The level of international competitiveness and its strategic implications

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The level of international competitiveness and its strategic implications Muhittin ORAL * Alan E. SINGER * * Ossama KETTANI * As the role of international competition in determining the relative positions of companies in the markets has become more evident than ever, governments and companies have become more aware of the importance of global competition in formulating their own strategies. As a result, the interest in the use of various competitive analysis techniques has grown rapidly, especially during the last decade. This article discusses a particular international competitiveness model and describes its application in manufacturing industry. The model is not only instrumental in quantifying the overall competitiveness levels of manufacturing firms but also useful in identifying specific weaknesses and strengths of a given industrial firm.

1. International competition and strategy

Phrases such as “ the new industrial competition” (Abarnathy, Clark and Kantrow, 1981), “competing through manufacturing” (Wheelwright and Hayes, 1985) and “strategies to gain and sustain competitive advantage” (Porter, 1980, 1985) are but a few examples that point out how important it is to link the strategies of a company with its level of competitiveness. In fact, the essence of formulating strategies is to improve, directly or indirectly, the competitive performance of the company. Many articles have appeared in the marketing and strategy literature providing excellent * Author’s address: Department des Sciences de l’Administration, Universite Laval, Ste-Foy, Quebec, P.Q. GlK 7P4 Canada. * * Author’s address: Department of Business Administration, University of Canterbury, Christchurch 1, New Zealand. Intern. J. of Research in Marketing 6 (1989) 267-282 North-Holland

0167-8116/90/$3.50

insights into the linkage between strategy and competitiveness. The studies of Hayes and Wheelwright (1984), Porter (1980, 1985) and Hayes (1985) are leading examples. They are, however, mostly descriptive in nature and usually provide only checklists as to the type and nature of some strategically important factors (intensity of rivalry among existing firms, possibility of new competitors entering the market, the characteristics of suppliers and the nature of the relationship established with them, bargaining power of buyers, threat of substitute products or services, the nature of government interventions, etc.) and do not contribute very much to resolving the issue of ‘measuring’ the competitiveness level of a company in international markets. A method of measuring international competitiveness is important if one wishes to position a company relative to its competitors in the markets of interest. Here we discuss a specific method that was developed for the Industrial Development Bank of Turkey (IDBT) to measure the levels of international competitiveness of local companies in foreign markets. IDBT needed a method to measure the international competitiveness of local companies in foreign markets. Such a need was prompted by the current economic realities (high levels of foreign debt, unutilized production capacity, unemployment, foreign trade deficit, foreign currency needs, etc.) of the country and the closeness of the application date to become a full member of the European Community (EC). A partial solution to the economic problem was to export industrial products in increasing quantities for a number of years to come. Accordingly, IDBT initiated a series of research projects

0 1990 - Elsevier Science Publishers B.V. (North-Holland)

hf. Oral et al. / International competitiveness and its strategic implications

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concerning the export capabilities of domestic companies, for the purpose of designing assistance programs in the areas of technology, production, finance, management, and marketing. This paper presents the international competitiveness model developed for IDBT. The features of the model and its application to 30 selected local manufacturing companies are discussed below. The companies were in the glass, textiles, and food processing industries, of all which are at a mature stage, with price competition and little or no product differentiation. Also discussed, albeit in general terms, is the use of the model in formulating competitive strategies.

formulation of international competitiveness is discussed; then, a mathematical model is presented. 2.1. The conceptual model of international competitiveness As a prerequisite to developing an operational model, it was necessary to formulate the basic concept of ‘international competitiveness’ in a way that could permit practical measurement. A distinction between ‘current’ and ‘potential’ competitiveness level was drawn. The current level of competitiveness of a company - as will be seen more clearly when discussed formally in more detail below - is its competitive position achieved under the existing conditions which are actually shaping the environments of both the firm and the competitor. In the context of the economic theory of the firm, the concept of current level of competitiveness very much

2. The international competitiveness model This section describes the international competitiveness model. First, a conceptual

CURRENT POSITION t

CURRENT COMPARATIVE POSITION

POTENTIAL POSITION

t

t

POTENTIAL COMPARATIVE POSITION

1C U R R E N T J INDUSTRIAL MASTERY

L POTENTIAL J

EJA=FAIR+,

f3p=Fp/Rp

FA

RA

FP

INDUSTRIAL MASTERY

I

! CURRENT LEVEL OF COMPETITIVENESS 4

LA= en. IlA

4 : :

1, :

POTENTIAL LEVEL OF COMPETITIVENESS Lp=tJp.Ilp A

: : : :

T

: : $

CURRENT COST SUPERIORITY v...

‘:, *-

:

*-.* ‘-.

-------------------------

POTENTIAL COST SUPERIORITY

:

nA

I_

:

:

COMPANY’SANDCOMPETITOR’S MACRO-ENVIRONMENT

_____________________________ ’

Fig. 1. The conceptual model of international competitiveness.

hf. Oral et al. / International competitiveness and its strategic implications

resembles the concept of X-efficiency of Leibenstein (1966). The potential level of competitiveness, on the other hand, is the competitive position that could have been achieved if both the firm and the competitor were to utilize all their current resources in the most efficient and effective manner. In this sense, the potential level of competitiveness corresponds to the concept of rational allocative efficiency (see, e.g., Leibenstein, 1966; Frantz, 1988) in the economic theory of the firm. The way the levels of current and potential competitiveness are conceptualized is shown in Fig. 1. The arrows shown with solid lines are the relationships which are explicitly incorporated into the international competitiveness model, whereas the arrows with dashed lines correspond to the relationships which are implicitly or indirectly handled. In the conceptual formulation used here, the current (potential) competitiveness level of a manufacturing company depends upon three basic factors: - current (potential) industrial mastery, - current (potential) cost superiority, and - company’s and competitor’s macro-environment. In short, current (potential) industrial mastery is a comparative measure indicating the company’s successes compared to its competitors in terms of generating and managing capital and operational resources. A high current (potential) industrial mastery score relative to competitors implies that the company performed (or has the potential to perform) better in selecting and utilizing its productmix, capacity, technology, machinery and equipment, plant location, personnel, etc. To operationalize these two concepts, four separate position measures were defined: - current position, - current comparative position, - potential position, and - potential comparative position. Sustainable competitive advantage also de-

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pends on a input costs. measure of superiority

company’s sourcing policies and To incorporate input costs into a competitiveness, indices of cost were constructed. The current (potential) cost superiority index is a weighted average, as will be seen shortly, of the company’s current (potential) input costs, compared to competitors. The usual manufacturing cost items are included as well as the cost items related to transport, distribution, advertising, promotion, and other marketing activities. Finally, the macro-environment of the company and competitors is represented in the model through factors such as interest rates, tax policies, local infrastructure and communications, political factors such as organized labor activity, tariffs and quotas, as well as local availability and quality of supplies. These factors are incorporated into the operational form of the model indirectly, as shown by the dashed lines in Fig. 1. This point will be clarified in the subsequent discussion of the mathematical model. 2.2. The mathematical model of international competitiveness

Having briefly discussed the major factors determining the level of international competitiveness of a company against its competitor in a given market, we shall now first elaborate on the concept of ‘position’ which is central to measuring the company’s industrial mastery and, hence, to evaluating its international competitiveness; then we shall provide mathematical expressions for industrial mastery, cost superiority, and competitiveness level, 2.2.1. Current position

This is the output that the company produces in the period for which competitiveness is being measured (be it historic, current, or future). Current position is formulated as a linear program, reflecting the practically uni-

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hf. Oral et al. / International competitiveness and its strategic implications

versal adoption of this methodology in production planning. More specifically, the estimation of current position I;k. was based on the following model: FA = Max c CX~X~ i Subject to Caijxj < li, i = 1, 2 ,..., m, j j=1,2T---Y n,

xj2°0,

where xi = the actually planned or programmed quantity of product j,

produced if the existing facilities and resources of the company were utilized fully and most efficiently. It produces awareness, when compared to the current position of the company, of the extent to which the existing facilities and resources are currently being successfully utilized. This sort of knowledge is most useful in making operational and investment decisions. The estimation of the potential position FP was based on the following model: FP = Maxxaryyj j Subject to C”iTYj<

CY~ = the actual weight or conversion coeffi-

cient (price, unit profit, or any other monetary or non-monetary factor) of the unit of product j into ‘standard’ units of output, aij = the company’s actual usage rate of capital resource i (machinery and

equipment, plant space, etc.) to produce one unit of product j given the current utilization of the company’s existing resources and facilities, and Ii = the actual availability level of capital resource i at the company.

Thus, FA is the planned output in standardized units. Its value is often available from actual budgets or production plans. In cases where competitiveness during some past period is to be measured, actual historic output is used as a surrogate measure of FAA. The conversion process into standardized units accounts for the factors such as quality, company image, marketing competence, etc., through the assignment of higher of lower values to aj. 2.2.2. Potential position

It is of interest to know the maximum possible optimal output that could have been

j ~~20,

li*,

i=l,2 ,-**, m,

j=l,2 ,..., n,

where yj = the quantity of product j that could be produced with the best possible technological and managerial parameters of the company, cy~ = the weight or conversion coefficient (price, unit profit, or any other monetary or non-monetary factor) of the unit of product j into ‘standard’ units of output assuming the best possible utilization of the company’s existing resources and facilities, at;= the company’s usage rate of capital resource i (machinery and equipment, plant space, etc.) to produce one unit of product j again assuming the best possible utilization of the company’s existing resources and facilities, and 1: = the potential availability level of capital resource i at the company.

Note that the potential position model and the current position model are basically the same, except for the values of parameters (Y, a, and 1. The estimation of these parameters

M. Oral et al. / International competitiveness and its strategic implications

in the case of the potential position model is more demanding and it is necessary to call upon the model-user’s detailed personal knowledge about the company’s capability. 2.2.3. Current comparative position The current comparative position is an indicator of the company’s output (in terms of production, distribution, services, etc.) if it were to have the actual technological and managerial capabilities (i.e., the ability to utilize the existing resources and facilities) of the competitor with whom the comparison is being made. The facilities of the competitor are, however, ‘normalized’ (scaled down or up, but preserving the competitor’s actual technological and managerial characteristics) according to the size of the firm, in order to have a suitable basis for comparison. For instance, if the competitor currently has the technological and managerial capability of producing X units of output per worker, it is assumed that the same labor productivity applies to the company for whom the index is being evaluated. Then the comparative position of the company becomes the competitor’s actual labor productivity (thus preserving the technological parameters of the competitor as currently achieved) multiplied by the actual number of workers employed at the company (scaled down or up to the size of the company). This is a pragmatic way of finding the comparative position. Clearly, other procedures can also be devised reflecting the competitive environment in which the company operates. In this empirical study, the estimation of the current comparative position R, was based on the following model: R, = MaxzPjuj j Subject to xbijuj
uj

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where uj = the quantity of product j that could be produced had the company possessed the actual technological and managerial parameters of the competitor, pi = the competitor’s actual weight or conversion coefficient (price, unit profit, or any other monetary or non-monetary factor) of the unit of product j into ‘standard’ units of output, and bij = the competitor’s actual usage rate of capital resource i (machinery and equipment, plant space, etc.) to produce one unit of product j. Observe that the current comparative position model above is basically the same as the firm’s current and potential comparative position models, except for the parameters pj and b,,, which reflect the actual characteristics of the competitor. The concept of current comparative position is important since it forces the planner or decision maker to think in terms of the competitors’ technological and managerial capabilities. In other words, the competitive environment of the company is partially incorporated through the current comparative position model, a feature that is rather essential in formulating competitive strategies. 2.2.4. Potential comparative position The potential comparative position is an indicator of the company’s optimal output if it were to have the best possible technological and managerial capabilities of the competitor with whom the comparison is being made. The estimation of the potential comparative position R, is based on the following model: R, = MaxxP;Cvj j Subject to zbi2;.vj
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M. Oral et al. / International competitiveness and its strategic implications

where vj = the quantity of product j that could be produced had the company possessed the best possible technological and managerial parameters of the competitor, pj*= the weight or conversion coefficient (price, unit profit, or any other monetary or non-monetary factor) of the unit of product j into ‘standard’ units of output assuming the best possible utilization of the existing resources and facilities at the competitor, and b$. = the competitor’s usage rate of capital resource i (machinery and equipment, plant space, etc.) to produce one unit of product j assuming the best possible utilization of the existing resources and facilities at the competitor. 2.2.5 Current industrial mastery This is defined as 0, = FA/RA and is a measure of the combined performance of the top level management and line management in all functional areas. It indicates where the company’s actual achievement stands in comparison to that of the competitor with respect to capital resource and facility utilization. A value of 0, greater than one (less than one) implies that the company is ahead of (behind) the competitor in terms of managing its facilities and capital resources. 2.2.6. Potential industrial mastery This is defined as and is a partial measure of strategic management performance in providing facilities and deploying assets in a way that potentially enables the company to improve its tierfor-

mance relative to competitors. A value of greater than one indicates that the company is in a strong strategic position. If this value is less than one, then the company is vulnerable. 2.2.7. Cost superiority The above measures of industrial mastery reflect only the output position of the company and do not, take input costs and usage rates into account. Competitiveness level depends on cost position as well as industrial mastery (Fig. 1). To reflect the cost position of the company, two indices called current cost superiority and potential cost superiority are defined as follows: current cost superiority =

potential cost superiority =

where PkR (P,*,) = the competitor’s actual (potential) price or unit cost of uariable resource k (or input k), PkF (P,$) = the company’s actual (potential) price or unit cost of variable resource k (or input k), qkR (q&) = the actual (potential) quantity of variable resource k used by the competitor to produce and transport one unit of output to the market, and qkF (q,$) = the actual (potential) quantity of variable resource k used by the company to produce and transport one unit of output to the market. A value of fl, > 1 (n, < 1) indicates that the company (competitor) is currently in a

M. Oral et al. / International competitiveness and its strategic implications

better position with respect to actual unit purchasing costs and input usage rates when all the inputs are considered together. The same argument also holds for lIi, > 1 (IIr < 1) in the case of potential competitiveness. If IT, > 1 and 17, > 1 against all competitors, then the company is clearly the cost leader and therefore has a competitive edge in the market. As briefly mentioned above, the cost superiority indices normally include the usual costof-goods-sold items (raw materials, labor, energy, overhead, etc.) as well as selling and administrative expenses (transport, special packaging, distribution, promotion, advertising, and other marketing activities) for the product. Typically, the components of cost superiority consist of several types of raw materials, different types of energy (electricity, LPG, fuel-oil, natural gas), different categories of manpower (skilled and unskilled workers, technicians, engineers, managers), financial resources (capital, short-, medium-, and long-term), and marketing items (transportation, distribution channels, sales force, promotions, advertising). In this study, the summation term is called the actual CkPkdkF (~kPk*FG+F) (potential) unit-cost-to-compete of the company. With this definition, II, (II,) is simply the ratio of competitor’s actual (potential) unit-cost-to-compete to that of the company. However, there are several reasons why an alternative but equivalent mathematical representation of expressions (1) and (2) is needed for practical applications of the measurement model in a company. First, practicing managers often insist that ‘competitor’s unit costs’ are unobtainable. Second, they often point out that direct comparison between ‘unit costs’ is inappropriate because of different management accounting principles employed. To overcome these purely behavioral obstacles to implementing the competitiveness model, the following formulations of cost superiority, which are mathematically equiv-

213

alent to (1) and (2) but enable indirect estimation of cost positions, were used: current cost superiority =

(3) potential cost superiority =

where ‘k = (‘kFqkF)/(

c pkFqkF) k

and vc = mFdFV( m&&). k

These equivalent formulations are more useful in practice, because there are several sources for many of the data items for each term in the formulas, such as input prices and usage rates. There are often several possible sources for data items for the equivalent formulation. Moreover, data tailored to the equivalent formulation also enables ready comparisons between a company and its competitor, in terms of individual input cost items and usage rates. The use of formulas (3) and (4) is not without shortcomings, however. When the company’s production process requires inputs of categories different from those of the competitor, a difficulty arises in terms of combining unlike units in the calculations. To resolve this problem, one needs to find a least common denominator that the different inputs share. Within certain categories, there exist physical common denominators. For instance, in the case of energy, BTU is the common unit of measure to which all forms of energy are converted for cost superiority calculation purposes. If nothing can be done in finding a common denominator, one is left with the formulations given in (1) and (2). Fortunately, there are many industries, such

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M. Oral et al. / International competitiveness and its strategic implications

as iron and steel, pulp and paper, glass, textiles, where this kind of conversion process is not needed. 2.2.8. Level of international competitiveness The level of international competitiveness of an industrial company is a function of both its industrial mastery and cost superiority. In other words, there is an interaction effect between industrial mastery and cost superiority, and competences in these areas are substitutable. This permits specialization in the sense that a company can still have a high level of competitiveness by being average in industrial mastery but having a very high level of cost superiority, or vice versa, as will be seen in Section 3. These features of international competitiveness plus the fact that the values of industrial mastery and cost superiority vary around 1 naturally suggest a multiplicative function to find the level of international competitiveness of a company. In this study, we define two types of international competitiveness level: actual competitiveness level = LA = @,n,, potential competitiveness level = L, = O,II,. As in the case of industrial mastery and cost superiority, a value LA > 1 (L, < 1) indicates that the company is currently more (less) competitive than its competitor. The more (less) the value of LA exceeds 1, the more (less) competitive the company is. The actual competitive edge (L, 2 1) may be due either to a better current industrial mastery (0, 2 l), or to a higher current cost superiority ( nI, 2 l), or to both, since L, is the product of 0, and II,. The same interpretation, of course, also applies to potential international competitiveness. Differences between the macro-environment of the company and that of the competitor are already partly reflected in the competitiveness model through differences in interest rates, energy prices, labor costs, etc. There are also some environmental factors

which directly effect the competitiveness levels of companies across foreign markets. One of them is the rate of export rebates paid to companies on the value of goods and services exported, which is a widely practices form of government subsidy in many countries. Such factors can easily be incorporated into the competitiveness model by making small modifications. For instance, suppose that an export rebate rate of y % is being applied by the government. A company eligible for this subsidy can calculate the impact of y % on the unit-cost-to-compete (since its price and unit-cost-to-compete are known). Let 6 be the resulting percentage decrease in unit-costto-compete. Then, the actual and potential competitiveness levels of the company can be modified to yield

respectively. If a similar export subsidy or advantage is provided to the foreign competitor by its government, then one has to modify the competitiveness model accordingly. Countertrade agreements are another factor affecting international competitiveness capable of being accommodated by the competitiveness model. Countertrade effectively eliminates the strategic significance of companies in countries not party to the particular agreement, leaving a reduced set of effective competitors to include in a multi-competitor analysis. Thus, a company that wishes to participate in a given export market need only consider other participating home-based companies as competitors for the purpose of measuring its competitiveness (see Oral et al., 1989). Before discussing the application of the competitiveness model, it is perhaps more appropriate to position it in the literature and make some remarks on its other properties. The most recent extensive literature surveys on competitive analysis techniques (see, e.g., Prescott and Grant, 1988; Singer and Brodie, 1990) indicate that the only model-based ap-

M. Oral et al. / International competitiveness and iis strategic implications

preach which is explicitly developed to measure the level of competitiveness is the one due to Kamani (1982). In this model-based approach, an oligopoly, where the price of product is fixed and the same for every participating company, is formulated as a nonzero sum game and the market shares associated with an equilibrium solution are taken as the competitive strength for the firms. More specifically, the competitive strength of a firm is expressed as a multiplicative function of its competences in production (suggested to be a function of average unit production cost) and marketing (suggested to be a function of marketing expenditures and relative marketing competence). Although the model seems to be conceptually sound from the view point of the economic theory of the firm, the level of aggregation is rather high to make it readily available for application for decision making purposes. The other point of concern is that it lacks guidelines as to how one can measure ‘relative marketing competence’ of a firm, a concept which is central to the application of the model. The international competitiveness model presented here is also a method of measuring organizational performance. From this point of view, the work of Beer (1972) appears to have some resemblances with the concepts of competitiveness model. Beer (1972) defines three levels of organizational achievement: actuality, capability, and potentiality. Potentiality is always better then capability, which is always better than actuality. He then defines productivity (actuality/ capability), latency (capability/potentiality), and performance (actuality/ potentiality) as sensible quantification of organizational achievement. However it is defined, he admits the fact that this involves research work on a considerable scale. The competitiveness model discussed in this paper is an attempt in that direction. The last, but not the least important point to be made about the international competitiveness model is the fact that it was de-

215

veloped for the use of measuring the competitiveness of companies in mature industries - namely, glass, textiles, and food processing - and therefore needs to be evaluated in this context. However, this does not say that it cannot be used, perhaps with some modifications, in other industries. Here, we nevertheless limit ourselves to the use and interpretation of the model in industries where the products are highly undifferentiated and price is the most dominant factor governing performance. 3. An application of the model

The study conducted for the IDBT involved 30 local companies, selected from textiles, glass, and food processing industries. Whilst application of the model to measuring competitiveness of a single given company is relatively straightforward (Oral, 1987) a rigorous application to this larger set of companies would involve time-consuming development of basic-position models for each company. To reduce the complexity, an approach involving managerial judgments was adopted. In each company, Delphi consensus methodology (DaIkey and Helmer, 1963) was employed to elicit the managers’ responses to a series of questions designed to elicit judgmental estimates for the four basic positions for that company (i.e., current, potential, current comparative, and potential comparative). A further simplification was achieved by replacing the several actual foreign competitors with a hypothetical ‘typical’ foreign competitor, whose parameters were determined in consultation with IDBT experts and with managers of the sample companies. The details of the procedures employed were as follows : Step 1: Selection of the companies The sample characteristics were dictated by the policy requirements of IDBT who were

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M. Oral et al. / International competitiveness and its strategic implications

interested in the international competitiveness of the larger and better performing local companies. Thus, 10 firms having these features were selected from the textiles industry, 10 from the glass and ceramics industry, and 10. from the food processing industry, for a total of 30 companies. Statistical considerations, such as better representation of the sectors in question through appropriate sampling techniques, played little role in selecting the companies for the field study. For routine industry analysis applications, a more structured sampling frame would normally be appropriate. Step 2: Design of the questionnaire

Five basic factors were taken into consideration while designing the questionnaire for the field study. First, the sequence of questions had to yield assurance as to the relevance of the data sought and its confidentiality. Second, it was essential that the sequencing and wording of the questions were to engender confidence in the study. Third, the questions had to lead to valid judgmental estimates for the four position values, despite the necessary simplifications to the model. Fourth, cross-checking questions were required to increase the reliability of the responses. Finally, it was important to maintain managers’ interest in the discussions over a long period. A closed-form questionnaire (6 to 12 alternatives answers for each question) of 60 pages, including 105 questions in total, was designed for the field study. It included: (a) questions related to the backgrounds of managers - such as education, experience, number of years in the company - to ease the possible tension that usually is present at the beginning of interviews; (b) questions pertaining to production capacity, input usage rates, purchasing practices, availability and use of financial resources, customer characteristics and market

conditions, etc.; all of these items were intended to prepare managers to think in terms of the four basic-position concepts of the model; (c) questions designed to establish values of the four positions, cost superiority, and the nature of the export markets and foreign competitors. By any standard, this was a long and demanding questionnaire, and as a result, certain procedure (see Step 3 below) had to be followed in conducting the personal interviews with managers. Needless to say, a mail-survey kind of procedure to collect data was out of the question simply because of the very nature of the questionnaire designed and the new concepts involved. Step 3: Plant visits and direct interviews

The research team spent two days, on the average, with each company and the participatory working sessions with the management were structured as follows: - explanation of the study to the general plant manager (20 minutes); - a seminar to familiarize the managers with the concepts and formulation of the international competitiveness model. The president or the general plant manager chaired the seminar and was attended by the managers responsible for production planning, manufacturing, R&D, quality control, personnel management, accounting and finance, and marketing (2 hours); - familiarize the research team with the production facilities and operations by touring the plant (1-3 hours); - formulation of an approach to parameter estimation that was appropriate to the unique context of the particular plant, followed by the Delphi method to obtain judgmental estimates of the four position values (2-3 hours); - discussion and processing of data for the estimation of cost superiority (5-6 hours).

M. Oral et al. / International competitiveness and its strategic implications

This step required considerable effort from the company personnel. In fact, it turned out to be participatory working sessions with the managers of the companies rather than interviews. The same research team made all the visits to the plants. Step 4: Collection of external data

The data requirements of the international competitiveness model can be classified into three groups: (i) the operations and characteristics of the company, (ii) the operations and characteristics of the competitors, and (iii) the political-economic-cultural environment both of the company and the competitor, including the characteristics of the target export market. Step 3 was mainly devoted to the collection of the data in the first group. The data in groups two and three were largely obtained using the sources and connections of IDBT, although the companies were helpful in naming the foreign competitors and export markets. Data and statistics (labor costs, energy prices, interest rates, costs of certain raw materials, unit usage rates of certain inputs, productivity figures, etc.) published by international organizations (OECD, UNIDO, ITC, etc.), industry associations or federations (European Glass Manufacturers Association, Intemational Textiles Federation, etc.) and institutes of statistics of different countries were also complementary to the development of the data base needed for the international competitiveness model. Step 5: Calculation of competitiveness levels

First, a target export market for each industry was selected, by consulting with the experts at IDBT and by analyzing the foreign trade figures: West Germany for the textiles industry, Iran for glass and ceramics, and the North African countries for food processing. Second, a ‘typical’ foreign competitor representing the rival countries in these export

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markets was selected. This selection was based on the particular product groups, typical product quality and the traded volumes, as indicated by foreign trade figures. The selected rival countries were South Korea in textiles, Great Britain in glass, and Italy in food processing industry. Finally, the actual and potential competitiveness levels of the firms were calculated against their typical foreign competitors in respective export markets. 4. The results of the empirical study

The actual and potential competitiveness level of each of the companies in the study are presented in Table 1. Although the companies and industries are, for confidentiality reasons, shown with their code numbers rather than with their real names, the competitiveness figures in the table are the true results of the study. Moreover, the results are given for 27, rather than 30 companies because one company refused to participate, and the other two companies gave conflicting answers or figures, and hence were excluded from the analysis. To illustrate the measurement of competitiveness, consider industry 1 as example. Table 1 indicates that the companies visited in this study have an ability to compete actually and/or have the potentiality to do so. The average actual competitiveness level, LA = 1.02, indicates that the companies are as strong as the typical foreign competitor in terms of current competitive positions. The average potential competitiveness level, LP = 1.28, implies that an even better performance could be achieved if the companies were to utilize fully and efficiently their existing resources and facilities. Companies 3, 4, 5, and 6 have especially strong competitive positions, as indicated by their actual competitiveness levels and it seems that company 4 is the best performer in terms of both the actual

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hf. Oral et al. / International competitiveness and its strategic implications

Table 1 a The competitiveness of selected firms Firm Competitiveness level Actual L, = o,n,

Industrial mastery

Potential L, = o,rrI,

Cost

Actual

Potential 0P

@A

1,

12

4

1,

12

4

4

12

13’

4

1 2 3 4 5

0.93 0.58 1.21 1.30 1.23

1.12 0.71 0.96 1.39 0.88

0.87 0.29 0.96 1.06 1.06

0.98 1.66 1.22 1.31 1.52

1.03 0.81 1.47 1.56 0.84

1.43 0.77 1.15 1.30 1.12

0.86 0.48 0.83 0.94 0.74

1.03 0.72 0.59 0.94 1.05

0.51 0.33 0.77 0.86 0.92

0.93 0.79 0.84 0.95 0.92

6 7 8 10

1.08 0.97 0.88 -

1.05 0.86 0.44 0.90 0.85

0.58 0.76 1.18 0.61 -

1.16 1.06 1.32 -

1.34 0.89 1.24 0.95 0.91

0.77 0.76 1.30 0.74 -

0.92 0.89 0.64 -

0.75 1.08 0.37 0.88 1.00

0.64 0.92 0.90 0.69 -

Average

1.02

0.92

0.82

1.28

1.00

1.04

0.79

0.84

0.73

9

a I, = industry i, i = 1 , 2 , 3.

and the potential competitiveness. Companies 2 and 5 seem to possess higher potential to compete. Company 2 presents rather an interesting case. It has the highest potential to compete, L, = 1.66, yet is the worst performer in the market with LA = 0.58. The large difference between L, and LA suggests that serious managerial measures must be taken immediately to improve the utilization of the existing resources and facilities, at Company 2. Company 8 is in a similar situation, but the difference between its L, and LA is less alarming. The other extreme is company 4. Its L, = 1.31 and LA = 1.30 are both greater 1, a desirable situation to be in; and the difference L, - L, is only 0.01, indicating that whatever potential company 4 has is currently being used to the limit. If company 4 wishes to improve its competitive position further, it has to go into new strategic investments, better technology, etc. In other words, the combined performance of production and marketing of company 4 is almost a perfect score. Top level management should consider new strategic investmepts for further improvements in competitive position.

-

12

superiority

Actual

Potential HP

HA 4

4

12

‘3

4

12

13

0.93 0.79 0.79 1.39 0.90

0.62 0.75 0.62 1.01 1.00

1.08 1.21 1.46 1.38 1.62

1.09 0.98 1.64 1.48 0.84

1.70 0.89 1.24 1.23 1.15

1.05 2.10 1.45 1.38 1.65

1.11 1.03 1.86 1.37 0.93

2.32 1.41 1.33 1.29 0.12

0.99 0.82 0.97 1.07 0.95 0.74 0.91 0.98

0.41 0.92 0.77 0.73

-

1.17 1.09 1.38 -

1.40 0.80 1.18 1.02 0.85

0.91 0.83 1.31 0.88 -

1.17 1.09 1.39 -

1.64 0.83 1.68 1.04 0.93

1.04 0.96 1.38 1.01 -

0.92

0.77

1.30

1.13

1.13

1.41

1.24

1.32

0.93

Similar arguments hold for company 3 since it almost fully utilizes its potential, and its L, and L, values are both greater than 1. The other selected companies of industry 1 fall in between these two extremes. To identify the particular competitive strengths and weaknesses of a given company or industry, one simply has to analyze the process of calculating competitiveness levels in reverse order. First, start with two major determinants of competitiveness level: namely, ‘industrial mastery’ and ‘cost superiority’. Assume, for a moment, that 0, > 1, 0, > 1 and 11, < 1, II, < 1. This implies that the company in question is strong in terms of industrial mastery, but weak with respect to cost superiority. This is an evaluation at an aggregate level. Suppose one wishes to go into a more detailed analysis and wants to find out the causes of such low cost superiority. Then one simply has to decompose the cost superiority formula into its components for each and every input item. This reveals the areas where the company or industry has advantageous and disadvantageous positions, as well as their degrees of importance. A

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M. Oral et al. / International competitiveness and its strategic implications

similar procedure can also be used in the case of industrial mastery to identify the factors which are in favor of or against the company. An analysis of this kind will now be performed for the companies of industry 1. The results in Table 1 indicates the following: (1) All the companies in industry 1 are cost-effective since their actual and potential cost superiority are greater than 1. Company 5 seems to be most cost effective with 17, = 1.62 and II, = 1.65. Company 2 against presents an interesting case. Although it has the highest potential to be the most cost-effective company in industry 1, somehow this has not been realized. In fact, company 2 is the only company in the industry which is not capable of utilizing its cost superiority fully. The others are currently quite successful in exploiting their potentials to the limit. In summary, the companies of industry 1 enjoy a cost superiority of considerable degree over the typical foreign competitor, as indicated by the average values 17, = 1.30 and lTP = 1.41. (2) On the other hand, the typical foreign competitor is better equipped than an ‘average’ local company with respect to te+nology and production facilities, achieving 0, =_0.92. And it is even better, as indicated by 0, = 0.79, in actually using these facilities. Having an industrial mastery at this level, the competitor considerably offsets the cost-effectiveness realized by the local companies, a, = 1.30, to arrive at almost the same actual competitive position LA = 1.02. If the local companies can, however, activate their existing potential, they can still outperform the typical foreign competitor in the target market since Lp = 1.28. A similar evaluation procedure can be applied to the companies of industries 2 and 3. Rather than repeating the same sort of arguments, we shall summarize instead how the international competitiveness model can be used to formulate competitive strategies.

5. Strategic implications of the competitive analysis results As the above interpretation suggests, a given company can be in one of several possible strategic states, depending on the values of L, and LA (see Fig. 2). There are eight distinguishable strategic states: State 1 The difference L, - LA is ‘large’ and positive, with L, > 1 (‘large’ is a quantity to be defined within the competitive environment of the company). The first relationship indicates that the company is not realizing its potential, implying that some managerial (production and marketing) changes are appropriate. The second relationship, LA > 1, indicates that the present position is sustainable, at least for some time, since the company enjoys an overall competitive advantage. Company 5 in industry 1 and company 4 in industry 2 are both in this state. State 2 The difference L, - LA is ‘large’ and negative with Lp > 1. The relationship LA > L, means that the competitor is not realizing its potential. Should the foreign competitor take the right managerial measures to improve its

COMPETITIVENESS LEVEL

G

POTENTIAL

COMPETITIVENESS

’ ACTUAL COMPETITIVENESS

0.. 1.5 . . . . . . . . . . . . . . . . . . . .._............. f-J

n

c

l

O

D

”

D

’

1 . 0 “DODD.’ f-J

0.5

n . ..I . . . . . . . I . ..I . . . . . . . . . . . . . . . . ““DO.’

1

2

3

4

5

6

7

Fig. 2. Competitiveness and strategic states.

6

STRATEGIC STATES

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M. Oral ei al. / International competitiveness and its strategic implications

position, the company will still be in a good position since L, > 1. Strategic changes may not be needed at this stage. Company 1 in industry 2 can be considered to be in this state. State 3 The difference L, - LA is ‘large’ with L, > 1, LA < 1. This indicates that the company has potential to compete, but is not realizing it. This is an undesirable situation and must be avoided. Therefore, urgent managerial (production and marketing) measures must be taken to activate the potential the company already has. Company 8 in Industry 2 and company 1 in industry 3 are typical examples of this state. State 4 The difference L, - LA is ‘large’ with L, c 1, LA > 1. Again, the competitor is not realizing its potential and the company is currently competitive. However, if the competitor does take appropriate actions to realize its potential, then the company will find itself in an unsustainable position, since L, -c 1. Therefore, the company should prepare countermoves embracing first managerial measures and then strategic investments (new plants, technological improvements, new distribution system, increased sales force, etc.). There is no company in the selected group which exactly falls into this state. State 5 The difference L, - LA is the ‘large’ and positive with L, < 1. Being in this state indicates that the company is in trouble actually as well as potentially. Therefore, managerial actions are immediately required to enable the company to improve operations and realize its existing potential. However, since L, -c 1, strategic investments are needed if the company is to achieve a sustainable competitive position in the future. Company 2 in industry 3 is a typical example of this State.

State 6 The difference L, - LA is ‘large’ and negative with LA < 1. In this state, the company is basically ‘riding’ on the failure of the competitor to realize its potential, since LA > L,. Should the competitor becomes aware of the situation and improve its competitive position, the company would then find itself in a very vulnerable position. The only suitable response would be new strategic investments. Company 5 in industry 2 is approximately in this state.

State 7 The difference L, - LA is ‘small’ and L, > LA > 1 (‘small’ is a quantity to be defined within the competitive environment of the company). Being in this state indicates that the company is actually and potentially in a good position. It is almost fully realizing its potential. Neither managerial measures nor new investments are urgently needed, especially if the L, and L, values are well above 1. Companies 3 and 4 in industry 1 and company 8 in industry 3 are typical examples of this state. State 8 The difference L, - LA is ‘small’ and L, < LA < 1. Again the company is almost fully realizing its potential. But, its actual and potential competitiveness are both low. Therefore, if the company wishes to survive in the industry, new strategic investments are urgently needed. Company 5 in industry 2 is in this state.

Two other types of application of the model to competitive strategy formulation are also possible: (i) market-oriented analysis, to rank the markets of interest, and (ii) competitororiented analysis, to study the position of the competitor of concern.

M. Oral et al. / International competitiveness and its strategic implications

5.1. Market-oriented analysis

Let Lr be the company actual competitiveness level against competitor r in foreign market m, and w, be the ‘importance’ factor (such as market share) of competitor R. Then the overall actual competitive position of the company in market m is given by LA” = c w,Lirn, r

where w, 2 0, and C,w,. = 1. If this is calculated for each relevant market, then the values of Li may be used to rank relevant markets according to the company’s competitiveness in those markets. This could suggest opportunities for profitable redeployment of company resources across markets. 5.2. Competitor-oriented analysis

Now suppose that the company and a particular competitor of concern, say competitor r, compete in several markets against each other. In this case, one has to keep the competitor in view across these markets. Let u, be the ‘importance’ of market m to the company, relative to other markets, where u, >, 0 and C,v,,, = 1. Then the overall actual competitiveness level of the company against competitor r across all relevant markets is given by LX = CIJmLy. m

The ranking of the competitors can be done in a way similar to market ranking. This analysis could then be used to identify potentially rewarding cooperative strategies, or opportunities for achieving significant gains through careful targeting of multiple-point competitive portfolio strategies. 6. Conclusion

The field study reported here shows that a model-based approach can actually be used

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to measure international competitiveness. The experience also suggests several possible applications to strategic decision making at the firm level. There are also several implications for marketing. First, factors such as export rebate and countertrade agreement may be quantified, relative to other factors effecting international competitiveness, in the context of developing an overall marketing strategy. Second, the model provides a new methodology for ranking markets and competitors. The model’s own potential has partly been realized in practice, in Turkish Glass Works, Inc., who used the model as a basis to develop their own strategic Decision Support System (Oral, 1987) for competitive strategy formulation. Perhaps the most important feature of this model is its capability to measure the combined performance of all the functional areas, from the view point of intemational competition, within a ‘comprehensive and integrative framework for the purpose of strategy formulation and policy decisions.

Acknowledgements

The authors wish to express their gratitude to all managers of the firms participated in this study. Unfortunately, they are too numerous to thank them here individually. The authors are also grateful to Mr E. Ibrahimoglu, Vice-President for Research of the Industrial Development Bank of Turkey, for his continuous support and encouragement throughout the study. Special thanks are due to M. Ar, Dr M. Caglar, Dr I. Pekanm, T. Dagdelen, A. Arsan, F. Tasci and A.O. Ozkan.

References Abamathy, W.J., K.B. Clark and A.M. Kantrow, 1981. The new industrial competition. Harvard Business Review Sept.-Oct., 68-81.

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Oral, M., A. Reisman, A.E. Singer and R. Aggarwal, 1989. Linking government policy formulation with international competitiveness and countertrade. Working Paper, FacultC des Sciences de L’Administration, Universitt Laval, Quebec. Porter, M.E., 1980. Competitive strategy. New York: The Free Press. Porter, M.E., 1985. Competitive advantage. New York: The Free Press. Prescott, J.E. and J.H. Grant, 1988. A manager’s guide for evaluating competitive analysis techniques. Interfaces 18, 10-22. Singer, A.E. and R. Brodie, 1990. Forecasting competitors’ actions: An evaluation of alternative ways of analyzing business competition. International Journal of Forecasting 6, to appear. Wheelwright, S.C. and R.H. Hayes, 1985. Competing through manufacturing. Harvard Business Review Jan.-Feb., 99109.