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Strat.

Change 18: 27–43 (2009)


Published online in Wiley InterScience
(www.interscience.wiley.com) DOI: 10.1002/jsc.829 Strategic Change

Core competencies for diversifying:


case study of a small business
Paul Trott,1* Tom Maddocks2 and Colin Wheeler1
1
Business School, University of Portsmouth, UK
2
Barcroft Ltd, Dorset, UK

䊉 This paper addresses a significant gap within the present body of work on the resource-
based view of the firm: the lack of empirical research on the resource-based perspective
within the SME sector (Newbert, 2007).
䊉 This study applies the resource-based view and core competencies analysis in a very
practical situation: a small manufacturing firm in the UK. The study is the result of a
two-year ‘action research’ project where the researcher was embedded within the firm.
The manufacturing firm supplies hydraulic tube assemblies to the yellow construction
industry and has experienced rapid growth over the past 10 years. Using a causal
mapping methodology the findings reveal distinctive capabilities that the firm is able to
use as a basis for diversification into the leisure marine industry.
䊉 The findings contribute to the body of literature on the resource-based view of the firm
by providing a methodological approach which helps to uncover core competencies
in practice.
Copyright © 2009 John Wiley & Sons, Ltd.

Introduction: growing a successful Founded in 1972 and now located in Dorset,


manufacturing firm Steel-Tubes Limited2 has extensive experience
in the tube manipulation industry and in
Diversifying away from your main business
particular the fabrication of rigid hydraulic tube
and revenue stream that has provided a stable
assemblies for the construction machinery
and profitable business for over 30 years is full
market. Steel-Tubes is a leading supplier to the
of risks and uncertainty. This paper illustrates
yellow goods industry, with an established cus-
how a manufacturing company in the UK, sup-
tomer base which includes JCB, Caterpillar, and
plying one of the UK’s fastest growing private
Hitachi. With a turnover of £15 m, the company
businesses: AED,1 set about this difficult task
is one of the largest tube manipulators in the
using core competencies analysis as a basis for
UK. While Steel-Tubes has been successful, with
diversification.
constant growth in turnover and employees, it
has grown into a position where 80% of the
business is from one customer. This is, how-
* Correspondence to: Paul Trott, Business School, Univer- ever, a strategy that Steel-Tubes purposely
sity of Portsmouth, Hampshire, PO1 3DE, UK.
E-mail: Paul.trott@port.ac.uk
1 2
The name of the firm has been changed to ensure The name of the firm has been changed to ensure
anonymity. anonymity.

Copyright © 2009 John Wiley & Sons, Ltd.


Strategic Change
28 Paul Trott, Tom Maddocks and Colin Wheeler

undertook seven years ago. Having seen the and demanding environments. Steel-Tubes has
potential growth of AED, over the past five so far managed to fight off competitors who
years, it focused on growing the business from have entered the market by offering a better
50% to 80% from AED. Having captured this quality product delivered on time. Indeed,
growth, the longer-term strategy is now on competitors have found it difficult to meet the
reducing the dependency on the single cus- demanding requirements of the customer
tomer and the yellow goods industry. — AED. By any measure this small company in
Dorset is an example of a successful manufac-
turing company producing high-quality steel
products on time every week for an industry-
Operating within such a leading company.
manufacturing All these successes have been achieved
environment demands a within a firm of 250 employees, 230 of whom
range of special skills not work on the factory floor. The firm can be
just in manufacturing but characterized by its craft-based approach to
manufacturing and quality. Emphasis is placed
also in quality on quality and service rather than on efficiency
management, logistics, and cost minimization. The very small manage-
and customer service. The ment team is headed by an accountant with
quality standards set for many years of experience in this and related
the products being manufacturing industries. The small group of
managers within the firm have few formal
produced are equivalent qualifications (the MD is one of only two with
to the highest in the a university education), but many years of
industry and the products industry experience. It is this in-depth knowl-
produced perform in edge of the industry and the customer that
seems to play a significant role in the firm’s
harsh and demanding
success. The MD, however, is aware of the
environments limited formal business expertise within the
firm to analyze and develop a strategy for
diversification.
It is sometimes easy to overlook the success The yellow goods industry continues to grow,
the company has achieved in growing the with JCB competing with Caterpillar and CNH
business from £9 m to £15 m over the past five of the USA, Komatsu of Japan, and Volvo of
years. While this has largely been supplying Sweden. Competition is fierce and AED contin-
a single customer, this customer has been ues to put further pressure on its suppliers to
very demanding and continues to be so. For lower costs and demand more for less. The
example, orders are placed with lead-times of dependency on one customer, however, is also
several months, but changes are made to these growing and will continue to grow as long as
orders a few weeks prior to delivery. Further, sales from AED outweigh total sales from other
a JIT manufacturing system does not allow for customers. This causes problems for Steel-
suppliers to operate late deliveries. Operating Tubes as AED is able to dictate terms that are
within such a manufacturing environment disadvantageous, such as demanding short lead
demands a range of special skills not just in times and instant response to new or adjusted
manufacturing but also in quality management, orders, causing disruption in production.
logistics, and customer service. The quality Dependency on one customer in a focused
standards set for the products being produced industry means that Steel-Tubes is vulnerable to
are equivalent to the highest in the industry changes in AED’s strategy, as well as changes
and the products produced perform in harsh in the construction machinery industry. AED is

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change


DOI: 10.1002/jsc
Identifying core competencies for diversification 29

there were many idiosyncrasies with the busi-


The dependency on one ness that would take a long time to appreciate
customer, however, is also and understand. Given the available resource,
a two-year project leveraging expertise from a
growing and will continue Business School seemed to offer the opportu-
to grow as long as sales nity for a research project that would involve
from AED outweigh total learning over a longer-term period (these are
sales from other also the conditions most suitable for ‘action
customers. This causes research’). This was in preference to external
consultancy firms whose approach and meth-
problems for Steel-Tubes odology would almost certainly have been on
as AED is able to dictate a much shorter time scale, especially given the
terms that are available resources. The next section explores
disadvantageous the strategic management literature in general
and the resource-based view of the firm with
respect to diversification.

also realizing the potential threat that being


dependent on a sole supplier poses to their
The concepts of the RBV and core
business and is currently looking at secondary
competencies analysis
suppliers for hydraulic tube assemblies. Having For the academic discipline of strategic man-
recently expanded into China and India, it is agement, the landscape has changed consider-
reasonable to conclude that AED may also be ably in little more than 10 years. The RBV
planning to outsource parts from these coun-
tries in the future.
The key challenge for Steel-Tubes was how
to identify a strategy to diversify and enable it For the academic
to build a business to generate a revenue discipline of strategic
stream beyond the yellow goods industry. This management, the
raises many questions, not least of which is landscape has changed
whether the firm is able to undertake the work
necessary to devise such a strategy? Over the
considerably in little more
past few years the senior management team than 10 years. The RBV
has discussed the diversification issue many emerged as the
times. Opportunities for diversification almost contemporary and
always resulted in the usual suspects: products dominant approach to
that contained steel tubes — golf trolleys,
tubular furniture, lamp posts, etc. The senior
strategy development
management team recognized that if it was to
carry out a rigorous diversification analysis it
did not have the resources or necessary skills emerged as the contemporary and dominant
internally to undertake such an exercise. In approach to strategy development. Virtually all
2006, Steel-Tubes secured a two-year Depart- the strategy journals and most of the business
ment of Trade & Enterprise Knowledge Trans- and management journals featured articles
fer Partnership Associate to help it develop written from a resource-based perspective.
opportunities for diversification. This was the Moreover, the language of the RBV — such
preferred method of choice for the MD of as resources, capabilities, and competencies —
Steel-Tubes, partly because he wanted to work now fills the mainstream business press. So
closely with the project and recognized that what are the key concepts of the RBV?

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change


DOI: 10.1002/jsc
30 Paul Trott, Tom Maddocks and Colin Wheeler

If the RBV is dependent on the two key


principles that firms are different and these Increasingly, economists
differences are relatively stable, then a key are using the notion that
question arises: how does one identify these
differences that determine the success of a
firms possess discrete sets
firm? It is the detail that is significant here, and of capabilities or
by differences we mean strengths. It is around competencies as a way of
this concept of strengths that so much of the explaining why firms are
debate has taken place. different and how firms
Strengths have been interpreted as resources,
capabilities, and competencies (Wernerfelt, change over time
1984; Barney, 1991). Hamel and Prahalad
(1994) developed the idea of core competen-
cies for a very specific type of resource. Indeed, However, knowledge or technology in itself
they developed three tests that they argue can does not mean success; firms must be able to
be used to identify core competencies, namely convert intellect, knowledge, and technology
‘customer value’, ‘competitor differentiation’, into offerings that customers want. This ability
and ‘extendibility’. Yet, despite the wide- is referred to as a firm’s competencies: the
spread acknowledgment of the salience of ability to use its assets to perform value-
core competencies for acquiring and sustain- creating activities. This frequently means
ing a competitive position, the notion of core integrating several assets such as product
competencies has remained largely amorphous technology and distribution, product tech-
(Onyeiwu, 2003). Indeed, there is a tendency nology and marketing effort, distribution and
in the literature to characterize core compe- marketing. Indeed, it is the investment in
tencies as any asset that enhances firm per- intangible assets that seems to be a determi-
formance. According to Hamel and Prahalad nant of core competencies (Onyeiwu, 2003).
(1994), a firm’s ability to generate profits from
its technology assets depends on the level of
RBV and dynamic capabilities
protection it has over these assets and the
extent to which firms are able to imitate these It is Jay Barney (1991) that is considered by
competencies. For example, are competen- many to have made a significant contribution
cies at the periphery or the center of a firm’s to the debate on the RBV when he argued that
long-term success? If they are at the center and there can be heterogeneity of firm-level differ-
difficult for firms to imitate, then long-term ences among firms that allow some of them to
profits are assured; for example, over the past sustain competitive advantage. He therefore
50 years few firms have been able to imitate emphasized strategic choice, where responsi-
Honda’s success in developing performance bility lies with the firm’s management to iden-
engines. tify, develop, and deploy resources to maximize
Increasingly, economists are using the returns. He further proposed that above indus-
notion that firms possess discrete sets of capa- try average rents can be earned from resources
bilities or competencies as a way of explaining when they are: Valuable, Rare, Imperfectly
why firms are different and how firms change Imitable, and Non-Substitutable (so called
over time. To summarize: competitive advan- VRIN attributes).
tage resides not in a firm’s products but in its A key issue for debate within the literature
competencies. These are defined as knowl- has been over what form resources take. It is
edge, skills, management processes, and rou- now widely accepted that resources include
tines acquired over time that are difficult to tangible ones such as patents, properties, pro-
replicate — this is most likely because they prietary technologies and intangible resources
are constantly changing or being updated. such as relationships and trust built up over

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change


DOI: 10.1002/jsc
Identifying core competencies for diversification 31

they argue that the choices made by any firm


It is now widely accepted must take place in an environment character-
that resources include ized by changing levels of technology, chang-
ing market conditions, and changing societal
tangible ones such as demands. Teece et al. (1997) refer to this
patents, properties, concept as the dynamic capabilities of firms.
proprietary technologies This is significant within the debate on the
and intangible resources RBV as it implies a shift in focus from protect-
such as relationships and ing rare, inimitable, and non-substitutable
resources (the so-called VRIN framework) to
trust built up over time continuously creating resources and capabili-
ties in order to compete (Kogut and Zander,
1982; Teece et al., 1997; Winter, 2003).
time (Galbreath and Galvin, 2004). It is this In a review of the empirical research on
wider interpretation of the concept of resourc- the RBV of the firm, Newbert (2007: 137)
es — and in particular the recognition that examines the issue of distinguishing among
resources include information, knowledge, resources, capabilities, and core compe-
and skills — that has further developed the tencies and finds:
concept of RBV.
Significantly, the idea that firms develop it is perhaps no surprise that capabilities
firm-specific routines as they conduct their and core competencies have been found
business differentiated the concept of RBV to be far more significant in explaining
from the more static ‘SWOT’ framework. competitive advantage and performance
Teece et al. (1997) put forward the idea that than resources.
firms develop dynamic capabilities that are dif-
ficult to replicate and it is this that makes firms Newbert further argues that resources have
different. This seems to chime well with Edith received a great deal of empirical attention
Penrose’s (1959) idea that it is resources that because, relative to capabilities and core
enable firms to create services or flows. But competencies, they are easy to measure. For
the technology capability of the firm frequently
dictates what is possible and what can or
cannot be achieved in a given time frame,
hence a firm’s opportunities are constrained The construct human
by its current position and current knowledge capital is the most widely
base, i.e. it is path-dependent. This introduces
studied resource as it can
the notion of technological trajectories (Dosi,
1982; Nelson and Winter, 1982). Acquiring be operationalized along
knowledge about technology takes time, dimensions such as
involves people and experiments, and requires demographics in certain
learning. To exploit technological opportuni- roles/positions
ties a firm needs to be on the ‘technology
escalator’, that is, firms cannot move easily
from one path of knowledge and learning to
another. According to Teece et al. (1997), the example, the construct human capital is the
choices available to the firm in terms of future most widely studied resource as it can be
direction are dependent on its own capabili- operationalized along dimensions such as
ties; that is, the firm’s level of technology, demographics in certain roles/positions,
skills developed, intellectual property, mana- whereas capabilities and core competencies
gerial processes, and routines. Furthermore, are difficult to access and identify. Indeed, he

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change


DOI: 10.1002/jsc
32 Paul Trott, Tom Maddocks and Colin Wheeler

presents the identification of capabilities and (i) What are the core competencies of Steel-
core competencies as a major methodological Tubes Limited?
challenge which necessitates a greater need (ii) How can core competencies be identified
for primary data collection techniques and within a small manufacturing firm?
will, by its nature, introduce a greater poten- (iii) How can core competencies be used as a
tial for respondent bias. basis for diversification?
Core competencies as a basis Methodology
for diversification
Given that the associate was to be embedded
The RBV emphasizes the theme of sustained within the company working alongside the
success within the research; diversification senior management team, the research lends
can be viewed as the other side of the same itself to an in-depth study of the firm’s resources
coin. It is growing the firm through utilizing and core competencies. The research metho-
the firm’s resources, capabilities, and compe- dology adopted for this project is most
tencies, which is at the heart of this approach accurately described as action research. Action
to strategy development (Clark, 2000). The research is problem-centered, user-centered,
commonly accepted theory of diversification and action-oriented. It involves the firm and its
is the resource-based perspective. members in active learning, problem-finding,
The previous discussions illustrate that there and a problem-solving process. It adopts a
has been a considerable debate amongst aca- ‘scientific’ method in the form of data-gather-
demics on the pages of many of the highly ing, forming hypotheses, testing hypotheses,
regarded strategic management journals. and measuring results; this is an integral part
Indeed, despite the confusion that exists of the process (Johnson, 1976). Data are not
regarding terminology, much of the debate simply returned to the firm in the form of a
has focused on the validity or not of the RBV written report, but instead are fed back in
as a theory (Gibbert, 2006a,b; Levitas and meetings, and the firm and the researcher col-
Ndofor, 2006; Connor, 1991), and all the prac- laborate in identifying and ranking specific
tical applications have been within multi- problems and in devising methods for finding
national firms and from a corporate-level their real causes. In this study an iterative
perspective. Empirical research in this field is inquiry process was developed within Steel-
almost entirely focused upon large and multi- Tubes, which led to data-driven collaborative
business organizations, with the result that the research in the form of three phases of enquiry
vast SME sector has been largely ignored. to understand underlying causes. These find-
Indeed, Petts (1997) and Mills and Platts (2001) ings have been used to try to develop organi-
argue that there has been little application of zational change (Reason and Bradbury, 2001).
the concepts to SMEs, manufacturing or Identifying resources and competencies
otherwise. While this may be a function of the within firms presents a considerable challenge
‘growing pains’ of the school of thought, this to researchers (Rouse and Daellenbach,
represents a significant gap within the present 2002). This is particularly so when there are
body of RBV/competencies literature. It is not strong relations of complimentarity and co-
our intention here to test the validity of the specialization among individual resources, so
RBV framework. Rather, we aim to show how that it is not necessarily the individual resources
the theoretical framework and an empirical but rather the way resources are clustered and
method could be used by managers of firms. how they interact with one another that are
This study attempts to apply the resource- important to a firm’s competitive advantage.
based perspective and core competencies Causal maps provide a method of analysis for
analysis in a very practical situation: a small researchers and managers within firms to
manufacturing firm in the UK. The research uncover complex systems in the areas of
questions therefore are: quality, strategy, and information systems

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change


DOI: 10.1002/jsc
Identifying core competencies for diversification 33

distinctive competencies and for developing


Identifying resources and and exploring the business model which
competencies within firms informs strategic direction (Eden and
Ackerman, 2000).
presents a considerable The analysis in this paper relies on content
challenge to researchers. analysis and cognitive maps. Cognitive maps
This is particularly so have been defined as:
when there are strong
relations of Graphic representations that locate people
in relation to their information environ-
complimentarity and ment. Maps provide a frame of reference
co-specialization among for what is known and believed (Fiol and
individual resources Huff, 1992: 267).

There are many different types of cognitive


maps. For example, causal maps (e.g. Bougon
(Fiol and Huff, 1992). These causal maps are et al., 1977) have been extensively discussed
known by many names, including Ishikawa and used in the management literature (see
(fishbone) diagrams, cause-and-effect diagrams, the special issue of the Journal of Manage-
impact wheels, issue trees, strategy maps, and ment Studies, 1992, 29(3) for a review). In the
risk-assessment mapping tools. Causal maps study presented here, the cognitive maps are
can be used by managers to focus attention on derived using Eden and Ackerman’s frame-
the root causes of a problem, find critical work (Eden and Ackerman, 2000). The cogni-
control points, guide risk management and risk tive maps produced in the study can be
mitigation efforts, formulate and communicate interpreted by drawing on the insights offered
strategy, and teach the fundamental causal rela- by personal constructs (Homer and Oliva,
tionships in a complex system (Scavarda et al., 2001; Pavlov and Saeed, 2004; Howick et al.,
2006). In the social sciences, a causal map is 2006).
generally considered to be a type of cognitive
map, which is an individual’s mental model of
the relationships (causal or otherwise) among
the elements of a system. Typically, causal maps Cognitive mapping is a
are drawn with nodes representing concepts, soft systems approach that
ideas, or areas. The nodes are linked with uni- enables the researcher to
directional arcs that represent beliefs about the establish people’s views
causal relationships among these nodes. Syn-
and why they hold
thesizing causal maps from a number of respon-
dents results in a ‘collective causal map’. these views
Eden and Ackerman’s modeling of compe-
tencies using a causal mapping methodology
is ideally suited to identifying relationships Cognitive mapping is a soft systems approach
among assets, distinctive competencies, and that enables the researcher to establish peo-
outcomes. The mapping process using dia- ple’s views and why they hold these views.
grams helps managers within the firm identify The technique is fairly simple to use and hence
and recognize relationships between capabili- does not require extensive training; typically,
ties where previously they were unrecognized. the interviews last about an hour (Eden, 1983).
The relationship between patterns of com- Further, it is a modeling technique that elicits
petencies and the goals of an organization a person’s understanding of a process in his
are used as the basis for establishing core own words. The constructed cognitive map

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change


DOI: 10.1002/jsc
34 Paul Trott, Tom Maddocks and Colin Wheeler

(model) uses the participant’s own language The research was designed in three phases.
and thus facilitates ease of understanding of Phase 1 was an exploratory approach using
the model. This is important for receiving focus groups to uncover competencies and
feedback on the developed model. Immediate capabilities within the firm. Phase 2 examined
problems are presented if the model cannot and evaluated the identified variables in more
be easily understood by the participant. detail. Phase 3 explored links and relation-
A number of studies have suggested that an ships between the variables using a mapping
in-depth interview, in the style required for technique.
cognitive mapping, cannot be started without
detailed knowledge and preparation (Marshall
(i) Phase 1: focus groups
and Rossman, 1989). Burgess says it is essen-
tial to get to know the people before detailed In order to gain a perspective from the differ-
conversations can occur. In this case, this cri- ent management perspectives, the focus
terion has been met following the immersion groups were divided into two groups: senior
within the organization by the associate for managers (five) and middle managers (seven).
two years. Table 1 illustrates the additional By dividing the sessions into these groups the
information and data to which such a process fear of any repercussions from senior col-
provides access. The direct interactive model- leagues is limited and more honest and com-
ing technique of cognitive mapping using elite plete findings were more likely. The sessions
semi-structured interviews was thus selected were tape-recorded and anonymity was
as an appropriate method for revealing the assured. The questions were designed to be
core competencies of the organization. explorative and to create discussion within
the groups (see Table 2). The questions
selected were split into groups, with each
Table 1. Information available due to KTP project group aiming to cover a different objective.
structure One group of questions aimed to identify
resources and capabilities and the other to
Immersion within the organization provides discover informal systems within Steel-Tubes.
access to:
In order to triangulate the findings from
1 Internal documentation Phase 1 and avoid in-built bias, interviews
2 Attendance at and information from internal meetings were held with two of the firm’s major cus-
3 Information from informal discussions with colleagues tomers and two potential customers to iden-
4 Confidential information
5 Historical and present data tify requirements seen as necessary in order to
compete and be successful in the yellow

Table 2. Phase 1 focus group questions

1 Steel-Tubes does lots of things, but what does it do well?


2 Which activities do Steel-Tubes struggle to do well, and which ones do they do very well?
3 What formal and informal systems exist within Steel-Tubes to allow them to deliver benefit to their customers?
4 How do the formal and informal systems compliment Steel-Tubes’ activities and how do they inhibit them?
5 What activities deliver the most customer benefit in terms of adding value?
6 What does Steel-Tubes do that competitors can’t do? For instance, high quality, flexibility, cutting and plating
its own products.
7 What resources does it have that help it to succeed?
8 Are these unique in any way?
9 In terms of unique capabilities are there areas in which Steel-Tubes has adapted and changed over the years
which have enabled it to continue to be successful?
10 How is Steel-Tubes able to be so flexible?
11 How could Steel-Tubes offer the same level of service to other customers as they do to their major customer?

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change


DOI: 10.1002/jsc
Identifying core competencies for diversification 35

construction goods industry. These findings


were compared to those identified internally Causal mapping was used
in Phase 1. in the third phase of focus
groups as it offers a
(ii) Phase 2: focus groups visible method of showing
linkages between the
In the second session the senior and middle
management groups were combined. The capabilities and resources
objective this time was to establish which of that were identified in the
the issues raised during the previous sessions earlier sessions
are core to enabling Steel-Tubes to compete
and which ones are key to Steel-Tubes’ success.
This was done in the form of an attribute
scoring exercise, where each of the partici- Opportunities for related diversification
pants scored the success factors identified in
The final part of the research was to identify
the previous sessions in terms of importance
opportunities for diversification using the core
(see Appendix 1). Discussions of why people
competencies. The biggest challenge for this
scored the attributes the way they did then
part of the research was addressing the scope
took place, with the emphasis on the differ-
and size of analysis required. In order to help
ence between senior and middle management
narrow the search, an initial screening was
views. Hafeez et al. (2002) designed a scoring
undertaken to try to identify those industries
exercise as part of the methodology outlined
that were large consumers/users of steel tube.
in their paper, and this was used as a template.
This was based on the initial guiding principle
By scoring the attributes of a company it is
for the research that any market opportunity
easier to identify the importance of each one
had to be related in some form to the firm’s
in relation to the others. This is important
heritage and skills (that is, 25 years of bending
as it is the relationships among the attri-
steel tube) — especially given the size of the
butes which are considered to underpin a
firm and limited resources. This provides
company’s competitive advantage and which
structure to the search and ensures that any
are likely to lead to core competencies
opportunity will be realistic and less likely to
(Wernerfelt, 1984; Hamel and Prahalad,
be naive and impracticable. Hence, the diver-
1994; Barney, 2002; Eden, 2006).
sification opportunities examined are related
to existing technological capabilities. Having
established the core competencies of Steel-
(iii) Phase 3: focus groups
Tubes, these were to be used as drivers to
For the third sessions, the participants were identify possible opportunities and assess
split into the two groups in Phase 1. This them for suitability in terms of diversification.
session was designed to build on the findings The heavy users of small bore tubular steel
from the previous sessions and determine the were the starting point for the search and
relationships among the identified attributes. investigation. Clearly, the final business deci-
Causal mapping was used in the third phase sion regarding choice of diversification would
of focus groups as it offers a visible method of necessarily be based on traditional business
showing linkages between the capabilities and information, such as:
resources that were identified in the earlier
sessions. The key objective was to establish 䊉 Size of market.
assets, capabilities, and outcomes and explore 䊉 Potential customers.
linkages among them through the develop- 䊉 Volume of steel tube used.
ment of a collective causal map. 䊉 Potential competitors.

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change


DOI: 10.1002/jsc
36 Paul Trott, Tom Maddocks and Colin Wheeler

䊉 Barriers to entry/exit. The benefits and negative effects of pro-


䊉 Resources needed for diversification. totypes being developed on production
䊉 Investment costs. machines needs to be explored, particu-
larly the way in which Steel-Tubes is able
to cope with this disruption on the pro-
Findings and analysis
duction line caused by the prototyping
All the sessions were approached by all the service. This is further evidence of the
participants with a willing and positive atti- ability to deal with disruption; the way in
tude, reflected in the quantity and quality of which Steel-Tubes is able to control an
the data gathered. The focus groups un- environment where prototyping and the
covered many resources and capabilities. Many production line work harmoniously, as
of these were raised in both sessions, suggest- opposed to working as separate entities
ing that these may be fundamental to Steel- in a traditional setup and as the literature
Tubes’ sustained competitiveness. It was clear would suggest, is most effective.
after analyzing the results from the focus (iv) A comprehensive in-house production
groups in Phase 1 that the services Steel-Tubes service
offers, coupled with the high-quality products Although this has been identified as a key
produced, were key factors behind Steel- success factor for Steel-Tubes, it is not yet
Tubes’ success. The attributes that enable clear if this is a unique resource within
Steel-Tubes to offer an exceptional service the industry. Further investigation will
were identified as follows: need to be done to establish the full capa-
(i) Accommodating production operation bilities of the two plants in order to
An issue which was raised in both groups provide a basis for benchmarking against
was the constant ‘disruption’ to produc- other companies.
tion. Having investigated this further, it (v) In-built capacity
seems disruption is caused to the order of More investigation is needed to discover
the queues for processes. It was explained what happens to orders that are at the
that although disruption to the order of back of the queues. It is not yet clear if
the queues happens quite regularly, this the nightshift production schedule con-
has little effect on productivity or the sists of orders which have been post-
actual production processes. Further evi- poned during the day or if nightshift
dence of this ability is that approximately production schedules are postponed to
33% of all parts produced are less than accommodate incomplete orders from
one year old, which suggests new prod- the day shift. If this is the case, are orders
ucts are introduced to the production line constantly postponed until they are con-
on a regular basis. sidered urgent or is there an in-built
(ii) Experience in small batch production capacity in production which accommo-
This year, the average order has been dates these postponed orders?
approximately 300, with a range of 20 to (vi) Planning and logistics
1500 but a mean average of 52 per batch. The planning and logistics department is
Further research is required into batch responsible for ensuring the right parts
sizes as this will be part of the criterion are being pushed through the production
to investigate market opportunities and line and that they get shipped on time. It
therefore it is important to understand is important to understand the way in
what is meant by a small batch size and which this is managed in order to bench-
whether or not this differs among indus- mark this against other companies.
tries.
(iii) Extent and skills of the prototyping Good teamwork at the operational level
service and the knowledge of bending being tacit in

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change


DOI: 10.1002/jsc
Identifying core competencies for diversification 37

(i) On-time deliveries.


Good teamwork at the (ii) Quality.
operational level and the (iii)Rapid response.
(iv) Competitive price.
knowledge of bending (v) Experience of working within the
being tacit in individuals industry.
are two areas which also (vi) Production planning & scheduling.
enable Steel-Tubes to offer Given the findings from Phase 1, variables (i)
an exceptional customer to (iv) were identified as necessary outcomes
service rather than capabilities or assets. These feed
into the causal mapping exercise in Phase 3.
Analysis from Phase 2
individuals are two areas which also enable
Steel-Tubes to offer an exceptional customer Further analysis of each of the capabilities
service. However, they are currently two identified was undertaken using a scoring
issues which are relevant to the project but at method based on the work of Hafeez et al.
present will not be investigated. This is because (2002). By scoring the attributes of a company
they will be more important when researching it is easier to identify the importance of each
market opportunities and will offer bias as to one in relevance to the others. It is the rela-
whether or not opportunities are realistic. tionships among the attributes which are con-
sidered to underpin a company’s competitive
Factors and outcomes identified
advantage and are likely to lead to core com-
from customers
petencies. Barney (2002), Eden (2006), and
The interviews were held at the customer’s Hamel and Prahalad (1994) recognize that
place of business and lasted approximately some attributes are more important than others
one hour. Not surprisingly, there was consid- and that they have to be ranked in some way
erable similarity with those from within the in order to be able to distinguish between
firm. The key factors necessary for success in ones which are crucial to core competencies
this industry were: (this is shown in Table 3).

Table 3. Findings from focus group 2 scoring


Production Coordinator
Poole General Manager

Commercial Estimator
Commercial Manager

Production Manager

Production Director
Prototype Manager

Quality Controller
Dispatch Manager
Logistics Manager
Quality Manager

Total

Knowledge and experience of bending 1 4 3 4 5 5 4 5 5 4 5 4


Good teamwork at the operational level 2 2 4 5 4 3 5 5 4 5 4 43
Comprehensive in-house production capability 4 2 1 5 2 3 5 3 5 5 5 40
High perceived quality in the industry 2 5 3 2 5 4 4 4 4 3 4 40
Flexible accommodating production system 3 3 5 3 1 4 3 4 5 4 4 39
Extent and skills of the prototyping service 4 4 2 2 2 4 4 5 3 4 4 38
Planning and logistics systems 3 2 2 4 3 4 3 3 4 4 4 36
In-built production capacity 3 3 4 3 4 2 2 4 3 4 3 35
Experience in small batch production 2 2 4 1 3 4 4 2 3 3 3 31
Total 24 27 28 29 29 33 34 35 36 36 36

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change


DOI: 10.1002/jsc
38 Paul Trott, Tom Maddocks and Colin Wheeler

AED satisfied

On-time deliveries
Rapid response
to order requests/modifications Outcomes
High-quality
products

Distinctive
Npd/prototyping service
Order taking & speed of response competencies
(formal & informal). Prioritizing orders, & the
(interpreting drawings/ideas from JCB)
ability to ensure orders are chased through
the factory and onto the delivery lorry.

Teamwork at the operational level


which accommodates change.
Assets
Comprehensive manufacturing
In-built
25 years experience Range of “tool-room” capability for steel tube assemblies
production skills that enable working
in small batch production & modules (plating, bending, welding)
capacity without drawings as craftsmen
of steel tube assemblies

Figure 1. Identification of core competencies within Steel-Tubes Limited: collective cognitive mapping.

Analysis from Phase 3 1. A flexible production system allowing rapid


response to orders.
The findings from Phase 2 feed directly into
2. A personal service to customers utilizing
Phase 3. Figure 1 shows a causal map with
specialist prototyping expertise.
three layers. The outcomes at the top of the
map can be distinguished from distinct com-
petencies as they tend to be factors that are As a final test for the validity of these core
demanded by customers. These were identi- competencies, they have been compared to
fied by correlating findings from Phase 1 and three questions devised by Hamel and Pra-
findings from interviews with customers. halad (1994):
Whereas distinct competencies are the effect
of processes within the firm (here a process is
1. Does it add customer value?
defined as a series of activities, which are
2. Does it differentiate your company from
linked together and managed), it is the ability
your competitors?
to manage distinct competencies that sepa-
3. Does it offer a base of expansion for your
rates them from assets, which cannot be
company?
managed. The map illustrates many links and
relationships that have been identified between
the resources and capabilities. This illustrates There is clear evidence from Steel-Tubes’
how Steel-Tubes’ flexible manufacturing main customer that it values the firm’s ability
system contributes to its success in terms of to respond rapidly to its orders. Sometimes
provision of service and how it is integral to Steel-Tubes is able to turn round a request in
Steel-Tubes. The two distinctive competencies 24 hours, something that competitors are
that were identified through an analysis of either unwilling (high cost implications) or
Steel-Tubes’ business model were: unable to do.

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change


DOI: 10.1002/jsc
Identifying core competencies for diversification 39

Table 4. Steel-Tubes’ competencies using Barney’s (2002) VRIO framework

Attribute Valuable Rare Costly to imitate Exploitable

Experience in small batch production No


In-built production capacity No
Good teamwork at the operational level No No
Planning and logistics systems Yes No
Comprehensive in-house production Yes Yes No
Knowledge and experience of bending Yes Yes No
Flexible accommodating production system Yes Yes Yes Yes
Extent and skills of the prototyping service Yes Yes Yes Yes
High perceived quality in the industry Yes Yes Yes Yes

of these industries was examined with respect


There is clear evidence to these competencies to see if the competen-
from Steel-Tubes’ main cies could be exploited. The emphasis of the
analysis was on the industry structure, supply
customer that it values the chains, and nature of supplier relationships.
firm’s ability to respond There were two industries that provided a
rapidly to its orders positive match with both of the core com-
petencies: the leisure marine industry and
specialist automotive.
The predominant material used for tubular
products in the marine industry is stainless
Using Barney’s (2002) VRIO framework, it is
steel. Similarly, low-volume automotive mar-
possible to analyze the capabilities identified
kets also use stainless steel tubular products.
and explore whether there is congruence.
These two sectors have characteristics that
Table 4 shows the attributes within the VRIO
match the core competencies of Steel-Tubes.
framework. This offers three attributes that
In addition, stainless steel in these markets
have the characteristics of core competencies
carries a premium price due to the aesthetic
as identified by Barney. The distinctive com-
value of the products. Another positive factor
petencies identified seem to satisfy all of Hamel
of producing small bore stainless steel tubular
and Prahalad’s (1994) tests and Barney’s (2002)
assemblies is the supplier gap within the
VIRO framework, so it is fair to conclude that
marine industry, which should make for an
the above are realistic core competencies for
easier market entry strategy.
Steel-Tubes Limited.

Conclusions
Opportunities for related diversification
This paper has illustrated how a small manu-
Table 5 shows the list of potential industry facturing firm supplying the yellow construc-
and market opportunities generated by discus- tion machine industry was able to use core
sions with steel tube suppliers into tube- competencies analysis to identify distinctive
related sectors. Column 1 contains the long capabilities as a basis for diversification. Fol-
list of industry sectors identified by both steel lowing this study, Steel-Tubes Limited decided
tube suppliers as heavy users of small bore to enter the leisure marine market. It has since
steel tube and tube bending machine suppli- secured its first order and supplied its first
ers as users of their machines. Columns 2 and product: a stainless steel mast for radar to the
3 are the two core competencies for Steel- UK’s second largest producer of leisure marine
Tubes identified by the earlier analysis. Each vessels.

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change


DOI: 10.1002/jsc
40 Paul Trott, Tom Maddocks and Colin Wheeler

Table 5. Analysis of opportunities for diversification

Industry sectors that are heavy users Flexible production system allowing Personal service to customers,
of small bore steel tube rapid response to orders utilizing prototyping expertise

Aerospace X
Agricultural equipment
Agricultural process plants
Air conditioners and heaters
Boilers
Composite substitutes for metal tubes
Defence X
Healthcare
Leisure equipment
Locomotive
Lorries/buses
Leisure marine X X
Material handling
Mining
Offshore oil and gas
Recycling and waste management
Renewable energy
Shop fittings
Specialist automotive X X

A Small manufacturing It Is agility in


firm supplying the yellow manufacturing rather
construction machine than simply flexibility
industry was able to use which enables the firm to
core competencies analysis configure operations to
to identify distinctive order and gives Steel-
capabilities as a basis for Tubes its distinctive
diversification capability and core
competencies

These findings provide some much-needed


empirical research from the SME sector, which
has thus far been overlooked within the area evaluated using the tests suggested by Hamel
of the resource-based perspective. Virtually all and Prahalad (1994) and Barney (2002), and
studies using the RBV have focused on large cross-checked with customers, suppliers, and
multinational firms as a basis of analysis (Petts, competitors. The analysis of core competen-
1997; Mills and Platts, 2001). cies of the firm guided the diversification anal-
This study has shown how the core compe- ysis. It is the relationship between assets and
tencies of an SME can be identified using a capabilities which is so crucial for small firms.
causal mapping methodology. The methodol- This is especially so for small firms where the
ogy to identify the core competencies used assets are likely to be on a smaller scale than
here had three phases based on focus groups, those of large firms. For Steel Tubes it is the
a scoring process for competencies, and the ability of the firm not only to have flexibility
development of causal maps (Hafeez et al., in its manufacturing operations, but also the
2002). The core competencies were further ability to respond quickly to customer orders

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change


DOI: 10.1002/jsc
Identifying core competencies for diversification 41

that is central to the success of the firm’s busi- level of support and company involvement
ness model. Hence, it is agility in manufactur- required in order to identify core competen-
ing rather than simply flexibility which enables cies. It is therefore no surprise that resources
the firm to configure operations to order and have received far greater attention because, as
gives Steel-Tubes its distinctive capability this paper has shown, relative to capabilities
and core competencies. Steel-Tubes has since and core competencies they are easy to
invested further in this part of its activities measure.
and employed more people within its newly
recognized capability-product prototyping.
Appendix 1: Attribute scoring
The casual mapping methodology cited in
exercise
this paper can be used by other SMEs, but it
should be noted that the resources and skills Below is the list of attributes that have been
required are significant. The mapping process identified as key to Steel-Tubes’ success. Using
requires extensive discussions between the numbers 1–5 please score each of the attri-
lead researcher and individuals, both inside butes depending on how important you per-
and outside the firm (Marshall and Rossman, ceive them to be: 1 being of low importance,
1989), and the organization of the interviews 5 being of high importance. However, you are
and focus groups and the analysis of the data only able to use the number 3 twice.
all take time. In addition, Steel-Tubes went
through the KTP approval process with the
DTI, recruited a graduate, and then introduced Key attribute Score
that person to all aspects of the firm’s opera-
tions. It was crucial during this period that the Comprehensive in-house production capability
graduate was able to develop the trust and Experience in small batch production
Planning and logistics systems
confidence of Steel-Tubes’ management. The Flexible accommodating production system
project also required the company’s manage- In-built production capacity
ment to engage fully with the process. Extent and skills of the prototyping service
Good teamwork at the operational level
Although technically employed by the Knowledge and experience of bending
Knowledge Transfer Partnership, the graduate High perceived quality in the industry
spent virtually all of his time at Steel-Tubes
Limited and in this respect was ‘embedded’ in
the firm. He developed a highly detailed under-
Acknowledgment
standing of the firm, not only because he has
been there for more than a year at the time of We are grateful to the Department of Trade &
writing but also because the mapping process Industry (DTI) for funding this Knowledge
demands extensive interaction with the Transfer Project (Research Project No.
company, suppliers, customers, and to an KTP000973).
extent competitors. So the experience of car-
rying out the analysis of Steel-Tubes suggests
Biographical notes
that it is essential for firms to ensure that a
full and detailed understanding of the firm is Paul Trott is a Reader in Innovation Manage-
developed during the process. ment at the Business School, University of
The findings offer support for Newbert’s Portsmouth and Professor of Innovation &
(2007) arguments relating to distinguishing Entrepreneurship at Delft University of
among resources, capabilities, and core com- Technology, The Netherlands. His book,
petencies. The methodology presented here Innovation Management & New Product
offers clear evidence of the challenges in Development, is now in its fourth edition. His
attempting to identify a firm’s core competen- research focuses on aspects of innovation
cies. Indeed, the paper illustrates the high management.

Copyright © 2009 John Wiley & Sons, Ltd. Strategic Change


DOI: 10.1002/jsc
42 Paul Trott, Tom Maddocks and Colin Wheeler

Tom Maddocks is a KTP Associate at Steel- Galbreath J, Galvin P. 2004. Which resources
Tubes Limited. He is employed by the Univer- matter? A fine grained test of the resource-based
sity of Portsmouth on a two-year KTP scheme view of the firm. Academy of Management Best
part funded by the DTI and Steel-Tubes Paper Proceedings, New Orleans, LA, August.
Limited. Gibbert M. 2006a. Generalizing about uniqueness:
Colin Wheeler is Professor of Marketing at an essay on an apparent paradox in the resource-
based view. Journal of Management Inquiry
Portsmouth Business School. His research
15(2): 124–134.
interests include international marketing strat-
Gibbert M. 2006b. Munchausen, Black Swans, and
egy, the internationalization of the small and
the RBV: response to Levitas and Ndofor. Jour-
medium-size firm, and export performance. nal of Management Inquiry 15(2): 145–151.
He has published widely and recently co- Hafeez K, Zhang Y, Malak N. 2002. Core compe-
edited a book titled Internationalization: tence for sustainable competitive advantage:
Firm Strategies and Management published a structured methodology for identifying core
by Palgrave. competence. IEEE Transactions on Engineer-
ing Management 49(1): 28–35.
Hamel G, Prahalad CK. 1994. Competing for the
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