Strategies companies adopt in order to maintain their positions at the top of the value chain
Strategies companies adopt in order to maintain their
positions at the top of the value chain
Companies need to adopt effective strategies to sustain
competition from various other organizations. Each organization, big or small
adopts strategies to evade competition and increase their profitability.
According to Johnson and Scholes (2000) strategy is broadly
defined as “the direction and scope of an organization over the long-term:
which achieves advantage for the organization through its configuration of resource
within a changing environment to meet the needs of markets and to fulfill
stakeholder expectation”. (p.32)
Dunning.J.H (1998) defines Multi-National company (MNC)
“which engages in foreign direct investment and owns or controls the
value-adding activities in more than one country. There are many factors which
identify the degree of a company’s multi-nationality like-
The number and size of foreign subsidiaries or associate
companies it owns.
The number of countries its operations are based and
The total revenue and employees
Porter (1985) gave a detailed overview of gaining sustainable
competitive advantage for an organization. He developed value chain analysis
which links the organizations value activities with main functional parts.
Value chain analysis explains the company’s capabilities which add value to
gain sustainable competitive advantage. The multinational company has primary
and secondary activities which add value (margin) to the organization. (Margin
is the difference between the total value gained and the collective cost of
performing the value activities).
According to Porter (1985) Primary activities of the company
include-
Inbound Logistics- This deals with the delivery of goods,
storage, supply and efficient usage within the firm.
Operations- This deals with the actual production of the
company goods either in the company or from the place of manufacture.
Outbound Logistics- This activity dispatches final products
to the customer.
Marketing and Sales- Advertisement and promotions to attract
more and more customers are the main elements of marketing and sales.
Service- After sale service of the products is very necessary
for customer retention.
Source: Porter, M. E. (1985) Competitive Advantage: Creating
and Sustaining Superior Performance, New
York
Porter (1985) further suggests Secondary activities of the
company include –
Procurement- This department’s activity is limited to the
purchase of goods and materials at low price and good quality, which are then utilized
by the operations department for production.
Technology Development- This activity includes addition and utilization
of modern technology for efficiency.
Human Resource management- Includes recruitment, training and
development of efficient managers and staff.
Firm Infrastructure- This deals with financial and accounting
support needed to administer the company.
Value chain in precise can also be defined as Interlinked
value-adding activities that convert inputs into outputs which,
in turn, add to the bottom line and help create competitive
advantage. A value chain typically consists of
(1)inbound distribution or logistics,
(2) manufacturing operations, (3) outbound distribution or
logistics, (4) marketing and selling, and (5) after-sales
service. These activities are supported by
(6) purchasing or procurement, (7) research and
development, (8) human resource development, (9)
and corporate infrastructure (web-1)
According to Grant R.M (2005) Strategy could be understood
and classified as corporate and business strategies; Grant.R.M (2005) defines
corporate strategy as “the scope of the firm in terms of industries and markets
in which it competes. Corporate strategy decisions include investment in
diversification, vertical integration, acquisitions, new ventures, allocation
of resources between the different businesses of the firm and divestments”. He
further goes and explains Business Strategy as to how the firm competes within
a particular industry or market and how it should develop a competitive
advantage over the industry players to prosper in the industry. (p.22)
Strategy also establishes a connection between the organizational
ability to that of the external environment. It could be deduced that a good
strategy will definitely add value either in the short-term or in the
long-term. This will also result in the reliability of a company provided any
circumstance faced by the company due to market turbulence.
Companies hence are very much dependent on the most effective
strategy which can prevail consistently to maintain a company’s position at the
top of the value chain. According to Bruce Kogut (1984, 151), “the notion of a
value-added chain has been a useful tool for international business scholars
who have focused on the strategies of both firms and countries in the global
economy”. He further suggests considering the markets around the globe have
been globalised value chains have become a very key element in the competitive
analysis across the organizations. To implement global strategic measures for
multinational companies has become a challenge, because different economies
need to be differentiated depending on the geographic norms and regulations. Kogut
further explains the role of “value added chains” in the design of
international business strategies. Hence across international borders one needs
to know how and where to break the value chain, be it technology, human
resource, operations etc. The resources should be effectively distributed and
effectively utilized.
Value chain has already been discussed earlier and Porter
(1985) further explains value-chain framework which he developed at the
individual firm level. When strategy is considered at a firm level a firm’s
discrete activities are taken into consideration. For example creation of a product,
manufacture, operation involved, products, marketing, after sale service,
costing etc. Porter further explains on the basis of these discrete activities
firms can establish two main types of competitive advantage which are low
relative cost and differentiation. Low relative costs refers to a firm’s ability
to carry out activities at a lower price than the competitors in the value
chain.
Differentiation refers to the firm’s ability to perform in a
different way as compared to other companies, which will effectively lead them
to provide a competitive edge. To justify the best strategy at a global level
is Porter argues, “The appropriate unit of analysis in setting international
strategy is the industry because the industry is the arena in which competitive
advantage is won or lost” (1987, 29).
Gary Gereffi (2000) elaborates and highlights the” remarkable
growth of manufactured exports from the low-wage nations to high wage nations
in the past few years”. This is considered as a pre-requisite to the global
value chain perspective. This particular phenomenon has left the producers from
the high-wage nations anxious because they would not be able to generate
cost-advantage. Hence the trend adopted by companies in the recent times if
“off-shoring”, where companies from high wage nation pass their job-work to
labourers from low-wage nation to save costs. For example a software company
based in U.K would have to pay high wages to their employees in the same
country, however if they off-shore the projects to developing nations like
India and China they drastically save costs on employee wages, thus
cost-effective strategy being utilized as an effective tool here.
Kaplinsly (2000) explains that the intangible part of the value
chain where “new sources of dynamic economic rents which means profitability in
excess of the competitive norms which are increasingly found in the intangible
parts of the value chain where knowledge, innovation, design “etc come into
picture. Thus these are also very valuable resources in determining effective
strategy and to be on top of the value chain.
Internationalization as explained in chapter 1, For a MNC
expanding abroad the pre-requisites of a multinational companies like knowing
local culture, language and customer needs is a very important aspect to be understand
and derive a suitable strategy by a MNC. The process of internationalization is
described in chapter 1 as developing these strategic and organizational
attributes is at the heart of the internationalization process through which a
company builds its position in world markets. This process is rarely well
thought out in advance, and it typically builds on a combination of rational
analysis, opportunism, and pure luck.
To conclude the above mentioned authors and their view point
clearly substantiates the importance of various strategies which needs to be
devised to be consistently remaining at the top of the value-chain .
REFERENCES
Dunning.J.H(1998) Multinational enterpises and the global
economy. Edinburgh
Gereffi, Gary
Gereffi, Gary, and Raphael Kaplinsky, eds. 2001. “The Value
of Value Chains: Spreading the Gains from Globalisation.” Special issue of the
IDS Bulletin 32(3
Johnson, G. and Scholes, K. (1999). Exploring Corporate
Strategy. Prentice Hall Europe: Hemel Hempstead .
p 11.
Porter, Michael E. 1985. Competitive Advantage. New York
Porter, M. E. 1985. Competitive Advantage: Creating and
sustaining superior performance. New
York
Kaplinsky, Raphael. 2000. “Globalisation and Unequalisation: What
Can Be Learned from Value Chain Analysis?” Journal of Development Studies
37(2):117–4
Kogut, Bruce. 1984. “Normative Observations on the
International Value-Added Chain and StrategicGroups.” Journal
of International Business Studies, fall, 151–67
Grant, R. M. (2002) Contemporary Strategy Analysis: concepts,
techniques, applications. (4thEd.) Cornwall
Web-1: Value chain definition http://www.businessdictionary.com/definition/value-chain.html
accessed on 07-feb 2010
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