4 Theories to Assess Your Firm’s Competitiveness

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4 Theories to Assess Your Firm’s Competitiveness

Thomas Brownlees

CEO and Founder,
440 Industries

Introduction

When approaching international market expansion, a firm is required to make sure that it has “what it takes” to compete internationally. It is not always simple, however to determine if our organisation can successfully compete abroad. So many known and unknown variables will affect our firms’ performance, and it’s very useful to crunch a few numbers to see what we can expect.

To this end, there are many business theories that can help us understand what are our elements of strength and weakness, so as to make informed decisions. There are 4 theories in business that distinguish themselves for focusing on international competitiveness, and in this post, we are going to see how they can help us develop a successful market strategy.

In this post, we’re going to look into:

1. Porter’s Diamond
2. Porter’s 5 Forces
3. Value Chain Analysis
4. Blue Ocean Strategy
5. Conclusions

1. Porter's Diamond

The starting point in understanding how companies develop their competitive advantage can be found in a theoretical framework, developed by Porter in 1990 called Porter’s diamond. This diamond allows us to understand how countries can become a successful home-base for international marketing-inclined companies in a particular industry. According to Porter, there are 4 relevant factors impacting the competitive advantage of a country.

Factor Conditions. The most important factors to competitive advantage are not natural resources but are created within the nation for competing with other advanced economies. Within factors of production we have:

- Advanced Factors
Skilled Labour
Knowledge
Capital
Infrastructure
- Basic Factor
Unskilled Labour
Natural resources

Only advanced factors are capable of generating competitive advantage because any company can instead acquire basic factors. The same goes with additional categories, such as Specialised and Generalised Factors. Like Scientific Research organisations capable of conducting research in particular fields. An example of this situation is provided by the automotive industry in Germany.

Demand Conditions. The composition of home demand is capable of shaping how a company interprets and responds to client needs. A competitive advantage can be acquired by those companies that operate in markets where the home demand is capable of providing a clearer picture or an earlier insight then foreign rivals can have. This does not mean that the size of the market matters, but it’s more relative to the sophistication of the demand. Sophisticated customers will require sophisticated products. A consequence of this is what is usually called early saturation. This forces companies to continually innovate and upgrade as well as finding new markets so that the PLCs can be longer. There are then two additional determinants which are government policy and chance events, in fact influencing the other 4 determinants.

Related and Supporting Industries. The presence of internationally competitive supplier industries creates an advantage in all downstream industries. This allows for efficient access to the most cost-effective inputs. Home-based suppliers allow to create an advantage in terms of accessing innovation and knowledge. Moreover this upstream excellence assists in creating related industries. The presence of related industries therefore allows for the creation of synergies and partnerships in the value chain.

Firm Strategy and Structure. There are also conditions which pertain to work ethic, discipline, respect for authority, and other character features which are an expression on a country’s values and history. These can contribute towards creating companies which internalise these values and target them towards goals pursued by a company. Another element is domestic rivalry, as vigorous domestic competition pressurises organisations towards pursuing internationalisation strategies.
Governmental Policy. The government can influence all the four elements, through regulatory and deregulatory policies. The government can both enhance and undermine these factors.
- Factors, the government can create or upgrade these factors, for instance through education.
- Demand conditions, a government can allow for companies to grow by investing in markets and industries which may achieve higher standards of production thanks to the government support.
- Related industries, the government have an important role in supporting, nurturing and growing clusters.
- Firm strategy, government policy influences how companies are created, structured, disciplined and so forth. Examples are avoiding restrictions on the flow of human resources and capital. At the same time, antitrust policies are at the grounds of internal competition.

Chance. These are events in which none of the elements we have discussed so far play any role, in any industry, but still, it has often played a role in a variety of industries. For instance, the petrol crisis of the 1970s pushed Japan to realise that it’s a country which was too heavily reliant on oil and took very aggressive steps towards energy conservation.

The Diamond is a system, as all factors are able to change all other factors. The most obvious example when talking about national competitiveness is the automotive industry in Germany which has a national competitive advantage, with VW, Opel, BMW and Mercedes, all placed in the south of Germany.

Despite the model being very widely used, it does not escape some criticism.

The model is based around the assumption that competitive advantage has been achieved because of the particular demand conditions experienced in the home market. This however has not always been the case as some industries were able to thrive only based on the demands of foreign customers. Nestle for instance relies heavily on foreign sales.
Natural resources are undervalued in this model, but other studies have shown that certain companies in Canada for instance were able to emerge only thanks to the ability to make use of locally available resources.

2. Porter's 5 Forces

However, for advanced industries located in advanced countries, this model is very influential. Also, see Porter’s Five Forces which relates to how competitive forces shape strategy. So if so far we’ve discussed competitive advantage in the context of a country, in this section we’ll delve into the competitive advantage of a company.

One of the benefits of the model is that it allows focusing on those forces which are really impacting profitability in an industry, and avoids distractions when it comes to other elements, like the internet which in this context is not a force, as much as an enabling technology.
Another interesting element pertains to how this model can be used to identify a positive-sum competition, where competition does not simply drag the price down but instead allows companies to define segments in the market where their product\service features are valued by consumers.

In the 5 Forces Model Porter suggests that competition is seen too narrowly, as, yes you may be competing with your direct competitors but you are in a fight for-profits with a much wider set of stakeholders.

A company’s competitive position is instead based on Porter’s 5 Forces model.

In this model the 5 forces that operate are as follows:

Rivalry Among Existing Competitors in an Industry
- The battle is usually in price competition, product introduction, advertising.
- The high rivalry is due to market share wars where you can only grow by earning other’s market share.
- If there is low differentiation, then you need to address branding
- If the exit barrier is high a company suffers high cost if they stop.

The threat of new entrants. This depends on the entry barriers like:
- Economies of Scale
- Product differentiation leads to strong brands which require stronger investments
- Capital Investment upfront in order to enter the industry
- Distribution, requiring intense sales interventions to gain shelf space
- Also the government, like in the case of alcohol, or through safety standards.
Bargaining Power of Suppliers. Competition is harder if:
- There is an oligopoly
- Forward integrations which put them in advantage
Bargaining Power of Buyers. A buyer group is powerful if:
- Buyers buy in large volumes
- If the products are standardised
- If buyers have a low profit, they will still try and pay less
- Backwards integration or self-manufactured
The threat of substitute products or services
- Firms from other industries can capture our customers,

3. Value Chain Analysis

The consumer’s perceived value is the consumer’s overall evaluation of the product service offered by a firm. The value in the eye of the consumer depends on a balance between the costs and the gains. And always remember that people don’t want a quarter-inch drill, they want a quarter-inch hole.

The competitive triangle. Is made up of the consumer the firm and the competitor. Winning a competitor is based on the perceived value offered to the consumer compared with the relative costs between the firm and the competitor. In Figure 4.5 company A and B struggle in providing a cost\benefit balance depending on the perceived value versus the relative cost. The perceived value advantage can derive from the 3 additional Ps that can be attached to the marketing mix (process, people and physical evidence).

In addition to processing the value chain, we realise that one of the elements which are mostly impacting the end cost is the value chain. At each stage, the value chain is adding additional cost. One of the strategies which are followed by companies is in fact to understand what are the most expensive stages in a competitor’s value chain and trying to bring down that cost to compete on pricing. However we realise that the true saving of cost does not rely on identifying the most expensive links in the competitor’s value chain, as much as by going through an experience curve, meaning that companies are able to produce at faster speeds and lower costs as economies of scale take place, or alternative leapfrog the experience curve by adopting a new more efficient manufacturing technology.

So, as we’ve already seen the Competitive advantage of a company lies in its assets or resources and capabilities. In order to assess the advantage presented by this mix of resources\assets and capabilities, the VRIO analysis has been suggested, whereby resources need to be:

V(Value), is the resource valuable to the firm?
R (Rarity) is the resource rare, or unique among competitors?
I (Imitability) is the resource difficult to imitate, or will a company trying to gain this resource be at disadvantage?
O (organisation) is the firm’s organisation capable of exploiting this resource and capture its value?

Only is the answer is yes to all 4 questions then, you are in the presence of competitive advantage.

Competences are instead split into two: personal (knowledge, skills, abilities, experience, personality) and corporate (processes).
Core competencies are value chain activities in which the firm is regarded as better than the competitors.

Competitive benchmarking is a technique to assess the relative marketplace performance compared with main competitors.

This can lead to the creation of a strategy, divided into the following points:

Stage 1: Analysis of the situation (identification of competence gaps), how are the firm’s A competences in relation to market demands of suppliers?
Stage 2: How will market demands look like in 5 years time? Triage
Stage 3: Objective, (same as stage 2) how does firm A wants the competence profile to be in 5 years?
Stage 4: Strategy Implementation, how should the objectives be reached? Usually through resource allocation, money, people etc.

In this analysis, it’s also important the value net, a company’s value creation in collaboration with suppliers and customers (vertical network partners) and complementors and competitors. This allows us to see the creation of two symmetries, on the vertical the co-creation of value by suppliers and consumers, like in the case of IKEA (IKEA effect) which allows creating value on the customer side, and the horizontal element which pushes us to understand that both friends and enemies are part of a wider value net. This is for instance the case with companies you love and companies you love to hate.

4. Blue Ocean Strategy

We are using the ocean as a metaphor to describe the competitive space in which an organisation chooses to ‘swim’.

The red ocean is a tough head-to-head competition in mature industries often results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool. Blue Ocean is instead an unserved market where the competitors are not yet structured and the market is relatively unknown, here the challenge is avoiding head-to-head competition. So in other words, in red oceans companies struggle for differentiation, but this should lead companies to draw into the blue ocean by re assessing what the customer really needs.

Value Innovation is, therefore, a strategic approach to business growth involving a shift away from a focus on the existing competition to one of trying to create entirely new markets, by focusing on innovation and creating a new marketspace. This is not incremental innovation as much as a focus market -pioneering and futurism. This shows how , to access to a blue ocean strategy can be provided thanks to the creation of value innovation by increasing the consumer’s value and reducing costs.

Blue Ocean Strategy, Making Your Competition Irrelevant

So what are the ‘Red Ocean’ and the ‘Blue Ocean’ Strategies? If we compare value propositions offered by companies on the market we can easily see how most companies occupy the so-called red ocean, or a market space which has already been thoroughly explored and where competition is dire, as the only way to grow is by acquiring market share of the competitors. In this context you are exploiting existing demand. In the blue ocean instead you are trying to discover an uncontested market, where you can find an uncontested space for an unknown industry or innovation, that allows companies to create new value propositions by creating new demands, therefore making competition irrelevant.

So how do you create value innovation? This is mostly done by assessing competition and creating a framework which lowers costs for consumers and lifts value, creating a value overlap which in unspoilt.

There are 4 Formulation Principles

Reconstruct Market Boundaries. (a. look across alternative industries, b. look across strategic groups, c. within the industry look across the chain of buyers, d. look at complementary product and service offerings, e. look across functional or emotional appeal, look across time).
Focus on the Big Picture
Reach Beyond Existing Demands
Get the Strategic Sequence Right

And 4 Execution Principles

Overcome organisational hurdles
Building Execution into Strategy
Align the Value, Profit and People Propositions.
Renew Blue Ocean.

So a company needs to, Focus, Divergence and create a Compelling Tagline. and how is this done?
Through the strategy canvas, the four actions framework and the Eliminate – Reduce – Raise– Create grid.

Strategy Canvas. Comparing Quality of Services that Make Up a Core Proposition.
Four Action Framework. Four Questions to Challenge a Way an Industry Operates.

Reduce. Which Factors Should Be Reduced well below the industry’s standard?
Raise. Which Factors Should be Raised well above the industry’s standard?
Eliminate. Which of the factors that the industry takes for granted should be eliminated?
Create. Which factors should be created that the industry has never offered?

5. Conclusions

There you have it, these are four really useful theories that can help us assess our firm competitiveness and establish where and how to expand our company to new markets. If this is a topic you’re interested in, look into our blog section to find additional materials, that can help you design the perfect strategy for your firm.

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4 Theories to Assess Your Firm’s Competitiveness Understanding how competitive your firm is on international markets is not a simple tasks, in this post, we present 4 theories that can help.

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Thomas Brownlees

I am an Anglo-Italian business lecturer and consultant based in Florence, Italy. In 2017 I started 440 Industries, an education and training company focused on fashion, music, and technology. Our mission is to help students, entrepreneurs and managers in overcoming the challenges of starting, developing and scaling their business in the creative industries. When there's a will, there's a way!