Competitiveness Business Essay
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Published: Mon, 5 Dec 2016
Competition is the basis of the victory or failure of firms. Competition decides the aptness of a firm’s activities that can add to its performance such as innovations, a unified culture or excellent execution (Porter, 1985). Competitiveness has turn out to be one of the significant concerns of government and industry in each nation. ‘Why do some nations succeed and others fail in international competition?'(Porter, 1990). There are numerous explanations for why some nations are competitive and others are not. The intense debate on competitiveness was initially given by Michael E. Porter in his book ‘The Competitive Advantage of Nations’ which was published in 1990. His vital idea in this book was to explain the reasons ‘why some social groups, economic institutions, and nations progress and flourish (Porter, 1990).
Since the key idea of this academic piece of work is to evaluate the global competitiveness of the Indian textile industry, therefore in this thesis a study of global competitiveness of Indian textile industry has been made with the help of four determinants of Porter’s Diamond Framework. The four determinants are factor conditions, demand conditions, related and supporting industries and firm/strategy/rivalry. This structure has been developed by using the theory of Porter five forces analysis which will be discussed later (Kathuria, 2008). Below fig.1 is the model by porter on the Competitive Advantage of Nation.
Fig. 1 Porter’s Diamond Model for the Competitive Advantage of Nation
RELATED AND SUPPORTING INDUSTRIES
FIRM STRATEGY, STRUCTURE, AND RIVALRY
Source: Porter 1990 pp.127
First, factor conditions are the most significant part of theory of competitive advantage of nations. Each nation owns factors of production such as labour, capital, natural resources, arable land and infrastructure which are essential to compete in every industry. As porter says, a nation’s firms achieve competitive advantage if they enjoy low-cost or distinctively high-quality factors of the specific types that are important to competition in a finicky industry. He also points out that competitive gain from the factor depends on how efficiently and effectively they are used (Porter, 1990).
He has categorized the factors as ‘basic factors’ (such as natural resources, climate, and location) and ‘advanced factors’ (such as infrastructure, communications, sophisticated skills and research facilities). There exists a complicated relationship between basic and advanced factors. He further argues that advanced factors offers the most lasting basis for competitive advantage whereas basic factors can provide preliminary advantages. He also points out that drawbacks in basic factors create pressures to invest in advanced factors (Grant, 1991). The factor conditions in context to Indian textile industry are that India is the major producer of cotton yarn in the world. India has relative advantage in labour cost over a few of the developed countries. India has skilled manpower in both technical and management fields (Kathuria, 2008).
The second important determinant of ‘diamond’ framework of porter is home demand conditions for the industry’s product or service. It is very essential for an economy to have a mature domestic market. The three necessary elements of home demand are ”composition of home demand, the size and pattern of growth of home demand and the mechanisms by which a nation’s domestic preferences are transmitted to foreign markets” (Porter, 1990). He argues that firms are highly responsive to the requirements of their closest consumers; therefore if the demand in the home nation is high it stimulates the firms to innovate and meet high benchmarks which will enhance the firm competitiveness continuously. The home base should offer former indication of demand trends to its home country seller before its overseas competitors (Grant, 1991).
The third determinant to attain national gain in an industry is “presence in the nation of supplier industries or related industries that are internationally competitive” (Porter, 1990). As said by Porter, competitive advantage in several suppliers industries award prospective benefits on nation’s firms in lots of other industries since they generate inputs that are of great magnitude for innovation and internationalization. The presences of related industries in a nation of competitive industries often guide to recent competitive industries. Related industries also share activities (technology development, manufacturing, distribution, and marketing) in the value chain when competing (Porter, 1990). For instance, India is ranked second in the world for yarn spinning capacity after China roughly accounting 20% of the world’s spindle capacity. Competitive advantage can be attained through establishment of relations between quality suppliers and clothing industry. India has a complete value chain and import content is very small (Kathuria, 2008).
The last determinant of diamond model explains the situation in which firms are created, organized, managed and the nature of domestic rivalry between them. The objectives, policies and ways of coordinating firms in industries vary from nation to nation. A range of cultural aspects like interaction between the employees, working principles and employee-employer relations plays a major part. The central idea given my porter in this determinant is that it is essential for firms to be familiar with the national rivalry and strategies played them in order to be successful globally (Porter, 1990). Porter further adds the relationship between domestic rivalry and determination of competitive advantage is very attractive. Rivalry creates pressures on the firms to decrease costs, improve quality and innovate (Grant, 1991).
Finally, the two variables that influence the above four determinants are ‘chance and government’. Chance events are important as they generate discontinuities that permit changes in competitive strategy. They have the ability to nullify the rewards of previously well-known competitors and create the potential that a new nation’s firms can replace them to attain competitive advantage in response to new and different conditions. The key role of government in the ‘diamond’ is to influence the four determinants. The government can manipulate the four determinants either positively or negatively. For example, the government can affect the factor conditions through subsidies, policies towards capital markets etc. All together these six factors explicate why some businesses prosper more than others. The main objective of this model is to explain how different nations hold the advantage of their home-base to build relations with different nations in order to become competitive globally (Porter, 1990).
The diamond model is supported by porter’s five forces model which will assess the competitiveness of Indian textile industry.
Porter’s Five Forces Model
Michael Porter gave the five forces framework for measuring the competitive environment of the industry. These five forces reveal the capability of the firms to earn an average rate of return on investment in surplus of the cost of capital. The five forces have the potential to determine industry profitability as they can control the costs, prices and essential investments of firms in an industry. The five forces are threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitute product of services and competitive rivalry (Porter, 1985). The Fig.2 will explain the porter’s five forces analysis of Indian textile industry.
BARGAINING POWER OF CUSTOMERS
High demand for apparels and home textiles in the US and EU markets.
BARRIERS TO ENTRY
No barriers in the domestic market. New capacities coming up.
THREAT OF SUBSTITUTES
Competition from low cost producing nations like Pakistan and Bangladesh.
Quote free regime competition from China.
BARGAINING POWER OF SUPPLIERS
High availability of cotton. Low cost of labour.
Source: Equitymaster.com, 2006
Bargaining Power of Buyers
Buyers can influence the industry due to their talent to compress prices, snip for superior quality products or services and to play competitors off against each other. Bargaining power of buyers assess the demand scenario of the industry (Henry, 2008). Global textile and clothing industry is presently measured around US$ 440 billion. The global textile trade is dominated by the US and European markets. With the removal of quotas the textile trade is estimated to increase to US$ 650 billion. Even though China is expected to become the supplier of choice but India will also gain from it as overseas importers wouldn’t take the threat of buying from one country only. As a result the exports of India will rise (Equitymaster.com, 2006).
Bargaining Power of Suppliers
Suppliers can exercise bargaining power over members in an industry by boosting prices or dropping the quality of purchased good and services Henry says that ” the factors that increases supplier power are the mirror image of those that increase buyer power” (Henry, 2008). India is the third major producer of cotton which is the main raw material in textile industry. Due to the rich accessibility of cotton and its low prices, it assists the manufacturers to lesser its production cost and maintain pricing pressure on the buyers. The other benefit that India has is its low labour cost per hour as compared to other countries like US, China, Taiwan Hong Kong and South Korea (Equitymaster.com, 2006).
Threat of New Entrants
It is the situation where the new competitors decide to enter the particular industry to decrease the level of profits earned by existing firms. Those industries attracts more new entrants in which existing firms earns returns more than their cost of capital (Henry, 2008). The removal of MFA quotas has given the opportunity to all the countries to enter the textile sector. As a result many big players are entering the textile sector. Smaller players which cannot enter the international markets are entering the national market creating excess supply thus deteriorating the cost structure. For instance, even if the major players like Arvind mills, Raymond and Alok industries consolidate with international companies they still cannot maintain their margins unless they have the ability of capturing the major part of foreign markets (Equitymaster.com, 2006).
Threat of Substitutes
This is the threat from those products and services which can fulfil similar requirements. The consumer can shift to these substitutes due to difference in prices and performance (Henry, 2008). India has a threat from low cost producing countries like Pakistan and Bangladesh which may hinder India’s exports demand (Equitymaster.com, 2006).
The main disadvantage of India is its geographical distance from major global markets of US, Europe and Japan in contrast to its rivals like Mexico, China etc which are comparatively nearer. Big geographical distance results in high shipping expenses and lengthy lead-time. Another disadvantage of Indian textile industry is its fragmented structure. The country has time-consuming and most complicated supply chains in the world (Equitymaster.com, 2006).
Grant, R.M. 1991. Porter’s Competitive Advantage of Nation’s: An Assessment. Strategic Management Journal. 12, pp.535-548
Kathuria, L.M. 2008. An Analysis of Competitiveness of Indian Clothing Export Sector Using Porter’s Model. The Icfai University Journal of International Business. 3(4).
Porter, M.E. 1985. Competitive Advantage: Creating and Sustaining Superior Performance. New York: The Free Press.
Porter, M.E. 1990. The Competitive Advantage of Nations. London: The Macmillan Press.
Porter, M.E. 1998. The Competitive Advantage of Nations (With a New Introduction). New York: Palgrave.
Henry, A. 2008. Understanding Strategic Management, New York: Oxford University Press Inc.
Equitymaster.com, 2006. Indian Textile Industry: Porter analysis [online] [accessed 28th May 2010] Available at: http://www.equitymaster.com/detail.asp?date=3/31/2006&story=1
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