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International Journal of Production Research
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An analytical framework based on AHP and activity-
based costing to assess the value of competencies in
production processes
Lorella Cannavacciuolo
a
, Luca Iandoli
a
, Cristina Ponsiglione
a
& Giuseppe Zollo
a
a
Department of Ingegneria Economico-Gestionale (DIEG), University of Naples Federico II,
Naples, Italy
Version of record first published: 19 Apr 2012.
To cite this article: Lorella Cannavacciuolo, Luca Iandoli, Cristina Ponsiglione & Giuseppe Zollo (2012): An analytical
framework based on AHP and activity-based costing to assess the value of competencies in production processes,
International Journal of Production Research, 50:17, 4877-4888
To link to this article: http://dx.doi.org/10.1080/00207543.2012.657974
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International Journal of Production Research
Vol. 50, No. 17, 1 September 2012, 48774888
An analytical framework based on AHP and activity-based costing to assess the value of
competencies in production processes
Lorella Cannavacciuolo
*
, Luca Iandoli, Cristina Ponsiglione and Giuseppe Zollo
Department of Ingegneria Economico-Gestionale (DIEG), University of Naples Federico II, Naples, Italy
(Final version received December 2011)
In this paper we present a model based on activity based costing and analytic hierarchy process to assess the
impact of individual competencies on value creation and its application to a case study of a small
manufacturing firm. Namely, our model is designed to support managers to deal with the following concrete
situation: suppose that a company has decided to acquire a new type of equipment/technology to improve a
process and deliver a superior performance to its customers, and suppose that this change requires in turn the
acquisition of one or more individual competencies. Our model will support managers to answer to these
questions: what is the cost of acquiring the new competence compared with the value generated by the
improved process? Is it preferable to develop the competence internally or to acquire it on the market? In
general, we argue that the proposed method can support managers to lay out a systematic description of the
problematic link between individual competencies, organisational capabilities and critical market perfor-
mances. Through the development and application of an analytical tool, this work intends to contribute to
bridge the literature on the evaluation of individual competencies with the strategic interpretation of
production competencies as organisational distinctive assets for value creation and as sources of sustained
competitive advantage.
Keywords: competencies assessment; organisational capability; activity based costing; analytic hierarchy
process
1. Introduction: competencies assessment and production management
Production processes innovation often requires both an investment in new equipment and technology as well as the
acquisition of skills and knowledge needed to operate the new hardware. While there are several consolidated
investment evaluation techniques to support managers to make investment decisions in the acquisition of new
material assets, there is a lack of methods to evaluate the costs and benefits associated with the acquisition and use
of new individual competencies.
The analysis of an investment in new competencies requires the estimation of a costbenefit ratio in which the
costs are due to the acquisition and utilisation of the individual competencies, while the benefit is related to the
added value generated by one or more critical organisational and production processes enabled by the competence.
This paper intends to contribute to the competencies assessment literature through the development of a model
for the evaluation of this costbenefit ratio. The model will support managers to answer to the following questions:
What is the cost of acquiring the new competence compared with the value generated by the improved process? Is it
preferable to develop the competence internally or to acquire it on the market?
The proposed methodology is based on the integration of the analytic hierarchy process (AHP) technique
and the activity-based costing method (ABC). This paper offers a new competence-based perspective to the
management of production and contributes to practice and theory in competencies evaluation in several ways.
First, our method offers an analytical tool that can complement traditional production investment analysis by
considering the role of intangible assets and human factors such as individual competencies; the use of our method
can help managers to develop an analytical understanding of how individual competencies impact on the companys
critical capabilities and ultimately on value creation.
Second, our study bridges into a unitary, analytical framework several streams of research on intangible assets
and competencies evaluation and applies this framework in the realm of operations and production management; in
particular we focus on the problematic relationship between individual competencies, organisational capabilities
*Corresponding author. Email: lorella.cannavacciuolo@unina.it
ISSN 00207543 print/ISSN 1366588X online
2012 Taylor & Francis
http://dx.doi.org/10.1080/00207543.2012.657974
http://www.tandfonline.com
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and critical market performances. While competencies have been modelled and measured both as individual
characteristics (Boyatzis 1982, Spencer and Spencer 1993) and as organisational strategic assets (Prahalad and
Hamel 1990, Teece et al. 1997), the analysis of the mechanisms through which individual skills and know-how are
integrated into and leveraged through higher level organisational capabilities has been neglected in the literature.
Re-wording Cleveland et al. (1989), production competence is an enigmatic functional phenomenon: what is it,
whether it can be measured and affects business performance are still questions that the production literature barely
touches on.
Third, while ABC and other costing analysis techniques have been used in several models to evaluate production
costs (Barth et al. 2008, Rezaie et al. 2008) and to support production design and re-engineering (Agyapong-Kodua
and Weston 2011), these works either do not explicitly consider competencies and other intangibles among the
production inputs or deal with immaterial assets in the same way they do with other passive production resources
such as materials or energy. As we explain in Sections 2 and 3 of this paper, in our model competencies have a
different status: they are considered as active resources that enable critical processes by activating, exploiting and
consuming passive resources. It is because of their ability to activate and consume other resources that
competences can originate costs that are usually not computed by the traditional costing approaches.
In the following we provide a detailed description of the model (Section 3) and of its theoretical foundations
(Section 2) as well as a step-by-step example of its application to the real case of a small manufacturing firm working
in a pharmaceutical packaging sector (Section 4). In the final part of the paper we discuss the managerial and
theoretical implications of our work and argue that the availability of an analytical approach to map the
relationship between individual and organisational competencies can help production managers to develop a higher
level of strategic awareness in which competencies are the link between production processes and the business
strategy.
2. Linking organisational capabilities to individual competencies
In strategic literature, competencies are considered as sources of sustainable competitive advantage. According to
the resource-based view (RBV) (Rumelt 1987, Barney 1991, 2001, Grant 1991, Amit and Shoemaker 1993) and its
later theoretical developments, as the core competencies framework and the dynamic capability theory, the
competitive advantage of a firm is based on the firms ability.
. to acquire and develop rare, inimitable and valuable resources (Barney 1991);
. to integrate them into organisational core competencies, intended as the companys collective knowledge
about how to coordinate diverse production skills and technologies (Prahalad and Hamel 1990);
. to renew the existing competencies in order to ensure timely responsiveness and rapid and flexible product
innovation, coupled with the management capability to effectively coordinate and redeploy internal and
external competences (Teece et al. 1997).
However, criticism has been raised against RBV and its derivates, in particular concerning the difficulties of
identifying and operationalising strategic resources and competencies. RBV has also been accused to be tautological
(see Priem and Butler, 2001, criticism and Barneys counter-arguments in the same journal, 2001).
Also as an attempt to reply to these criticisms, some authors have investigated and modelled more in depth the
process that support the creation of competitive advantage. Sirmon et al. (2007) look inside the black box of
competitive advantage creation and describe the dynamic flow from resources to value as a three-stage process:
structuring, bundling and leveraging. The first step is the structuring phase, i.e. the construction of a resources
portfolio containing all the resources controlled by a firm. Then, in the bundling phase the firm combines its
resources to construct or modify its current capabilities. The leveraging phase focuses on the application of firms
capabilities to create value for customers and wealth for owners.
Grant (1991) contributes to make clearer the distinction between resources and capabilities. According to Grant
resources are inputs into the production process they are the basic unit of analysis. A capability is instead the
capacity for a team of resources to perform some task or activity.
Hafeez et al. (2002, 2007) have investigated the link between resources and capabilities and have concluded that
capabilities are formed through the co-ordination and integration of activities and processes. In this view a
capability is the ability to make use of resources to perform a task and it is strategic to the extent it enables the firm
to deliver a fundamental customer benefit (Hafeez 2002).
4878 L. Cannavacciuolo et al.
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Following these studies, we define a capability as the result of the integration of one or more critical processes to
deliver value for customers. A process is considered critical when it unambiguously affects one or more drivers of
customers satisfaction. For a high-tech company, for example, the ability of rapidly updating its products through
constant innovation and the addition of new functions is a capability inasmuch the speed of updating is perceived as
a valuable distinctive characteristic by customers (which is usually the case in this example). Finally, capabilities can
give rise to competitive advantage only if they are not easily imitable by competitors. In this view individual
competencies are activated to implement the processes that constitute a capability. Our definition implies a
hierarchy made up by the following components (Figure 1):
(1) individual competencies and other resources are structured into a portfolio of assets;
(2) resources and competencies are bundled into critical processes;
(3) critical processes are integrated into higher order strategic capabilities;
(4) strategic capabilities are leveraged to deliver customers satisfaction on critical performances drivers.
This hierarchy represents the framework on which we have built the cost model that will be presented in the next
section. In our framework individual competencies have a special status and are distinguished from other passive
inputs, primarily because competencies activate, exploit and consume other resources in given job situations or
processes (Capaldo et al. 2006). Individual competencies are modelled as the missing link in the chain resources-
processes- capability-value. In this perspective it is not possible to reduce the calculation of the individual
competencies cost to the costs of the human resources in which they are embodied (wages, social security
contributions, training and selection cost, etc.), but the costs of the individual competencies have to include also
costs related to other material and immaterial resources consumed by competencies in the realisation of critical
processes.
Unlike other methods developed for the evaluation of intellectual capital (Nordhaug and Gronhaug 1994,
Stewart 1997, Andriessen and Tiesen 2000, Morris 2001, Sveiby 2001) our framework does not reduce competencies
economic evaluation to some kind of aggregated valorisation of immaterial resources.
Our approach also differs from other well-known studies that conceive competencies as individual skills,
knowledge and abilities that are causally related to a superior individual performance (Boyatzis 1982, Spencer and
Spencer 1993). While the works in this stream acknowledge the fundamental role of individual competencies in value
creation, they focus on the development of individual skills and do not analyse the relationship between individual
competencies and value creation at the organisational level.
Finally, we also contribute to the literature on the strategic management of competencies: if on one hand
there are many studies in this stream that have investigated the relationship between competencies and performances
(Spano and Lioukas 2001, Arthurs and Busenitz 2006, Bennour and Crestani 2007, Sirmon et al. 2007, Ortega,
2010, Bhamra et al. 2011, Yam et al. 2011), on the other hand the relationship between value and competencies is
assumed to be a black box in which the causal links between competencies and competitive advantages is not
modelled.
Figure 1. The link between capabilities and individual competencies.
International Journal of Production Research 4879
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3. The model
In order to develop a costing model to compute the cost of individual competencies, it is necessary, at this stage, to
provide a definition of competence cost. According to the theoretical premises above outlined, we define the exercise
cost of a competence as the sum of human, material and immaterial resources activated by a competence whilst
contributing to the realisation of activities. The total cost of ownership of a competence (TCCO) is thus:
TCCO recruitment cost training cost exercise cost 1
The recruitment and training costs arise because of the acquisition of a new competence. These costs can be
easily estimated while the cost of exercise is the cost of the competence in action. In particular, the evaluation of the
exercise cost has to be performed with a technique able to translate in quantitative terms the relationship between
processes, competencies and resources. The activity based costing (ABC) methodology fits well this need as: (i) it is a
technique of cost analysis based on the concepts of process and activity; (ii) it makes it possible to determine the
cost of an object on the basis of the activities and resources that it consumes. As already outlined, the application
of ABC in production literature is not a novelty, but the ABC model is not used to estimate the cost of intangibles
and specifically of the competencies enabling production processes. In our model competencies are treated as cost
objects that consume different kinds of activities and resources (Figure 2).
The first step is to map resources, activities, competencies and the links among them (Figure 2). Competencies
are associated to all the activities they contribute to; activities are then linked to all the resources they consume. Of
course it may be the case that a same resource is used by more than one activity and that the same activity is used by
more than one competence.
Given this map, the cost of a competence is calculated in function of the activities it contributes to, while the cost
of an activity is calculated on the base of the resources it consumes. In order to calculate the amount of a resource
consumed by any activity and the amount of an activity consumed by each competence, causal drivers, called
respectively resource and activity drivers, are determined.
Resources costs are allocated to activities according to the following formula:
CA j i 1, n CR i RDij j 1, 2, . . . , m 2
where CA(j) cost of jth activity; CR(i) cost of ith resource; RDij resource drivers between the ith resource and
the jth activity; and i RDij 1.
In the same fashion, the cost of the activity Aj is allocated to competence Ck through the activity drivers, as
shown by the following formula:
CC K j 1, m CA j ADkj k 1, 2, . . . , l 3
Figure 2. The ABC model applied to competencies.
4880 L. Cannavacciuolo et al.
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Where CC(K) cost of kth competence; CA(j) cost of jth activity; ADkj activity drivers between the jth activity
and kth competence.
A critical aspect in the application of ABC is the identification and estimation of the drivers. In our case in
particular, while the causal relationship between resources and activities is usually less problematic, the
identification of the activity drivers, which quantify the causeeffect relations related to the consumption of
activities by competencies can be definitely more critical. In fact, a precise estimation in quantitative terms of this
relationship could be either problematic or very time consuming.
To resolve this criticality, we have framed this issue as a decision problem in the following way: What
competence is more important to carry out a given activity? We then assume that the impact of the competencies on
the activities can be measured indirectly through experts judgments and that such estimation can be used as a
reasonable proxy for the activity driver. The analytic hierarchy process (AHP) developed by Saaty (1978) is a
methodology that can be used to support the elicitation and the computation of the activity drivers based on experts
verbal judgments.
3.1 The methodology
The methodology for the evaluation of competencies costs can be articulated in an as is and to be phase
(Figure 3). The version of the method we present in this paper has been crafted within an empirical work developed
in the case of a small manufacturing company interested in the adoption of a process innovation.
The steps of the as is phase are:
(1) Identification of current capabilities and critical processes: This step aims at identifying the firms capabilities
linked to distinctive characteristics of products/services and at breaking up these capabilities in critical
processes and their constituent activities. In order to map distinctive characteristics, capabilities, and critical
processes we developed a semi-structured interview that was delivered through interviews to market and
production managers. Additional information sources that can be used in this step are competitive analyses
at the industry level, product benchmarking and customers satisfaction surveys. Triangulation among these
different sources and a final validation, perhaps through a few iterations, by the company managers may be
needed.
(2) Mapping of competencies and resources onto critical processes activities: The goal of this step is to identify
what competencies and resources are involved in performing critical processes. This step has been performed
through interviews with the production manager and several visits to the production site. In this way, we
obtained a map between resources, activities and competencies similar to the one reported in Figure 2.
Formal descriptions of production processes, as those available for quality certification, can be helpful in
this phase, as well as careful observation and interviews with line workers and other staff. Unfortunately
these sources cannot be always available, especially in the case of small companies.
(3) Computation of competencies exercise cost through ABC: The evaluation of competencies exercise cost
through ABC requires the individuation of causal drivers. This step was carried out by interviews to
company experts supported by the AHP methodology. It would be advisable wherever possible to involve
Figure 3. The methodological frame work.
International Journal of Production Research 4881
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several experts in the elicitation of weights and to combine their estimation through one of the multi-person
aggregation techniques suggested by Saaty and Peniwati (2008).
The output of the as is phase is the exercise cost of competencies needed to maintain the current capabilities.
The to be phase aims at computing the competencies cost related to the acquisition of new competencies needed to
support the implementation of an innovation. The development of an innovation is either aimed at strengthening an
existing capability or at supporting a new one.
So, in the to be phase, starting from the new capability that has to be strengthened or built, a set of new
competencies to develop or acquire is identified and for each competence the TCCO is computed. Thus the to be
phase is articulated in the following steps:
(4) Identification of the (new) capability to be implemented: As in step 1, through interviews to the company
managers and the analysis of secondary sources about the industry and market forces, strategic capabilities
concerning new distinctive characteristics of products/services can be identified. In the case of a new
capability, it is necessary to design the critical processes involved and map them onto activities.
(5) Identification of new competencies and gap evaluation: As in step 2, a map of the individual competencies
required by each activity has to be developed. The acquisition of a new competence can be pursued either by
the empowerment of an existing competence (e.g. specialisation) or through the acquisition from the external
environment. A gap analysis between the needed and current competencies is carried out.
(6) Computation of TCCO for the acquisition/development of the new competencies: This step aims at estimating
the costs that the company has to bear to close the competence gap. This cost is given by the difference
between the TCCO of the new competence and the TCCO of current competencies. The TCCO of current
competencies is equal only to exercise costs, while for new competencies the TCCO is equal to exercises cost,
computed through ABC, plus training and recruitment costs.
The cost of this investment has to be compared with the added value obtained by new capabilities. The focus of
this work is on the cost side. In a prior work, a real option model has been developed to determine the economic
value of competencies in under uncertainty (Cannavacciuolo et al. 2004, 2009).
4. The computation of competencies cost: a case study
In order to illustrate how the model presented in the previous sections can be used, we report about its application to
a small company, named Alpha for privacy, established in 1997 and producing packaging for pharmaceutical
products. Its products are phial tops, measuring cups, measuring spoons, capsules. The company organisation is
quite simple; there are only two main units: administration and production. The main production process is plastic
components moulding through a traditional injection process. The traditional injection process cannot be used to
produce a wide range of products, such as plastic phials, because these products have to be moulded through a
combined process of injection plus blowing (injection-blowing process) of high density polyethylene (PEHD). Thus,
the company managers were evaluating the opportunity to enlarge the portfolio of products through the
implementation of the injection blowing technology. The injection blowing process required a strong initial
investment in a new kind of press and the consequent acquisition of know-how related to the innovative moulding
process.
Following the flow depicted in Figure 3, the application of the proposed methodology to this case has been
structured in three phases:
(1) Mapping (competencies, capabilities and critical processes, steps 1 and 2).
(2) Cost of current competencies computation (step 3).
(3) Gap analysis and computation of cost related to the acquisition of new competencies (steps 4, 5 and 6).
In order to carry out the three aforementioned phases, the research team interviewed the production manager
and the engineer responsible. The latter was the best source of information about the process and the competencies.
In the following, we will refer to him as the expert. The data were gathered through field observation and interviews
to the production manager, the expert and some of the workers. Interview time ranged from half an hour to 2 hours.
The data-gathering process was carried out during three visits to the production site. In the first visit the resources,
the activities and the competencies involved in the traditional injection process have been identified, through a field
observation and an unstructured interview to the expert, the manager and some of the workers. With respect to
4882 L. Cannavacciuolo et al.
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competencies, two levels of specialisation have been identified: base and advanced. The interview was also useful to
obtain a detailed description of each activity in order to understand which competencies were activated and which
resources were consumed. The description, in turn, helped with the identification of the resource drivers, while an
analysis of the accounting books was performed to identify the costs of the resources.
Using the AHP technique, for each activity the competencies have been compared by the expert in a pair-wise
fashion in order to assess which competence was more important to perform the given activity. The elicitation of the
expert judgements has been carried out during the second visit. In the third visit, the research team interviewed the
expert in order to understand which competencies the company should own to perform the new injection blowing
process. During the second and third visit we had the opportunity to revise and validate the data collected up to that
point in order to identify informative gaps, mistakes or misinterpretations.
4.1 Mapping
The production process is very simple and the critical capabilities are easy to identify in this case. The value
perceived by customer depends essentially on three factors: price, timeliness and width of the products portfolio. A
critical capability is job order flexibility, intended both in terms of range of products and delivery time. To this
capability only one critical production process is associated, i.e. the moulding process. During the mapping phase, it
has been broken up in activities and the competencies involved in each activity have been identified.
The production process can be articulated in six main activities: Planning, Set up, Layout planning,
Maintenance, Quality control, Machine management and Material handling.
The Planning activity aims at designing, building and testing the mould as well as at defining the technical
specifications for the machines needed to perform the operations. The engineer responsible carries out this activity
in collaboration with the machine suppliers in order to customise the machines to the companys production needs.
The required competencies are: the knowledge of the traditional injection process, of the switchboard hot channel,
of the product technical specifications as well as the knowledge of the raw materials and of the parts and
components of the mould.
In the Set up phase the machines are set for the production of a specific product. The required competencies are
the knowledge of the traditional injection process as well as the knowledge of the mould and of the characteristics of
the raw materials. In addition, it also requires the competence of recognising faults and quality defects or
imperfections in the finished product.
The activities of Layout planning, Maintenance and Quality control aim at monitoring, supporting and improving
production. In the Layout planning designs the production manager tries to optimise the production layout in order
to make the process more efficient. The required competencies are the capacity of planning a workflow and of
scouting equipment. Maintenance guarantees that machines work properly and efficiently; the related competencies
are the knowledge of the machines (fridges, compressors, thermo regulators, aspiration system) and the knowledge
of base manufacturing. Quality control applies and enforces the norms imposed by the quality system (ISO) to the
production process and the required competencies are knowledge of ISO norms and quality requirements of
products as well as the knowledge of the traditional injection process and of the characteristics of the raw materials.
The focal activity of the production is the Machine management which transforms the raw materials into
products. The required competencies are the knowledge of the traditional injection process, of the raw materials
characteristics, of the machine characteristics as well as the knowledge of the quality requirements. Finally, Material
handling takes care that the products are properly and timely stored. This activity requires competencies in pallet
truck and administrator procedures for material handling.
For each of the aforementioned activities, the pool resources and the associated competencies have been
identified as shown in Figure 4.
As depicted in Figure 4, the same competence can be required to perform one or more activities. For example,
C1 is needed for planning, set-up, quality control and machine management. Table 1 lists the types of competencies
involved in the production process.
The resource drivers have been defined through an interview with the expert and through consultation of the
accounting books. Office equipment has been allocated through an estimation of the amount consumed by each
activity. The expert made the estimation on the basis of his knowledge of the production process. Raw materials,
energy, depreciation of the traditional injection press and of the trucks are totally allocated to just one activity:
International Journal of Production Research 4883
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Machine management. Human resources have been allocated through an estimation of the amount of time spent by
individuals on each activity.
The activity drivers evaluation has been carried out through the AHP method, by performing the following steps:
(1) The vector C(C1, C2, . . . , Cn) of the competencies elicited in the mapping phase was presented to the
expert together with the list of the activities.
(2) For each activity Ak, the expert was required to answer the following question: In your experience, is
competence Ci more important/critical than competence Cj in performing the activity Ak? And how much?
The experts answers have been coded using the scale 1, 3, 5, 7, 9 where 1 means equally important and 9
means absolutely more important and recorded into preferences matrices defined on the Cartesian product
CC.
(3) Through the application of the Saaty algorithm (1978), we have computed the importance the of
competencies for each activity, normalised between 0 and 1. These weights represent the activity drivers.
Table 2 shows the activity drivers calculated for the competencies involved in the Planning activity.
4.2 Competencies cost computation
In the first step of ABC, the cost of the resources was allocated to the activities, through the resource drivers
identified with the help of the expert and through the consultation of the accounting books. Then, through the
activities drivers calculated by means of AHP algorithm, the costs of the activities were allocated to the
competencies. In this way, the cost of each competence includes eventually the cost of all the resources used by the
competencies. Figure 5 summarises the cost of the competencies related to the production process.
As shown in Figure 5, a Pareto analysis shows that three competencies (C18, C1, and C9) account for the 65% of
the total cost of competencies, which is equal to E243,095.51.
4.3 Gap analysis and computation of the cost of acquisition of a new competence
Once the cost of competencies that are currently used in the process has been computed, it is possible to estimate the
cost for the acquisition of a new competence. In our case, some new competencies are needed to improve a critical
capability: the job order flexibility.
Figure 4. The ABC schema of alphas production process.
4884 L. Cannavacciuolo et al.
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The investment could strengthen this capability because the acquisition of the new press for the implementation
of the injection blowing process would allow the company to enlarge the product portfolio, and to reduce the costs
and the lead time. The evaluation of the investment required a comparison among the cost of the current
competencies configuration using the traditional injection process and the cost of the new configuration needed to
implement the injection blowing process. The difference between these costs gives the extra cost that the firm has to
bear to switch from the current to the new competencies configuration.
Figure 5. The costs of competencies.
Table 1. The list of competencies required by the productive
process.
Competencies
C1 Knowledge of the traditional injection process
C2 Knowledge of raw materials characteristics
C3 Knowledge of mould elements
C4 Knowledge of switchboard hot channel
C5 Knowledge of mould materials
C6 Knowledge of product technical specifications
C7 Knowledge of machine characteristics
C8 Capacity of finding quality faults
C9 Capacity of planning workflow
C10 Capacity of scouting equipment
C11 Knowledge of presses working
C12 Knowledge of fridges working
C13 Knowledge of compressors working
C14 Knowledge of thermo regulators working
C15 Knowledge of aspiration system working
C16 Knowledge of base manufacturing
C17 Knowledge of ISO norms
C18 Knowledge of quality requirements
C19 Knowledge of pallet truck
C20 Knowledge of administrator procedures for materials
handling
Table 2. The activity drivers linking Planning activity to
competencies.
Competencies
Activity
drivers
Co-planning activity
C1 Knowledge of the traditional injection process 0.02
C2 Knowledge of raw materials characteristics 0.31
C3 Knowledge of mould elements 0.14
C4 Knowledge of switchboard hot channel 0.03
C5 Knowledge of mould materials 0.05
C6 Knowledge of product technical specifications 0.32
C7 Knowledge of machine characteristics 0.13
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As far as the other cost items that constitute the TCCO, it was relatively easy for the firm to appraise the costs of
three alternative ways available to acquire the new competence: internal personnel training vs. assumption of a new
unit of personnel vs. recruitment of a temporary worker with the desired skills/expertise. In the case under
examination, the company opted to train an internal unit of personnel through the supervision of an internal tutor,
and the opportunity cost was reduced because the training was done mainly on the job during the production idle
times.
The choice to develop the new competence internally was preferred, because the acquisition of a new unit, or the
recruitment of a temporary worker, would have been less synergic with other already existing competencies
connected to Machine management, such as the knowledge of the raw materials and of the product technical
requirements already owned by the available workers.
The total difference between the two competencies configuration was about E45,000. It is the cost of the
investment in competencies for the implementation of injection blowing process, starting from the competencies
already owned by the company. The total value of the investment is equal to the sum of the cost of acquisition of
a new press and the cost of acquisition of a new competence. This cost represents one of the two pivotal elements
for the costbenefit analysis. The other element is the economic assessment of the benefit obtainable by the adoption
of the injection blowing process. The accurate estimation of this value can be tricky and goes beyond the aim of
this work. In general, it involves the consideration and modelisation of possible sources of uncertainties, such as
variability of the demand, often without sufficient data. We have proposed elsewhere a financial method to solve
this problem (Cannavacciuolo et al. 2004, 2009). Here it is easy to show that the main benefit obtainable by the
implementation of the injection blowing process is the possibility for the company to realise new products, such as
plastic phials. A wider range of products improves the competitiveness of the company and enlarges the customer
portfolio and sales. Sales increase and expected product margins in the new configuration can be roughly estimated
to have a preliminary idea of the economic value generated by the innovation before embarking into more
sophisticated evaluation when uncertainty levels are medium or high.
5. Managerial implications
The main problem we encountered in the application of our model was associated with the characteristic of the
chosen firm, a small company in which the technical know-how is highly concentrated in the competencies and tacit
knowledge of an expert, and where there is a lack of explicit and formalised description of business processes. This
has implied the need to perform an organisation analysis through interviews and have several meetings with the
production managers.
The aim of the organisation analysis was not only to articulate the production process into activities but also to
support the managers to make explicit the resources and competencies involved in each phase. In such cases there is
an additional added value given by the adoption of analytic methodologies for process and cost analysis, i.e.
increasing their awareness and understanding of the company capabilities as well as of the processes bottlenecks,
critical points and improvement opportunities.
We argue that one contribution offered by our method is not really in the utilisation of advanced analytical
techniques such as ABC and AHP, but in the help that such a combination may offer to make managers more aware
of the nature of competencies and of their role in the activation of critical processes. In this perspective, an
important managerial implication is that analytical techniques can be useful tools both for analysts and managers in
order to trigger investigation processes and organisational learning (Argyris and Schon 1978).
Secondly, the application of AHP and ABC allows company managers to spot critical competencies,
characterised by a high costs and high impact on value creation, on a factual basis. Eventually, managers can
achieve a clearer identification of which competencies are really needed to sustain competitiveness and which ones
instead can be outsourced or even dismissed without significant material or strategic losses. Furthermore, managers
can develop a clear picture of the existing competencies configuration that can help them to identify a suitable
strategy for the acquisition of competencies needed to implement an innovation.
Thirdly, the proposed methodology can be integrated in a wider investment evaluation model of the costbenefit
ratio associated to an innovation. The benefit can be quantified through more or less traditional techniques,
including sophisticated financial evaluation tools.
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6. Conclusion
In this paper we have presented a model for the economic evaluation of competencies and applied it in the realm of
production management. Our results can be summarised as follows:
. We have developed an analytical and computable tool through which managers can map and evaluate the
links between individual competencies, critical production processes and strategic capabilities and
performance. The model can be used to investigate and weigh individual competencies in terms of their
contribution to value creation and to the generation of sustainable competitive advantage.
. We have contributed to the competencies assessment literature in which there is a lack of methods and tools
for the estimation of the economic value of competencies.
. The proposed model for the evaluation of the cost of competencies can be considered as a lean management
tool to help production managers in achieving a better understanding of the link between value creation,
capabilities, critical processes and individual competencies. Our method can help in particular small firms
to develop an analytical picture of their points of strength and weakness and to start developing a
knowledge base and a strategy for the maintenance and the development of their key assets and capabilities
with reasonable effort.
It is often said that a RBV or competencies-based view of the company can be more helpful for small firms when
they have to engage in a strategic analysis than a structured assessment of the company competitive position based
on industry forces and competitive environment analysis. However, clear guidelines or easy to use methods are not
available to support small companies to perform an accurate strategic assessment of their core competencies. Our
method contributes, at least in part, to fill this gap by making it easier to perform a strategic analysis according to a
RBV perspective.
The application of the suggested method in a real case study helps us to outline some potentialities and
criticalities of this study.
The use of a case of a manufacturing company has probably favoured the application of the methodology
because manufacturing processes are usually easier to observe, describe and measure than the immaterial processes
in service or knowledge-based companies; we expect that the application of the method to service companies can be
more difficult, because of the smaller standardisation and higher variety of processes as well as of the predominance
of intangible activities and outputs. So we plan to develop further the method and to test its applicability in the case
of small service companies.
A second limitation is that in our case the supervision of the external analyst was really critical. The challenge is
to develop methodologies that small companies can apply with definitively less external support, in a self-evaluation
mode. This will imply the development of tools to support the analysis and the data elaboration in each step.
However, since the method is structured enough, we are confident that with little effort the methodology can be
made more systematic through the development of adequate supports for data collection (e.g. interviews and data
triangulation methods), as well as for process and competencies mapping and assessment (e.g. through the help of a
software tool to support and guide the assessors in the various steps).
Acknowledgement
This paper presents a part of our results obtained under the frame of the research grant CNCSIS IDEI 810/2008 The
Development of Theoretical Fundaments of Knowledge Ecosystems and Their Applications on Economy and Healthcare,
funded by the Romanian Education and Research Ministry UEFISCDI.
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