The sudden disappearance of funding threatened many firms in the Korean furniture industry. Almost overnight, many of these firms went out of business. Even large furniture manufacturers were at risk. Accustomed to the easy market conditions of the early 1990s, large manufacturers created vertically integrated enterprises that were supplied by a number of smaller firms. Korean collectivism and a desire to create long-term relationships were partially responsible for retention of inefficient suppliers and maintenance of inefficient businesses within these companies' structures. Nevertheless, the severe economic conditions brought into sharp focus the economic risks of either operating or conducting business with inefficient organizations. Many large manufacturers went out of business, leaving a multitude of suppliers without an outlet for the components they produced. Ultimately, many of these firms also went out of business. Remaining firms quickly realized that they could not survive independently. Four large firms, with skills for coordinating activities with a large number of external players, divested their inefficient internal operations and substituted the resources and skills of specialized smaller firms. Within eighteen months, four distinct value chains composed of a centrally located hub firm surrounded by a number of smaller specialist firms were formed. These specialist firms conducted value chain activities that could not be efficiently done by the hub firm. Our research studies the development and performance of value chain firms in the Korean furniture industry. In particular, it employs a core competence/network organization lens to answer the question: What factors determine profitability in network firms?
The remainder of this article is organized in the following manner. The next section discusses the core competence concept and explains how it might be used to identify appropriate partners for a hub firm. Then an examination of network theory explores determinants of profitability among network firms, and develops corresponding hypotheses. The next section addresses research methods and tests hypotheses. The final section presents conclusions and future extensions of this research.
Core competencies are those rare skills/capabilities that lead to superior competitive advantage for the firms possessing them. In this study Korean furniture producers managed their core competencies in two ways. First, they conducted a strategic audit (either explicitly or implicitly) to differentiate necessary from marginal skills and the underlying resources leveraged by these skills. This was done in order to facilitate the ability of these firms to transverse the new highly turbulent environment through a focus on the most important skills they possess (core competencies). Second, they established value chains with other firms that gave them access to the core competencies of these firms. Awareness of these other firms' core competencies came about through long experience with them in competitive/cooperative contexts. It should be noted that this in no way implies that simple awareness alone allows for the imitation of the core competencies of others. We do assert, however, that some firms are better able than others to assess the existence and nature of the competencies of others.
The management of core competencies is one of the most important strategic challenges facing a firm given their crucial relationship to superior profitability. Once created, core competencies cannot be simply stockpiled for use when needed. Rather, these core competencies require constant use to maintain corporate fitness (Teece, 1990). Thus, firms, regardless of geographic position and competitive circumstances, must view the management of core competencies as a strategic issue. Here, we introduce the idea of also accessing the core competencies of fellow value chain members.
The maintenance of corporate fitness not only requires investment in existing competencies but also the acquisition and development of new ones. …