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:
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.
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.
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.
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.
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:
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:
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:
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.
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.
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
And 4 Execution Principles
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.
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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