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Cost Management-final                                                                                                       16

industry and of its competitive situation also relates to what happens to value chains of firms in the industry. The effectiveness of low cost versus differentiation spends on the nature of users' value chains, and on how competitors value chains act with those of both sellers and users.

Since these five forces are ever-changing, Porter's framework needs to be employed as a dynamic analytical tool. This is because competition is a dynamic process; equilibrium is never reached and industry structures are constantly being reformed.

A major difficulty in industry structure analysis lies in defining the specific industry. No industry has clear boundaries either in terms of products or geographical areas. For example, does one analyse the industry environment of Ford as the "transportation equipment " industry, the "motor vehicles and equipment" industry or the "automobile" industry ?

To overcome the difficulty of defining an industry, the concept of substitutability can be applied to a firm's supply and demand chains. On the demand side, if buyers are willing to substitute one product for another—e.g., Toyotas for Fords—then the manufacturers belong in a single industry. However, this guideline does not always hold. For example, customers may be unwilling to substitute Apple Macintosh computers for H.P. computers, even though both manufacturers belong to the same industry. On the supply side, if two manufacturers can make each other's products, then they belong to a single industry.

Core Competencies Analysis : Industry structure analysis is well suited to describing the what of competitiveness, i.e., what makes one firm or one industry more profitable than another. But understanding the particulars of such advantages as low cost, quality, customer service and time to market may still leave the question of why largely unanswered. For example, why do some companies seem able to continually create new forms of competitive advantage while others seem able only to observe and follow ? Why are some firms net advantage creators and others net advantage imitators ? For assessing competitive advantage it is necessary not only to keep score of existing advantages — what they are and who has them — but also to discover what it is that drives the process of advantage creation. Industrial structure analysis is much better suited to the first task than to the second. Thus, industry structure analysis must be supplemented by an equally explicit core compe­tence focus. Organisations need to be viewed not only as a portfolio of products or services, but also as a portfolio of core competencies.

Core competencies are created by superior integration of technological, physical and human resources. They represent distinctive skills as well as intangible, invisible, intellectual assets and cultural capabilities. Cultural capabilities refer to the ability to manage change, the ability to learn and team-working. Organisations should be viewed as a bundle of a few core com­petencies, each supported by several individual skills.

Core competencies are the connective tissue that holds together a portfolio of seemingly diverse businesses. They are the lingua franca Vn&l that allows managers to translate insights and experience from one business setting into another. Core competence-based diversification reduces risk and investment and increases the opportunities for transferring learning and best practice across business units.

For instance, Microsoft's only factory asset is its human imagination. This company has excelled in inventing new ways of using information technology for a wide variety of end users. In contrast, using its core competence in information processing, Xerox developed icons, pull­ down menus and the computer mouse, but failed to exploit the marketplace.

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