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Competitive strategy is the bedrock on which companies base business decisions to reach their targets and achieve profitability. Formulating and implementing strategies in international business is much more complicated and difficult task than doing so in home or familiar markets. Competitive strategy deals with the development of abilities by a firm to keep ahead of competitors in the fields in which it operates. Firms develop competitive edge in global markets by possessing certain assets, abilities or characteristics. The primary elements of competitive advantage are the critical offer, the significant operating factors and the firm's strategic resources. (Bennett and Blythe, 2002) Corporate strategies and international marketing strategies are linked closely and have a bearing on business performance. (Brown, 1994)
While some companies focus on a single source of competitive advantage, it is common for many firms to opt for a combination of options to be flexible and attain the best position even in adverse market conditions. (Bennett, 1996) In arriving at competitive strategies in international business, it is imperative to carry out a thorough analysis of the strengths and weaknesses of the firm and also its competitors, identification of key success factors in the business and develop a precise understanding of consumer behavior, demands and attitudes. The compulsions of globalization of trade and commerce have made it necessary for firms to reassess corporate strategies in the global context. This is applicable even for firms, which do not directly import or export for its operations, as the developments in international markets could give them desired competitive advantage.
Porter's model of competitive strategy:
Michael Porter, a pioneer in business strategy, proposed a model for competitive strategy. This model identifies three critical success factors and a firm must have achieved or oriented towards at least one of them: (Porter, 1980).
Cost leadership arising out of super efficient business practices and production methods or due to economies of scale
Differentiated output, which results in the firm's output distinct and superior in certain ways compared to competitors
Foray into niche businesses which are not in the realm of competitors
According to Porter, the three forces are mutually exclusive. For a firm that is the cost leader in its segment, it may not be possible to invest heavily in brand building or dedicate resources to achieve the degree of specialization required to cater to the niche markets. In the view of Porter if a company attempts to achieve all the three strategic positions simultaneously, it is likely to fail.
The competitive environment:
Porter postulated that five forces determine the nature and extent of competition for any industry, whether national or international - threat of new entrants threat of substitute product or services, bargaining power of suppliers, bargaining power of buyers, rivalry among the existing competitors. Rivalry intensifies with number of firms, slow market growth, high costs and high exit barriers. It is the driving factor that determines the extent of firm's indulgence in seeking competitive advantages. It varies across industries and markets and thus provides reasons for each firm to come up with its own marketing strategy. The five forces determine the long-term industry profitability. In industries where the five forces are favorable, there is an attractive return on the invested capital and firms will compete for gaining positions in the market. In pursuit of gaining competitive advantage, firms can resort to changing prices, product differentiation, creative use of sales and distribution channels and exploiting relationships with suppliers.
Porter advocates that understanding of the factors that drive competition between firms is vital to the success of international business:
Competition between firms increase as the market share of existing firms becomes more or less the same
Competition becomes high if the overall market growth slows down and there is over-supply
Firms marketing perishable goods or those that are difficult to store and move will find greater level of competition
Firms will compete hard if competitor's activities result in reduction of business volumes
As competing products become more and more similar, firms will compete fiercely to push their markets in the market.
Competitive advantage of Nations:
Some countries are more competitive than others and some industries within nations are more competitive than the rest. The mammoth rise of the multinational corporations and more recently global companies is an indictor that there is little of no correlation between corporate efficiency, the quality and availability of resources. Porter's analysis of national competitive advantages that lead to international trade were founded upon the following hypotheses:
the ability to automate production processes is resulting in a situation where manpower costs and human competencies are not as critical to successful operations as they once were companies are increasingly becoming international and has the capacity to shift operations from country to country when they so desire
The rise of Multinational Corporation has broken the link between corporate efficiency and availability of resources within the firm's own country. Thus a multinational corporation is able to leverage resources at multiple locations to its advantage and thus better prepared to face business uncertainties
In the modern world, manpower and capital market mechanisms of many industrialized countries are comparable and hence companies have greater freedom to decide on the location of their businesses. Pressures of demand and supply would determine competitive advantages rather than cost of skilled labor and capital markets.
The Porter Diamond:
In this model, Porter identifies four major forces that determine a country's ability to compete in international markets. They are factor conditions - skilled labor, road and rail infrastructure, natural resources; demand conditions - nature and extent of demand in the country, consumer needs, consumer perceptions and behavior; related and supporting industries - availability of suppliers, input component manufacturers, ancillary business services; firm strategy, structure and rivalry - the organization and management of firms and the degree of domestic competition. Other factors that can also influence the ability to compete are government policies and luck and chance.
The national home base plays an important role in determining the extent of competitive advantage the country or the firm can achieve in the global market. Porter contends that in the present and in future, investment driven economies would be more successful than factor-driven economies. In his view, nations that have heavily involved with industries have not been very successful. In fact, he goes further and argues that lack of national resources such as oil and minerals could push a country to high levels of innovation. Porter also advises against nations creating domestic monopolies, as such a move would render the domestic firms uncompetitive in international markets.
The process of internationalization:
In the course of international business, firms make successive decisions to enter, expand or retreat from investments in a market. Firms may either enter several international markets one after the other or in parallel. In view of the complexities involved in managing multiple activities, it is necessary to view internationalization as a process rather than as an isolated investment decision. Firms operating in multiple countries commonly referred to as multinational corporations (MNC) have already gone through the process of internationalization. Coca-Cola, Pepsi, Intel, Microsoft, Unilever, Nike are some of the well-known MNCs, operating in several countries across the world. These corporations are truly internationalized by virtue of their successful business operations in several countries.
Successful internationalized firms are generally leaders or prominent players in their fields. For instance several MNCs have exhibited clear cost leadership, in the sense that their cost structures are among the lowest in the industry, thus providing opportunities to maximize profitability. Other firms have been able to exhibit differentiation and their products and brands that are distinct from that of competitors. Many firms are also good in identifying niche markets and meeting the demand, thereby improving revenues and profits. Thus internationalized firms have shown the tendency to be cost effective, demonstrate differentiation or specialization in serving niche markets.
This relates to Porter's model of competitive advantage, which postulates that for achieving successful competitive strategy, firms must be able to attain at least one of the three elements - cost leadership, differentiation, and specialization. Internationalized firms would generally have some years of continuous existence is the markets and therefore have a relationship with the markets, buyers and sellers. These firms are likely to face the threat of new entrants, threat of substitutes or new products and usually, a fair extent of rivalry can be expected in most markets. Further, the firms would have developed close relationships with sellers and buyers and hence subject to their bargaining powers, depending on the demand-supply scenario in the market. Porter's model has therefore much relevance to the functioning of internationalized firms.
Advanced countries like the United States and the United Kingdom have more internationalized firms with many of them successful for several years. Firms of these countries are so large and well spread throughout the globe that they are unlikely to compete directly with firms from small or developing countries. However, such firms have different marketing strategies, which determine the degree of success in…[continue]
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