Competitive Advantage and Business Locations - Essay Example

Competitive Advantage and Business Locations The uneven development over time and space is a critical aspect of capitalist economies; it results in a variety of differentiated economic landscapes where the rich and poor nations are characterised apart from each other. Largely, the formation or destruction of an industrial region is usually a result of growth or slowdown of various economic sectors, which by extension reflects on locations where firms believe they can maximise their profits. When industries perceive, for example, that a certain region has an opportunity to provide high profits and low production costs, they will likely flock there and in their setting up business, consequently they will affect the income rates, employment numbers, housing and infrastructure. They will then exploit the resources that made the area attractive; these could include mineral ores, labour, agrarian produce and water just to mention a few. However, this boom will only be actively sustained for as long as the factors that make the area competitive are present; in reality, the competitiveness of a location reflects the availability of resources in that location. Therefore, when they are no longer available or do not bear the competitive advantage they had to start with, it ultimately result in concomitant losses in the sectors whose growth had been spurred by the initial incursion. In summary, uneven or incomplete development and spatially divided labour is the inevitable outcome of the process of maximising profits in a capitalistic global economy. One of the primary themes in understanding the areas where industries locate and why they chose these particular locations is comparative advantage. Broadly defined, this can be described as the ability of an area to produce goods at a lower cost and consequently higher profit than other places that produce similar goods (Harrington and Warf, 1995). However, these rights stress the fact that competitive advantage is neither inane nor coincidental; they point out that it is constructed from a combination of historical developments and social, political and geographical factors. For a region to realise a competitive industry, it must be capable of specialising in some products and be able and willing to import some while at the same time exporting their product (Harrington and Warf, 1995). In most cases, the advantages found in a place are those most suited for its immediate needs and to this end, studying a group of industries in a region is instrumental in comprehending the competitive advantage therein. Through them, one can observe the special distribution of various firms and the relation between a nation’s demographical set up and its economy. Therefore, through comparative advantage it is easy to comprehend the occurrence and incidence of uneven development and the patterns that underpinned its change over time. Examples of comparative advantage can be deduced from various global economic trends that contribute to creation and manipulation of trade patterns. For example, developing countries such as those found in Africa and parts of Asia and South America in most cases focus on food production as well as mining. The products of their labour are imported to the west, mostly their former colonial masters and in return, they use the income from this to purchase electronics, drugs machinery and other products that are not locally available. For instance in Britain, different regions have specialised in various types of production, which gives each a competitive edge in its respective field. Wales is renowned for coal production, Scotland whiskey and London is a hub for financial services and business (Harrington and Warf, 1995). In the same way, the US is divided in various states with each being specialised although not strictly so, in the production of different goods, which they sell to each other or foreign countries. For example, Detroit is known for automobile production while Texas is specialised in petroleum production among other things. Today, one of the countries that have stood out in regard to competitive advantage is China; when it opened itself up to the world nearly 20 years ago, it was not immediately evident how its immense market of nearly 1.3 billion potential consumers could affect (Rong, 2010). However, China has emerged and the leading global destination for both manufacturers and marketers since it appears to have an overwhelming advantage over most other countries. World Bank Statistics approximate that China’s middle class given the nation’s population is numerically more than the entire US population and it is expected to reach 800 million in the next decade and a half (Evans and Toolan, 2014). Evidently, China is unequivocally the world biggest market for manufactured goods China has vast mineral resources and thousands of multinationals, manufacturing products that need iron or, tin and other such raw materials have been importing them from China for a long time. However, in recent times, many have opted to shift their entire production there since it is more cost effective and is guaranteed to increase their competitive advantage. Furthermore, the Chinese education system is one of the biggest and technical oriented in the world; coupled with the country’s high population density, this means that industries have a virtually unlimited supply of skilled and cheap labour. China has both the geographical and mineral advantage as well as human resource, and this makes it a strategically very appealing destination. As a result, its outsourcing market is growing by around 30% annually as hundreds of companies outsource their production headquarters each year (Evans and Toolan, 2014). In addition, this is because facilitating the manufacture of products in China, with a little investment in research and sourcing strategies, they can build expansive and highly profitable partnerships. National competitive advantage is among the foremost theories that seek to explain competitive advantage. Michael Porter propounded it, so it can be used to analyse the reasons why some nations tend to be more competitive than others are. It follows a model known as the Porter diamonds. It proposes that among other factors, the home base an organization operates from is a key in shaping the extent to which it can achieve global advantage. The diamond is composed of four key determinants that Porter loosely describes as the “playing field that each action establishes and operates for its industries” (Porter, 2004). The first is factor conditions, which are the position the nation holds concerning skilled labour or infrastructure that can be used to boost production. Secondly, there is the demand condition, which refers to the level and type of demand in the home country; ultimately, before anyone produces, they must consider their target market and it is here that these conditions are factored in. There is the existence of supporting industries that determine the extent to which a manufacturer can rely on local suppliers and other complementally entities. For example, when setting up a soda bottling company in a given city, the firm must first consider the availability of industries that can supply it with water, containers and other elements of their production process that they do not have. Finally, the fourth factor is the first strategy structure and rivalry; this refers to the nation conditions that give the creation of companies’ organization and management in a country. It factors in the cost of company registration of the business culture and level of direct business support (Porter, 1985). According to Porter, these primary nation conditions determine the national environment in which companies are created and the extent to which they can grow both locally and internationally (Porter, 2004). When discoursing on the different degrees of success that nations achieve in their various production, one notices that this success is almost directly proportional to their having or lacking some of the above factors. Competitive advantage inevitably results from the existence of expectation institutions that have been successful in creating specialized factors and kept on upgrading and developing them. Porter cites Denmark as an example of spatial specializations; it has two hospitals that since their founding concentrated on diabetes research; consequently, they have a world leading export position in insulin. This is presumably because by concentrating on one product, they have gradually with the assistance of the national government developed the factors of production needed for high quality research and production. South Korea has distinguished itself through manufacture of electronic goods such as mobile phones and electronics. LG and Samsung Electronics are two examples of excellent companies based in the country. Consequently, the factors of production for the manufacture and consumption of such technology are more advanced here than in most other countries. This competitive advantage is leveraged by the availability of various resources needed for the production of technological devices such as smartphone, and lithium batteries for vehicles. One of the world’s biggest manufacturers and suppliers of petrochemical goods, ICT and energy solutions is LG Chem, which is based in South Korea (Kim, 2008); it was established as a manufacturer of cosmetics but has exclusively become a B2B firm (Kim, 2008). Here, polymers, Lithium batteries and thermoplastics used globally in automotive engines are manufactured for both local and international demand. LG Chem also cooperates with Oil Corp and it is approximated to produce one, 5 million tons of ABS annually for both China and Korea (Kim, 2008). Mobile phone companies such as LG Samsung, Huawei and Apple Inc. purchase screens and other components of the fast growing market from this firm. Consequently, South Korea’s local industries enjoy a significant competitive advantage over others based in China, US and Europe since they have cheaper access to the products from the firm by virtue of proximity. In addition, they can do their entire sourcing process locally without needing to import parts or materials for their production from outside which significantly reduces their total production costs. This competitive advantage has contributed to Samsung’s success in the international market and allowed it to surpass Apple Inc. as the leading seller of smartphones since the latter’s profit margins are compromised by the fact that they need to outsource a lot of materials from China or Korea. In the same way, the auto industry in Koreas has picked up significantly over the past few years more so the manufacture of smart cars, which are in high demand globally in response to the fuel and global warming crisis. KIA, a Koreas car manufacturer has made serious inroads in the hybrid car market dominated by Toyota and GM since South Koreas national competitive advantage is quickly growing in line with the above factors helping the local industries respond to international demand. Another theory of competitive advantage that could be examined in this context is the resource-based theory. Grant, (2010) proposes that this theory explains the variance in performance among different firms. It attributes the superiority of organisations to its being in position of unique bundles of competitive resources, which provide it with a competitive advantage. This theory can be traced back to Penrose who describes a firm as bundle resources that the management uses over time and its effectiveness is determined by the management’s decision-making skills (Barney, 2001). The resource-based view is founded on the assumption that the assets held by a company are the primary inputs for all its strategic planning (Barney, 2001). It emphasizes on leveraging rare resources or resource combination to transform short-term competitive advantage into long term and sustainable competitive advantage. The resource becomes a highly valuable resource that cannot be imitated without considerable effort and the firm can then apply the rest of its resources in sustaining above average returns having limited the potential for competition. The characteristics of these resources are abbreviated as VRIN, which stands for Valuable, Rare, Inimitable and Non-substitutable: Valuable implies that the resource must create value to a firm and in this context, a country as well the value factor means that the cost invested must remain lower than its expected rents. It also needs to be rare since in a perfectly competitive strategic market, the willingness of consumers to buy a product or a given price will depend on their inability to get it elsewhere for less. It should also be difficult to imitate since if a single firm only controls it, it is easier to manage and when competitors cannot duplicate, it serves as a powerful source of competitive advantage. Finally, it must be non-substitutable since even if it has all the other properties, as long as it can be substituted, it loses its competitive advantage. In 2013, Apple and Samsung were embroiled in a highly publicized legal battle as the former accused Samsung of having illegally used their technology infringing on their copyright. This was just one of the many cases that have emerged on international level as companies from different parts of the world struggle for the same technology and markets. Knowledge resources are the main areas where the Resource based view applies since as soon as a patent has been registered, it should essentially make the product in question fit in the description of the VRIN factors (Barney, 2001). However, given the scope of the international market, many companies have fallen to the temptation of overlooking copyright regulations especially when there emerges a potentially disruptive piece of technology. This has mostly been noticed in China where there have been numerous cases of copyright infringement. Companies that have outsourced there have been forced to compete with local firms that produce the same products they do at a fraction of the price. For example, when IKEA and Swedish furniture manufacturer initially moved to China, they discovered that local firms were using their design to manufacture counterfeit copies of their goods. The levels of competition tend to rise based on the viability of resources in given areas, in China, many of the firms that manufacture counterfeit goods can easily do so because there are raw materials and cheap labour which has resulted in the country becoming the hub of counterfeit goods. Others can use the resource-based theory to study the trends in competitive survival where some organisations formal and informal try to improve their competitive edge by illegally trying to duplicate the rare or un-imitable resources. The effectiveness of such acts is however largely determined by the level of government support and the legal framework in a country. In UK and US, the laws against copyright infringement are very strict while in China, these laws are not as well understood or implemented. In conclusion, it is obvious that the competitiveness of any location is dependent on the availability of resources that are available. As long as manufacturers and producers have access to factors, production, or resource they are bound to capitalized on them and this encourages new entrants increasing the competition. Porter’s national competitive advantage model has been used to demonstrate how industries in the global market tend to be unevenly successful even if they are providing the same services (Porter, 1985). The most effective way an industry or country can use to guarantee a competitive edge is by providing the necessary infrastructure to ensure specialization. In addition, as demonstrated, the theory or resource-based theory can be effectively used to draw attention to the underhand methods that are used by some organisations seeking a competitive advantage through illegal or unethical actions. References Barney, J. B., 2001. Resource-based theories of competitive advantage: A ten-year retrospective on the resource-based view. Journal of management, 27(6), 643-650. Barney, J.B., 2001, Is the resource-based theory a useful perspective for strategic management research? yes. Academy of Management Review; 26, (1), pp. 41–56 Evans, M. and Toolan, J., 2014. Manufacturing in China can give your business the competitive advantage. Forbes, [Online] 20 July. Available at: Grant, R.M., 2010. Contemporary strategy analysis. New Jersey: John Wiley and Sons. Harrington, J. W., and Warf, B. 1995. Industrial location: Principles, practice, and policy. London ; New York : Routledge. Kim, S., 2008. LG Chem to supply GM Volt batteries. Reuters. [Online] 22 October. Available at: Porter, M.E., 1985. Competitive Advantage. New York: Free Press. Porter, M.E., 2004. Competitive advantage: Creating and sustaining superior performance. Free Press. Reprinted in abridged form In: De Wit B and Meyer R. Strategy, process, content, context: An international perspective. London: Thomson. Rong, F., 2010. Understanding developing country stances on post-2012 climate change negotiations: Comparative analysis of Brazil, China, India, Mexico, and South Africa. Energy policy, 38(8), 4582-4591. Read More