International Competitiveness

Objectives

By the end of this, you should be able to:

        i.            To explain the meaning and significance of international competitiveness

      ii.            To discuss the measurement of international competitiveness and make comparisons between the major trading nations

    iii.            To determine the factors which affect a firm’s international competitiveness

    iv.            To determine the factors which affect a country’s competitive environment.

Introduction

The issue of international competitiveness has become the focus of much attention in recent years. Companies are increasingly aware that they have to be internationally competitive not only when they venture abroad but also because they face international competition in their home market. Even small firms in the supply chain of larger firms may have to fight off foreign competition. As markets become more open to global competition, competitiveness may well be the key to survival.  Some of these competitive factors can be under the direct control of the firm; some can be managed by strategic planning, while others are outside the firm’s control. Countries and governments may also be able to influence the international competitiveness of their firms. For example, the economic conditions prevailing in a particular country or aspects of its culture may have a bearing on competitiveness.

Governments may also achieve this effect by creating a favourable economic, legal, and regulatory environment or, in some cases by more active intervention. Because national characteristics and government policy help to create the conditions for competitiveness, countries themselves are often described as being internationally competitive.

The meaning and significance of International competitiveness

Meaning:

International competitiveness can be defined as the ability of a firm to compete in international markets. Competitiveness is a relative term which can only be interpreted in relation to a firm’s competitors- it has no absolute value. Thus, firm “A” may be more competitive than firm “B” but less competitive than firm “C”.

Competitiveness is often measured in terms of price, unit production cost, or labour productivity relative to a firm’s competitors. Some indicators or product quality could also be used, but measures of this kind are more difficult to quantify. Ultimately, superior competitiveness should lead to improvement in market share, profit or some other measure of successful performance, though firms do not always translate their competitiveness into improved performance.

Determinants of a firm’s international competitiveness:-

The determinants of a firm’s international competitiveness are as follows:-

1.      Technology and technological knowhow: the use of technology, when combined with a knowledge of its potential applications, contributes to product innovation and hence to competitive based on superior or differentiated product rather than price, technology, as measured by the level of R&D expenditure and by the number of patents filed, appears to contribute to the competitiveness of firms in a number of manufacturing industries.

2.      Marketing techniques:- successful marketing depends not on the choice of appropriate methods but also intimate knowledge of the product and market, and the ability to learn from previous experience, these qualities rely on knowledge and abilities which are specific to the firm.

3.      Intellectual property: patents, copyright, and trademarks provide a degree of protection for a firm’s products and reputation; these can be exploited to the firm’s competitive advantage in international markets.

4.      The ability to upgrade and innovate:  Innovation requires a creative imagination, design skills, and understanding of what the consumer wants, and a corporate culture, which encourages the generation of ideas as well as technology and technical ability.  Most innovation is incremental rather than fundamental – refinements of existing products or new applications of existing technology – but this process may be essential to create or retain a competitive advantage.

5.      Management style and competence:-  Unity of purpose, the ability to motivate, and flexibility in the face of changing circumstances are crucial in maintaining a competitive position.  No single style of management suits all firms in all circumstances, but it should be able to facilitate these requirements.

Principles of competitive strategy formulation

The most widely accepted views of strategy formulation are owed to the ideas of Michael Porter, who argues that whether strategy is deliberate or emergent, it is the relative position of a firm and its products within its industry that ultimately determines its success or failure.

The strength or weakness of the firm’s relative position, he argues, requires us to understand three aspects of the firm’s operations in the context of its industry:

·         The external forces that drive a firm’s industry structure

·         The type(s) of “generic” strategy that determines a firm’s competitive positioning within this industry structure

·         The internal organization of the firm as embodied in its “value chain,” or its internal sources of competitive advantage.

As we shall see, Porter argues that a combination of these three aspects of the firm in the context of its industry structure optimally determines how the firm structures itself and competes globally.

Industry structure

The structure of any industry consists of five competitive forces that shape a firm’s strategy: (1) the firm’s buyers/market; (2) its suppliers; (3) its competitors; (4) products or services that may be substitutes for what the firm offers; and (5) the threat of new entrants.  Each of these five forces determine the prices that firms can charge for their products, the costs they incur, and the investments they have to make in order to create and sustain entry barriers in the industry.

The power of buyers is a determinant of the prices that a firm can charge in the marketplace; the greater the buyer power, the lower the firm’s ability to price high.  The power of suppliers is a determinant of the costs incurred by the firm for its inputs; again, the higher the supplier power, the higher the costs that the firm will incur. The breadth and depth of competitive rivalry determine profits not only by constraining a firm’s ability to price, but also by constraining its costs (competition for factor inputs) and its investment spending (R&D, capital and advertising, for example).  The presence of close substitutes determines – and often limits – what the firm can charge for its goods and services without inducing substitution and market share erosion.  Finally, any industry that offers profits is always a magnet for potential new entrants, thus raising the question of how a firm can erect entry barriers, and the investments and costs that will be incurred in erecting these barriers.

The strength and importance of each of the five forces vary from industry to industry, but they all matter to a greater or lesser degree in every industry.  For instance, buyer power tends to be higher in industrial as opposed to consumer products; supplier power tends to be higher in industries such as airplanes, since the supplying firms are large and few in number (although competition even among a couple of firms in the commercial airframes industry has lowered profits in that industry); commodity chips offer an example of an industry in which competitive rivalry is intense, and firms are often forced to price their products at razor-thin margins; all industries are affected by the presence of substitute products to some degree (for example, the arrival of the fax turned out to be a substitute for the services offered by the overnight delivery industry); and many industries incur huge costs in R&D and advertising in order to try to continuously impede the entry of potential new entrants.

The first step in the formulation of competitive strategy is, therefore, to undertake a systematic audit of how each of the five forces affects the profitability-pricing and costs- in a particular firm, given the structure of the industry in which it competes.  The next step is to determine the positioning that the firm seeks within the industry structure:

 In other words, what approach should the firm adopt in competing in a particular industry, once it has figured out what the five external forces and their impacts are?

Competitive positioning

A firm’s performance, given the five forces and the industry structure, is determined by the competitive positioning that it adopts with respect to its competitors.  Porter suggests that there are two broad types of competitive advantage that determine a firm’s positioning within an industry:  They are the “generic” strategies of cost leadership and differentiation; in addition, the firm should also determine its competitive scope, or the breadth of operations that it seeks to be involved in-the range of products, the types of buyers or market segments, the geographic areas it will serve, and the like.

Cost Leadership: With the generic cost leadership strategy, a firm seeks to be the lowest cost producer of a product or provider of a service.  The extent that the cost leader can provide products or services of sufficient value to command prices near the industry average, it can achieve above-average profits.  If a low-cost producer priced its product relative to competitors at a level equivalent to its cost advantage over competitors, it generally would not be more profitable in the short run; however, it might achieve above-average profits in the long run if its pricing practices increased its market share and drove competitors out of the business, and consequently, allowed it to increase prices later.  For cost leadership to lead to sustainable above-average profits, the firm’s products must: (1) achieve parity with the industry average in quality and other attributes valued by customers, and (2) have a source of cost leadership that is not easy for other firms to imitate or otherwise match.

Differentiation: A firm using this strategy seeks to differentiate its product or service on dimensions that are highly valued by customers. If the firm can uniquely differentiate itself in this manner and has costs that approximate the industry average, then the premium price it can command allows it to earn above average profits. Any number of characteristics might provide the basis for differentiation. These characteristics might be directly related to the product or service itself or might be indirectly related through any of several aspects of the firm’s value chain. Eveready Batteries might command a premium price because they provide longer-lasting power.  In contrast, Caterpillar Tractors might command a premium price because of available 24-hour service and spare parts delivery anywhere in the world. This means that customers highly value a number of product attributes, there is the potential for several firms to pursue a differentiation strategy if they attempt to differentiate their products from each other on diverse attributes.  If, on the other hand, for a given product or service, there is only one attribute that customers highly and widely value, there will be less room for firms pursuing a differentiation strategy.  The most successful firm in this setting would be the one that is best able to distance its product from that of its competitors on the attribute valued by customers and can, at the same time, keep a superior cost position. For a differentiation strategy to lead to sustainable above-average profits, products must achieve unique advantage on attributes highly valued by customers and the source of the differentiation must be one that is not easy for other firms to imitate or otherwise match.

Scope:  Relative to both these generic strategies, a firm can choose to limit the scope of its strategy.  For example, a firm could pursue a differentiation strategy by creating a product or service with an attribute that is highly valued by a narrow set of customers.  While the restriction in scope reduces the total volume and revenue the firm can obtain from the product, to the extent it can differentiate its product and maintain a superior cost position, it can earn above-average profits in this “niche”.  This would also apply to a focused-cost leadership strategy.  To the extent that the cost leader can provide products or service of sufficient value to command prices near the industry average for some targeted segment of customers, it can achieve above-average profits.  Whether pursuing a cost or differentiation strategy, for either of these generic strategies to work in a focused scope, there must be differences among targeted customers or segments of the market.

Sources of Competitive Advantage:  The Value Chain

A variety of ways of examining the internal aspects of a firm and how they are the sources of the firm’s competitive advantage have been proposed. However, the “value chain” approach proposed by Michael Porter is arguably one of the most cited and widely utilised. Porter separates the internal components of a firm into five primary activities and four support activities (see figure 14.1). Primary activities are those that are directly involved in the creation of a product or service; support activities facilitate the creation of the product or service and its transfer to the customer.Porter stresses that, rather than the cost of these activities; it is the value that they add to the product or service that must be assessed in order to truly understand the firm’s relative position.  The value of product or service is a function of how much customers are willing to pay and how many customers are willing to purchase the product or service. The firm makes a profit if it can produce something whose value exceeds its costs.  Determining value activities internal to the firm requires a separate examination of each of the nine primary and support internal activities.

Inbound Logistics: This component of the value chain consists of activities that are designed to receive, store, and then disseminate various inputs to the products.  Raw materials, delivery, transportation, inventory, and other issues are commonly a part of inbound logistics.

Operations: A wide variety of activities are conceptualized as being within the operations component of the value chain.

 Activities that transform the inputs into the products and services of the firm are at the heart of operations.  In addition, activities (such as maintenance) that keep the machines in working order would also be included in the operations of the value chain.

Figure 14.1:The Value Chain

 

                                                                 Firm Infrastructure

                                                              (e.g., Finance, Planning)

 

        Support        

       Activities                                  Human Resource Management

 

                                                              Technology Development                           M

                                                                                                                                    A

                                                                        Procurement                                         R

                                                                                                                                      G

                                                                                                                                      I

                                                                                                                                    N

                              Inbound     Operations    Outbound    Marketing    After-Sale

                              Logistics    (Manu-         Logistics      and Sales      Service

                                                 facturing)

                                                            Primary Activities

                                                           

Outbound Logistics:  Outbound logistics include those activities that get the product from the firm to the customers.  This might involve transportation, vehicle scheduling, warehousing, and order processing.

Marketing and Sales: Marketing and sales activities are designed to let customers know about the products and services available and to entice them to purchase what the firm has to offer.  Activities such as advertising, promotion, direct sales, and pricing would all be included in this component of the value chain.

Service:  These activities are designed primarily to keep the product in the hands of the customer after the purchase, and to increase the probability of a repeat purchase.  Service activities may involve repair, supply of parts, installation, or product warranties and adjustment.

Each of these primary activities has associated costs.  They enhance the firm’s positioning and profitability if a customer is willing to pay more for them than they cost.  The importance of the various activities changes and depends on the products and services, and the preferences of the customers. For example, in the fashion industry, customers often want the latest styles, colours, and fabrics as soon as possible. This places a premium on both fashions to customers. As illustrated in Figure 14.1, the four support activities cut across all five primary activities; that is, elements of a given support activity can be found facilitating each of the five primary activities.

Procurement: The activity of procuring usable and consumable assets can be found in each of the primary activities.  For example, not only must raw material be purchased within inbound logistics but procurement within inbound logistics may also involve the purchase of deliver trucks and scheduling software for the fleet.  Purchases of machinery and replacement parts are examples of specific procurement activities within operations.

Technology Development: This support activity of the value chain revolves around know-how and the tools or equipment related to the exercise of that know-how.  The technology may be as simple as pencil manually recording information or as complicated as a supercomputer.  While technology development may be concentrated on product development or process innovation, know-how and the means by which that knowledge is applied to tasks is present in all five primary activities.

Human Resource Management: Given the impact that capable and motivated people can have on all activities of a firm, human resource management is potentially the key support activity. In service industries such as law, consulting, or accounting, the quality of the people determines the quality of the service, and, therefore, the component of the value chain is significant.

Firm Infrastructure: Firm infrastructure has less to do with brick and mortar and more to do with functions that support all primary activities.  Infrastructure consists of planning, finance, accounting, legal, government relations, among other activities.  It is principally the information supplied by these functions to the various primary activities that is of concern. For example, legal information concerning worker safety standards may be needed in operations, while legal information on truth in advertising standards may be needed in marketing and sales. Just as each of the primary activities had associated costs, so do the support activities.  The support activities enhance the firm’s positioning and profitability to the extent that they contribute to valued primary activities and the final product or service purchased by the customer. The importance of the support activities changes and depends on the products and services and the preferences of the customers. Returning to our earlier example of the fashion industry, the preference for customers for the latest styles, colours, and fabrics as soon as possible may reduce the importance of legal information as a component of the firm’s infrastructure, but might increase the importance of planning information as related to specific buying seasons and purchasing cycles. This might also increase the importance of the technology development support activities that specifically allow fabrics to be coloured after they have been assembled into a sweater, rather than as separate yarns, so that the latest colour preferences by customers can be incorporated.All activities in the value chain are a source not only of costs but also of buyer value.  A firm is profitable if the collective value of performing activities in each element of the value chain exceeds the costs of performing those activities.  Firms gain their competitive advantage from constantly innovating and upgrading every aspect of the value chain, and by figuring out new ways to conduct each of these activities.