Date: September 16, 2014
BYD’s core competencies
BYD has a lot of resources and competencies, as you can see in the VRIO Framework (Exhibit 1). However, the core competencies that give BYD its competitive advantage are 3: a) Strong R&D: This is the capability that gives BYD the majority of its competitive advantage when compared with the 200 Chinese firms that have entered the battery market since 1995. BYD invests around 2% of revenues to product and process R&D. This investment allows BYD to discover different solutions for the challenges that arise, avoiding larger investments in costly equipment and delivering the market expectation. b) Low Cost and High Quality Production Process: The annual capital expenditure at the typical Japanese firm is more than five times that at BYD. The fact that BYD does not invest in expensive automation allows this company save money from investments in equipment and from future and quick depreciations (over five years). The way BYD manages its labor allows this company to save money and deliver a high quality product. c) Strong Human Resources: In order to achieve a reliable production process, BYD has a disciplined workforce, which receives extensive training and is put into a career plan with BYD. As a critical component of the company’s operating system, the labor-intense process at BYD is managed in an amazingly productive way.
The Porter’s Five Forces Analysis of the automotive industry (Exhibit 2) shows that this industry has high barriers of entry. However, all of the BYD core competencies described above are transferable to the automotive business and would decrease the barriers for BYD to get into this new industry.
1- High capital required: BYD still has the funds from the Initial Public Offering on the Hong Kong Stock Exchange that happened in July 2002.
2- Necessity of economies of scale to be cost competitive: Using similar methods of “Low Cost and High Quality” will give them the cost advantage over global competitors. Assembling the cars cheaply will help them reduce the cost of the existing Flyer model by about 30%.
3- Protection from local Governments: As BYD’s location is already in the Chinese market, which has a huge expected growth for demand, this company is already in a good position to not face this big barrier.
4- Design and Quality make the difference in choosing a car: Although Qinchuan did not have its own R&D group, BYD knows that a strong R&D department gives it the competitive advantage in the battery market. BYD’s strong human resources will facilitate the process of hiring these employees from the market, giving them the disciplined training necessary to deliver the high quality expected. So, with the perspective of BYD’s core competencies and the barriers to enter in the automotive business, BYD should enter the auto industry, leveraging core competencies for corporate diversification.
BYD’s competitive positioning in the battery market
In the battery market, BYD’s cost is below that of its Japanese competitor, giving this firm’s competitive positioning in this market as the cost leader (Exhibit 3). BYD’s cost is 39% below Sanyo’s cost, allowing BYD to have a profit 34% higher than Sanyo’s and also a total value 28% lower than its competitor’s total value. So, even though Sanyo has the biggest market
share in this industry (Exhibit 4), BYD is in a much better strategic position to sustain its competitive advantage through time. On the other hand, BYD faces increasing competition from nearly 200 Chinese firms that also rely on labor-intense production processes. However, these groups of companies focus on sales channels and do not care about technology or the development of new components. In contrast, the emphasis on technology and R&D that BYD uses to develop its products gives it the necessary competitive advantage over this group. BYD’s investment in technology makes this company different from any other in this group,...
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