How companies gain competitive advantage through Porter's generic strategies

Competitive Advantage and International Business

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Competitive advantage and international business

Hello and welcome to today's seminar. Today is a two part seminar that covers two of the hottest and most sort after business topics. These are competitive advantage and international business. Many of you may have heard about these two terms but may not know what they mean so I will start by defining these two terminologies.

Competitive advantage

Competitive advantage can be defined as the advantage which one company or organization has over and above what its competitors have. It is the advantage that one company gains above another by offering consumers greater value.

How does value creation lead to competitive advantage?

When talking about competitive advantage, we have mentioned value. So how exactly does value come in? The company or organization needs to create a certain value in the market. Value refers to the perceived benefits of the product or service by the end user or customer. To increase the value, the company increases the benefits of the product or service to its customers. Value can also be increased by lowering the cost of the product Arend, 2009.

To reduce the cost, the company must find a way to use its available resource effectively and efficiently in order to achieve the lowest cost of production Chen & Edgington, 2005()

The creation of value is affected by the ability of the firm to create and capture value which depends on how strong the competition is. Therefore there is a direct relationship between value and competitive advantage. By increasing the value of the company's product or services, the company increases its competitive advantage. To increase its competitive advantage, a company must be involved in product innovation, process innovation or innovation of the transaction itself. All of these innovations increase the value of the company's products and services which in turn improves the company's competitive advantage Saeed, Grover, & Hwang, 2005()

What factors and strategies allow a firm to sustain competitive advantage?

Sustained competitive advantage is what a business needs in order to survive against the ever-growing competition over a long period of time. There are various factors and strategies through which a company can sustain its competitive advantage. One is by building a strong brand Wiggins & Ruefli, 2002.

A good example of this is the Virgin brand which is synonymous with low cost items and is well-known all around the world. A second strategy is that of having a strong organizational culture that is focused on the organization's core strategy. For example Apple which has an innovation culture which is focused on the company's core strategy of differentiation. Strategic HRM which focuses on utilizing the company human resources effectively and efficiently is also another strategy that can lead to sustained competitive advantage Collins & Clark, 2003(; Ferligoj, Prasnikar, & Jordan, 1997)

. A good example of failure can be seen in the Miller IT company which failed to manage its human resources effectively and thus failed to gain sustained competitive advantage. The company ended up paying the price for this by going bankrupt.

International business

Multinational corporations are those companies or organization which are operating in more than one country and are duly registered. Usually, they have their headquarters in one country but the structure of the company allows a somewhat decentralized management. These companies usually include both horizontal and vertical economies of scale.

Additional risks and opportunities faced by multinational corporations

The multinational corporations face an additional risk that is brought about by fluctuations of currency exchange rates. As a result of the company decentralizing its manufacturing facilities and operations to the other countries, it is affected by changes in currency rates whereby the company can experience problems in optimizing various aspects such as price and marketing strategies. The company must therefore heavily invest in human capital and innovative solutions to help it survive amidst these currency fluctuations.

A second risk is that of political interference. As a result of the multinational companies expanding to different political structures, there can be interference by the politicians. This is where the company is forced to comply with certain measures in the new market. For example, the local companies may try to use political interference to prevent the multinational corporation from gaining significant market share. Multinational companies have been greatly criticized for undermining the local culture through providing cheaper alternatives and this is one of the major sources of political interference. Doukas & Lang, 2003()

Despite these risks, multinational corporations also experience certain opportunities for growth. The first opportunity comes from the ability of the company to reduce its cost of production. The company can analyze the production costs of certain products and optimize its operations to achieve the lowest cost of productions Doukas & Lang, 2003.

A good example is a computer manufacturer who may find it to be cheaper to produce microchips in one country then import them into others. Therefore, the multinational can be able to apply a cost leadership strategy as a result of optimization of cost of production. A multinational corporation is also able to benefit from other factors such as low cost of labor which can significantly lower the cost of production.

Strategies that can be used by a multinational corporation to take advantage of the opportunities described

In order to take advantage of the opportunities described above, the multinational can decide to apply the gambler's earnings hypothesis. This is an attempt to explain the phenomenon of investing profits received from the foreign investments into other foreign subsidiaries. The investor keeps reinvesting in the current opportunities rather than scanning around the world for more opportunities. This ensures that the company builds its current opportunities till they are large enough to be self-sustaining before they invest further.

Secondly, the organization can use Porter's idea of clusters. This means that the company should promote cooperation and competition by enhancing the three innovations described earlier which are product, process, and transaction innovation. A good example of the clusers is the movie industry in Hollywood, the automotive industry in Detroit and biotechnology in Boston. This means that the company needs to find the right geographical area to invest in order to benefit. There are many reasons why these clusters arise such as availability of resources such as minerals, soil, port facilities, favorable weather, cheap labor, etc. Michael Porter, 1987(; M.E. Porter, 1998)

Strategies that can be used by a multinational corporation to mitigate the risks described

Governments are concerned with economic stability and that their local businesses are doing well. They therefore do their best to make sure that the monetary and fiscal policies in place favor local investment. To beat this, there are several strategies that can be put in place. First is a constant analysis of political risk. This ensures that the company is well aware of the political environment. Secondly is negotiation with local businesses. By engaging in such negotiations, the company can form international joint ventures or other business relationships that promote the position of the multinational corporation Weitzel & Berns, 2006()

Differences of achieving competitive advantage at international and domestic level

These differences arise majorly as a result of the risks and opportunities that multinationals experience. As a result of local competition which was already in existence, the chances of success of the multinationals are greatly impacted. The multinational thus needs to have a corporate strategy which is dynamic in nature and responds to the local market environment both internally and externally. The table below shows the differences between domestic and international conditions. These bring about the different strategies of achieving competitive advantage at the domestic and international level.

Factors

Domestic conditions

International conditions

Culture

Homogeneous

Heterogeneous

Currency

Uniform

Different currencies and exchange rates

Economy

Stable and uniform

May be variable and unpredictable

Government

Stable

May be unstable

Labor

Skilled workers available

Skilled workers may be hard to find

Language

Generally a single language

Different languages and dialects

Marketing

Many media, few restrictions

May be fewer media and more restrictions

Transport

Several competitive modes

May be inadequate

Source: World Bank

The best way of achieving competitive advantage in the international level is achieving greater economies of scale. This is the strategy that has been used by the successful multinational corporations such as Coca-Cola. By becoming cost leaders, the companies have managed to gain sustained competitive advantage which has helped them gain significant market share. Another way of gaining competitive advantage is ensuring standardization of products. This is done by ensuring that the product in one country is exactly similar to that in a foreign country. This helps the company build a strong brand image that is related to their quality.