Critical Analysis of a Firm’s Core Competencies and Competitive Advantage

INTRODUCTION

This essay critically analyses the link between a firm’s core competencies and achievement of competitive advantage. The theoretical link is explored by choosing Dell as an example to evaluate theory and practice gap. The essay investigates how competitive advantage is achieved by developing inimitable (core) resources; which is supported through review of literature. The essay further establishes and investigates the link between Resource Based View and Sustainable Competitive Advantage and evaluates how the two conceptual theories have assisted Dell in differentiating itself from competition.

CORE COMPETENCY AND COMPETITIVE ADVANTAGE DEFINED

In order to explore the link between core competency and competitive advantage, it is crucial to understand the implications of both terms. Based upon Hofer and Schendel (1978), competitive advantage could imply exploitation of resources resulting in an organisation’s distinctive position compared to competition.  While most firms view the attainment of competitive advantage as earning greater investment returns, it can comprise of various aspects, for instance, enhancing environmental impact or capturing a greater market share can be viewed as a source of competitive advantage for a particular firm. The term was used in several articles by Cave (1984) and Spence (1984), yet it was not explicitly defined until 1985 when Porter (1985) put forth his perception of the concept. Porter (1985) defined competitive advantage as the value delivered by a firm’s products that exceeds costs of creating that value. In this context, competitive advantage was achieved by a firm through adoption of either a differentiation or cost leadership strategy.

However, it is evident from research that competitive advantage does not solely rely upon implementation of value creating activities as the notion undermines and sometimes ignores to account for the potential of competitors. Therefore the concept of distinctive/core competency was explored by Prahalad and Hamel (1990) who described it as the distinctive knowledge, capabilities and skills, of a firm that differentiate it from competitors. These unique capabilities could incorporate anything from a firm’s value creating strategy to its organisational culture. Core competency notion is perceived to create significant value for a firm that competitors cannot imitate or exploit in the long run (Thompson & Strickland, 1999).  The core competency theory has therefore, added meaning to competitive advantage concept.

Core Competency and Competitive Advantage – The Link

A firm’s competitive advantage reflects its internal competitive context while the core competency inclines towards the broader strategic intent. Research indicates that development of core competencies by organisations increases their resources returns which deteriorate in value if they are not utilised effectively (Arthur, 1996; Prahalad and Hamel, 1990). Failure to develop such distinctive capabilities can erode a firm’s competitive advantage (Cohen and Levinthal, 1990; Bettis, Bradley, and Hamel, 1992). Therefore, firms are not only encouraged to develop and exploit unique capabilities but also defend them, in order to distinguish themselves from competitors. Prahalad and Hamel (1990) mention that a ‘competency’ is classified as ‘core’ if it satisfies the following conditions:

• It delivers superior value and extended benefits to customer
• It assists in unique differentiation of products/services which is inimitable by competitors
• It explores and provides access to a wide range of markets

It is obvious that if firms strive to offer superior value to their customers, they will cultivate strong, long term relationships with them that will form the basis of competitive advantage. Similarly if a firm differentiates itself based on its product design or customer service, it will outperform competition provided that these capabilities are distinctive enough to become inimitable by competitors.

According to research, successful firms thrive upon their core competencies and consider them as a source of competitive advantage (Collis and Montgomery, 1995; Watson, 1994). The debate between Prahalad and Hamel and resource based researchers have suggested that market structure is not rigid and can be modified through long term innovation. Prahalad (1993) also mentioned the various level at which a firm must compete to achieve competitive advantage. The following figure summarises the conceptual idea:

This innovation points towards a firm’s ability to shape the market by developing distinct capabilities through innovation in technology that lead towards sustainable products resulting in competitive advantage. Drawing upon Kay (1993), the distinctive capabilities of a firm also comprises of the network of relationships with customers, suppliers and similar firm related activities. Therefore core competencies that do result in competitive advantage are the ones embedded in a firm’s structure and culture. Therefore, in a broader perspective, core competencies can emerge from human resources, operation and marketing functions within a firm, with an impact on financial performance that ultimately translates into competitive advantage (Reed & DePhilliipi, 1990).

Based upon a research of 25 firms by Adelaide and Carl (2001), it was established that those firms that shared their unique capabilities internally and defended them from being imitated by competitors, have appeared to achieve and sustain their competitive advantage over a much longer time period. However, a firm might not be successful in maintaining a competitive edge if it fails to develop competencies that are effective enough to compete within a turbulent external and competitive environment (Ansoff, 1965). For instance, the current economic crisis has made it more difficult for firm’s to compete within their industry as consumers have become conscious and selective of their purchases. In such a crisis, only those firms attain a competitive edge that continually develop their core competencies taking in account the changing consumer perceptions. Similarly it is argued that if a core competency is not shared throughout the different organisational levels, the capabilities might become unproductive as the end products/service would not be distinctive and competitive position will deteriorate (Prahalad, 1995). It is evident from the literature that there exists a dual causal relationship between the two concepts; therefore, it is crucial to discuss how firms apply these theoretical concepts on a practical level. To establish the link between theory and practice, the core competencies of Dell are discussed and how it has lead the company to attain a competitive position within the computer industry.

THE CASE OF DELL

Dell is considered as the world’s largest and most renowned manufacturer of PCs. The company specialises in manufacturing, developing, designing and marketing hardware products; mainly computers, mp3 players, printers and the like. Dell operates via a ‘direct sales business model’ which has significantly differentiated the company from its competitors (Datamonitor, 2009).

Dell’s Business Model

The business model of Dell operates through the following system:

• The company accepts orders (mainly comprising of PCs) directly through internet and telephone. 
• They then purchase standardised/commoditised parts and components and assemble in accordance with these orders to produce customised hardware
• PCs constitute 60% of sales while 85% of custom is acquired from corporate customers
• After sales, service is again provided through internet and telephone

This model is a depiction of Dell’s strategy that primarily focuses on provision of high quality and value-for-money PCs to its customers. The direct sales channel has always adapted itself to advancements in technology which has enabled it to provide rapid and efficient service to customers. Consequently, the business model has enabled Dell to achieve significant cost advantages because there are no intermediaries involved. Based upon Evans et al. (1992), competencies and capabilities are complementary concepts; where the former emphasises on technological or production expertise at various stages of the value chain, while the latter encompasses the entire value chain. In this context, Dell has not only developed its core competencies but has also transformed them into core capabilities that have added value to all the primary and secondary activities of its value chain. Therefore, Dell’s business model can be viewed as a core capability of the company that has enabled it to develop specific core competencies that are strategically aligned with both internal and external factors. It is due to these competencies that Dell has not only achieved competitive advantage but has sustained it throughout the years. 

Just in Time Inventory System

Another major core competency of Dell is its Just-in-time inventory system that operates in such an efficient manner that inventory lasts only two hours unlike its competitors who have inventories lasting four weeks (Datamonitor, 2009; The Guardian, 2007). The parts ordered by customers come directly to the factory, hence, Dell has no outstanding inventory. Moreover, Dell trains and assigns profit margins and quality and production targets to its staff in order to deliver superior customer value, quickly and efficiently. Therefore it demonstrates the ability to integrate its internal competencies in order to effectively market and deliver products at prices that rivals cannot compete with. As an outcome, Dell’s customers value its products and prefer them to competitors which have established the company’s competitive edge. These competencies are embedded within Dell’s culture and structure and are difficult to imitate by competitors. Drawing upon Hoffman (2000), competitive advantage can only be sustained when value adding strategy is not simultaneously implemented by competitors and benefits arising from strategic implementation cannot be duplicated. In this context, the inventory system has also enabled Dell to develop and maintain superior supplier relations is another prominent core competency that is perfectly inimitable and has helped the company achieve competitive advantage.

According to Kay’s model of Distinctive Capability (1993) there are two fundamental relationships that can be identified for Dell (i) direct dealing with customers which is linked with its procurement policy and then (ii) with suppliers. The way they have integrated these can be considered a distinctive arrangement of their architecture which enables them to achieve innovations in supply and distribution channels and good brand reputation- for efficiency/speed/value and therefore reduce the propensity of customers to switch.

Therefore, by developing unique capabilities through efficient business processes, Dell has been able to attract and retain its customers, suppliers and investors, enabling the company to achieve competitive advantage. This analysis has established a clear link between theoretical findings and practical observation which reinforce the notion that core competencies and competitive advantage are interdependent. However not all competencies are core and they might not result in competitive advantage as argued in the literature.

Sustainable Competitive Advantage and Resource Based View – The Link

Porter (1985) and Lynch (2003) have defined sustainable competitive advantage (SCA) as the successful implementation of competitive strategies (differentiation or cost leadership). In this regard, Dell has adopted the strategy of differentiating on cost basis through its superior business and supply chain model. However, Barney (1986, 1991) has provided the most meaningful definition of SCA and mentions that

“A firm is said to achieve sustained competitive advantage when it employs a value creating strategy not simultaneously being implemented by current or potential competitors and when other firms are unable to duplicate benefits of this strategy” (p. 102: Barney, 1991).

In this context, Dell’s distinctive strategy of ‘direct sale’ has distinguished it from competitors.

The resource based view also shares a dual causal relationship with achievement of competitive advantage and stresses on firm’s unique (value adding) resources that should be identified and developed to incorporate the ‘sustainability’ factor linked with competitive advantage (Lynch, 2003). RBV theory emerged to explore the issue why firms within similar industries achieve different levels of success (Barney, 2001). In this context Barney (1991) points towards the unique resources that help the firm succeed and sustain its financial performance in a competitive environment. For example, Dell has been able to develop unique resources within its value chain activities due to which it has a first-mover advantage in reversing the traditional design, research and development, manufacturing, assembly, storage, selling and distribution model. Also Dell thrives upon its efficient human resources and related strategic resources (including product design, quality etc.) that enable it to outperform competition.

These resources are labelled as ‘rent’ creating resources, due to the superior value they add to a firm’s activities. Drawing upon Barney (1991) a firm’s competencies and resources should be ‘rare, valuable and inimitable’ in order to translate into sustained competitive advantage. In this context, the link between SCA and RBV can be summarised as follows:

Even though most theorists use the term “valuable” to characterise a core resource as source of competitive advantage, however, some researchers argue that ‘valuable’ resources must not only generate rent but should also restrict competition. Others conflict with this idea and observe that SCA is dependant upon rent creation (Bowman, 1974:47).

Similarly the different theorists interpret the term ‘inimitable’ differently, which has also created some ambiguity concerning the notion of such resources and the extent to which they are practically developed and utilised by firms to achieve SCA. According to Peteraf (1993) and Dierickx & Cool (1989), such resources described under RBV, might not be tradable in imperfect markets or when firms do not account for externalities. For instance, in case of Dell, standardised components may no longer satisfy customers who want better quality, customised (not commoditised or standardised) components. These are changes in external environment and markets that can erode Dell’s SCA in future.

Most importantly, researchers argue that it is a firm’s resources that limit penetration in new markets and profit margins it expects (Wernerfelt, 1989). In this context, SCA does not appear as a straight forward link with the RBV. Fundamental resource constraints might comprise of physical input or labor shortages, insufficient resources for financing operations or insufficient managerial capacities. Therefore, even when resources are rare, valuable and inimitable, the above constraints limit the achievement of SCA. For instance, if Dell fails to satisfy consumers by either poor response to their demands or by not adapting to their changing perceptions, the core competencies and unique resources of Dell will appear unproductive as they are not delivering desired value to the company and its customers. Consequently, even if the firm holds a RBV and has developed rent creating resources; its competitive advantage will be unsustainable. Therefore, theoretical concepts and practical observations indicate that, though RBV and SCA are inter-linked, it is not necessary that firms possessing rent creating resources always sustain their CA. 

CONCLUSION

From the above discussions it can be concluded that even though core competency, RBV and competitive advantage are inter-linked, it is still debatable whether firms can always reap the benefits of developing unique and inimitable resources and capabilities. In today’s scenario where economic and financial crisis has eroded the competitive advantage of many large firms, it is crucial that firms develop competencies targeted towards customer retention. Moreover it is concluded that the turbulent external environment and competitive environment is such that resources and competencies cannot be categorised as valuable, rare and inimitable in the long run. The basis of this argument relates to the fact that if a firm achieves SCA, it would maximise profits and attaining abnormal returns will draw other firms to imitate them. These firms will either duplicate the original strategy or will develop core competencies that will surpass the other one. All these factors have started eroding competitive advantage of a well established company like Dell. Therefore a firm’s strategy must reside upon a careful scrutiny of external environmental factors and internal organisational factors if competitive advantage is to be sustained. Further research is required in exploring how a firm can successfully implement a business transformation strategy and develop effective competencies within a crisis situation. Firm product/service aspects perceived as the most crucial by customers must be researched and incorporated during the strategic transformation process in order to achieve SCA.