The basic unit of understanding competition is the industry. An industry is a group of competitors producing products or services that compete with each other to satisfy customer needs. Many discussions of competition and international trade employ overly broad industry definitions such as machinery, automobile ancillary, textile, software, or tourism.
These are not strategically meaningful industries because both the nature of competition and the sources of competitive advantage vary a great deal between them. Machinery, for example, is not one industry, but dozens of strategically distinct industries such as machine tools, weaving machinery, rubber processing equipment and printing machinery, each with its own unique requirements for success.
If India wants to be a “success story” nation such as Japan, Korea and Taiwan, it must identify strategically meaningful industries.
Firms, not nations, compete in international markets. Firms must choose a position within an industry. At the heart of positioning is competitive advantage. In the long run, firms succeed relative to their competitors if they possess substantial competitive advantage: lower cost and differentiation.
Lower cost is the ability of a firm to design, produce, and market a comparable product more efficiently than its competitors. If prices are similar to those of competitors, lower cost translates into better returns. Korean steel and semiconductor producers have attacked world markets using this strategy. They produce comparable products at very high cost, employing low-wage but highly productive labour.
At the heart is productivity, stemming from continuous quality improvement of processes: manufacturing, service and business. Improvement, that demands company-wide participation.
Differentiation is the ability to provide unique and superior value to the buyer in terms of product quality, special features or after-sales service. German machine tool producers, for example, compete with differentiation strategies involving high product performance, reliability and responsive service. Differentiation allows a firm to command a premium price, which leads to superior profitability, provided costs are comparable to those of competitors. At the heart is customer delight, stemming from institutionalizing a structured quality planning process. A process managed by quality professionals, not amateurs.
Competitive advantage of either type translates into higher productivity than that of competitors. The low cost firm produces a given output using fewer inputs than competitors require. The differentiated firm achieves higher revenues per unit than competitors. Thus, competitive advantage is directly linked to the underpinning of national income. Any successful strategy must pay close attention to both types of advantage while maintaining a clear commitment to superiority on one.
The need of the hour for India, is compulsory quality training for all leaders and managers of strategically meaningful industries. Training on how to implement the quality improvement and quality planning processes. Bombay Dyeing and Mafatlal Fine have given the lead in one distinct industry; Tata Steel and Mukand in another. The government should provide attractive tax incentives for such training, to create the desired quality culture essential for our survival.
Training on quality control, though essential, does not provide the required competitive advantage. At best, it serves as a prerequisite for supply. If a firm is to gain advantage, it must choose the type of competitive advantage it seeks to attain, and the scope within which it can be attained.
The worst strategic error is to be stuck in the middle, or to try simultaneously to pursue all the strategies. In shipbuilding, Japanese firms follow the differentiating strategy, offering a wide array of higher quality vessels at premium prices. Korean shipyards pursue the cost leadership strategy, also offering many types of vessels at lower cost than the Japanese firms. Successful Scandinavian yards are focused differentiators, concentrating on specialized types of ships such as ice-breakers and cruise ships that involve specialized technology and which command prices high enough to offset higher Scandinavian labour costs. Finally, Chinese shipyards, the emerging competitors in the industry, offer relatively simple, standard vessel types at even lower costs and prices than the Koreans. There is a hierarchy of sources for competitive advantage in terms of sustainability.
Lower order advantages, such as low labour costs or cheap raw materials, are relatively easy to initiate. Competitors can often readily duplicate such advantages by finding another low cost location or source of supply. In consumer electronics, Japan’s labour cost advantage has long since been lost to Korea and Hongkong. Firms based in these nations are already being threatened by even lower labour cost in Malaysia and Thailand. Japanese consumer electronics producers have established overseas production follows this progression.
Higher order advantages such as proprietary process technology, product differentiation, customer relationships, are more durable. Achieving higher order advantage requires more advanced skills and capabilities.
A second determinant of sustainability is the number of distinct sources of advantage a firm possesses. If a firm rests on only one advantage, competitors will concentrate on nullifying or overcoming this advantage. Japanese small copier products have advanced features, low manufacturing costs, extensive dealer networks and high levels of reliability. Numerous advantages raise the ante for competitors who seek to imitate.
The third and most important reason competitive advantage is sustained is constant improvement and upgrading. Virtually any advantage can be replicated sooner or later if a leader rests on its laurels. In order to sustain advantage a firm must become a moving target, creating new advantages at least as fast as competitors can replicate old ones. This is the most vital input for Indian companies that wish to survive the next three years. Trailblazing efforts in this direction have commenced at Mahindra and Mahindra (Tractor Division) and Advani Oerlikon.
Japanese automakers initially penetrated foreign markets with inexpensive compact cars of adequate quality and competed on the basis of low labour costs. Even while their labour cost advantage persisted, the Japanese companies were upgrading. They invested aggressively to build modern plants to reap economies of scale. Then they became innovators in process technology, pioneering just-in-time production and a host of other quality and productivity practices. This led to better product quality, repair records, and customer satisfaction ratings than foreign rivals.
Most recently, Japanese automakers have advanced to the vanguard of product technology and are introducing new, premium brand names such as Lexus. To sustain a position, a firm may have to destroy old advantages to create a new, higher order ones. Korean shipbuilding firms did not become international leaders until they aggressively expanded the scale of their shipyards, moved to adopt new building techniques that substantially boosted productivity by reducing labour content, and developed the technical capabilities to build more sophisticated vessels. All these steps reduced the importance of labour costs at a time when Korean firms still enjoyed a labour cost advantage.
The apparent paradox involved in nullifying old advantages often deters firms from upgrading. If firms fail to make the painful and seemingly counter-intuitive step to doing so, however, competitors will do it for them. The national environment should encourage this sort of behaviour. Nations succeed where the national environment uniquely enables firms to perceive new strategies for competing in an industry. Nations fail where firms do not receive the right signals, are not subject to the right pressures, and do not have the right capabilities.
India Inc. demands a renaissance for cotton textiles and garments; a rebirth for historic tourism; breakthroughs in the auto ancillary industry; leadership in the sophisticated computer software; and above all, “ productivity” as a national obsession. A nation’s standard of living in the long-term depends on its ability to attain a high and rising level of productivity in the industries in which its firms compete. This rests on the capacity of its firms to achieve improving quality or greater efficiency.
CREDITS: Suresh Lulla, Founder & Mentor, Qimpro Consultants Pvt. Ltd.