Delivering Competitive

Advantage
WHAT IS COMPETITIVE
ADVANTAGE?
Competitive advantage arises from a value creating proposition,
possibly by managing the strategy for competition (Porter, 1980) or
by managing the firm’s value creating activities (Porter, 1985).

Barney (1991) contends that competitive advantage can be derived

from rare, unique and heterogeneous resources that translate into
firm’s capabilities.

Porter (1990) then reasons from his study of ten nations that it is the
quality of the environment– the factor conditions, the demand
conditions, the presence of related and supporting industries, and the
firms’ structure and rivalry within – that help incumbents achieve a
high and rising level of productivity in a particular field.
TODAY’S COMPETITIVE
ADVANTAGE
Today, companies can source for goods, capital and
technology globally. With more open global market,
easy access to information and faster transportation,
the role of location in competition is said to have
diminished!

But if location does not matter, why is today’s

economic map of the world still being dominated by
growing clusters of economic activities?
 FOUR SETS OF FORCES
• Four forces dominate the competitiveness environment. The
global economy assumes that production does not necessarily
need to be close to the end-user as companies can and should
benefit from the comparative markets worldwide - Garelli (1997)

However, it is now the economy of

proximity that provides value-added
services close to the end user. Local
things such as knowledge,
relationships, motivation provides new
sources of competitive advantage that
distant rivals cannot match – Porter
(1998)
 WHAT IS
COMPETITIVENESS?
National competitiveness is determined
by the productivity with which the nation
uses its human, capital and natural
resources.

Productivity in a nation arises from a

combination of domestic and foreign
firms, and sets the standard of living (e.g.
wages, ROCE, returns to natural
resources)

Porter (1998) contends that it is not what

industries a nation competes in that
matters for prosperity but HOW it
competes. It is also about HOW global
industries and MNCs competes.
PERSPECTIVE OF FIRM
SUCCESS
Internal External

Competitive advantage Competitive advantage

resides solely inside a resides partly in the
company or its industry locations at which a
Competitive success company’s business units
depends primarily on are based
company strategic Cluster participation is an
choices important contributor to
competitiveness
 Internal
Sources of
Competitive
Advantage
© DR ADRIAN KUAH 2010
VALUE CHAIN
Competitive advantage grows out of the value a firm is
able to create for its buyer and is achieved through
relentless improvement to the organisation’s product and
service through understanding and controlling of the
value chain process (Porter, 1985).

Shows how resources can work together to bring

competitive advantage. Breaks down the whole
production process to show the contribution made by
each part. Highlights problems – high cost or inefficient
areas.
VC Based on Low-Cost Leadership
SUPPORT ACTIVITIES

Infrastructure Centralised cost controls

Human
Intensive training to emphasise cost saving means;
Resource encourage employees to look for new ways to improve methods
Management

Technology Economies of scale or R&D and technology development;

Development learning and experience amortised over large volume

Purchasing from numerous sources;

Procurement strong bargaining power with suppliers

PRIMARY Large shipments: Economies of Bulk or Mass marketing: Centralised

ACTIVITIES massive scale in plants: large order mass distribution: service
warehouses experience shipment national and facilities in
effects campaigns region

Inbound Operations Outbound Marketing/ Service

Logistics Logistics Sales
 VC Based on Differentiation
SUPPORT ACTIVITIES

Try to coordinate activities tightly between functions;

Infrastructure build quality into organisational practices
Human
Treat employees as special team members;
Resource emphasise design incentives that promote quality
Management
Heavy R&D expenditures to make distinctive or even unique products;
Technology
refinement of high quality manufacturing and technology processes;
Development emphasis on excellence, world class quality

Procurement Selective purchasing from best or world class suppliers

Use of best Extremely fine Fast delivery to Special, High emphasis

materials, quality distributors; distinctive ads; on treating
parts, and manufactured extra care in technical sales customer as
PRIMARY
components workmanship packaging and know-how special in-
ACTIVITIES emphasised and transport dividual; fast
and courteous
special service.

Inbound Operations Outbound Marketing/ Service

Logistics Logistics Sales
 CRITICISM OF VALUE
CHAIN
Good diagram - powerful
concept
Can be difficult to apply where
 company does not control all stages
 conglomerate companies in many sectors
 data for each stage are difficult to obtain

There now there is a need to

consider value chains for the
industry or value systems
 SUSTAINABLE
COMPETITIVE ADVANTAGE
Barney (1991) underlines the link between the firm resources and
competitive advantages
Not all resources can create competitive advantage. In order to do
so, it has to meet 4 conditions:

 It must be valuable. It is able to be exploited at the right time,

 It has to be rare in origins. It id not readily available to competitors
 It has to be imperfectly imitable. This can due to its unique history, causal
ambiguity and/or social complexity
 It does not have any substitute : no alternatives
SUSTAINABLE
COMPETITIVE ADVANTAGE
A firm can get a sustained competitive advantage when
it possesses resources which are (the underlying theory
assumes):

Heterogeneous
Otherwise the competitors could easily introduce the same
strategies

Immobile
Otherwise the competitors could easily get the needed
resources to copy the strategies
Determinants for
National Competitive
Advantage
CLUSTERS AND VALUE
SYSTEM
Competitive advantage grows out of the value a
firm is able to create for its buyer and this can be
diagnosed through the value chain (Porter, 1985).

The importance of the entire value system to

competitive advantage is manifested by the
prevalence of clustering - Porter (1990).

© DR ADRIAN KUAH 2010

INDUSTRY CLUSTERS?
Clusters are critical masses in one place of unusual
economic success in particular fields Porter (1998)
Clusters are defined as geographic concentration of
competing, collaborating and interdependent
companies and institutions which are connected by a
system of market and non-market links DTI White
Paper (1998)
Clusters, in geographical and technological sense,
are a large group of firms in related industries at a
particular location Swann (1998)
CLUSTERING
CHARACTERISTICS
Clusters are interdependent firms linked to each other in a
value-adding production chain. Roelandt and den Hertag
(1999)

Clusters are concentration of firms that are able to produce

synergy because of their geographical proximity and
interdependence Rosenfield (1997)

Economic clusters are not just related and supporting industries,

but rather related and supporting institutions that are more
competitive by virtue of their relationships Feser (1998)

© DR ADRIAN KUAH 2008

 CLUSTERING
CHARACTERISTICS
Martin and Sunley (2002) refuted the vague characterisation
and concept of clusters:
 associated and interconnected firms; linked through their commonalities
and complementariness in products, services, inputs, technologies or
outputs activities.

 physical proximate groups of companies; encouraging the formation of,

and enhances value creating benefits via their interactions.

 co-location itself does not imply clustering when these associated

clustering benefits like innovation, productivity, growth or other superior
competitiveness cannot be shown or described.

© DR ADRIAN KUAH 2008

 Agglomeration
Economies
Clusters Externalities
& Linkages & Spillovers

Industry
Clusters
Clusters, Clusters,
Innovation and Growth and New
Productivity Value Creation Entry

Competitive
Advantage
CLUSTERS &
AGGLOMERATION
ECONOMIES
Agglomeration externalities are defined as any
economies or cost reductions that are possible if
several firms locate near to each other (Evans 1985).
Models of dynamic externalities argue that cities or
clusters grow because they allow people to interact and
learn from one another, and proximity promoted this.
Externalities involve a diversity of supplier,
information and knowledge spillovers on market
conditions and technology transfer.
CLUSTERS &
AGGLOMERATION
ECONOMIES
The forms of externalities are
 localisation externalities resulting from geographical
agglomeration within the same industry creating external economies
of scale
 urbanisation externalities arising from the agglomeration of
firms in different industries, creating external economies of scope
 pecuniary externalities arising from transactions amongst firms
reducing costs, also known as economies of complexity

MAR (Marshall-Arrow-Romer) externalities with positive influences

on firms’ growth as knowledge accumulated by one firm would help
the technology evolve in other firms.

© DR ADRIAN KUAH 2008

CLUSTERS & SPILLOVERS
Spillovers are a broader concept than traditional
agglomeration externalities, particularly because a
spillover like that of information and knowledge is not
necessary spatially bound. - Baptista (1996) Oakey (1985)

Knowledge spillovers, central to clustering phenemenon,

arise from everyday contact, networking through
geographical proximity and other formal arrangements
like JVs.

© DR ADRIAN KUAH 2008

COST & BENEFIT ANALYSIS
OF CLUSTERING
Demand Side Supply Side
Benefits Customer proximity Knowledge spillovers
Reduced consumer search costs Specialised labour
Information externalities Infrastructure benefits
Reputation Information externalities

Costs Congestion and competition in Congestion and competition in

output markers input markets (property and labour)

COST &BENEFIT ANALYSIS OF LOCATING IN CLUSTER

Source: Swann et al [1998: 57], with slight modifications
CLUSTERS & LINKAGES
Clusters is a kind of new spatial organisation form in
between that of “arm’s length markets” and “vertical
integration” systems.
Porter (1998) has suggested that a cluster’s boundaries are
defined by the linkages and complementaries across
industries and institutions that are most important to
competition.
Oakey (1985) had earlier emphasised the importance of
input and output linkages in defining the boundaries of a
cluster and the agglomeration advantage.
CALIFORNIA WINE
CLUSTER –
CLUSTER MAP
Grape stock
State government
agencies
Wine making equipment

Barrel

Bottle
Fertilizer, pesticide,
herbicide Growers Wineries Caps and corks
and and
vineyards processing
Grape harvesting Labels
facilities
equipment
Public relations and
Irrigation technology advertising
Specialised publication
Educational, research, &
trade organisations

Tourism cluster
California agricultural California agricultural
California agricultural California agricultural
California agricultural
cluster cluster
cluster cluster
cluster

Food and restaurant

California agricultural
California agricultural
cluster
© cluster
DR ADRIAN KUAH 2008
cluster
CLUSTERS &
POSITIVE FEEDBACK
Porter (1998) also acknowledged that the positive feedback
loop within a cluster and that the formation of new
businesses amplifies the benefits of clustering.

Other extraneous effects from this positive feedback include

a higher rate of productivity growth (Henderson, 1986),
more prolific innovation (Baptista and Swann, 1998) and
significant information and knowledge spillovers (Oakey,
1985).
CLUSTERS &
POSITIVE FEEDBACK
Positive feedback is seen to be playing a central role in the
dynamics of clusters (Baptista and Swann, 1999; Beaudry et al.,
1998; Swann et al., 1998; Swann and Prevezer, 1996).

+ +
Industry
Strength

New Entry Fixed Effects Growth of

Incumbents

Science Base
CLUSTERS & SYNERGY
The country could possess numerous competitive conditions that are
important to the cluster, such as the presence of a strong
government, stable financial institutions and good transport
infrastructure.
The right conditions would create a form of synergy or strategic fit
between the cluster and region; and further intensifies the positive
feedback mechanism (Kuah, 2002)
The strategic fit model will serve to explain why certain countries/
regions can possess most of the competitive attributes but still could
not catalyst the growth of a desired cluster
CLUSTERS & SYNERGY

Infrastructure
Technology Leader
Sci & Tech

People
Time to Market

Govt

STRATEGIC
Nation’s FIT & Firm / Industry Reliability
Mgmt Competitiveness SYNERGY Strategies

Finance
Cost to Market
Dom. Econ
Internationalisation Other Winning Strategies
CLUSTER AND VALUE
CHAIN
Competitive advantage grows out of the value a
firm is able to create for its buyer and this can be
diagnosed through the value chain (Porter, 1985).

The importance of the entire value system to

competitive advantage is manifested by the
prevalence of clustering - Porter (1990).

© DR ADRIAN KUAH 2008

CLUSTERS AND
INNOVATION
Innovation is seen to be central in creating a competitive
advantage by perceiving or discovering new and better
ways to compete in an industry and bringing them to
market - Porter (1990).

Porter (1990) has also noted that competitive advantage is

sustained only through relentless improvements to the
firm's product and organisation. Clusters, indeed, is
important for organisational improvement and
technological innovation (Baptista and Swann, 1999).

© DR ADRIAN KUAH 2008

CLUSTERS AND
COMPETITIVE ADVANTAGE
Porter (1998) sums up that clusters broadly affect
competition and create competitive advantage in three
ways:
 By increasing the productivity of companies based in the cluster;
 By driving the direction and pace of innovation, which
underpins future productivity growth; and
 By stimulating the formation of new businesses, which expands
and strengthens the cluster, forming a virtuous circle or positive
feedback.

© DR ADRIAN KUAH 2008

 Agglomeration
Economies
Clusters Externalities
& Linkages & Spillovers

Industry
Cluster
Clusters, Clusters,
Innovation and Growth and New
Productivity Value Creation Entry

Competitive
Advantage
WHAT IS A DIAMOND FOR
COMPETITIVE ADVANTAGE?
Firm Strategy,
Structure and
Rivalry

Factor Porter (1990) Demand

Conditions Competitive Advantage Conditions
of Nations

Related and
Supporting
Industries

© DR ADRIAN KUAH 2008

DEMAND CONDITIONS
Factors affecting demand conditions
 Local or Regional Demand

 Growth of Demand

 Sophistication of Local Demand

© DR ADRIAN KUAH 2008

FACTOR CONDITIONS
Types of Factor Conditions
 Endowed Factor Condition
 Basic Factor Condition
 Advance Factor Condition

Need to characterise them to better understand the way they can be

developed

© DR ADRIAN KUAH 2008

RELATED AND
SUPPORTING INDUSTRIES
Importance of Related Industry
 That could adapt existing skills/ equipment to support new cluster

Importance of Supporting Industry

 To supply to the industry within proximity

© DR ADRIAN KUAH 2008

FIRMS STRUCTURE,
RIVALRY & STRATEGY
Structure
 Number of firms/ big players

Rivalry & Strategy

 Types of competition (domestic/intl)
 Strong domestic industry is good
 Pluralism is good

© DR ADRIAN KUAH 2008

HOW THEY MUTUALLY
AFFECT EACH OTHER
Firm Strategy, Structure
and Rivalry Buyer
Seaport built
Sophistication
by exiting
cluster

How they
Factor Conditions reinforce Demand Conditions
each other?

Skills est by Other industry

Related and Supporting requiring
other industry
Industries products

© DR ADRIAN KUAH 2008