In order to address competition created by clone microchips with lower prices, the Smart Chips company has to analyze its competitive position and value chain management and develop changes allowing to optimize costs and decrease the cost of microchips. Key activities in value chain are inbound logistics, operations, outbound logistics, marketing and sales, and service (Porter, 2004). These activities are closely related to infrastructure of the company, technology, human resource management, procurement issues etc.
The Smart Chips Company should reconfigure its value chain in order to create a cost advantage. According to Porter (1998), the major drivers related to value chain activities include institutional factors (taxes, legal regulation etc.), economies of scale, vertical integration, links between value chain activities and/or business units, choice of the company’s strategy (differentiation versus cost), geographical location and utilization of capacity.
The company should undertake the following actions: organize a meeting at the senior management level and determine the most appropriate strategy (cost, differentiation or focus). Managers of all departments have to identify key operations for their units and possibilities of creating more value, thus making a list of elements which can be improved at each stage of the value chain (Porter, 1998). The company should also consider the issue from the customer’s perspective and fro the perspective of major stakeholders and suppliers. The suggestions on adding value on each of the steps should be merged together and shape a new cost-effective approach for The Smart Chips Company. This approach should be integrated into the company’s culture and every employee should realize the importance of own actions and their direct impact on the company’s financial and competitive success.
The Smart Chips Company should also analyze the microchip industry with regard to Porter’s five forces, and consider ways of protecting their R&D competitive advantage against cloning. Besides competitive rivalry in the industry (which is rather high for microchip sphere), such forces as threat of new entrants, buyer and supplier power and threat of substitutes are affecting competition (Porter, 2004). Currently the problem is created by the threat of new entrants, availability of substitutes and buyer power (Porter, 2004). Key factors are low switching costs and availability of resources for cloning the chips; thus, the company might consider creating barriers to entry (patent protection, governmental support of their research, etc.) and try to increase switching costs by offering unique service, interrelated components or special functions (which cannot be copied by competitors). At the same time, the key issue for the Smart Chips Company is to improve cost-effectiveness of its value chain, since the example of competitors clearly shows that there are unused opportunities in this chain.
Porter, M.E. (2004). Competitive strategy: techniques for analyzing industries and competitors. Free Press.
Porter, M.E. (1998). Competitive advantage: creating and sustaining superior performance. Simon and Schuster.