Application of value chain in developing competitive advantage at Kenya Petroleum Refineries Limited (KPRL)
A successful business strategy requires the development and maintenance of some form of sustainable relative competitive advantage in addition to internal facts and figures, external information is also necessary for a decision maker to gain up-to-date knowledge of the market conditions, competition and customer expectations. To analyze the specific activities through which firms can create a competitive advantage, it is useful to model the firm as a chain of value creating activities. The Value Chain is a tool for diagnosing competitive advantage and finding ways to enhance it, (Porter, 1985). The value chain framework is an approach for breaking down the sequence of business functions into strategically relevant activities through which utility is added to products and services. The case study sought to determine the application of value chain in developing competitive advantage in KPRL. The study examined how KPRL has broken down the sequence of its business functions into strategically relevant activities through which utility is added to products and services. This was done in order to understand the behavior of costs and the sources of differentiation. The findings of the study indicate that KPRL has in place systems, processes and structures that support value chain both at primary and support levels. Although there are activities that create value in KPRL, operations and technology related activities stand out as the ones through which significant value is either lost or not created. As a result of technological limitations associated with the refinery configuration some key activities have not delivered the much needed competitive advantage mainly due to high residual oil, excessive fuel usage and loss. This in itself is a threat to the future of the refinery due to competition from modern and complex refineries in the Middle East. Consequently the refinery technology requires urgent upgrading. v Issues of quality of products and services are important, however, it is not much the customer perception that drives competition and therefore the appeal to differentiation is not very strong in KPRL. The refinery does not directly serve the final consumers and petroleum products by their physical characteristics are homogeneous global commodities. Refinery customers are largely attracted to sources that provide better margins which come from complex refineries. It is the margins that drive the pump prices at retail level. Therefore cost focus is more relevant compared to differentiation as a tool of strategy in creating competitive advantage at KPRL. The overall economics or value addition of the refinery depends on the interaction of three key elements: the choice of crude oil used, the complexity of the refining equipment and the desired type and quality of products produced. To survive in today‟s highly competitive business environment an organization has to achieve at least temporary a competitive advantage. At KPRL a low cost strategy focusing on providing goods and services at a lower cost than imports or superior goods or services at an equal cost should be pursued. Merchant refining at KPRL should be considered post the proposed refinery upgrade to ensure backward integration to crude and products trading to enhance benefits within a wider value chain. These will enhance value creation through cost reduction for greater margin realization.