Organizational Core Competence And Competitive Advantage

Introduction

1.1 Background to the Study

In today’s highly competitive business environment, business organisations need to act fast in order to secure their financial situations and their market positions. Firms are continuously striving for ways to attain a sustainable competitive advantage. They need to count more on their internal distinguished strengths to provide more added customer value, strong differentiation and extendibility; in other words count more on their “core competencies” (Hamel &Prahalad, 1994). Therefore, according to Hamel &Prahalad (1994), strategy has to move from competing for product or service leadership to competing on core competence leadership. The core competence has to be a primary factor for strategy formulation as it is an important source of profitability. Therefore, by competing based on core competence leadership, the company is able to form a solid base for sustainable competitive advantage.
The two concepts go hand in hand when utilised effectively.

This concept can be anchored with two common strategic management theories, namely resource based theory and competitive advantage theory. A resource-based view of a firm explains its ability to deliver sustainable competitive advantage when resources are managed such that their outcomes cannot be imitated by competitors, which ultimately creates a competitive barrier (Mahoney and Pandian, 1992). Resource based theory explains that a firm’s sustainable competitive advantage is reached by virtue of unique resources being rare, valuable, inimitable, non-tradable, and non-substitutable, as well as firm-specific (Barney, 1999). Porter proposed the competitive advantage theory in 1985. Porter emphasizes productivity growth as the focus of national strategies. Competitive advantage rests on the notion that cheap labour is ubiquitous and natural resources are not necessary for a good economy. Competitive advantage attempts to emphasize maximizing scale economies in goods and services that garner premium prices (Stutz and Warf, 2009). The term competitive advantage refers to the ability gained through attributes and resources to perform at a higher level than others in the same industry or market (Christensen and Fahey, 1984).

Competitive advantage is achieved by companies through strategic planning and management which is a continuous process that evaluates, controls and examines the business, the competitors and the industry at large and sets goals and strategies to overcome obstacles on their way to success. (www.slideshare.net) Therefore, building core competence becomes essential to competitive advantage because advantages emanating from the product-priceperformance-trade-offs are almost short term. Especially in an era where technologies are altering the existing boundaries of business; advantage can last only through competence enjoyed at the very roots of products. (Eric &Saatcioglu, 2006). The motive of this study is therefore to be able to find out if core competence really leads to sustainable competitive advantage.

Currently, there are about 47 insurance companies licensed to operate in Nigeria. The insurance penetration in Nigeria is less than 5%. All these companies are competing for a relatively small market. Based on the Association of Nigeria Insurers’ 2014 annual report, CIC General Insurance was first in terms of market share for purely general insurance. This means that the company is the benchmark for the industry. This study will focus on this company’s strategy and the use of its core competencies to gain competitive advantage.

1.1.1 Core Competency

A core competency can be defined as a harmonized combination of multiple resources and skills that distinguish a firm in the marketplace. To be considered as such, a core competency must fulfil three criteria. It should provide potential access to a wide variety of markets. This means that it should enable the firm to position itself in different market segments easily. It should also make a significant contribution to the perceived customer benefits of the end product. The customers should be able to get value for their money by getting quality products at an affordable price. The core competency must also be difficult to imitate by competitors. The core competence should enable a firm to completely differentiate its products and/or services in the market while giving the competitors little chance of being able to deliver similar products and/or services at a lower cost or better standard. (www.wikipedia.org)
Core competencies are valuable capabilities that are collective and unique in their characteristics, as well as strategically flexible contributing towards the success of potential business. An organizational core competency is an organization’s strategic strength. Thus, it is what it does best than its competitors and should never outsource. Organizational core competencies, the unique resources of an organization, affect many products and services and provide a competitive advantage in the market place (Johnson & Scholes 2002).

Organizations use their unique resources which include their capabilities and competencies to be ahead of their competition. Once an organization identifies its unique area of excellence, its management is required to come up with a strategic plan of how to utilize its competencies to achieve great competitive advantage.

1.1.2 Sustainable Competitive Advantage

Competitive advantage is a company’s ability to perform in one or more ways that competitors cannot or will not match. Companies strive to build sustainable competitive advantages. Competitive advantage is at the heart of a company’s performance in competitive markets. It is about how a company puts the generic strategies into practice and it grows fundamentally out of the value a firm is able to create for its buyers (Porter, 1990). It may take the forms of prices lower than competitors for equivalent benefits or the provision of unique benefits that more than offset a premium price. Thompson & Strickland (2002) argue that competitive strategy consists of all those moves and approaches that a firm has and is taking to attract buyers, withstand competitive pressure and improve its market position. Competitive advantage in companies grows out of the way the companies organize and perform discrete activities.

Competitive advantage is at the heart of firm’s performance. It is concerned with the interplay between the types of competitive advantage, i.e., cost, differentiation and the scope of the firm’s activities. A sustainable competitive advantage creates some barriers that make imitation difficult. Without a sustainable competitive advantage, above average performance is usually a sign of harvesting (Porter, 1985). The secret of a sustainable competitive advantage lies in performing every step in the value chain in an appropriate way. A competitive advantage essentially has to be one that not only merely represents better performance than that of its competitors, but also delivers genuine value to the customer, thus ensuring a dominant position in the market. The internal resources and capabilities of an organization play a very important role in building competitive advantage.

1.1.3 Core Competence and Sustainable Competitive Advantage

An organization’s competitive advantage potential depends on the value, rareness, and imitability of its resources and capabilities. However, to fully realize this potential, an organization must also be organised to exploit its resources and capabilities. In a dynamic world, only organizations that are able to continually build new strategic assets faster and cheaper than those of their competitors will earn superior returns and create long term competitive advantage.

The competitive advantage to which core competencies lead is a function of several forces from both the supply and the demand side (Kak, 2008). The concept of core competence is distinct from both the traditional strategic thinking of competing for market share and Porter’s (1985) low cost-differentiation strategy.

CIC General Business is a member of the CIC group where CIC General caters for insurance against damage to or loss of property. General insurance covers a number of classes of insurance. These include covers against damage by fire, theft of items, motor vehicle insurance, personal injury covers, marine insurance as well as cover for theft of money during transit or by employees. CIC General Insurance is the flagship of the company and contributes the biggest amount to the gross written premium as well as to the profitability.

CIC General Insurance is the pioneer in offering insurance cover to small scale traders and micro enterprises. The company also has innovative products that enable it to be a market leader. The CIC Motor Commercial Plus product is the most profitable commercial cover in the insurance industry and this has been the biggest contributor to profitability in the company.

1.2 Research Problem

Hamel &Prahalad (1990) contend that “core competencies are the collective learning in the organizations, especially how to coordinate diverse production skills and integrate multiple streams of technologies.” They argue that core competence is communication, involvement, and a deep commitment to working across organizational boundaries. Gupta, Woodside, Dubelaar & Bradmore, 2009 point out that core competence was originally invented as a tool for justifying business diversification at large companies, and for supporting internal processes such as product development (Hamel &Prahalad, 1990). This argument is supported by the resource based theory.
Resource based theory explains that a firm’s competitive advantage is reached by virtue of unique resources being rare, valuable, inimitable, non-tradable, and non-substitutable, as well as firm-specific. Competitive advantage refers to the ability gained through attributes and resources to perform at a higher level than others in the same industry or market. It is therefore important to try and link the two concepts together in order to gain sustainable competitive advantage on competitors.

Contemporary business theory argues that companies must compete to keep or gain competitive advantage. Insurance companies also strive for competitive advantage. In Nigeria the insurance industry has about 47 main stream insurance companies competing for almost the same target market. The distribution channel for insurance products is intermediary driven i.e. insurance brokers and agents. Banks are the latest entrants to join the insurance distribution channel by offering bancassurance to their customers. All this has led intense competition and insurance companies are now trying to position themselves strategically to be able to compete effectively. The focus of this study will be on CIC General Insurance Company Limited. The company is a market leader in the General Insurance industry and this means the company must be employing the right strategies.

There have been various studies done on core competence in relation to competitive advantage. Agha (2012) studied the effect of core competence on organisational performance.

His finding was that proper use of core competence led to better organisational performance. Lado& Wilson (1994) studied human resource systems as a form of competitive advantage.

They found that by hiring the right people, a firm was able to gain an edge over its rivals. King, Fowler &Zeithaml (2001) studied the middle management edge in utilising core competencies to gain competitive advantage. They found that deciding on the core competencies should not be a management decision only but rather the views of all the staff need to be sought. Papula & Volna (2013) observed that technology and innovation were key drivers of competitive advantage in an ever changing environment.

A number of local studies have also been done. Wanyanga (2007) studied the utilization of organization’s capabilities as an operation strategy in the hotel industry in Nigeria. His study noted that most hotels in the country had not fully identified their strategic capabilities and always scanned the external environment to identify the opportunities without identifying their internal non-imitable capabilities that will give them a competitive advantage. A study by Ngugi (2011) looked at the strategic capabilities at the British Broadcasting Corporation (B.B.C.) – Africa. He concluded that the firm’s capabilities and resources available to it must interact positively with the requirements of the firm’s markets and their requirements be defined clearly and explicitly for the firm to achieve desired performance results. Marucha (2011) studied core competencies for the Nigerian Insurance industry as a whole. In his study, he found that most companies had various core competencies but do not focus solely on their main one. Ilovi (2011) studied how insurance companies gained competitive advantage. The finding was that there was no single strategy and they usually followed Michael Porter’s framework.

From the various studies, none of the authors have focused on use of distribution channels as core competence. If an organisation is able to leverage on a unique channel that can reach more people, then they are able to significantly gain a competitive advantage. In the insurance industry in Nigeria, the products and services offered by insurance companies are rarely differentiated. For instance, the standard motor insurance product is being sold at a strictly regulated rate with a legal requirement of instant premium payment before cover is considered effective, that is, cash and carry. In addition, the rating of huge risks (commonly referred to as Listed Risks), is heavily controlled by Insurance Regulatory Authority which consults with a panel from the Association of Nigeria Insurers to provide the rating guidelines hence a uniform rate across the industry for the identified specific risk. Industry players are therefore not allowed to vary the rate for compliance purposes. This leads to firms seeking other avenues of competition other than price. As a result, insurance firms have to be smart to beat their competitors to the business. Some companies then invoke their customer care skills, speedy service delivery among others to beat the competition. These set of tools used by the firms are the companies’ competencies and capabilities which help the gain competitive advantage. Hence, how is CIC General Insurance Company using its perceived core competencies to gain sustainable competitive advantage?

1.3 Research Objective

The objective of the study was to determine how core competencies affect competitive advantage in organisations.

1.4 Research questions

What are the core competencies of CIC general insurance company.

What are the effect of these core competences on competitive advantage of organizations.

1.5 Significance of the Study

This study contributes to the resource based theory as it adds a different dimension to the resources that may be put into good use when creating competitive advantage. The resource based theory focuses on the internal strengths but does not focus on the distribution methods that can be employed to maximise on the internal strengths of the organisation.

This study is important for insurance firms because they will be able to identify key competencies, areas for investment and how to improve on the same to achieve a competitive advantage. Insurance managers will gain insight into the competitiveness of their core competences and find ways of how they can redesign the same with a view to achieving competitive advantage by use of their own known core competences. Insurance marketers too will find this study useful as they will be able to identify competitive internal organizational competencies which can aid them to sustain organic growth and ensure maximum retention of customers.

The research will form an invaluable source of reference for the IRA, especially in coming up with policies to guide the industry in the development of good business practices, having healthy competition and good corporate governance. If the industry regulator can focus on what the top companies are doing to remain competitive and profitable then they may impose sound regulations to ensure that business carried out by companies is not merely imitation.

They may be able to ensure that all companies focus on what they are most competent at.

1.6 Limitations of the Study

Limitation is an aspect of research that may influence the results negatively, but over which, the researcher has no control (Mugenda and Mugenda 1999). There were a number of limitations that the researcher encountered. Non response because of fear to reveal detailed information concerning the organization due to fear of exposing the company’s key strategic decisions that led to competitive advantage. The researcher foresaw a challenge in collecting the required data from the interviewees. The interviewees feared giving information stating that the information requested may be used against them. It was not easy to convince some of the senior respondents in the company to participate in the study. CIC General Insurance is known to work under very strict confidentiality in order to secure any unauthorized access to information. Most of the respondents agreed to participate on condition that the information was not to be divulged to any other party other than for academic purposes only. To limit the effects of this limitation, the researcher carried with him an introduction letter from the University confirming that the data requested was used for academic purposes only.

There was a lack of co-operation from some of the respondents for fear of victimization from their supervisors. The researcher also foresaw a challenge where the respondents were likely to give the ideal scenario instead of providing the situation the way it was at that time. This affected research findings as it distorted the study findings.

1.7 Scope of Study

This research work focuses on organizational core competences and its effect its effect of comparative advantage. CIC general insurance company in Abuja was used for this study in comparison with other companies in the industry.

1.8 Organization of the Study

The study comprises of five chapters.

Chapter one consists of the background to the study, statement of the problem, purpose of the study, objectives, research questions, significance, limitation of the study, delimitation of the study, basic assumptions, definitions of key terms and organization of the study.

Chapter two comprises of literature review theoretical and conceptual frameworks.

Chapter three deals with research methodology, covering research sampling, procedures, research instruments and their validity and reliability, procedures for data collection and data analysis.

Chapter four comprises of findings and discussions which were generated by the study.

Chapter five presents summary, conclusions and recommendations.