is too long to wait, as Google engineers have discovered. It may
barely perceptible delay, but that causes people to search less. The competition to be the quickest
is fie ereating frustrating
and tablels are digital traffic
rce
S,
especially because data-hungry smartphones
as people download maps, video clips of sports highlights, news updates, etc.
jams.

Build Competitive Advanlage 241

 and R&D advantage tool. tool. The
The case
Technology of
CA through technology as a
competitive
Inme techn.
using live by technology.
Oday, many
organisations
are
here. They,
in case,any in this matter is
ime
is referred to and a superiority
is not what
gy companies
R&D in large measure R&cD achieve the s a m
ame t
companies use
technology and
improvements
brought
about by
experience and
an gener
nal puryese
as well as customer
rront-end technologies create superior
concerned. They to qualify as a
LneSas CA.
A. Unfriendly tech.
c u s t o m e r s are user-friendly
4s Tar as the must be
technology fill the bill.
for the company. The be, does not
Customers
sophisticated, or cost saving it might
nology, however

too Leads to CA
Creating Entry Barriers 10. While they
s e r v e as defense for exis
in detail in Chapter the main entre
We have discussed entry barriers Economies of scale
serve as
newcomers.
baricades for the in some others, Cac
testants, they are
dominance fill that role t advan
differentiation and brand
Some industries; product
barrier in all industries.
The cost advantage can en
manat
that cannot be replicated is a major entry
tage technology, access to the best raw material sources.
assels
from different sources such as ownership of that all these barriers sernve
location, etc. It is obvious erve as a
already created at lower cost, favourable
competitive advantage to those who have built them up.

Better Resources too Can Serve as CA

Resources too can be the basis for competitive advantage. For example, for a bank, possession of a wie
network of interconnected branches is a resource. The question is whether it would serve as a compei
tive advantage for the bank. The answer is Yes. In order to serve as a competitive advantage, a resoure
has to meet the following criteria:
(i) It has to be 'valuable' to the customers (they must see value in it)
(i) It has to be scarce, if not rare
(i) It has to be inimitable: (should not be easy to copy; it should have characteristics that are difficu
for
competitors acquire; possessing
to
a weak or temporary advantage)
a resource that competitors can easily copy generates o
The resource, however, need not be tangible for this purpose.
Using Value Chain Analysis in Identifying and Building CA
Value-chain analysis propounded by Michael Porter is a useful
tool in identifying and building
petitive advantage. In Chapter 7, we saw the role of value-chain
marketing planning process (in particular in the internal analysis in the strategic plann role u
competitor analysis. Here, we will appraisal). In Chapter 10, we saw
its role
see
in building CA.
chain concept in detail and highlight its linkage to competitive Here, we will alsoo explain the
the basics of value chain approach. Figure 11.1 presents a advantage building. Chart thevalt v
chain idea. diagrammatic representat0
How is 'Value Chain' Idea Used in
We have been emphasising that
Building CA
to competitive
competition, which a firm is able to advantage grows Supeno

create for its fundamentally out of the vaer th

thecompetitor's for cquivalent benefits, or the buyers. It may take the form of
pr thanoftset
lowe

rice. The
premium pric name of the provision of unigque
benefits that more
walue-creating activities performedgameby isthetofirm
enhance value relative i mainitof

competitors. The key this endeavour is and develop valuetochain

to competition,
a
In
u tothat o
competitors and comparing and analysing the value chain of thethat is
supen of
te

those
Ry analysing the value chain olcontrasting
the
the former
with the latter. company a
and

nesses of tthe
competitor. It also gets competitor,
anidea of the
the firm
gets a Strengths and wea
good grasp of
chain. By co
comparing the costs and performance costs and
titor's
valur

can find out where it stands

relative of
to the
its value performance in the
chain with those of the Coito.
activities better than its
competitors, competitor. If the co value-creale
performsadvantage. e-c
to that firm
extent it s some key
achieves a mpetitive
competitive
MarketingManagrm
 FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT
PROCUREMENT
MARGIN
INBOUND OPERATIONS OUTBOUND MARKETING SERVICE
NI9HVW
LOGISTICS| LOGISTICS & SALES

PRIMARY ACTIVITIES

The Value Chain

Figure 11.l
Obviously, in order to be useful in the context of competitive advantage building, the value chain
exercise has to cover the value chains of the competitors. In fact, it should cover the value chains of the
fim's suppliers, distributors, and customers. Even this is not enough; it should cover the value chains
of the suppliers, distributors, and customers of the competitors, as well. Such in-depth comparison of
value chains enhances the firm's scope for identifying and building its competitive advantage.

CHART I1.4 Basics of Value Chain Approach

The basic ideas in value chain approach are as follows:

collection of activities and be disaggregated in terms of the activities.
Every firm is a can
Every activity performed by the firm creates some value. Some of them are specially value creating ones
The activities are linked as a chain.
value. The sum of all the value inputs embedded in all the activities reflects
Every link in the chain (each activity) is a vessel for carrying
in the firm's product and service.
activities that are major value creators in any firm; they would, of course,
create cost
There are five primary activities and four support
as well.
The five primary activities consist of:
business)
Inbound logistics (bringing materials into the
manufacturing, etc.)
Operations (product design,
Outbound logistics (sendingthe products
out)
Marketing and sales
Service
he four support activities consist of:

Firm's infrastructure
Human resources
Technology development
Procurement to 20 combinations of major value activities. For e x -
all the five primary
activities
giving rise of the firm. Ultimately, all the primary
four support activities occur through
ne
activity, occurs in every
one or
the primary activities
technology development, support activities in the firm.
a
ample, a vast
matrix of value-creating
generate chain of the firm.
Support activities together, with
effects constitutes the value
their interacting
activities along
nis matrix of value-creating for creating and delivering
value to the customer.

ne unified chain of activities is to be used its value-creating activities. It also depends on how
how well each department
the
firm pertorms
of coordinated.
he total value created depends on
levels are linked
and
the activities at the
various department
value-dellvering process.
And, buyers patronise the firm that offers the highest
e value-creating and
Business (Marketing) is basically a

and in competitively
delivered value. Ien value can De created in good measure a

The is to locate activities

in the value caln in
of them.
name of the game
value in each
maximum possible
building competitive advantage.
manner and create
or in diagnosing and creation activities that are one up to those of the competitors.
can use the value chain approach focused, value.
s advantage through
consistent,

They build compet

petitive The Free Press, New York, 1985.
Adapted from Michael Porter, Competitive Advantage,
Source:Adapted 243

Buildir Competitive Advantage

 achmarking and Value Chain can be Used in Combination
marking, in effect, amounts to analysing one's own as well as competitors' value chains.

ailding CA-A Conscious and Continuing Endeavour

neveloping competitive advantage involves conscious and continuing efforts. It also needs consider-
hle resources. More than resources
per se, what is of greater importance is their
strategicwhich
application.
The fim has to ensure that the right share of the limited resources goes to those factors, consti-
tute the source of its competitive advantage.

The Concept of Core Competence

Building Durable CAs Requires Unique Capability
For succeeding on a continuing basis, the firm needs durable, sustainable, and higher order CAs. A
given CA does not remain a CA forever, and under all circumstances. A majority of CAs gets erodedin
course of time. All firms eventually reach a situation where there is nothing unique about many of their
CAs. The competitors have erased or are in the process of erasing them. This happens mainly because
the competencies on which the CAs were based, could be imitated by the competitors. Competitors
acquiring the same advantage are, however, only one part of the story. The other part is that the original
CAs ceases to be CAs when circumstances change. Instead of resting on its laurels, the firm must de-
velop durable CAs. A durable CA is one that cannot be easily copied by the competition. For possess-
ing durable CAs, firms must possess some competency which is fundamental, enduring, and unique to
the firm, a capability at the very roots, a capability, which cannot be easily imitated by the competitors.
From this unique capability, newer and more durable CAs will keep accruing to the firm. Such a capa-
bility constitutes a core competence (CC).
A sustainable competitive advantage is one that cannot be easily copied by the competition.
Sources of competitive advantages are the skills and assets of the organisation. Assets include pat-
ents, copyrights, locations, and equipment and technology that are superior to those of the competition.
Skills are functions such as customer service and promotion that the firm performs than its competitors.
It can be a competency in technology/process, it can be a special expertise. The main thing is that
T has to be an extraordinary competency, a competency that lies at the root of the firm's businesses/
products. And it has to be the exclusive preserve of the firm, or it should be available to the firm in a
Substantially larger measure as compared to its competitors. According to C K Prahalad, core compe-
Ence is "a bundle of skills that are not widely available in an industry'". He adds,

We have to look at the organisation as a portfolio of competencies, and not just as a portfolio of busi-
ness units. We must identify the core competencies, which make us successful in existing businesses,
and that would allow us to create new products. And, we must examine what we can' do that other

companies might find difficult.

of firms.
lart 11.5 gives a few examples of core competence

CHART II.5 Examples of Core Competence

Firm Core Competence
or miniaturisation; it can make any product tiny
Capability for
Philips Optical media expertise.
and adhesives and combining them in multiple ways
3M Capability for making substrates, coatings, it an advantage in aiverse like cars,
which gives products motorcycles, lawn mowers, and
Honda Capability for making engines,
generators
DuPont in chemical technology
Unique strength
T in electronics
Unique strength and computing
semi-conductors,
NEC Unique strength in telecom,
ancth in optics, imaging, and mieroprocessor controls; together, they lend Canon an advantage in diverse prod-
Canon scan
cameras, and image
ucts as copiers, laser printers,

245
Bulding Competitive Advantage
 successtul corporations and their
of globallynumber
nrongh an examination of a
it is nol a particular prodc"old f
drive home the point that
products. Prahalad and Hamcl Behind the product/productProdue
dominant posilion.
cgory that ends these corporations the iS waged more on the "ory
market leadership
is the c o r competence. The battle for global gth of
strength of the products/brands n
firms than on the
core compepetencies of the compcting
lies the substantive
war of core comne by hem
Behind he visible battle of the products/brands, can see the
inventions, ofwe distinct core
Coorations. In fact, behind every major product distinction between comnesiPele
and the
the coporations. The attributes of core conmpetence in Char
tive adva
o
Prahalad and Hamel
are shown Chart 11.6.
Hge and core competence, as propounded by
inimitable ofthe
strength firm that:
C o r e competence is a fundamental, unique and
to a variety of
products/markets
() Provides the tirm, the access
benefits in the end products
to customer
(11) Contributes significantly imitated easily by competitors
firm and cannot be
(1i) Is an exclusive preserve of the available in a substantially larger measIres
Or, it is
(iv) Is not available to the competitors.
tim compared to its competitors. at the root technolo
competence, a compelence logy n
Core competence is largely a technological are largely the result of techol
businesses/new products
particular. This is so because
new
where technology is fast alteringeti
is true in today's technology-driven world,
This especially show that the core competencies ofthe
in Chart 14.5
ing boundaries of businesses. The examples
several overarching technologies.
the of their command over
outcome
corporations are
gainin
in the root technology/process/expertise keep
Corporations that enjoy a core competence and fresh value enhancement.
new and proprietary products
lasting advantage through technologies (e.g. TelecO
streams of interrelated and overarching
Often, command over multiple firm in the composite area, giving rise n
to a
computers, fiber-optics) confers a core competence
many unique products.
rise to a variety of products with wideh
Core competence is a knowledge base, which gives
varying product missions.

Attributes of Core Competence

CHART 11.6

Provides firm
access to a
variety of
products/
markets

Contributes
Essential for
significantly to
firms pursuing customer
product route Core
benefits
competence-
Fundamental
unique, &inimitable
strength of firm

Exclusive
Atechnological preserve of firm,
competence and not available to
knowledge base
competitors
 1 Distinction betuween Competitive Advantage and Core
Table Competence
Competitive A d v a n t a g e
Core Competence
not necessarily imply a core competence Does imply acompetitive advantage
s not constitute a sure success formula for a firm Does constitute a sure success formula for a firn over
not
Does
term a long term
Over a 1ong
a temporary competitive superiority Provides a lasting superiority tothecompany
Provide
cruesfrom a functional strength in any of the mani- Strength has to be a core sirength like a unique capabil-
Accrues

by a firn
foldfunctions performed and limited ityin technology/process
firm in a specific way Helps it in a general, far-reaching and multifaceted
Helps a

manner
Devides competitive strength to the firm in a given | Helps the firm to excel in a variety of businesses/prod
business/product
ucts
imitated and competitors catch up fast Is long lasting; competitors cannot easily catch up with|
Can be easily
the firm
Is not uniqueto any nrin over the long term Is fundamental and unique to a firm

Criical Comments on Core Competence Idea

is the
There have been competence idea. The oft-repeated one that,
some critical comments on the core
felt that it is on account of
idea restricts the number of businesses a firm can have. Prahalad, however,
a misunderstanding
that people think that the core competency concept is a perspective that restricts
idea actually helps the firm to
the number of businesses a company can be in. The core competence
Behind its
operate a by having one core skill. Prahalad cites 3M as an example.
number of businesses
and adhesives
multitude of businesses and products lie 3M's core skills in making substrates, coatings,
for a large number
and combining them in multiple ways. One core product-sticky tape-accounts
of products.
criticism is that when firm goes for diversification, it makes a dent in its core
a
The second major
in diversification. He explains
competence. Prahalad, however, feels that core competence is not lost
in for
that even firms like Tata respect the principle of core competence though they have been going
locomotives, and IT, with their core com-
diversifications in large measure. Tata excels in steel, heavy
able to outsmart HLL in soaps or cosmetics, where
the
petencies in them. They, however, were not It is
the Tatas sold Tomco and Lakme to HLL. only com-
latter has core competence. Recognising this,
divided, and that one cannot have deeper knowledge
monsense that with diverse interest, attention gets
mean that the core competence approach
does not
in or a of all of them. But it does not
deeper pursuit
whatsoever
Support any kind of diversification could g0 a bit too far, on occasions.
competency as a concept
cautions that core
Jetfrey L Sampler extreme of diversification to the other extreme
example, companies have moved from the
Or many
Instead of engaging themselves in more businesses,
as
oT
Clinging to core competency too seriously. even parts of their existing
business in an attempt
waTanted by the times, they have been outsourcing
when the world no longer values your
"What
Sampler asks, happens
Sucking to competence.
a core
Core competence?

ExERCISE
Review Questions
the test of CA?"
CA and Strength? What is
What are the distinctions between value?
4How is CA an essential requisite for delivering
and strategy.
Explain the linkage between CA
competitive advantages?
How do firms diagnose and appraise their
advantages?
How do firms build their competitive
Explain the concept of core competence.

247
Building Competitive Advanlage