The major trade theories discussed in the precedent chapter were mainly focused on the following aspects. The Absolute Advantage theory rests on the fact that one country dominates completely the other one in terms of major resources. This is not something true in most cases. For example, even if one compares a modest country like the Burkina Faso to a rich country like the United States of America, there will not be absolute advantage of the USA in almost every field. May be in agricultural production, the Burkina Faso could be better in certain instances than the USA. We think here of cassava or cotton. Absolute advantage could be applied between a competitively strong nation and one which is weak. It could be a country from the first world with one from the third world.
Comparative advantage is something practical and quite clearly understood. For example, the United Kingdom used to have comparative advantage on mechanical products to the tropical countries whereas the tropical countries had a comparative advantage over the United Kingdom in terms of sugar production or fresh fruits. The foundation of comparative advantage rests on the fact that each country can excel in its own field of production while increasing total products of two comparative products. Has such a thing been put concretely in practice and have the results been reaped? This may not be true as the stronger nations always try some way or the other to get the best from every field or game they want to play. The European Union produces beet sugar while it imports cane sugar as well.
A business can achieve an edge over its competitors in the following two ways:
Through external changes namely when environmental factors change, many opportunities can appear that, if seized upon, could provide many benefits for an organisation. A business can also gain an upper hand over its competitors when its capable to respond to external changes faster than other organisations.
By developing them inside the company when a firm can achieve cost or differentiation advantage when it develops internal resources, unique competences or through innovative processes and products.
When environmental factors change many opportunities arise that can be exploited by a business to achieve superiority over its rivals. For example, new superior automobile production, which is manufactured and sold in Brazil or India, would favour lower production costs for such companies and they would gain cost advantage against competitors in a global environment. Changes in consumer demand, such as trend for wearing branded products, can be used to gain differentiation advantage if a company would sell unbranded or imitated clothing apparel.
Companies need also respond fast to changes. The advantage can also be gained when a company is the first one to exploit the external change. Otherwise, if a company is slow to respond to changes it may never benefit from the arising opportunities.
These could come from core competences. Competence is an ability to perform tasks successfully and is a cluster of related skills, knowledge, capabilities and processes. A company that has developed a competence in producing miniaturised electronics would get at least temporary advantage as other companies would find it very hard to replicate the processes, skills, knowledge and capabilities needed for that competence. This came from Honda, the Japanese automobile company that initially used and developed such competences for its engines like VVIT.
Innovation is another useful factor to consider here. Usually, a company gains superiority through innovation. Innovative products, processes or new business models provide strong competitive edge due to the first mover advantage. For example, Samsung’s high definition cameras in its mobile phones creates something innovative recently and this was built upon its earlier ability to provide consumers with instant 12-shot pictures.
The most important recent ideas in strategic planning have come from the work of Michael Porter. His competitiveness strategies framework demonstrates that managers can choose from among three generic strategies. Success is incumbent upon the selection of the right type of strategy. Porter’s strategy has been to detail carefully how management can create and maintain competitive advantage that will achieve profitability for any business above industry average.
For the time being, in the post-GATT period, and the dismantling of the Multi-Fibre agreement, certain South-East Asian nations appear to practice the theory of cost-leadership. Countries like Taiwan, Malaysia, the Philippines, Korea, Singapore, are practising such a strategy. This is why cars like Daewoo, Toyota, Hyundai and electronic goods like Aiwa, Sanyo, Panasonic made and assembled in such countries are sold at a lower price. Today, in the textile and manufacturing industry countries like Bangladesh, India, Pakistan, will be practising such a strategy and will become very competitive. Upper-middle emerging economies will probably suffer from the low-cost strategy adopted by the countries.
This strategy allows a firm to be different from other. The distinction can be provided by high quality, extraordinary a service, innovative design, technological capability or a positive brand image.
The differentiation strategy is quite common to European countries historically speaking. Switzerland’s reputation for excellent watches comes from the fact that the Swiss made watch has always been unique over other brands despite their consequent popularity in the past twenty years. Watches like Seiko, Citizen or Orient may be very popular but they cannot be compared to a top quality Swiss watch like Rolex or Hublot which is distinctive. Recently, Swatch put on the market the very fashionable and attractive looking Swatch watches at a comparatively low-cost.
Similarly, England’s reputation with reference to opts electrical goods has barriers over the world. The Morphy Richards iron, the Precious switch and many items have been highly valued by consumers. It has also excelled in steel products such as the Peglar tap, the Sheffield cuisine utensils, the Raleigh bicycle. Concerning machines, the English had focused a lot on quality and durability namely the Morris Oxford car or the Bedford buses and lorries.
Emerging economies like Mauritius, Turkey or Egypt have been trying to implement differentiation strategy because of the nature of competition they face from lesser developed countries which are nowadays preying on our industrial success. Free Zones and cost-leadership is practised by such countries.
The focus strategy aims at a cost advantage in a narrow range of industry segments. This must be differentiated from a differentiation strategy which focuses on a wider segment. Management will select a group or groups of segments in an industry and tailor the strategy to serve them to the exclusion of others. The goal is to exploit a narrow segment of the market.
A focus strategy is quite rarely applied by countries but it can be argued that it can be applied in segments where only a few capital-intensive industries can compete. For example, in the aeronautic industry, there are two major competitors, the Boeing and the Airbus. Presently, the Airbus is trying to focus on the French-speaking countries which are quite limited as they are generally spread in Northern Africa. Boeing is trying to focus all over the world but competition through this segment is quite difficult.
In the extraction of gold, only a few countries compete. For example, South Africa is one of the key players in the gold market which is of much appeal to a narrow segment of businessmen.
Focus strategy is most powerful for small firms. This is because they do not have economies of scale or internal resources. At country level, agricultural countries may focus on industries where the segment is quite narrow, e.g. dates, special types of tea such as the pekoe.
This strategy is especially useful for the small companies with a limited budget and specialised products. But even large companies with mass products can make use of this strategy to target niche segments. Companies focus on the customers based on their demographics, interests, occupation or social causes. Once the target group has been identified, a marketing strategy can be developed. Some of the strategies that can work well here are word of mouth campaigns, endorsement campaigns and targeted collateral campaigns. The companies can also target high margins by providing specialised services.
Emerging economies might find it difficult to create new markets or exploit the same markets that they actually cover. In the tourism sector, island economies like Sri Lanka, Philippines, Seychelles, Mauritius, Cap Verde, will be keen to consider niche markets apart from their traditional ones. There is now an increase in middle-class Chinese and Indians willing to travel abroad. High spending tourists from the Emirates might be willing to choose unknown destinations that add variety to what they want to see and enjoy. Niches are generally markets which are small in size but offer a distinctive advantage of high price offer. Understanding that emerging markets cannot easily target niches, special areas for targeting might hence be described as niches for them. Niche tourist markets might also be Eastern European countries like Romania, Hungary, Latvia, etc. where tourists might enjoy travelling to paradise islands although they are few in number.
Porter uses the term ‘stuck in the middle’ to describe organisations that are unable to gain a competitive edge in any one of the strategies. Such countries find it difficult to achieve a long-term success. Porter has corrected his assumption by accepting that companies that were ‘stuck in the middle’ could also be good performers. A ‘stuck in the middle’ position happens when a business designed to be low cost starts adding little extra frills which do not add a corresponding amount to the customer value of a product. The business suffers the cost; the customer does not get the benefit. Or when a differentiated business comes under pressure on prices—perhaps there has been a market disruption from new technology or an ultra-low priced competitor from overseas—and starts cutting costs in areas which damage the differentiation advantage.
Air Asia wanted to exploit Indian Ocean markets with low frill service. Initially, this concept gained benefit both in terms of customers travelling with the company and the profits initially earned. When there was a low season, Air Asia could not put lower prices nor could it afford keeping the same ‘low-cost’ price. It was obliged to leave certain markets that it targeted for its future development.
Long-term success with any one of the strategies requires that the advantage be sustainable. Countries must resist the erosion of their competitive force or action by competing nations by evolutionary changes in industry. Each country must be able to create barriers (entry barriers) that make imitation difficult and reduce opportunities for imitation. Countries must reduce the price of their exports to gain volume sales when there are economies of scale. Tying up buyers with exclusive contracts may sustain competitive advantage. Sustainable competitive advantage requires constant attention and effort by governments and industrialists in order to keep themselves one step ahead of competition. Hamel and Prahalad have proposed an alternative framework for pursuing competitive advantage, growing out of a firm’s strategic intent and use of competitive innovation. A firm can build layers of advantage, search for loose bricks in a competitor’s defensive walls, change the rules of engagement, or collaborate with competitors and utilize their technology and know-how.
Operating models that work for developed markets might not necessarily succeed in emerging markets. Involving operations in emerging market strategy can avoid fragmented and misdirected investment, which often prevents growth goals. A recent study analysed the emerging market strategies, portfolio, target countries, and operating models of 15 leading biopharmaceutical companies. The study also assessed the growth potential and market access of developing countries, including the BRICs (Brazil, Russia, India, China) and select countries in EMEA (Europe, Middle East, Africa), South America, and Southeast Asia.
Among the key findings of the study was that most companies operate in emerging markets by extending the mind-set gained from success in developed markets. When it comes to deploying investments, companies tend to give highest priority to the near-term objectives of market entry and revenue generation rather than balancing country-specific objectives with regional or global goals. These approaches typically don’t provide efficiency and scale, and companies can end up with a fragmented operating network capable of only meeting individual country objectives.
The right operating model depends on a company’s product portfolio and markets of interest. By considering these two dimensions, operations can map a direction for emerging markets strategy that balances market opportunity with operational risks and required investments.
Each of the operating models described above requires different levels of assets, ownership, financial control, governance, and technology. As companies move from innovation—to market-driven strategy, they should consider reconfiguring their operating models to address the challenges of increasing operational investment (number of assets and ownership stake) and complexity. As companies increasingly engage in emerging markets business, they can develop the right operating models to make the most of their investments and balance risk. The right models will help them avoid over-investing in less attractive markets or under-investing in high-potential markets.
To succeed in emerging markets requires different thinking. Biopharmaceutical companies should quickly realise that established approaches for developed markets might not necessarily succeed in emerging markets. They may want to consider the following recommendations:
In developed markets, operations typically follow the lead of the commercial organisation. But operational success and corresponding risks can make or break emerging market aspirations. In developing markets, operations therefore should proactively partner with commercial and other functions to achieve near- and long-term business objectives.
Excelling in emerging markets requires dedicated focus. A separate cross-functional team should manage emerging market strategy, investment, planning, and execution. While emerging market operational resources should have the appropriate level of autonomy and decision-making rights, they should tightly integrate with other core emerging market functions, including regulatory, compliance, and commercial.
Along with cost-conscious manufacturing expertise, operations will benefit from a ‘regulatory factory’— a function that can significantly accelerate product registrations. With a sharpened focus on the regulatory process, operations can improve product launch timing and build scale quickly in emerging markets. A leading biotech company that implemented this type of regulatory centre in emerging markets obtained an 11-fold increase in capacity.
Emerging markets will continue to offer growth potential for biopharmaceutical companies during the next decade. Companies that involve operations in upfront strategy planning, operating model design and execution will be among the most successful in achieving growth goals and global reach.
Why is it important for emerging economies to partner up with companies in the host country? Analyse the organisational focus of companies in relation to core emerging market functions, including regulatory, compliance, and commercial. How will companies that are involved in operations in upfront strategy planning, operating model design and execution be most successful in achieving growth goals and global reach?
Many western companies shied away from emerging markets when they should have engaged with them more closely. Since the early 1990s, developing countries have been the fastest-growing market in the world for most products and services. Companies can lower costs by setting up manufacturing facilities and service centres in those areas, where skilled labour and trained managers are relatively inexpensive. Moreover, several developing-country transnational corporations have entered North America and Europe with low-cost strategies (China’s Haier Group in household electrical appliances) and novel business models (India’s Infosys in information technology services). Western companies that want to develop counterstrategies must push deeper into emerging markets, which foster a different genre of innovations than mature markets do .
If Western companies do not develop strategies for engaging across their value chains with developing countries, they are unlikely to remain competitive for long. However, despite crumbling tariff barriers, the spread of the Internet and cable television, and the rapidly improving physical infrastructure in these countries, CEOs cannot assume they can do business in emerging markets the same way they do in developed nations. That is because the quality of the market infrastructure varies widely from country to country. In general, advanced economies have large pools of seasoned market intermediaries and effective contract-enforcing mechanisms, whereas less-developed economies have unskilled intermediaries and less-effective legal systems. Because the services provided by intermediaries either are not available in emerging markets or are not very sophisticated, corporations cannot smoothly transfer the strategies they employ in their home countries to those emerging markets.
Many companies shied away from emerging markets when they should have engaged with them more closely. Companies can lower costs by setting up manufacturing facilities and service centres in those areas, where skilled labour and trained managers are relatively inexpensive. If Western companies do not develop strategies for engaging across their value chains with developing countries, they are unlikely to remain competitive for long.