Late Dr.C.K.Prahlad who is popularly known as the ‘Management Guru” has stressed on Core Competence and many companies who have followed his theories have benefited immensely.
Firms can acquire core competence through heavy investments in technology, research and development followed by new product innovations. The most profitable companies are those that create and dominate new markets, looking for opportunities to further explore key skills and competencies. New product innovations such as chilled prepared meals, the compact disc, and the anti-lock breaking system for cars, took place in companies which have excellent in-house R&D facilities. In India Ranbaxy, Dr Reddy Labs in Pharma, TCS and Infosys in software; HUL, Nestle, Cadbury in fast moving consumer goods have a good track record of exploiting their key research and development skills for achieving consistent growth. Employees play a key role in acquiring such capabilities. Leaders have to provide a positive work climate for employees to develop such crucial skills. 3M is renowned for its ability to empower employees and produce innovative products. Laboratory staff are free to devote 15% of their time on developing ideas. They are allowed to work as per their own convenience. Technicians are encouraged to talk with customers.
To gain a fundamental strength in the long run, a firm should focus on one or two core skills, which it should develop. Focus does not mean restricting the number of businesses the firm can operate. It only means concentrating on a particular group of customers, a specific geographical area, or a certain part of the product or service line. The rationale is that by specializing the organization can serve the market segment more effectively than competitors who try to cover the entire market. The focus strategy still relies on a low cost or a differentiation approach or perhaps both to establish a strong position within the particular market segment or niche. The differentiation within a focus strategy can occur by tailoring products to the exclusive needs of the market segment. A cost advantage may be simultaneously possible because a firm may be able to offer better prices on custom orders even though another firm may have the cost leadership in serving the larger volume requirements of the broader market. Building core competencies is not easy.
Low cost leadership is based on a firm’s ability to offer a product or service at a lower cost than its rivals. When a firm is able to build a substantial cost advantage over other competitors it can pass on the benefits to customers and gain a large market share.
Buyers in such a market are able to drive down prices to rock bottom levels where only the low cost producers survive – this partly explains the success of low cost producers. Low cost producers are also able to withstand sluggish demand conditions weather out business cycles and get ahead of their rivals. Local brands for example in FMCG sector are growing at a respectable level even when other established players are finding it difficult to stay afloat.
Low cost strategies can be used effectively when the market for the product or service is price sensitive, the buyers are powerful enough to extract a concession from the manufacturer, the buyers are not brand loyal and are willing to switch from one seller to another based on price differences.
Economies of Scale: Large established firms produce sell and advertise in greater volume than smaller firms and late entrants. The substantial volumes that they are able to generate help them take advantage of economies of scale within many primary and supporting value adding activities. More employees are required to carry out an activity. This, in turn, helps them specialize and achieve greater productivity. Fixed costs can be spread over a large volume. The firm can gain from quantity discounts available on component inputs and other raw materials. Also, large volume players are in a better position to vertically integrate and make their own inputs at a lower cost. High levels of vertical integration enable firms to control all of the inputs supplies and equipment required to convert raw material into the final end product.
They can focus effort on these few activities, which they are best equipped to carry on and get supplies from others – thereby avoiding large fixed cost capital investments. They can also avoid investing in those technologies or production processes that could become obsolete in a short span of time. For example, Dell Computer does not invest in making chips or designing software it simply assembles and distributes personal computers by buying key components from outside suppliers. The saving obtained through tight inventory and production cost control is passed on to the buyers.
The principal source of experience based cost reduction is through learning from the organization members. As employees repeat activities, they learn how to carry them out more quickly and accurately. The net effect is continuing improvements in both productivity and quality as employees’ experience base expands. Again, as a firm’s engineers become more familiar with the way a product is manufactured , they can often redesign components that cause problems in later assembly, reduce the number of components needed to make the product and substitute better materials . These changes help in reducing manufacturing costs and improving the product quality over time.
Increasing experience also helps engineers to bring small but useful improvements in the way the product is manufactured by changing the work flow or altering the equipment design.