Porter's Competitive Strategy in International Business

Introduction to Competitive Strategy in International Business

Competitive strategy is the bedrock on which companies base business decisions to reach their targets and achieve profitability. Formulating and implementing strategies in international business is a far more complicated and difficult task than doing so in home or familiar markets. Competitive strategy deals with the development of capabilities by a firm to stay ahead of competitors in the fields in which it operates. Firms develop a competitive edge in global markets by possessing certain assets, abilities, or characteristics. The primary elements of competitive advantage are the critical offer, the significant operating factors, and the firm's strategic resources (Bennett and Blythe, 2002). Corporate strategies and international marketing strategies are closely linked and have a bearing on business performance (Brown, 1994).

While some companies focus on a single source of competitive advantage, it is common for many firms to opt for a combination of options in order to be flexible and attain the best position even in adverse market conditions (Bennett, 1996). In arriving at competitive strategies in international business, it is imperative to carry out a thorough analysis of the strengths and weaknesses of the firm and its competitors, to identify key success factors in the business, and to develop a precise understanding of consumer behavior, demands, and attitudes. The compulsions of globalization of trade and commerce have made it necessary for firms to reassess corporate strategies in the global context. This applies even to firms that do not directly import or export, since developments in international markets can still provide or erode competitive advantage.

Michael Porter, a pioneer in business strategy, proposed a model for competitive strategy that identifies three critical success factors. A firm must have achieved, or be oriented toward, at least one of them (Porter, 1980):

Porter's Models: Generic Strategies, Five Forces, and the Diamond

According to Porter, these three forces are mutually exclusive. A firm that is the cost leader in its segment may not be able to invest heavily in brand building or dedicate resources to the degree of specialization required to serve niche markets. In Porter's view, if a company attempts to achieve all three strategic positions simultaneously, it is likely to fail.

Porter postulated that five forces determine the nature and extent of competition in any industry, whether national or international: the threat of new entrants, the threat of substitute products or services, the bargaining power of suppliers, the bargaining power of buyers, and rivalry among existing competitors. Rivalry intensifies with the number of firms in the market, slow market growth, high costs, and high exit barriers. It is the driving factor that determines the extent to which firms seek competitive advantages, and it varies across industries and markets, providing each firm with reason to develop its own marketing strategy. The five forces determine long-term industry profitability. In industries where these forces are favorable, there are attractive returns on invested capital and firms compete for strong market positions. In pursuit of competitive advantage, firms can resort to changing prices, product differentiation, creative use of sales and distribution channels, and exploiting relationships with suppliers.

Porter argues that understanding the factors that drive competition between firms is vital to the success of international business. Competition between firms increases as market shares become more or less equal. Competition intensifies when overall market growth slows and there is over-supply. Firms marketing perishable goods or those that are difficult to store and transport will encounter greater levels of competition. Firms will also compete fiercely when competitors' activities reduce business volumes, and as competing products become increasingly similar, firms push harder for market share.

Some countries are more competitive than others, and some industries within nations are more competitive than the rest. The rise of multinational corporations — and more recently, truly global companies — indicates that there is little or no direct correlation between corporate efficiency and the quality and availability of domestic resources. Porter's analysis of national competitive advantages that drive international trade was founded on the following observations:

In this model, Porter identifies four major forces that determine a country's ability to compete in international markets: factor conditions (skilled labor, infrastructure, natural resources); demand conditions (the nature and extent of domestic demand, consumer needs, perceptions, and behavior); related and supporting industries (availability of suppliers, component manufacturers, and ancillary business services); and firm strategy, structure, and rivalry (the organization and management of firms and the degree of domestic competition). Government policies and chance events can also influence a country's competitive ability.

The national home base plays an important role in determining the competitive advantage that a country or its firms can achieve in global markets. Porter contends that investment-driven economies will be more successful than factor-driven economies. He argues that countries heavily reliant on particular industries have not always fared well, and goes further to suggest that a lack of natural resources — such as oil or minerals — can actually spur high levels of innovation. Porter also advises against nations creating domestic monopolies, as doing so renders domestic firms uncompetitive in international markets.

In the course of international business, firms make successive decisions to enter, expand, or retreat from investments in a given market. Firms may enter several international markets in sequence or in parallel. Given the complexities of managing multiple activities, it is necessary to view internationalization as a process rather than as an isolated investment decision. Firms operating in multiple countries — commonly referred to as multinational corporations (MNCs) — have already undergone this process. Coca-Cola, Pepsi, Intel, Microsoft, Unilever, and Nike are among the well-known MNCs operating across the world. These corporations are truly internationalized by virtue of their successful business operations in numerous countries.

The Process of Internationalization

Successfully internationalized firms are generally leaders or prominent players in their fields. Many MNCs have demonstrated clear cost leadership, meaning their cost structures are among the lowest in the industry, providing opportunities to maximize profitability. Other firms have achieved strong differentiation, with products and brands that are distinct from those of competitors. Many firms are also effective at identifying niche markets and meeting their specific demand, thereby improving revenues and profits. Thus, internationalized firms have shown a tendency to be cost-effective, to demonstrate differentiation, or to specialize in serving niche markets.

This pattern relates directly to Porter's model of competitive advantage, which postulates that for successful competitive strategy, firms must attain at least one of the three elements — cost leadership, differentiation, or specialization. Internationalized firms will generally have years of continuous market presence and, therefore, established relationships with buyers and sellers. They are likely to face threats from new entrants and substitute products, and a fair degree of rivalry can be expected in most markets. They will also have developed close ties with buyers and sellers and will thus be subject to bargaining power dynamics depending on the demand-supply scenario. Porter's model therefore has significant relevance to the functioning of internationalized firms.

Advanced economies such as the United States and the United Kingdom have produced a high number of internationalized firms, many of which have been successful for several decades. Firms from these countries are so large and so broadly spread across the globe that they are unlikely to compete directly with firms from smaller or developing countries. Nevertheless, they employ different marketing strategies, and these differences determine the degree of success in their businesses. Porter cites the example of American firms choosing wage parity with labor costs rather than exploiting their sources of competitive advantage during the 1970s and 1980s. Japanese firms, by contrast, accorded greater preference to automation over labor and were thus able to achieve greater productivity and lower costs.

There was a period when Japanese companies were successfully running assembly plants in America, barely years after U.S. firms had found the same operations unviable (Porter, 1990). Different organizational structures and strategies work better in some industries than others. Italian firms, for example, have demonstrated excellence in select industries such as lighting, furniture, footwear, and woolen fabrics, while German firms appear to have the strongest competitive strategies in technology-based industries such as chemicals, pharmaceuticals, and complex machinery. According to Porter, in the current international business environment, company ownership and headquarters location are no longer the decisive variables — what matters is how firms leverage their sources of competitive advantage.

Firms within the same industry and of comparable size can exhibit very different capabilities in exploiting competitive advantages, especially in dynamic market conditions. In the early 1990s, SC Johnson of the USA and Rothmans Cigarettes of the UK both had plans to expand into East and Central European markets. Within a few years, SC Johnson had established a manufacturing plant in Ukraine, while Rothmans was still exporting and considering setting up only a representative office in the same region. Despite operating in the same products and markets, the two companies adopted entirely different strategies. A profiling of the two companies reveals some interesting contrasts.

SC Johnson was twice the size of Rothmans and operated in 71 countries, compared to Rothmans' 17. SC Johnson had 50 years of international experience, twice that of Rothmans. Beyond these statistics, SC Johnson's managerial approach to international operations was decidedly forward-looking. It sought to be a pioneer, venturing into new markets at the earliest opportunity to gain first-mover advantage. Rothmans perceived itself as a more cautious company, content to play a waiting game. This example highlights the fact that marketing strategy and risk-bearing capacity are central to decision-making in firms' international operations (Bridgewater and Egan, 2002).

Value Chain Analysis and International Marketing

To begin with, the firm should assess whether its current experience and expertise is sufficient for selling products in foreign markets, and evaluate the need to upgrade its sales and marketing capabilities. A fundamental step is to understand the various risks — including economic and political — that will be faced in the target markets. This assessment will determine which entry option is most suitable. For instance, in Middle Eastern countries, it is generally advisable to enter the market through a partnership or joint venture with local companies, as it is extremely difficult for foreign firms to operate independently. The firm should also assess the demand-supply situation, as well as government policies relating to foreign investment, foreign trade, and taxation.

Firms may need to seek expert assistance to carry out such assessments before entering foreign markets. It is very important that firms develop a deep understanding of the competitive environment in target countries and the strengths, weaknesses, opportunities, and threats present there. With the collected information and assessments, firms should identify the competitive advantages they can offer customers once they enter the foreign markets. It is in this context that firms on the verge of internationalization can apply Porter's model, which requires that firms in international business be capable of acquiring at least one major competitive advantage.

For several years, German automobile manufacturer BMW confined its manufacturing activities to Germany, with the exception of one small unit in South Africa. In 1992, however, faced with rising competition, stagnant volumes, and declining exports, BMW decided to evaluate the feasibility of opening a plant in South Carolina, United States. With this facility, BMW would qualify as a 'local manufacturer' in the USA and thereby gain substantial fiscal concessions and other benefits. BMW recognized the risk of potential high external tariffs, but concluded that the benefits outweighed the risks. There was also another compelling reason: the German Deutsche Mark was strong against other European currencies, meaning BMW had to maintain high domestic prices to sustain revenues in its home currency. Supply from a US base would provide some insulation from fluctuations in European exchange rates.

In addition, labor costs in South Carolina were lower than in Germany, the state government offered significant tax incentives, and BMW could gain ready access to low-cost inputs from Mexico. Crucially, Japanese companies such as Toyota, Nissan, and Honda were already successfully running US assembly units. BMW proceeded with the investment and it proved so successful that the company made deep inroads into the American car market, forcing competitor Ford to invest heavily in promotional campaigns to counter BMW's growth. This is a further illustration of Porter's model in action — firms should be international in outlook and must develop the capability to relocate operations in order to derive maximum competitive advantage.

International business provides significant opportunities for both established and new firms to compete and achieve strong returns. In a globalized environment where the demand drivers of traditional markets are in decline, internationalization offers a valuable avenue for sustaining growth. Despite some criticism, Porter's model of international business has far-reaching implications for firms already in international markets and for those seeking to enter them. The key to success is to gain competitive advantages over competing firms and leverage them effectively. When deciding to enter a foreign market, it is essential to have as thorough an understanding as possible of the business conditions and the various risks involved. Factors such as production capacity, labor costs, location, and availability of resources need no longer be constraints, provided firms are willing to take the steps necessary to acquire competitive advantages. In essence, international business is increasingly boundary-less, and only firms that are ready to accept this new reality will survive and flourish.

Porter's noteworthy contribution to the study of international business is value chain analysis, which deals with the relationships between activities that create and add value across various input chains until the final output is delivered (Porter, 1985). Value chain analysis provides clear indicators of how a firm utilizes its resources in producing its final output. In developing the framework, Porter distinguished between primary activities and support activities. Primary activities include inbound logistics, operations, outbound logistics, marketing and sales, and service. Support activities provide assistance for the primary activities and include procurement, human resources, technology, and infrastructure. Along the chain of activities, value may be added either directly or indirectly. In addition, firms maintain quality assurance systems to ensure that the final output meets minimum standards. Integration of all activities in the value chain is vital to the successful performance of firms in international markets.

Within the value chain, marketing is the element most affected by international operations. Porter has acknowledged that firms are increasingly gaining the competence to operate in multiple countries and are able to identify resources and methods to do so. However, the same cannot be said of marketing, which is not merely an internal activity but requires selling the firm's outputs in international markets that can vary greatly from one location to another. In international business, the marketing mix — price, place, promotion, and product — is affected by a range of forces: the political system, legal environment, economic conditions, market demand, competitive environment, cultural factors, socio-demographic environment, consumer background and behavior, and logistics and distribution factors (Bennett and Blythe, 2002). For marketers, understanding each of these elements in every location is necessary to succeed and sustain operations over the long term.