When a company is considering expanding into international markets, it is required to ensure that it possesses “what it takes” to compete successfully on an international level. However, determining whether or not our organization can successfully compete in other countries is not always an easy task. There are a lot of known and unknown factors that will affect the performance of our companies, and it can be very helpful to run some figures to see what kind of outcomes we can anticipate.
There are a lot of different corporate hypotheses that can assist us in understanding what aspects of our company are strong and what aspects need improvement so that we can make decisions based on accurate information. In the field of business, four distinct theories stand out for emphasizing international competitiveness. In this article, we are going to examine how these theories can assist us in the process of developing an effective market strategy.
The Porter’s Diamond
The conceptual model known as Porter’s diamond, which was established by Porter in 1990, is a good place to begin when attempting to comprehend how businesses come to possess a significant advantage in their respective markets. With the help of this diamond, we can comprehend the process by which a nation can develop into a thriving home base for internationally marketing-oriented businesses operating within a specific sector. Thus according to Porter, the degree to which a country benefits from its competitive advantage is determined by four key factors.
Conditions and Factors
The most significant factors contributing to a nation’s competitive edge are not its natural resources but rather those that it has developed within itself to compete with the economies of other advanced nations. The following are examples of production factors:
- Advanced Considerations
- Understanding Capital Infrastructure Talented Labor Infrastructure
- Factors of Primacy
- Underskilled Labour
- The world’s natural resources
Because every company is capable of acquiring basic factors, only advanced factors have the potential to generate a competitive advantage for their organization. The same can be said for further categories, such as Generalized and Specialized Factors. Comparable to organizations that can conduct research in specific fields. The vehicle sector in Germany serves as a good illustration of this predicament because of how it currently stands.
Conditions About Demand
The makeup of home demand has the potential to influence how an organization comprehends and satisfies the requirements of its customers. Those businesses that operate in markets in which domestic demand can provide a more accurate representation or an earlier insight than their international competitors can have can gain a competitive advantage through their operations in those markets. This does not imply that the magnitude of the market is significant; rather, it emphasizes the importance of the level of sophistication exhibited by the demand.
Customers With a Higher Level of Sophistication Are Going to Want More Sophisticated Goods
This results in something that is typically referred to as early saturation as consequence. Because of this, businesses are compelled to pursue continuous innovation and upgrade, in addition to exploring new market opportunities, to extend the PLCs. The other four factors are affected by further two factors, which are national policy and random events. These two factors influence the first four factors.
Industries that are Related to and Support Others
The existence of supplier industries that are competitive on an international scale confers a competitive advantage on all industries that come after them. This enables quick and easy access to the inputs that are the most economically viable. A competitive advantage can be created by utilizing locally based suppliers in terms of gaining access to new information and innovations. In addition, the excellence of the upstream process contributes to the development of related industries. Therefore, the existence of related businesses makes it possible to create synergies and partnerships within the value chain.
Company Methods and Organizational Structure
There are additional conditions that relate to work ethic, discipline, regard for authority, and other personality traits that are an expression of the values and history of a country. These factors can play a role in the formation of businesses that internalize the aforementioned values and direct those values toward the objectives sought by the company. A further component is local rivalry, which plays a role because intense local competition puts organizations under pressure to pursue internationalization strategies.
Policy Made by the Government
- By enacting regulatory and deregulatory laws, the government can exert influence over all four aspects. The influence of the government can be strengthened or weakened, depending on the situation.
- The government can generate new factors or improve existing ones, like by improving educational opportunities.
- Under the right supply and demand circumstances, a government can encourage business expansion by investing in expanding markets and industries that have the potential to meet higher production standards as a result of the government’s assistance.
- Clusters are important to the growth of related industries, and the government plays a crucial role in their development, assistance, and cultivation.
- How businesses are established, organized, and disciplined, as well as the policies of firms and governments, are all influenced by these factors.
- A couple of examples of this would be avoiding limitations on the stream of capital and human resources. Simultaneously, antimonopoly policies are at the foundation of competition within an organization.
These are situations in which none of the factors that we have talked about up until this point play any role in any industry; despite this fact, it has frequently played a part in a wide range of industries. For example, the petrol crisis of the 1970s pressured Japan to realize that it was a country that was excessively dependent on fossil fuels and forced Japan to take very significant actions towards conserving energy.
The Diamond is a structure in which every factor can influence the behavior of every other factor. When we talk about national competitiveness, the most prominent example is the auto industry in Germany. The automobile industry in Germany has a national competitiveness because Volkswagen, Opel, BMW, and Mercedes are all located in the southern region of Germany. Even though the model is utilized by a very large number of people, it is not immune to criticism.
The model is based on the notion that a competitive edge has been attained due to the unique demand conditions that have been encountered in the domestic market. This was not always the case, as evidenced by the fact that certain sectors were able to flourish solely due to the demands of customers located in other countries. For instance, the majority of Nestle’s revenue comes from outside the country. In this prototype, the valuation of environmental assets is significantly understated; however, other studies have demonstrated that the capacity of certain companies.
Value Chain Evaluation
The customer’s overall assessment of the product or service that a company has to offer is referred to as the customer’s perceived value. The customer’s perception of value is contingent on there being a satisfactory equilibrium between the benefits gained and the costs incurred. Also, keep in mind that people are not looking for a quarter-inch drill; rather, they are looking for a quarter-inch hole.
The triangle of competitiveness. consists of the company, the customer, and the other competing business. When comparing the perceived value provided to the client by the company and the expenses involved between the company and the competitor, the perceived value provided by the company is more important.
In addition to working through the value chain, we have realized that the value chain itself is one of the factors that have the greatest influence on the final cost. The value chain incurs additional costs at each stage it progresses through. When it comes to price competition, one of the tactics that businesses employ is to analyze the value chains of their rivals to identify the stages that are the most costly for their customers and then work to reduce those costs as much as possible.
However, we have concluded that the real key to cost reduction is not in locating the most pricey links in a competitor’s value chain so much as it is in moving through an experience curve. This means that businesses can manufacture at higher rates and lower costs as scale economies take place, or they can overtake the expertise curve by implementing a new and more effective manufacturing technology.
According to what we’ve learned thus far, the assets, resources, and capabilities of a company are what give it a competitive advantage over its rivals. The VRIO analysis is something that has been suggested to evaluate the benefit that is provided by this particular combination of resources, assets, and capabilities. This analysis requires the resources to be:
- V (Value), can the resource be considered valuable to the organization?
- R (Rarity): Does the resource have a low supply or is it one of a kind among its rivals?
- I (Imitability) — Is the resource challenging to imitate, or will a business that tries to acquire it be at a competitive disadvantage?
- O (Organization) Does the company have an organization that can fully utilize this resource and derives value from it?
You are only in the presence of a competitive advantage if the answer to all four of the aforementioned questions is yes. Rather, competencies are divided into two categories: personal, which includes knowledge, skill sets, abilities, experience, and character; and corporate, which includes all of these except for personality (processes). The activities along the value chain that constitute a company’s core competencies are those in which the company is regarded as performing superiorly to its rivals. The process of evaluating a company’s relative market performance in comparison with that of its primary competitors is known as competitive benchmarking. This can result in the development of a strategy, which can be broken down into the following points:
- Step 1: an analysis of the situation, which includes the identification of any gaps in competence; specifically, how do the company’s A competencies compare to the market demands placed on suppliers?
- Step 2: What do you see the demands of the market being in the year 2020? Triage
- Step 3: Objectives (the same as stage 2), what does company A want the competence status to look like in five years?
The fourth stage is the implementation of the strategy, which addresses the question of how the goals should be attained. Typically, this is accomplished through the distribution of resources, such as money, people, etc.
In this assessment, the value net, which is a company’s process of creating value in cooperation with partners and rivals as well as customers and suppliers (vertical network partners), is also an essential aspect to consider.
This enables us to see the formation of two symmetries: on the vertical, the co-creation of value by suppliers and customers such as in the scenario of IKEA (the IKEA effect), which permits creating value on the consumer side; and on the the horizontal, the element that forces us to comprehend that both acquaintances and foes are parts of a larger value net. This is the case, for example, with businesses that you adore and companies that you cherish the ability to despise.