Volume 23 Number 7/8 2000

Competitive Advantage in Global Industries

by D. Passemard and Brian H. Kleiner

Introduction

Many theories tried to explain why a country is more competitive than another. For some, the national competi-
tiveness comes from macro economic phenomena directed by change rates, interest rates, deficit of the national
budget. For others, it depends on the abundance of cheap work force, or raw materials.

Some may, also, have shown the importance of the political support.

However, none of these explanations is sufficient to explain the commercial success of a country. An alterna-
tive to these rather macro economic explanations was developed by M. Porter. It consists in studying specific in-
dustrial sectors and segments of a nation instead of the overall economy. M. Porter studied what specific
elements condition the international success of an enterprise in a certain segment. He figured out that the enter-
prises of a country must have a competitive advantage by inferior costs, or differentiated product to assert them-
selves worldwide (the advantage is situated in the products rather than in the external elements of a country).
Thus, it would be interesting to understand the fundamental basics of what is a competitive advantage according
to M. Porter, and how, through the globalisation of the economic game enterprises improve their competitive
advantage. That is why, the first part of this article is devoted to the definition of the competitive advantage, and
the second part explains how to integrate this concept in the global industries.

The competitive strategy.

The appropriate unit of analysis in setting competitive strategy is industry (which is a group of enterprise in di-
rect competition). Strategically, an industry may be distinguished from another by the fact it proposes products
that have similar sources of competitive advantage. In other words, the industry is the location where the firms
win or loose a competitive advantage. The enterprise, with its competitive advantage, must define and elaborate
a profitable approach of its industry. There is no universal strategy: to be successful, a strategy must be specific
to the enterprise and the industry under consideration. The strategy must be based on the enterprise’s scope of
competence and real means. On every competitive strategy, there are two components to distinguish. First, the
structure of the industry in which evolves the enterprise: From one industry to another, the profitability may
change a lot (see the difference in profitability between the pharmaceutical industry versus the iron and steel in-
dustry). Second, the positioning of the enterprise within the industry (some positions will be more advantageous
than another whatever the profitability level).

Structural analysis of an enterprise.

A competitive strategy should be based on a deep analysis of the structure of the industry and its evolution. In
every industry (taken nationally or worldwide), the competitive game can be described through five forces:

* The threat of new coming enterprises;

* The threat of replacing products;
* The suppliers’ power of bargaining;
* The customers’ power of bargaining;
* The rivalry inside between the firms of the same sector.

The action of these five forces determines the long run profitability of a given industry. When the five forces act
favourably a great number of firms will settle an interesting return on investment. On the contrary, when one or
several forces are more active than the others (like in the iron and steel industry or the computer industry, for in-
stance) the number of profitable enterprises will be smaller. The intensity of these five forces depends on the
structure of the industry, that is, of its main economic and technical characteristics. For instance, the difficulty
for a new firm to come into the industry depends on the height of the barriers to entry such as customers’ fidelity,
economy of scales, ...etc. Each industry has its specific structure. However, this structure may evolve with the
sector. Indeed, the enterprises can have an influence on the forces: They can reduce the pressure from the new
coming enterprises by increasing the barriers to entry thanks to the raising of fixed costs, for example.

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The positioning in the industry.

It is not enough for an enterprise to consider the structure of the industry, it also has to take an appropriate posi-
tion within the industry. The positioning of an enterprise has to match the great option it had taken with regard to
the market (in the chocolate industry, M&M/MARS, a US company preferred mass production of an average
quality chocolate while Swiss companies such as Lindt chose to market high quality production in a more lim-
ited distribution network). The fundamental component of the positioning is the competitive advantage, which
can be divided into advantage by low costs or advantage by differentiation. The advantage by low costs means
that the company is more efficient than its competitors on the conception, the production, and the marketing of a
product (thus, for a given price, the firm will be more profitable than the others). The differentiation is the ability
of the enterprise to supply its customers with a same product but of a better quality (that is, intrinsic quality or
services). In both cases, the competitive advantage translates a higher productivity of the enterprise. However it
is very difficult for a firm to dispose simultaneously of both advantages by the costs and by differentiation (in-
deed, proposing great performance, good quality and services is costly). An enterprise can improve its technol-
ogy and method of production to reduce its cost and obtain a differentiation, but in the long run the competitors
will imitate its behaviour and the enterprise will be required to choose which advantage to push. Anyway, no
strategy can obtain good results if the enterprise takes care of both advantages at the same time.

Another criterion for the positioning is the competitive scope, that is, the extent of the target within an indus-
try. The enterprise must determine the range of products it will propose, the type of customers it will attract, the
geographical area it will invest, ...etc. This criterion is very important since all the industry is segmented: the
same products are presented in several categories (a Tee-Shirt from Target or from Lacoste are clothes but are
considered by the customers as different). Supplying different segments requires the firm to have the necessary
capacities and the specific strategies. Thus, it is possible to find in one industry various competitive scope.

The notion of strategic platform includes the researched type of advantage and its range: It is the type of strat-
egy an enterprise should involve to get the best performance in a given industry. The chart in exhibit 2, repre-
sents the four archetypes of strategic platform. This concept explains why there is no universal strategy: Many
profitable strategies could coexist and come along with the notion of competitive advantage. Then, the enter-
prise, to insure its leadership, should define sharply the type of advantage it is seeking, and the scope on which
the advantage is going to be reached. The worst strategy for the firm is not to choose a particular strategy: This
will drive the company to a bad strategy position that will bring low profitability.

Origin of the competitive advantage.

The evolution of the competitive advantage is a function of the way the firm organises and manages the activi-
ties. The functioning of an enterprise may be divided into various activities: Solicitation of the customers by the
sellers, maintenance, conception, realisation of new products by the R&D department. Each of these activities
creates value to the customers. Then, the final value created is sized by the price the customers accept to pay to
get the product or the service. The enterprise is profitable if this value is greater than the global cost. To get a
competitive advantage against its competitors, the firm should supply its customers with the same value than the
competitors and be more efficient in the production (domination by the cost), or elaborate specific activities that
generate a greatest final value and authorise higher purchase prices (differentiation). These activities can be
classified in what M. Porter called a “Chain Value” (Exhibit 3). All the activities in the chain value contribute to
create the value for the customers. These activities are of two types: The primary activities that are involved in
the continuity of the production, and the support activities. Whatever the activity, it requires an infrastructure
comprising the board of executives and the financing activities. The strategy will define the way the value chain
is organised. When the enterprise conceives a new way to manage its activities, uses new technologies or differ-
ent means of production, it may acquire a competitive advantage. However, an enterprise is more than a simple
addition of these activities. The value chain is a real network of interdependent activities whose costs are linked:
For example, the firm can reduce the cost of the services by investing more in the conception of the product, by
integrating more expensive, but of a better quality, components. The good management of this system of inter-
dependence is a real source of competitive advantage that can be decisive. The advantageous exploitation of
these interdependencies requires to succeed in both the organisational co-ordination and the determination of
compromises between the different departments (which happens very rarely).

Besides, the chain value, which is the basis of the competitiveness of a firm in a given industry, should be re-
placed in a larger flow of activities called the “Value System” (Exhibit 4). This value system includes the value

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chains of the firm’s supplier, the firm itself, the distributors, and the customers. The product goes from one
value chain to another, becoming each time a means of production. The competitive advantage becomes more
and more a function of the firm’s know-how in managing the global value system. So, it is up to the firm to cre-
ate a competitive advantage by optimising and co-ordinating its existing external relationships. The chain value
appears to be a useful valuator of the costs advantages since, to be sure to get this kind of advantage, the firm has
to ensure the optimisation and the co-ordination of its activities. It also highlights the factors of differentiation,
since the differentiation results of the way the products, the services affects the customers’ activity. Thus, the
idea of value chain allows not only to analyse more deeply the different types of competitive advantage, but also
to understand the role of the competitive scope on the acquisition of a competitive advantage. The competitive
scope is very important since it is going to control the nature of all the activities within the enterprise, and the
configuration of the value chain. The firm which chooses a narrow target is able to adjust precisely its perform-
ance to the needs of the segment: It has a superior potential to reduce its costs, and to practice a differentiation on
the product compared to those which choose a large target. However, a larger target can allow a firm to reduce
its cost through the economy of scale. To ensure a competitive advantage, the firm may choose a different com-
petitive scope or a different segment than its competitors.

To create and preserve a competitive advantage.

The competitive advantage is born as soon as a firm discovers a new or a more efficient way to come into the in-
dustry and put the discovery in concrete form, than its competitors: That is to say, as soon as it innovates. How-
ever, the word innovation should be understood in its largest meaning. Defining the source of innovation is
equivalent to describing the ways to create competitive advantages. It is in fact possible to distinguish five main
sources of innovation:

* The new technologies;

* The modification of the demand or a new demand;
* The occurrence of a new segment;
* The changes in the costs or the availability of means of production;
* The changes in the regulation.

As a matter of fact, the creation of a competitive advantage is a tough task, but preserving it is much harder.
The preservation of a competitive advantage depends on three conditions. One depends on the sources of the
advantage: There is a hierarchy among the advantages, which can be minor (costs reduction of the work force),
or major (possession of a special technology whose obtaining requires a higher skill level. The second deter-
mining factor is the number of sources of competitive advantage (the more, the better). The third factor of pres-
ervation is related to the continuous effort of modernising and perfecting: every advantage is virtually suscep-
tible of being copied. Then the preservation of the competitive advantage requires the firm to adopt an anti-
natural behaviour consisting of keeping changing their strategies (naturally no one would change a winning
team).

Competitive advantage in global industries.

The pattern of international competition.

The pattern of international competition differs markedly from industry to industry. Industries can be classi-
fied along a spectrum from multidomestic to global in their competitive scope. In multidomestic industries
(banking, insurance, caustic chemicals....), competition in each country is independent from competition in
other countries: competition occurs on a country-by-country basis. The competitive advantage of enterprises
evolving in such industries is largely specific to the country. The international industry is a collection of do-
mestic industries. The international firm’s strategy should be country-centred: its subsidiaries should enjoy a
great autonomy. At the other end of the spectrum, are global industries (TV sets, semi-conductors, automo-
biles,...) which can be defined as industries in which a firm’s competitive position in one country may be sig-
nificantly affected by its position in other countries. An international, global industry is a series of linked do-
mestic industries in which the rivals compete against each other on a worldwide basis. All competitors in a
global industry compete with increasingly co-ordinated strategies: the firms must integrate their activities on a
worldwide basis to capture the linkage between countries.

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Obtaining a competitive advantage thanks to a global strategy.

To have a global strategy consists, for the firm, in selling a product in several countries according to a world-
wide approach. It will require the firm to sell this product in the totality of the country where there exists a sig-
nificant market. In this situation, the firm can reach a large enough scale of production to pay off the R&D costs
and to use an advanced technology in the production. Then, the question is going to be how to spread geographi-
cally the activities, and to manage the value chain in a perspective of worldwide activity.

The global strategy approach gives the firm two possibilities to secure its competitive advantage and to com-
pensate its handicaps. The first one is correlated to the way the firm is going to distribute geographically its ac-
tivities; the second is due to the quality of the firm’s co-ordination among its activities.

* The configuration: Where and in how many countries each activity of the value chain is exerted?
* The co-ordination: How the different activities are co-ordinated? Is the same brand name, and the same
approach of the market used in every country?

In the case of a multidomestic competition, the multinational firm has in each country subsidiary companies
which are autonomous and manage their activities as a portfolio. In the case of a global competition, the interna-
tional firm looks for increasing its competitive advantage through its international presence.

At the moment to organise its activities internationally, the firm faces two arrays of options in both configura-
tion and co-ordination for each activity in the chain value. Configuration options range from concentrated (per-
forming the activity in one location and serving the world from it) to dispersed, that is, performing the activity in
every country. Co-ordination options range from high to low. For example, a firm producing in three plants at
one extreme (low co-ordination) may allow each plant to operate with full autonomy. At the other extreme (high
co-ordination), the plants could be tightly co-ordinated by employing the same information system, the same
production system, the same parts,...etc.

The choice of a global strategy.

There is no ideal global strategy; there are several ways to get involved in international competition which im-
ply for each of them geographical choices, and choices about the activities’ co-ordination (exhibit 5). The chart
in exhibit 5, illustrates some of the various, potential international strategies. The simplest global strategy is to
concentrate as many activities as possible in one country, serve the world from this home base, and tightly co-
ordinate through standardisation those activities that must inherently be performed near the purchaser (this
strategy was used in the 1960’-1970’ by firms such as Toyota). There are many different kinds of global strate-
gies, depending on the firms’ choices about configuration and co-ordination throughout the value chain. Com-
petitors with country centred strategies can co-exist in an industry, but global strategies by some competitors
frequently forces other firms to follow. Thus, a global strategy can be defined as one in which a firm seeks to
gain competitive advantage from its international presence through either concentrated configuration, dis-
persed and co-ordinated activities, or both. The degree of globalisation is also going to depend on the position
upstream or downstream of the activities. For example, in the aluminium industry, the upstream stages (alu-
mina, ingot) are global, and the downstream stage of semi-fabrication is a group of multidomestic business be-
cause product needs vary by country, transport costs are high, and intensive local customers service is required.

The processus of globalisation.

It is the evolution of the technologies, of the demand, of the governmental politics, or of the country’s infra-
structure that launches the processes of globalisation by creating among the enterprises some major inequalities
in the competitive positions. The automobile industry became globalised when the Japanese constructors had
got a substantial competitive advantage in quality and productivity, when the demand had become more uni-
form and the cost of transportation became lower. It is usually a strategic innovation that generates the potential
of globalisation. The enterprise which discovers the means to involve a global strategy in an industry has good
opportunities to dominate its international competitors. In global industries, the occurrence of a new leader al-
ways starts with the acquiring of an advantage in the national frame at the level of the conception, the quality of
the product, the new approach of the marketing. To ensure its competitive advantage, the firm has to use it to
penetrate new international markets, to consolidate this domestic advantage thanks to new economy of scale,
gains in its reputation, and to set up judiciously certain activities in certain countries. Even if the domestic ad-

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vantage is hard to keep, a global strategy will allow to widen it and to make it evolve. In fact, the competitive ad-
vantage can last only if the enterprise gets involved in the international competition and improves it.

The precursor’s advantage.

To react early to any structural change is as important in the international context as in the nation alone. In lots of
global industries, those who win are usually those who were the first to perceive a new strategy, and to put it in
concrete form at a global scale. The precursor’s advantage is geared down by the global competitiveness. The
precursor is going to be the first to get a worldwide range which creates other advantages such as reputation,
economy of scale. A dominating position, got this way, can be kept for decades. In the tobacco or whisky indus-
tries, for instance, British enterprises had kept their leading position during one century, despite the general de-
cline of the British industry. The same phenomenon can be seen in the United States of America for soft drinks
(Coca Cola), software or hardware industries (IBM, Microsoft), and in any other developed country.

Alliance and global strategies.

Strategic alliance which is usually called coalition is a key option in global strategy. These alliances are long run
agreements between one or several enterprises and are usually found in sectors such as semi-conductors, air-
craft engines, pharmacy. International alliances rally enterprises involved in the same industry, but based in dif-
ferent countries; they are a way for those enterprises to get involved in global competition. The different
partners, then, allocate at a worldwide scale, the different activities of the value chain. This kind of strategy is in-
teresting since it has been allowing the firm to make economies of scales which are realised when the firms put
their marketing forces, their means of production,... in common. The alliance is also a means to divide the risks
(especially financial risks): the R&D expenses are more and more important and represent great financial risk
for a sole firm. However, those strategies may be costly. Some difficulties arise in the co-ordination with the
partners who may have different or even contradictory targets. Those problems are going to prevent the enter-
prises to fully enjoy the advantages of a global strategy. Thus strategy of alliance appear to be a temporary solu-
tion, a way to reduce uncertainty. Moreover, the most successful alliances seem to be those that are the most
specialised, that is, that respond to the will of having access to certain national markets or certain technologies.
Then, the alliances are a tool providing the extension or the consolidation of a competitive advantage, but rarely
the means to create one.

Conclusion.

Finally, to create a competitive advantage, the enterprise is required to progress, to innovate, and to discover the
best competitive opportunities and exploit them. The firm should not stop improving the quality of its products
and its methods. Its main role is to take risks and to invest. A country succeeds in a sector when the national
frame creates a favourable environment to this continuous effort, and when the capacity is given to the enter-
prise to be strategically aggressive and to react quickly. The preservation of a competitive advantage, in the long
run, requires this advantage to be continuously improved thanks to a policy of sustained investments. To keep
this advantage, the firm has to adopt a continuous evolution, which is not comfortable from an organisational
point of view. Internationally, to succeed it is required to be able to transform a domestic position into a global
one.

References

Porter Michael E., L’Avantage Concurrentiel des Nations, InterEdition, Paris, 1993.

______ Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, New York, 1985.

______ Competitive Advantage of the Nations, Free Press, New York, 1990.

______ Competitive Strategy: techniques for analysing industries and competitors, Free Press, New York,
1980.

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APPENDIX

Exhibit 1: The Five Competitive Forces

Threatening of new
coming industries

Suppliers’ power of Rivalry between the Customers’ power of

bargaining firms of the same sector bargaining

Threatening of replacing
products

Exhibit 2: Four Archetypes of Strategic Platform.

Competitive Advantage
Cost Differentiation
Competitive Large Target Domination by the costs. Differentiation
Scope Narrow Target Global Cost Strategy. Specialised Strategy

Exhibit 3:The Value Train

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Exhibit 4: The Value System

Suppliers’ Firm’s Distributors’ Customers’

Value Chain Value Chain Value Chain Value Chain

Exhibit 5
High foreign investment Simple
high with extensive co- global
ordination among subsidi- strategy
aries
Co-ordination
of
Activities Country-centred strategy Export-based strategy
by multinational or do- with decentralised market-
mestic firms operatig in ing
only one country
Low Geographically Configuration of Geographically
dispersed Activities concentrated

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