Defining core competence to propose appropriate outsourcing strategy in ameco joint stock company

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HOCHIMINH CITY OPEN UNIVERSITY

Project

| Defining core competence to propose appropriate outsourcing strategy in AMECO Joint Stock Company

Submitted in partial fulfilment of the requirement for the Degree Master of Industrial Business Management | TRƯỜNG ĐẠI HỌC MỦ TP.HữM THƯ VIỆN Name of student: LE TRAN KHANH ID: 38 | Year of completion: 2011

Class name: Master in Industrial Business Management Project Supervisor: Dr Jacques Martin

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iii

ABSTRACT

In today’s business environment, enterprises with strong capabilities or potential competitive advantage can compete against the increasing number of rivalries To sustain competitiveness, outsourcing has been approved by several companies Therefore, enterprises should take proposal and implementation of appropriate outsourcing strategies into consideration for leveraging efficacy and competitive position

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TABLE OF CONTENTS Acknowledgements Abstract Table of Contents List of Figures List of Tables CHAPTER 1: INTRODUCTION 1.1 Introduction

1.2 Rationale of the Study 1.3 Project learning objectives

1.4, Personal learning objectives

1.5 Layout of thesis

CHAPTER 2: LITERATURE REVIEW 2.1 Core competence

2.2, Relation of competence and outsourcing 2.3 Implement of outsourcing strategy

CHAPTER 3: COMPANY’S PRESENTATION

3.1 Company profile 3.2 PEST analysis 3.3 Porter’s Five Forces 3.4 SWOT analysis

3.5 Current supply chain in AMECO 3.6 The development prospects

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CHAPTER 5: FINDING AND DISCUSSION 5.1 Result of methods

5.2 Defining core competence of manufacturing in AMECO 5.3 Proposing the appropriate outsourcing strategy in AMECO 5.4 Dealing with risks when outsourcing

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Figure 1.01 2.01 2.02 3.01 3.02 3.03 3.04 3.05 3.06 3.07 3.08 3.09 3.10 4.01 4.02 5.01 5.02 5.03 LIST OF FIGURES Title Layout of thesis

Planning guide to identify appropriate actions The sourcing strategies

AMECO factory

11 waves Roofing machine Tile wave machine

Purlin machine Curving machine

Products of those machines

Percentage of technical engineers in AMECO Revenue in AMECO Summary of SWOT Current supply chain in AMECO Research model Research process

Core Competency Matrix

Core Competency Matrix for AMECO

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Table 2.01 3.01 3.02 3.03 3.04 5.01 5.02 5.03 5.04 5.05 5.06 5.07 LIST OF TABLES Title

The sourcing strategies

General Company Information Basic machine tools in AMECO

Number of technical engineers in AMECO Revenue in AMECO

Main activities in AMECO

Dominant activities and main reasons in AMECO Current situation of outsourcing in AMECO

Benefit of current situation of outsourcing in AMECO

Main benefits and drawbacks of current situation of outsourcing Summary main ideas to improve the current situation of outsourcing

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1

INTRODUCTION

1.1 Introductio:

1.2 Rationale of the study 1.3 Project learning objectives 1.4 Personal learning objectives

1.5 Layout of thesis

1.1 Introduction

It is impossible that an enterprise possesses capabilities to make outstanding

performances of all activities An organization cannot do the best alone without

cooperation with other specialists in specific areas, which accounts for the significance of outsourcing However, without careful consideration and appropriate strategy deployment, the plunge into outsourcing emerges two-sided effects on the enterprise’s competitive advantage or a consequence in a bankruptcy To reduce the risks of operation outsourcing process, an organization should examine and study its internal capabilities in terms of identification of core function or functions, external relations regarding potential opportunities and threats, the enterprise’s targets, strategic vision and make proposal in advance

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1.2 Rationale of the study

Identifying core and non-core competencies should be taken into consideration so that the company can determine which functions should be kept in-house, and which ones should be outsourced Through this study, I desire to apply the theoretical concepts of defining core competencies and outsourcing strategy in the practice of AMECO Company in the context of Vietnam The study aims at pursuit of gaining competitive advantage and stable development in AMECO by recommending choosing the appropriate outsourcing strategy in the line with defining core competence It will be a successful future research if proposed solutions are feasible to help AMECO adjust the current operations and achieve greater efficiency

1.3 Project learning objectives

This study states the general objectives of providing the insight of clarifying the core and non-core competences to choose the right outsourcing strategy Core competency will be identified through the analysis of internal capabilities and external factors’ influence by the means of SWOT, PESTEL and Porter’s Five Forces Understanding the current outsourcing situation in AMECO, evaluating whether the current strategy is right or not and proposing the appropriate strategy of outsourcing for competitiveness sustaining are the specific objectives of the project

1.4 Personal learning objectives

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1.5 Layout of thesis INTRODUCTION Briefly introduce the subject and its importance COMPANY’S PRESENTATION Briefly introduce company’s profile and general information means of methods (TTT aan n eens of relevant theo

FINDING AND DISCUSSION Presentation of the results drawn out by Deeper study of the data collection, relation

and methodology

CONCLUSION Presentation of conclusions and

suggestions for further research

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2 LITERATURE REVIEW sovsesccessensensssnssnneenvesee TT wed 2.1 Core competence 2.2 Relation of competence and oufsourcing 2.3 Implement of oufsourcing stra(€gy s<ss<ss<xsecse l144940148508181401 001400 kg S8 Literature review provides the insight of the theory of core competency and outsourcing

strategy, the relation of these two concepts in terms of competitive advantage, and management implication of outsourcing strategies

2.1 Core competence

2.1.1 Definition

Competence is defined by Prahalad, and Hamel (1994) as “a bundle of skills and technologies rather than a single discrete skill or technology” (p 202) It is integration and a system of skills and technologies that strengthen the enterprise’s competitive position

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technology but an innovation Companies should build the value added skills that are conceived by customers in the long run Flexible skill sets to meet the customers’ needs

and continual reassessment create successful core competencies

The statement of Quinn and Hilmer (1995) responds to the enquiry of numbers of core competencies They are “Limited in number Most companies target two or three (not one and rarely more than five) activities in the value chain most critical to future success.” (p.53) What are the reasons for the limit of core competencies? In my opinion, more than one competency is built in the case of losing it and less than five competencies indicate concentration on the dominant activities to strengthen the enterprise’s abilities A prominent emphasis is put on the customer value added As significant elements to customers for long term, core competencies provide the firm’s understanding and serving to customers They must identify customer needs to provide activities at lower costs and effective to customers

With respect to the distinction, core competencies are regarded as “unique sources of leverage in the value chain Effective strategies seck out places where there are market imperfections or knowledge gaps that the company is uniquely qualified to fill and where investments in intellectual resources can be highly leveraged.” (Quinn and Hilmer 1995, p.54) Uniqueness of competencies cannot remain because of reliance on superior managers in terms of creativity, contribution and innovation “Core competencies must be captured within the company’s systems - broadly defined to include its values, organization structures, and management systems.” (p.55)

2.1.2 Determinants to identify core competence

Prahalad and Hamel (1990) recommended three tests to identify core competencies First, core competencies enable access to different markets Second, a core competence should be concerned with customer benefits of the end product, which is consistent with the identification of Quinn and Hilmer (1995) Third, a core competence may not be imitated easily, especially “a complex harmonization of individual technologies and production

skills” (p.84)

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205) An exception of core competencies is process- and manufacturing-related competencies that “yield sizable cost benefits to the producer” In terms of competitor differentiation, core competence is competitively unique and “substantially superior to others” (p.205) Comparing competences of a company with its competitors helps to avoid overstating uniqueness of their capabilities Extendibility implies that core competences are deployed to make new products or services

In general, a core competence may be included in “an aptitude to manage that factory, channel, or intellectual property” (p.207)

2.1.3 Significance of core competence

Prahalad and Hamel (1990) proved the effectiveness of accumulating core competencies by “using collaborative arrangements to multiply internal resources” with the examples of NEC (p.80) Decentralization hinders organizations from focus on core competencies Individual businesses tend to rely on outsiders in terms of critical skills and “collaboration became a route to staged exits” In the short run, competitiveness is gained by price and quality of end products Otherwise, competitiveness, in the long run, is rooted from capability to build core competencies which are unique to produce unanticipated products at lower costs and more rapidly than competitors Management’s ability to consolidate the corporate technologies and production skills into competencies can accelerate quick adaptation of individual businesses to changing opportunities

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The essence of core competences is modified again with relation to the customer value by Quinn and Hilmer (1995) The concept provides consideration on which activities that help the firms create unique value to customers or effectively buy externally “Competencies thus involve activities such as product or service design, technology

creation, customer service, or logistics that tend to be based on knowledge rather than on

ownership of assets or intellectual property per se Knowledge-based activities generate most of the value in services and manufacturing.” (p 52) To win in the competition, a firm should notify “the true focus in strategy” in which its capacities are developed for more power to customers and a specific sector than other business rivals (p.54)

2.2, Relation of core competence and outsourcing

Prahalad and Hamel (1990) defended organizational complexity and integration across different areas of skills against outsourcing and fragmentation: ‘The embedded skills that give rise to the next generation of competitive products cannot be ‘rented in’ by outsourcing “Outsourcing can provide a shortcut to more competitive products, but it typically contributes little to building the people-embodied skills that are needed to sustain product leadership.’ (p.84) Outsourcing may fade the firm’s attempt to develop the corporate skills due to dependence on the external capabilities

However, it is likely a paradox that Prahalad and Hamel (1994) did not support that a company should make everything but recommended for controlling core competencies to make the biggest contribution to the customer value Core competences which are valued

by customers and offer access to new markets should be kept in-house Actually,

outsourcing or insourcing is a great challenge to the business managers Therefore, understanding what is a core or noncore competence determines decision on what to outsource or to own

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First, investment and energies are spent on the best activities of a firm to “maximize returns on internal resources”

Second, well-developed core competencies prevent current and potential competitors from gaining and sustaining the competitive advantages

Third, “perhaps the greatest leverage of all is the full utilization of external suppliers’ investments, innovations, and specialized professional capabilities that would be prohibitively expensive or even impossible to duplicate internally.” (p 48-49)

Fourth, “in rapidly changing marketplaces and technological situations, this joint strategy decreases risks, shortens cycle times, lowers investments, and creates better responsiveness to customer needs.” (p.49)

2.3 Implement of outsourcing strategy

3.3.1 Purpose of outsourcing

According to Insinga and Werle (2000), the rationale of outsourcing is to accelerate competitive advantage by receiving higher return on assets through less capital investment and enhance ability to adapt the changing environment through less investment in in-house resources

2.3.2 Benefits of outsourcing

Outsourcing is likely a fruitful strategy for gaining competitive advantage of small- and- medium sized enterprises Quinn and Hilmer (1995) pointed out a number of benefits It helps the managers to reduce the time on peripheral activities and concentrate on the core of their business Outsourcing also reduces the short-term direct costs, long-term capital investment and develops their core competencies Core competencies will be protected and developed under tight and direct control for addition to customer value Moreover, the buyer company can also impose some certain risks and management problems to the suppliers Sharing risks with outsiders minimizes the influence and prevents damage on the enterprise’s entire system

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services that the buyer company cannot achieve alone Outsourcing is regarded as a wise strategy to promote internal capabilities and approach “the rapid response and innovative capabilities of small enterprises.” (p.64) Through outsourcing strategy, a company can improve and enrich their knowledge bases

Additional benefits that this methodology bring include strategic outsourcing arrangement, clarification and focus on core competencies, “identification of strategic gaps and specific strategies for cost saving and asset shedding”, and recognition of the firm’s dependences and vulnerability (Insinga and Werle 2000, p.59)

2.3.3 Drawbacks of outsourcing

No matter how effectively the strategy is implemented, there are still emergence of numerous drawbacks Quinn and Hilmer (1995) discovered vulnerabilities If there are insufficient and unqualified suppliers, the outsourced products or services will not be as innovative and satisfactory to customers as large buyers do internally Non-core competency activities should be kept in-house instead of offering training, investment,

expenses to weak suppliers More than that, there is a shortage of information in the

market place or from individual suppliers The buyers are usually not informed about the labor or raw material problems until it’s too late for another supplier’s selection

Quinn and Hilmer (1995) also made a list of strategic risks: 1 Loss of critical skills or developing the wrong skills (p.65)

2 Loss of cross-functional skills (p.66) The proper management of outsourcing can accelerate sustainable innovation through multiple supplier relationships

3 Loss of control over a supplier (p.67) After learning from the buyers, the suppliers can resell the knowledge to the coordinating company’s competitors

2.3.4 Remedies for the risks

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interdependencies with other parts of business can result in vague requirement and commitment in the contract So, Quinn and Hilmer (1995) suggested: “To manage more extended outsourcing effectively, contracting and logistics activities generally need to be elevated to corporate strategic levels The lesson was drawn out that “Employ the contract and relationship strategy as complements.” (Mclvor 2008, p.34) In addition, the development of the much more sophisticated knowledge-based systems needed to capture and analyze essential details about the company’s own internal processes and’ those of vendors.” (p.68) According to Melvor (2008), questioning and studying the causes of poor process performance help managers to determine the suitable strategies with respect to outsourcing or insourcing Finally, “Understand the potential for opportunism prior to outsourcing the process.” (p 34)

2.3.5 Outsourcing strategies

On the basis of resource-based view, Barney (1991) suggests in the framework that firms obtain sustained competitive advantages by implementing strategies that exploit their internal strengths, through responding to environment opportunities, while neutralizing external threats and avoiding internal weaknesses Insourcing or outsourcing is considered based on low cost, effectiveness, or unique capability by Quinn and Hilmer (1995) If the company’s activities are highly evaluated with extraordinary performance by customers, those key activities are recommended with in-house implementation OIn the other hand, Insinga and Werle (2000) suggested conducting “a thorough and systematic review of its functions and operations in order to establish a consistent strategic basis for outsourcing.” (p.58) Assessing internal capabilities is executed by raising questions about in-house capability of competitive performance and grading levels of those capabilities and by establishing objective perspective with the assistance of knowledgeable outsiders Insinga and Werle (2000) introduced a planning guide that is a

recommended appropriate action based on the two dimensional matrix and concepts The

matrix illustrates the actions in the relation with the certainty degrees of potential for competitive advantage, levels of internal capabilities and types of activities

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activities should be conducted in-house under tight control if the organization has strong capability associated with significant competitive advantage

Emerging activities are in cell 4, 5 and 6 Cell 4 is concerned with the certainty degree of competitive advantage The enterprise without strong competitive advantage can cooperate with partner who has more capability in order to remain competitive position Another possibility of sustaining competition in this case is collaboration with a more capable group or groups Collaboration aims at strengthening the enterprise's position but reducing the risks in a commitment Cell 5 relates to the evolution of potential for competitive advantage The moderate internal position makes the enterprise's position in

this cell stronger than that in cell 4 As the increase of certainty level for competitive

advantage, the organization should prepare for in-house processes or under a more direct control On the other hand, corporation with more capable group or groups help the enterprise to enhance the capability when the potential for competitive advantage

increases Risks and investment will be shared with partners and collaborators If in the

future, the externalized activities reveal higher potential for competitive advantage, the resources can he added

Activities in cell 6 are considered to move towards or away from becoming key The strong internal capability and high potential for competitive advantage motivate the enterprise to keep in-house with full control and ownership Sharing risks and investment with others are more necessary than remaining the competitive position in the situation of less uncertainty of potential for competitive advantage

Basic activities consist of cell 7, 8 and 9 Cell 7 indicates the drain of resources if the enterprise obtains low in-house capability and low potential for competitive advantage Therefore, it is essential to buy the activities in the marketplace Cell 8 relates to moderate capability and low potential for competitive advantage Regarding developing second source, less dependence on in-house capability and external sources can reduce the investment and operational risk The enterprise’s sources can be prevented from

draining by activities bought in the marketplace In cell 9, in the situation of the less

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10 is concerned with “neither competitive advantage nor significant internal capability” (p.66) Cell 11 refers to the moderate internal strength without the sources of competitive advantage Cell 12 refers to strong capability but little or no competitive advantage The enterprise should sell off the capability and reinvest the processes in other area

Absolutely

1 Get 2 B Ũ 3D ° Key aclivit a

capability ‘uild strength Imhouse ‘ey activities

Probably

4aPartner Sq Partner 6c Do

in-house

5b Collaborate Emerging activities Potential foran Possibly 5 ¢ Share risk

6b Share risk

activity to yield 8a Develop xecond source | SA Mcke it (external) Spratt

competitive advantage Basic activities

Not Likely 8b Buy Sb Consider

|seHling/buying

11 Exi/Buy

(Sell.ebandon,or gllow to weaken) 12 Consider

selling/buying Commodity activities

None

Weak Moderate ~ Strong

Internal capability of the enterprise to perform an activity in comparison with competitors

Figure 2.01 = Planning guide to identify appropriate actions

Source: Insinga, R C and Werle, M J (2000) ‘Linking outsourcing to business

strategy’, Academy of Management Executive ISSN 0896-3789 Volume 14 Issue 4 58-

70

In the later study, Mclvor (2008) showed the framework with four quadrants to provide instructions of sourcing strategies regarding competitive advantage and the organization’s in-house capability

Quadrant one

Internal investment reveals a wise choice in the two cases Firstly, the organization obtains the technologies for the early development in the future or the firm's performance disparity can be improved initiatively with the assistance of effective benchmarking exercises Secondly, potential competitive advantage is recognized to be offered to suppliers or competitors through outsourcing process

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company can benefit from self-evaluating and self-reflecting its internal performance and stimulating improvement

Quadrant two

Internal performance and development can be conducted when the sourcing organization attains a competitive position with inimitable capabilities over time Even when the suppliers have potential capabilities, keeping and developing in-house should be prioritized due to the risk of the suppliers’ exploiting the capability in other areas

Regarding outsourcing, the sourcing company possesses “superior performance positions in a limited number of processes due to the resources required to maintain such a position.” (p.30) The outstanding performance of the organization that is not sustainable is easily replicated by competitors Therefore, external relation with suppliers can be optimized for sustaining competitive positions

Quadrant three

Measures for the lack of the sourcing organization's capability for a non-critical process to competitive advantage include selling the process to professional organizations or outsourcing it to suppliers

Quadrant four

Outsourcing is a suitable option when the organization possesses a strong capability for the noncritical process to the competitive advantage On the other hand, concentration on resources to develop capabilities in processes that promise for competitive advantage However, the organization should take cautions of the high potential for opportunism in which the capability will be exploited by the specialists in this area

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QUADRANT ONE QUADRANT TWO Critical to _ Compestive Advantage oR œ | 6 2 r - 1 r -F - —~ _}-'_ ovtsource | HT L 1! OUTSOURCE | Lolli Contribution to Competitive Advantage Not Critical to rc — Competitive ! OUTSOURCE , Advantage t—-—x——- N Les More Capable Relative Capable 3 Capability ' 4 Position QUADRANT THREE QUADRANT FOUR 5

Figure 2.02 — The sourcing strategies

Source: Mclvor, R (2008) ‘What is the right outsourcing strategy for your process?’, European Management Journal 26, 24-34

Table 2.01 — The sourcing strategies

Position Most appropriate when

Relative capability: possible to replicate and advance upon the superior performance position of competitors/suppliers in the process

Contribution to competitive advantage: superior performance in the process has a major impact upon competitive advantage; and

Opportunism potential: high potential for opportunism associated with outsourcing

Relative capability: not possible to replicate the superior performance position of competitors/suppliers in the process;

Quadrant

one

Contribution to competitive advantage: process likely to diminish in 2 importance in the future; and

Opportunism potential: possible to manage the potential for

opportunism associated with outsourcing by adopting an appropriate relationship strategy

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Quadrant

three

Relative capability: not possible to replicate the superior performance position of competitors/suppliérs in the process;

Contribution to competitive advantage: process not a source of competitive advantage; and

Opportunism potential: possible to manage the potential for opportunism by adopting an appropriate relationship strategy

Quadrant

four

Relative capability: sourcing organisation possesses a significant performance advantage over competitors/suppliers which is difficult to replicate;

Contribution to competitive advantage: process not a source of competitive advantage; and

Opportunism potential: outsourcing not possible due to the lack of capable suppliers and spin-off not feasible

Relative capability: sourcing organisation possesses a performance advantage over competitors/suppliers in the process;

Contribution to competitive advantage: process not a source of competitive advantage; and

Opportunism potential: possible to manage the potential for

opportunism by adopting an appropriate relationship strategy with a supplier or spinning it off as a separate business

Quadrant

two

Relative capability: Relative capability - not possible to sustain superior performance position in the process;

Contribution to competitive advantage: process likely to diminish in importance in the future; and

Opportunism potential: possible to manage the potential for opportunism by adopting an appropriate relationship strategy

Relative capability: sourcing organisation possesses a significant performance advantage 9 Over competitors/suppliers which is diffi cult to replicate;

Contribution to competitive advantage: superior performance in the process has.a major impact upon competitive advantage; and

Opportunism potential: high potential for opportunism associated with outsourcing the process

Source: Mclvor, R (2008) ‘What is the right outsourcing strategy for your process?, European Management Journal 26, 24— 34

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In general, these two planning guides instruct how to examine the in-house capability and potential for competitive advantage, select the appropriate strategies for implementing the responsive actions The major purpose of these studies is to strengthen the internal capability by focusing on the core competencies or minimize the operational risks by external relations They may lead the sourcing organization to the success of achieving

competitiveness

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3 COMPANY’S PRESENTATION 3.1 Company profile 3.2 PEST analys' 3.3 Porter’s Five Forces 3.4 SWOT analysis

3.5 Current supply chain in AMECO ccssssesssessssecseestesesneeseesscssseneescsncsneeneeseeeneeaee 28 3:6; The development: prospetts ziccsscsssssnonnsovseassovesnssucesssnavervonnsansncssdvasvautsvossecsssusssusinss 28 3.1 Company profile: (AMECO joint stock Company) — www.ameco.vn <4 - Sean SUTTONS Figure 3.01 — AMECO factory

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¢ Roofing roll-forming machine, metal roll forming machine, curving forming machine

s Folding machine, press-brake machine and hydraulic shearing machine

Cut to length line, slitting line and coil color coating line, coil galvanization line

In early 2009, the company had been assessed and registered against the provisions

of ISO 9001:2000 International standards by Global GROUP (UKAS 039) with

Certificate of registration number 73Q10075

The machines make many profiles such as: Steel roofing, steel wall, steel purlin, stecl panel, floor decking panel, partition, light weight steel frame and tud, door frame, ceiling frame, wall stud, wall panel, roller shutter, door frame, racking system, cable tray, guard rail, vehicle bodywork and another profiles that the company can design and manufacture the machines according to the request of customers

AMECO has integrated over 10 years of engineering experiences with efficient and economical manufacturing facilities They provide high quality machinery and processing systems at competitive prices

The prominent strength of AMECO Company is capability of product customization Machines are designed and manufactured based on the customers’ profiles in order to meet their needs The customers can buy the standardized products or make order through attaching the profile or samples of products

Table 3.01 — General Company Information

General Company Information (in statistics in 2010)

Sector Machinery manufacturing

Authorized capital 0.7 million dollars

venture capital 1.5 million dollars

Total revenues 2.6 million dollars

Export revenues 0.3 million dollars

Net income 0.45 million dollars

Primary product ~ Roofing roll-forming machine Total quantity of machines per month 14-18 items

Current machines (serve for making products) - Basic machine tools - wire cutting machines - Overhead crane

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Company’s area Number of employees Mission Values Strategy (next 3 years) The products: Figure 3.04 - Purlin machine - assembly tools 5000 m2 150 persons

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Roofing Gutter Shutter Figure 3.06 — Products of those machines 3.2 PEST analysis

Political and legal

Victnam’s one-party political system and the decentralization of political power support political stability (BBC News Online, 2010) Politics in Vietnam is driven by consensus (Bill Hayton, 2006) Dissent against the government is limited Those advantages provide sonable a conducive environment to do business Stability of the national politics and administrative business policies of the government have never originated strikes in AMECO Therefore, the firm production has not been hindered by riots or terrorism However, there have been nuisance to business due to bureaucracy, few well-qualified lawyers, and rudimentary trial procedures in Vietnam They must be careful when doing contracts to avoid disputes

Economic environment

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at higher prices than AMECO - a Vietnamese local company Moreover, there are plenty of difficulties for foreign companies to conduct technology transfer, maintenance and repair when they export products to Vietnam Finally, those products are not appropriate to meet practical needs of customers in Vietnamese market

Social environment

In general, Vietnamese are most well educated, with a literacy rate of over 90% (UNESCO Online 2000) In particular, Ho Chi Minh City, the highest population — concentrated city in the country, processes many famous school and some other important higher education establishments AMECO is located in Binh Duong province, adjacent Ho Chi Minh City, consequently, the firm benefits from favorable conditions The company managers get easy to recruit self-motivated and skilled workers and staff (Vietnam has a young and ambitious population) Besides, good traffic infrastructure, communications system, convenient transport and administrative services supported the business However, one of restrictions is labor mobility, the workers are easy to change their work at any time with many excuses such as relocation, more attractive salary, larger-scale companies As a result, it is a must for the company to frequently change welfares, salary and operate many recreational activities as football, volleyball, tennis, karaoke tournaments

Technological environment

Because of market diversity, the firm must improve products which are completely well- qualified AMECO has made improvement on the basis of 10 - year experienced engineering staffs and Chinese - Taiwan — Japanese advanced technology The R&D department is an effective working team who attempt to make 1 new product every 2 months In addition, they focus their attention on improving current products to make them more efficient and valuable Customers bring them drawings or samples of new products which were found according to tastes and demands of markets Consequently, they must change the technology or transfer the new technology That also accounts for the slogan “Forever Improving” of AMECO*which encourages the staff not to make obsolete machines but new models with innovation

3.3 Porter’s Five Forces

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Given the above analysis, it can be observed that the company business take advantage of the environment that creates conducive opportunities leading to a partial success Its development largely depends on the company’s position within the industry and its

competitive edge to be able to counteract dynamics surrounding it To view the

company’s authentic competitive position in mechanics industry, they must understand the environment involving the customers, their needs for the machines and services that causes risks and obstacles to the development The business relationship of supplier and customers can be gauged by analyzing the competitive framework Michael Porter’s five forces help us to study the variables that influence the structure of competition and profitability These are discussed in the following sections

Competition for substitutes

Their main machines make metal roofing products of which disadvantage is its heat absorbability For that reason, Onduline roofing (cellulose-bitumen roofng, www.onduline.com) is selected as a substitute Onduline roofing is a light good sound insulator, thermal insulator and rustless material In addition, its price is approximate to

metal roofing However, this material also has some foibles which seem not to surmount The first limitation is less resistance to fire The second is quick deformity under the

action of high temperatures The company overcame those obstacles by manufacturing a machine to which a thick layer of polyurethane (PU) insulator is appended under metal roofing to insulate, which has brought significant effects Besides, this product can be sound-proof, fire-proof and well-designed

Threat of potential new entrants

When a company achieves stability of turnover, human resources, technology and production system the company will create a good training environment Experienced staffs that quit and establish a new company may become competitors On the contrary of the difficulties such as high initial capital investment, unknown brand names, location, and staff there are some advantages such as making distinction products (based on product availability), strategies of old compart, potential customer groups Therefore, they must consolidate competitive position by forever improvement on price, quality, customer care and product diversity

Bargaining power of buyers

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Customers always wonder if they should buy domestic machines or imports The prominent factors which affect their choice are price and quality Obviously, customers always want to buy products at low price but with high quality Vietnamese customers generally have a tendency to prefer imports to domestic machines due to their high quality and longevity Consequently, domestic manufacturers must find solutions to keep quality up and price down They have many advantages to reduce price such as cheap labor, support from government Besides, they try to replace some parts of machine with cheaper ones appropriate to Vietnamese market, which do not have any impact on quality of the whole machine

Bargaining power of suppliers

Their machines are manufactured primarily from steel including firm steel, sheet steel and round steel There are many suppliers for this material; however, they are very different in terms of price, quality and service They are classified into two groups: weak suppliers and powerful suppliers Weak suppliers are supposed to be in the majority Normally, they have less capital, less capacity and no brand Their products are cheap but the quality is unstable and delivery time is unpunctual Those limitations influence the whole manufacturing process Meanwhile, powerful suppliers are opposite because they are well-known and have more capital Besides, their products have stable quality and deliver time is punctual However, those suppliers usually have price unanimity They try to be in agreement about prices for their sake To overcome this problem, AMECO will make an attempt to combine weak suppliers and powerful suppliers Choosing suppliers depends on the technical requirements and importance of machinery parts

Rivalry between established competitors

AMECO has fast growth rate, they invested more machinery, equipment, and worker to enlarge production scale This is the economy of scale characterized as a manufacturing process which increases the number of products and reduces the average cost per product Therefore, they must sell a very large number of machines on the market, and thus compete to gain market share, leading to intreased intensity of competition However, their competitors also want to enlarge production scale and increase the market share, therefore, they must focus researching on distinct products, perfect services, competitive price

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3.4 SWOT analysis

Strengths

AMECO possesses a variety of basic machine tools: Table 3.02 — Basic machine tools in AMECO

Basic machine tools Basic machine tools

Lathes 13 items Grinding machine 01 items

Milling 07 items CNC Lathes 05 items

planers 06 items welding 20 items

Drilling 07 items crane 05 items

Sawmills 02 items Steam Pump 05 items

Hydraulic cutting machine 02 items Hydraulic presses 03 items Wire cutting machine 07 items Pipe bending machine 01 items Flat Grinding Machine 02 items fire protection systems 20 items

The company’s management-operation system and technician staff including mechanical engineers, electrical engineers and technical workers is developed based on knowledge and capabilities of technology

Table 3.03 — Number of technical engineers in AMECO

Number of technical engineers

Electrical engineers 06 persons Mechanical engineers 22 persons Technical workers 76 persons

Other staffs 42 persons

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Employees 4% 15% Electrical engineers ® Mechanical engineers ~ Technical workers = Other staffs 52%

Figure 3.07 — Percentage of technical engineers in AMECO

- AMECO is one of the famous brand names in the field of manufacturing roll forming machine in Vietnam AMECO’s consumer markets are not centralized and ranged from Vietnam, Thailand, Cambodia, Indonesia, Malaysia, Nigeria, Australia, etc However, the major market is domestic market

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- The slogan “forever improving” embedded in the firm’s tradition encourages AMECO to maintain competitive position and meet the demands of domestic and foreign customers with respect to the products’ designs, functions under constant improvement and value added to customers

- The company’s consultancy department which serves the newly established companies

with the lack of business experience in the field of roll-forming machine manufacturing

offers trust and satisfaction to customers Weaknesses

- The company’s brand and reputation are affected severely by duplicates of other firms - The firm bought second-hand to most of the basic machine tools made in Japan and fixed for later use Therefore, the exactness and efficiency could not gained from these old machines

-The small area of the firm causes difficulty in arrangement and activity conducting - The general director takes over a lot of positions consisting of CEO, head of technical designers, business managers and chief financial managers

- Low level of English skills has challenged the maintenance team with exporting

strategy

- The capability of purchasing is unqualified and insufficient The two purchasing staffs are not specialized in mechanics, which may lead to a negative effect on outsourcing

strategy

Opportunity

- Constantly expanding consumer market, AMECO has been made effort to increase market shares in ASEAN region Recently, the company has penetrated almost of Thai markets and made a good reputation In other countries, the quantity of the market shares is low and consuming process is conducted through intermediaries

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effectiveness: improve die sets, rollers, electric system (inverter technology implemented in controllers)

Threat

- AMECO has faced problems of competition sustaining against the existing and potential competitors nationwide and overseas

- Some competitors have duplicated the logo and brand name of AMECO to gain market

shares

Strengths 5 Weaknesses \

~ Many basic machine tools - Small area ~ Many technical employees

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Master production schedule 3.5 Current supply chain in AMECO: General design | Purchasing Semi-finished goods — na 8 3 Ễ s Ss 2 R E J + 1 i ' ' ' ' 1 ' ' 1 t ' ' \ t t. -} it Syst cP MRP1 BOM Capacity planning Material Requirements Planning Bill of material

Figure 3.10 — Current supply chain in AMECO

3.6 The development prospects

According to the current rate and market share, in 2012, AMECO managers will have to recruit more 25% staffs, build another factory for dividing the current factory into an assembly factory and a processing factory On the other hand, increasing the export rate from 30% to 45% is also considered as a necessary orientation of the company in 2012 Opening representative offices has also been planned in Thailand in 07/2012 and in

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4

RESEARCH METHODOLOGY

4.1 Proposal research model —.11 ¬ 30 4.2 Research me(l0đ0lOY o5 s< << csetseerezerveeoxeexrevrrevrzerrvsrerserrserrsvrr 31 4,3 Research question seessescesessecncovonsnsesenece K99 1180 se — 1 , 4.4 Methi0đS -.-co<<c<cesce (.90989599408009090088850.0088080 2998959936509069866808686050080s0 sessed 4.5 Researcli pF0C€SS ư.e gg1 (Ề139390914045050 080010 sư —., 4.1 Proposal research model Research purpose Defining core competence to propose appropriate outsourcing strategy in AMECO Research sub-problems Ị Defining core competence manufacturing in AMECO I 1 i f - i r R - ¬

{ - Theoretical review 1 i Questionnaire

1 - Secondary data ! ‘ > 1 - Semi-structure interview ` !

ccc-ccc==crr=er=rr=rrrrrrree , { - Case study I

Information needs

1 Definition of core competence and outsourcing strategy 1 Pros and cons of outsourcing

2 General situation of outsourcing in ”AMECO

3 Classifying the core and non-core functions in AMECO 4 Future strategy of outsourcing in AMECO

Figure 4.01 — Research model

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4.2, Research methodology

This project will be focused on subjective, conflictive ontology regarding an outsider as the researcher and an insider as the manager of AMECO Multiple perspectives from different positions of reflecting the ideas may bring validity to the project The methodology is inductive, because I am trying to build a new theory useful for outsourcing strategy starting with already existing data The information I found is qualitative and my aim is to find ways of improvement This kind of methodology allows me to understand the pros and cons of outsourcing in relation to core competence and afterwards I will be able to propose change in AMECO

4.3 Research question

- How core competence is defined to propose appropriate outsourcing strategy in AMECO Joint Stock Company?

The research will come up with two objectives:

1 Defining core competence in AMECO

2 Proposing appropriate outsourcing strategy in AMECO

4.4 Methods

The purpose of this thesis is to define what is core competence and propose the

appropriate outsourcing strategy in AMECO In order to fulfil this purpose, I conducted a qualitative study comprising of case studies, questionnaires and interviews A qualitative study provides me with story and good overview of current situation and offers suggestions to improve the practice in AMECO In addition, in the process of encouraging managers to propose their ideas about outsourcing strategy, I used the open

questions in questionnaires I am a middle manager in AMECO, such interactions helped

to bridge the distance between myself (the researcher) and the other managers

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is based on the qualitative analysis which provides explanation of using outsourcing in manufacturing and generates decision making for deploying appropriate outsourcing strategies in a Vietnamese manufacturing company With relation to the objective of the study, the case study is suitable for representing examples of other two companies to improve the current practice of AMECO Company through outsourcing strategy in the context of Vietnam With the purpose of gathering data on managers’ perceptions and interest in manufacturing outsourcing, the questionnaires were completed by AMECO’s managers A questionnaire allows the access to information collected from a large sample It is a cheap way and does not need prior arrangement as interviews Omitting names in questionnaire response brings comfort and truthful expression of participant’s feeling (Collins 2010, 128) In fact, the questionnaires supplied a great deal of detailed information on the respondents’ viewpoint or experience in implementing outsourcing in their company as well as their proposals about outsourcing strategy Besides, I validate the data from the questionnaire through semi-structured interviews with Chief executive officer in AMECO | interviewed the CEO at his factory in Binh Duong province It is an

efficient tool for confirmation and modification of data collected from the questionnaires

in the research

4.5, Research process

The purpose of these methods employed in my thesis is to identify the competencies and current situation of outsourcing in AMECO Then my analyses and findings are focus on proposing the appropriate strategy of outsourcing in AMECO

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STAGE 1 ‘Research objectives Ũ STAGE 4 Conclusion STAGE 2 Information collection tt STAGE 3 Data analysis and Research application Literature review - Company profile

~ PEST, Five Force, SWOT analysis ~- Supply chain model

Figure 4.02 — Research process

4.5.1 Secondary data

This section relates to the description of chapter 2

Secondary data source is collected from departmental records and reports via activities of manufacturing, designing, purchasing and other operational processes These sources of data are used to define competencies and evaluate company’s current situation of outsourcing As a production manager of AMECO, I can get access to the data source and do observation with ease

4.5.2 Questionnaire methodology

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As a small-sized joint stock company, the enterprise’s information has not been publicized, which accounts for deploy of questionnaire method for data collection in order to assure the objectives in analysis The questionnaires including 11 questions were

sent to respondents via email from Oct 10th 2011 to Oct 17th 2011 The respondents

received and answered the questionnaires The participation is voluntary The sample size of the study was 26 managers in AMECO

The questionnaire was composed in English in advance However, the target respondents

were Vietnamese workers Therefore, the questionnaire should be translated into

Vietnamese for more understandable communication

The questionnaire consisted of three sections as the following:

Section 1 — Main acti: in AMECO

QI In your opinion, which activities of your products are you satisfy with? (no more than 6 items)

Make the participants think about their company’s products, they feel free to vote components based on their opinions With this data collection, we will have general

information about their products and some key activities

Q2 Which ones do you think that no competitors can do better than your company? (no more than 3 items)

Select the valuable data by leading the respondents to think more about products and their competitors The responses to this question reveal the staff’s assessment on their processes in terms of product components or activities that show the company’s superior performance over other competitors

Q3 Are those components (in Q2) processed in house or outsourced? Define where they are processed

4 In your opinion, the reasons why the competitors cannot do better than your company

(Activities in Q3)? ~

The data collected from this question indicates the respondents’ evidence and their comments on the enterprise’s competence

Section 2 ~ Current situation of outsourcing