International Management Review Vol. 8 No. 2 2012 Management of Business Processes Can Help an Organization Achieve Competitive Advantage Pramendra Kumar Singh Kanpur Institute of Technology, Kanpur, Uttar Pradesh, India [Abstract] Competitive advantage can be considered as an advantage, condition, or position that facilitates more efficient operation and higher quality products and/or services for an organization. According to Michael Porter, if earnings exceed costs, then an organization is said to achieve competitive advantage. Competitive advantage in Porter’s perspective is being able to increase earnings despite the competitive pressures. This is one of the aspects of gaining competitive advantage. The other aspect was well explained by Rayport and Sviokla, where by analyzing the stages of a value chain, the organization is able to redesign its internal and external processes to improve efficiency and effectiveness. The value chain is a model that describes a series of value-adding activities connecting a company’s supply side with its demand side. The value-adding functions of a firm are divided into major and support. The major functions are operations, marketing, accounting and finance, and product service development. The support functions may be human resource management, purchasing, and technical function, etc. In order for an organization to achieve competitive advantage, all functions must be related to each other. The operations function adds value by using the organization’s resources effectively and by producing goods and services that satisfy the needs and requirements of the customers. The Japanese car manufacturer, Toyota, was able to add value to its products because of its innovative product-design process and Six Sigma methodology. In addition, all organizational functions are also integrated into a single process. If enterprises are to remain competitive, they need to reduce the complexities resulting from widely dispersed and often disparate business processes. Establishing consistent core business processes and managing them are just two steps toward meeting increasing customer expectations in today's market. From a process perspective, Managing Business Process is regarded as a best practice management principle to help companies sustain competitive advantage. This paper reviews and examines the key concepts of Business Processes, Management of business process (BPM) and its effects on organizational performance. This paper contributes to a better understanding of the field of competitive advantage and business process management. [Keywords] competitive advantage; business processes; value chain; core business processes; business processes management (BPM); support functions Overview of Competitive Advantage A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices. It is a condition which enables a company to operate in a more efficient or otherwise higher-quality manner than the companies it competes with, and which results in benefits accruing to that company. Competitive advantage is the position of a company in a competitive landscape that allows the company to earn return on investments higher than the cost of investments. A competitive advantage essentially has to be one that not only merely represents better performance than that of its competitors, but also delivers genuine value to the customer, thus ensuring a dominant position in the market. When Does Competitive Advantage Occurs Competitive advantage occurs when an organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors. A firm is said to have a competitive advantage when it implements a value-creating strategy not simultaneously being implemented by any current or potential player. Successfully implemented strategies will lift a firm to superior performance by facilitating the firm with competitive advantage to outperform current or potential players. To gain competitive advantage, a 19 International Management Review Vol. 8 No. 2 2012 business strategy of a firm manipulates the various resources over which it has direct control, and these resources have the ability to generate competitive advantage. Superior performance outcomes and superiority in production resources reflect competitive advantage. Significance of Competitive Advantage: An Overview Competitive advantage is at the heart of a firm's performance. It is concerned with the interplay between the types of competitive advantage, i.e., cost and differentiation, and the scope of the firm's activities. The value chain plays an important role in order to diagnose and enhance the competitive advantage. A sustainable competitive advantage creates some barriers that make imitation difficult. Without a sustainable competitive advantage, above average performance is usually a sign of harvesting. Competitive advantage is, in very basic words, a position a firm occupies against its competitors. Methods or Ways of Creating Sustainable Competitive Advantage According to Michael Porter, the three methods for creating a sustainable competitive advantage are through the following: 1. Cost leadership - Cost advantage occurs when a firm delivers the same services as its competitors but at a lower cost. 2. Differentiation - Differentiation advantage occurs when a firm delivers greater services for the same price of its competitors. They are collectively known as positional advantages because they denote the firm's position in its industry as a leader in either superior services or cost. 3. Focus (economics) - A focused approach requires the firm to concentrate on a narrow, exclusive competitive segment (market niche), hoping to achieve a local rather than industry-wide competitive advantage. There are cost-focused seekers, who aim to obtain a local cost advantage over competition and differentiation focusers, who are looking for a local difference. The secret of a sustainable competitive advantage lies in performing every step in the value chain in an appropriate way. The internal resources and capabilities of an organization play a very important role in building competitive advantage. The organizations that wants to build competitive advantages, which cannot be eroded (no matter how much change is there in the environment), must make linkages between the advantage and the capabilities underlying it as impenetrable and as confusing as possible. Also, the most important part of the competitive advantage stems from a capability that is impossible to replicate. Basis for Competitive Advantage One of the bases for competitive advantage is the ability to create knowledge and move it from one part of the organization to another. The creation of knowledge is a dynamic and continuous process involving interactions at various organizational levels. Organizations must learn from their environment how to survive and produce competitive condition that shapes the character of success. Time is an important factor, and it eventually renders nearly all advantages obsolete. Learning is the only sustainable source of advantage, so managers must link their core competence to different types of strategies across time. The real competitive advantage lies in integrating operations for the sake of demanding quality targets or meeting specialized customer needs. Another basis may be that an organization should provide a differentiating edge to be competitive to serve customers better, which is a newer method by which a company can turn more profitable. Due to fierce global competition, senior management must understand not only the technologies, but also the competencies and motives of competitors. Building successful alliances requires identifying the core competencies of both the partners and developing the strong interpersonal skills and values needed to manage them. If an organization's capabilities are scarce, defensible, or hard to imitate, these can form the basis for sustainable competitive advantage and surplus profits. An organization's competitive advantage potential depends on the value, rareness, and imitability of its resources and capabilities. Technology is important for competition if it significantly affects an organization's competitive advantage. The basic tool for understanding the role of technology in competitive advantage is the value 20 International Management Review Vol. 8 No. 2 2012 chain. It requires an organizational capacity to identify promising new technologies worldwide and absorb them into new products and processes quickly and effectively. Organizations need to be constantly oriented towards improving their critical competencies or capabilities to absorb new technologies and improve and combine existing technologies. People are the source of competitive advantage as the frequent innovations in product development are the results of human capabilities. The competence at the level of people enables the organizations to generate innovative ideas and translate those ideas into actions. All organizations provide worthwhile goods and services through people working together. The identification of the people with specific competencies to do the specified jobs well is an important step. Training the people for delivering superior performance at their respective work places can develop the competencies. People with the right competencies in the right jobs mean competitive advantage and producing better profitability, which serves the ultimate goals of a good business to maximize the satisfaction of the owners and customers. Value Chain and Competitive Advantage The value chain, also known as value chain analysis, is a concept from business management that was first described and popularized by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance. A value chain is a chain of activities for a firm operating in a specific industry. Products pass through all activities of the chain in order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of added values of all activities. It is important not to mix the concept of the value chain with the costs occurring throughout the activities. Value chain analysis is a powerful managerial tool for identifying which activities have competitive advantage potential. Let us have a look at Michael Porter’s value chain framework. The value chain framework of Michael Porter is a model that helps to analyze specific activities through which firms can create value and competitive advantage. These activities are as follows: • Inbound logistics: Includes receiving, storing, inventory control, transportation, and scheduling. • Operations: Includes machining, packaging, assembly, equipment maintenance, testing, and all other value-creating activities that transform the inputs in to the final product. • Outbound logistics: The activities required to get the finished product to the customers: warehousing, order fulfillment, transportation, distribution management. • Marketing and sales: The activities associated with getting buyers to purchase the product, including channel selection, advertising, promotion, selling, pricing, retail management, etc. • Service: The activities that maintain and enhance the product’s value, including customer support, repair services, installation, training, spare parts management, upgrading, etc. • Procurement: Procurement of raw materials, servicing, spare parts, buildings, machines, etc. • Technological Development: Includes technological development to support the value chain activities such as Research and Development, process automation, design, and redesign. • Human Resource Management: The activities associated with recruiting, development (education), retention, and compensation of employees and managers. • Firm Infrastructure: Includes general management, planning management, legal, finance, accounting, public affairs, quality management, etc. Business Processes-An Overview Business processes define how an enterprise operates and differentiates itself by managing the interactions between customers, employees, partners, and systems. Competitive advantage lies in the ability to adapt business processes to changing conditions quickly and efficiently with minimal time and cost. A business process or business method is a collection of related, structured activities or tasks that produce a specific service or product (serve a particular goal) for a particular customer or customers. A business process begins with a customer’s need and ends with a customer’s need fulfillment. Business Processes are designed to add value for the customer and should not include unnecessary activities. The 21 International Management Review Vol. 8 No. 2 2012 outcome of a well-designed business process is increased effectiveness (value for the customer) and increased efficiency (less costs for the company). Davenport (1993) defines a (business) process as “a structured, measured set of activities designed to produce a specific output for a particular customer or market. It implies a strong emphasis on how work is done within an organization, in contrast to a product focus’s emphasis on what is done. A process is, thus, a specific ordering of work activities across time and space with a beginning and an end and clearly defined inputs and outputs: a structure for action. ... Taking a process approach implies adopting the customer’s point of view. Processes are the structure by which an organization does what is necessary to produce value for its customers.” Identification of key business processes is critical to organizations as they execute organizational strategy by aligning the results of these processes with the strategic goals. However, there are three types of business processes: • Management processes are the processes that govern the operation of a system. Typical management processes include "Corporate Governance" and "Strategic Management." • Operational processes are processes that constitute the core business and create the primary value stream. Typical operational processes are Purchasing, Manufacturing, Marketing, and Sales. • Supporting processes are those that support the core processes. Examples include Accounting, Recruitment, and Technical support. Basically, in today’s business environment, organizations know that to be competitive they need to respond to change—especially as customer expectations increase. Customers are more mobile today and so expect a certain level of quality of service regardless of where and how they conduct business. Customers also expect organizations to respond with a significant amount of personalization. It is extremely difficult to meet these challenges in a timely manner if business processes are widely dispersed and inconsistent. Consistent core business processes and data representation is essential to allow decision makers to respond quickly to the changing market. In any organization, there exists a common set of core business processes that must exist for the organization to function properly. They are mentioned below: Ten Core Business Processes 1. Customer Strategy and Relationships (Marketing) 2. Employee Development and Satisfaction 3. Quality, Process Improvement, and Change Management 4. Financial Analysis, Reporting, and Capital Management 5. Management Responsibility 6. Customer Acquisition (Sales) 7. Product Development 8. Product/Service Delivery 9. Accounting Management 10. Technology Management However, the methodology used to identify, derive, or create core business processes will vary with an enterprise’s size, industry, and culture. But there are several proven methodologies and supporting tools for deriving and improving business processes. The first three steps are straightforward: 1. Investigate and remove hurdles relating to organizational cultural issues, governance processes, and supporting infrastructure up front. 2. Educate participants on what a core business process is, how it will benefit their respective business area, and the chosen methodology that will be used to derive these processes. 3. Don’t try and do all of the critical business processes at once. Suggest a phase approach with a sound transition strategy. Once the core business processes are identified, it’s important to prioritize which ones to tackle first. A new business channel is a good place to start, as business analysis and requirements gathering have likely already been done, which should provide a good jumping-off point for identifying core processes. Next, tackle any business process areas featuring disparate results between business units. Then, look at processes for which new enabling technology is being considered. Rounding out the list are those 22 International Management Review Vol. 8 No. 2 2012 processes supported by different implementation and those supported by more than one location or business. If enterprises are to remain competitive, they need to reduce the complexities resulting from widely dispersed and often disparate business processes. Establishing consistent core business processes is just one step toward meeting increasing customer expectations in today's market. A typical organization should have less than 15 key processes. A few will be the generic processes within their industry, while others will be specific to their unique approaches, goals, service, geographic location, policies, etc. Generally, organizations are aware of most of the processes that drive their success. Unfortunately, there are often many processes which have an equal or greater impact on the organization which never receive the attention they deserve. Many times, it's these latent processes that keep organizations from performing up to their potential. Identifying key processes using a structured approach, aligning their outcomes to deliver the business goals, designing appropriate measures and allocating sufficient resources for their improvement is the key to the success of an organization. Managing the Business Processes and Competitive Advantage When it comes to performance management, managing the performance of your processes can be your best avenue for driving performance gains. Many corporations have successfully completed one or more Business Process Management (BPM) initiatives. As the BPM initiatives continue, perhaps some will realize that the business processes require connecting and integrating in such a manner so as to identify additional performance improvements between the previously modeled core cross-functional business processes and their external entities (e.g. customers, suppliers, etc.). Some might refer to this type of scrutiny as value chain analysis. Looking at the relationships among core cross-functional business processes will most likely provide additional opportunities for performance improvements beyond those of the individual business processes. These newly discovered opportunities allow the leveraging of the initial investments in the first few BPM initiatives to achieve additional improvements and competitive advantage. Now, let’s have a look at the driving forces of Business Process Management (BPM): 1. Ensuring Process Consistency 2. Optimizing Business Processes 3. Automating Cumbersome Manual Processes 4. Ensuring Compliance Business process management (BPM) enables enterprises to explicitly manage their business processes by providing the ability to understand, automate and optimize those processes. Enterprises that adopt BPM and embrace continuous process improvement stand to gain many advantages: (1) Ability to operate business processes more reliably, faster, and more efficiently. (2) Increased flexibility and agility while eliminating redundancy and cost. (3) Reduced cycle times to develop and deliver new products or services. (4) Improved customer service. (5) Provide information that enables better decisions. Business processes are performed by both people and applications. In an end-to-end business process, the implementation of the process is distributed throughout the various people and applications involved in the process. While there may be an explicit understanding of how the process coordinates these people and applications, very rarely will there be visibility into the state of individual transactions passing through the process. BPM enables the process logic to be managed in an independent business process layer that coordinates the constituent people and applications. This enables business processes to be managed as strategic business assets alongside other business resources, such as people and applications. Organizations invest in BPM for competitive advantage when they believe that by optimizing their processes they can offer superior value to their customers that their competition will be unable to match. Processes that create competitive advantage are not generic by definition. And rarely are they simple. Furthermore, organizations that use BPM for competitive advantage, also, must ensure that the processes adapt and change as the competitive environment around them changes. BPM automates and streamlines 23 International Management Review Vol. 8 No. 2 2012 the business processes which are crucial for the organization in order to improve productivity. From hiring a person to processing a purchase order, BPM helps restructuring, controlling, and handling work flows involving people and systems to complete a process more efficiently. To use BPM effectively, companies must focus on the outcome of the process and design work flows based on the expected result from the process. There should not be any difference between a task done by computer systems or people. BPM should be able to map the interaction among the entities, objects, and tasks and bring them in line with the process work flow. Business rules used in the process also should be clearly defined. Business Processes Management (Bpm) Life Cycle Business process management activities can be grouped into five categories: design, modeling, execution, monitoring, and optimization. Design. Process Design encompasses both the identification of existing processes and the design of "to-be" processes. Areas of focus include representation of the process flow, the actors within it, alerts and notifications, escalations, Standard Operating Procedures, Service Level Agreements, and task hand-over mechanisms. Good design reduces the number of problems over the lifetime of the process. Whether or not existing processes are considered, the aim of this step is to ensure that a correct and efficient theoretical design is prepared. The proposed improvement could be in human-to-human, human-tosystem, and system-to-system workflows, and might target regulatory, market, or competitive challenges faced by the businesses. Modeling. Modeling takes the theoretical design and introduces combinations of variables, which determines how the process might operate under different circumstances. It also involves running "what-if analysis" on the processes: Execution. One of the ways to automate processes is to develop or purchase an application that executes the required steps of the process; however, in practice, these applications rarely execute all the steps of the process accurately or completely. Another approach is to use a combination of software and human intervention; however, this approach is more complex, making the documentation process difficult. As a response to these problems, software has been developed that enables the full business process (as developed in the process design activity) to be defined in a computer language which can be directly executed by the computer. The system will either use services in connected applications to perform business operations or, when a step is too complex to automate, will ask for human input. Compared to either of the previous approaches, directly executing a process definition can be more straightforward and, therefore, easier to improve. Monitoring. Monitoring encompasses the tracking of individual processes so that information on their state can be easily seen, and statistics on the performance of one or more processes can be provided. An example of the tracking is being able to determine the state of a customer order (e.g. ordered arrived, awaiting delivery, invoice paid) so that problems in its operation can be identified and corrected. In addition, this information can be used to work with customers and suppliers to improve their connected processes. Examples of the statistics are the generation of measures on how quickly a customer order is processed or how many orders were processed in the last month. These measures tend to fit into three categories: cycle time, defect rate, and productivity. Optimization. Process optimization includes retrieving process performance information from modeling or monitoring phase; identifying the potential or actual bottlenecks and the potential opportunities for cost savings or other improvements, and then, applying those enhancements in the design of the process. Overall, this creates greater business value. Key processes are those that move a business closer to its goals and have the greatest impact on the organization. In other words, these are the processes which would seriously impact revenues, should they fail. Let us examine the steps necessary to manage and maximize the efficiency of the key processes. Below is a 10 step process for managing key processes that drive business success and ensure sustainable competitive advantage: 24 International Management Review Vol. 8 No. 2 2012 1) Baseline Current Environment. Every performance improvement initiation starts with a baseline. The responsible person must first know how well the organization currently executes key processes before it can fully understand what needs to be done in order to reach desired levels of process execution. This is the foundation and gives the business its starting point for where it needs to improve. 2) Identify Critical Success Factors. Critical success factors are the elements that must be present in order for an initiative to be successful. Some critical success factors in process management include: Process alignment - aligning processes to organizational goals and objectives is critical to organizational success; Technology investment - the more processes can be automated, the more efficient the organization will be and the more it will be able break down and identify bottlenecks and inefficiencies; Measuring performance - in order to truly understand its process execution, an organization must be able to measure its processes from start to finish. 3) Organize and Centrally Locate Processes. In order to fully understand how processes interact with one another, processes must be organized. It used to be that each department managed its processes with very little interaction with other divisions. But in today's fast-paced business models and the need for instant process execution, it is vital that organizations consolidate, standardize, and manage cross-functional processes. This requires centrally locating processes and taking a look at the big picture. 4) Standardize Processes. Often, organizations have similar processes that are executed by multiple divisions and teams. One division may be extremely efficient at executing that process while another division executes at a much lower efficiency rate. Unfortunately, many organizations don't standardize their processes. By leveraging the processes that strong performing divisions employ and standardizing those processes among weaker performing divisions, the entire organization can benefit from extraordinary performance gains. 5) Redesign Inefficient or Ineffective Processes. This is where organizations take action. Once it has baselined and measured its processes, it is ready to take action. Identify the inefficient processes within the organization and the processes that do not support the organizational goals and objectives. If the organization is a small organization or has limited manpower, it can take one process a time. Over time, the organization will have redesigned several processes and the impact will be clear. 6) Eliminate Workarounds and Duplicate Steps. How many times have organizations worked on a process that was flawed and found a workaround? It's amazing the things people will do patch up a process error to get the job done. It always amazes clients when a process is mapped out and all of the inefficiencies and duplicate steps are identified. Sometimes, two divisions basically have passed ownership back and forth until it came to an escalation point and a decision was made by senior management. How much time an organization can cut out of a process when flaws are mitigated is often very surprising. 7) Automate Processes Where Possible. This is the name of the game. The more automated processes are, the less chance for human error and the more predictive performance will be. This sometime requires a significant investment. But in an age where organizations want things done yesterday, the investment is most times well worth staying ahead of the competition and establishing customer loyalty. 8) Identify Metrics and KPIs. This is where organizations quantify how effective its processes are. Establishing performance measurements for key processes, especially those that span across multiple organizations, will significantly improve business performance. How many times has an organization evaluated a failed process only to get the usual finger pointing across the divisions involved? When an organization can break down a performance measure and understand how much time it should take for each division (or individual) to execute its part of the process, then the organization can assign accountability. And accountability often means results. 9) Cross Train Employees. In order for an organization to be successful, especially large organizations, it's important that employees understand three things: What are the organizational 25 International Management Review Vol. 8 No. 2 2012 goals and objectives? How does their function contribute to the organizational goals and objective? How does one's individual function impact the larger, cross-functional process? Understanding how each employee's function impacts the function of other division is the first step in gaining synergy among employees and the processes that drive the organization. 10) Develop Plan for Process Reevaluation. So, the organizations has baselined and centralized its processes. The organization has standardized where possible and eliminated inefficiencies and workarounds. The organization has applied metrics, automation, and cross-trained employees so that they understand their role in the bigger picture. Now it's time to do it all over again because process improvement is a continuous process. Competitors are going to keep getting better, faster, and more efficient, so an organization must do the same. Conclusion Management at the operational level is predominantly about the improvement and control of the processes essential to the business to achieve the objectives of the organization. Setting the direction and goals for business process improvement is a critical step, and one that needs to be addressed by higher management. While the introduction of technology can be a useful contributor for many organizations, business process improvement does not always need technology to be successful. It is far more important to get processes right before the implementation of technology is considered. It is executive management’s responsibility to ensure that there is a clear link between the process improvement projects undertaken by the business and the organization’s strategy and objectives. 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