THE COMPETITIVE ADVANTAGE OF FIRMS IN GLOBAL INDUSTRY
First and foremost, the important aspect to note and to discuss is the creation and sustainability of competitive advantage of multinational enterprise in the Global world and how strategies formed by each firm contributes to competitive advantage.
An industry regardless is a combination of group of competing companies providing services or products that compete directly with each other. Products are encircled by strategically oriented industries especially if they have similarities in competitive advantage. The industries who share the same consumers, technologies, production channels, and etc. have their distinct way of competitive advantage requirements.
Multinational enterprise competition is either won or lost depending on how successful their strategic competitive advantage favors them. The industry is an open avenue where multinational enterprise can compete with each other. Firms use competitive advantages to sustain and maximize profit for themselves although, there is no best competitive advantage but only the strategic means that is in favor of the firm succeeds.
There are two major aspects to be considered while choosing a firm’s competitive advantage.
- The structure of the industry where the firm competes. The industrial competitiveness differs to each other, so for sustainable profits, not all industries offer same opportunities.
- Positioning within an industry: competitive positioning is very important but some multinational enterprise in a highly attractive industry may still be in difficult situation and might not have earned satisfactory profits if it has not chosen the right competitive positioning.
Changes in the structure or entry barrier of industry can influence the attractiveness of the industry.
Analytical structure of industry
There are five competitive forces that explain what multinational enterprises undergo in order to compete with each other in the industry. They are as follows:
- The threat of new entrants into the industry
- The threat of substitute products or services of another firm
- Suppliers bargaining power
- Buyers bargaining power
- Rivalry among the existing competitors
The performance and the profitability of each multinational enterprise are determined by the strength of the above mentioned five forces. Many industries where by the five forces favors them performs profitably well with great invested capital returns such as soft drinks, database publishing, pharmaceuticals etc. Whereas, industries which experiences pressure from one or more of those five forces tends to struggle and few among the firms in the industry realize profitability for a long term.
The five forces are the basic tools used in determining the profitability of the industry because the prices firms charge are controlled by these forces and likewise the cost they have to bear and above all the investment required to competing in the industry. for instance, when a new entrants surfaces, there would be limits to the overall profit potential in the industry due to the fact that new entrants would bring fresh capacity and would look for market share pulling down margins.
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Higher cost of competitiveness brings about more profits for example, advertising, sales expense or passing on profits to customers in form of lower prices. Competitors tend to lower the price they charge on of products due to the presence of close substitute products. The structure of the industry’s function is determined by the strength of each competitive factor for instance, the extent at which an enterprise’s sales is at risk to any one buyer and the issue of price sensitivity. This is regarded as buying power.
Multinational enterprise can use their strategy influence the five forces to raise barriers of entry for instance the introduction of computer information to airline industry has raised the entry barrier as any new enterprise would require investment in hundreds of millions of pounds.
Industrial structure varies and are different to each other depending on the type of industry it is such as the pharmaceuticals where barriers of entry is very high and difficult to penetrate due to the need of huge fixed research and development costs and economies of scale in selling to physicians. Getting and developing a substitutes and effective to drugs is not an easy task.
The structure of the industry creates differing requirement for success such as differing skills and resources in different industries. Furthermore, multinational enterprise must be structurally attractive in the industry with sustainable entry barriers such as technology, skills, channels access and reputation of brand/product.
Factor that might affect competitive advantage of multinational enterprise is the standard of living which would depend of the capacity of the firm to penetrate structurally attractive industries. Structural change helps competitiveness and creates opportunities for competitors to penetrate new industries. Structural change creates avenue for competitors to penetrate industries.
A good example is the American dominance of IBM and Xerox, the firm was challenged successfully by a Japanese copier company due to underserved product segment such as small copier, using a new approach to the consumers by using dealers instead of direct sales, mass production of goods and pricing approach was modified.
This strategic approach reduced the entry barriers and had a negative implication on the previous leader’s (American firm) advantages.
Positioning within industries
According to Porter, at the heart of positioning is competitive advantage therefore for multinational enterprise to achieve success, they must possess a sustainable competitive advantage the two types of competitive advantages by Porter are as follows:
- Lower cost: this means being able to design, produce and market similar product more efficiently than other competitors. For example the Korean steel and semiconductor firm was able to produce at a very low cost, using low-wage but highly productive labor force and a modernized process.
- Differentiation: the ability to maintain quality and unique and superior value to consumers.
Competitive Advantage Creation
Competitive advantage would be shifted by innovation if multinational enterprise fails to perceive a new way of competing or are not able to respond to competition. For e.g. the Swiss watch producers were unable to identify the competitive advantage of Timex an American company due to the fear of low quality production whereas the American Timex mass produced inexpensive disposable watch. Causes of competitive advantages are:
- New technologies: some multinational enterprises steeped in an old technological paradigm cannot cope with this
- New and shifting consumer needs: in order to meet the needs of consumers firms might need to adopt a new value chain which might be difficult for some firms. For example the American fast food firms were able to gain competitive advantage over local restaurants due to this.
- Shifting cost: firms may find it difficult to compete as cost of production changes.
New entrant /new industry segment:
- Government regulation changes: government may change her regulation such as the standard required for each products. This might be a barrier for some firms to compete.
Highlights of factors affecting multinational enterprises
There are two major types of factors affecting multinational enterprise.
- Internal factors
- External factors
Internal factors include:
- Political parties
- Consumer of respective country
External factors include:
- Political environment,
- Legal environment,
- Socio-cultural environment
- Demographic conditions of respective country
FURTHER EXPLANATION ON THE PROBLEMS FACING MULTINATIONAL ENTERPRISE
The supply chain of multinational companies can be made richer and promising, the cost of work force which is high could be changed or transformed and potential markets can be expanded. Furthermore, the advantage of multinational enterprise competition can be made stronger in a global market. Otherwise, some problems are met in the changed environments in foreign countries at the same time. The changed environments can be divided into four main parts, such as the following:
- Difference in culture
- Factors occurring in the environment
- Legal issues in environment
- Economic environment
- Political system issues
All the changed environments make problems to multinational companies. In particular, problems which are caused by changed culture environment are the most serious aspect of running a multinational business.
Cultural Competitive Advantage
The norms and values of a country contribute to the cost and influence the cost of doing business in that country and likewise, the cost of doing business in a country enhances the strength of firm’s competitive advantage in an international market. For instance, the Hindu does not support capitalism as the ethics embedded in the Protestantism and the Confucianism furthermore, the Islamic laws disallowing interest payments mat raise the cost of doing business by constraining a country’s banking system.
The example of Japan’s cultural influence of competitive advantage on international business cannot be over emphasized due to its ability to lower the cost of doing business such as group affiliation, loyalty, reciprocal obligations, honesty, and education which has contributed to the success of the country’s competitive advantage.
In comparison of Japan and American firms, it has been argued that Japan is not in support of entrepreneur whereas the Americans are which has made it possible for the American firms to dominate companies that are in support of entrepreneurial activities such as biotechnology and computer software.
Maintaining Economic Competitiveness
As argued by Michael Porter, according to Heckscher-Ohlin theory, government’s investment in education would go a long way to help the country by giving a good and proper education and skills to a larger population in the country. A good example is Japan, the secrete behind her success is the provision of quality education to a larger number of her population, which has tremendously maintained, contributed and helped her competitive advantage.
Status of demand
The status of home demand has a major role to play in the production of domestic products which enables firms to be innovative and aspire for quality. Japanese’s quality camera production is due to the need for consumer’s demand.
The existence of complementing industries would help the strength of its competitive advantage such as the Swedish steel industry’s strong competitive advantage due to the production of fabricated steel like ball bearing and cutting tools.
Adopted strategy, structure and firm’s rivals
According to Michael Porter argument, the idea developed or employed by each country varies which might or might not help them maintain national economic competition. According to him, the Japanese and the German firms are being dominated by top engineers whereas in the USA, that with good financial background dominates the firms. He further argues that the USA’s loss of power in the engineering dominated firms was due their adopted idea.
Furthermore, rivals into the industry always bring about ways of improving production quality, cost reduction and innovative ideas which helps firms to compete internationally.
Michael Porter has very good competitive ideas which could help a firm to compete internationally.
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- McGraw-Hill/, (2005) international business: competing in the Global marketplace 5th Edition. The McGraw-Hill/Irwin companies Inc.
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