Exploiting competitive advantage in international business

By Joseph Akyeampong Esq

It is normally the case that in Ghana, people often place premium on foreign goods especially those from the western world as having more durability and being price competitive than locally produced goods. As a result of the preference for foreign goods on account of their durability and price competitiveness which has skewed demand in their favour, there has been sustained campaigns by governments over the years to drum home the imperative of shifting tastes to local goods in preference for foreign goods, especially when there are equally good substitutes particularly with household goods.

During the first full presidency of  John Mahama, he made strenuous efforts to skew the taste of Ghanaians to local goods. In an article in the Daily Graphic and appearance at an event, he informed Ghanaians about the prioritisation of some basic goods which are used or consumed in his household as being made in Ghana goods.

Dr. Ekwow Spio-Garbrah as Minister of Trade and Industry between 2014 and 2016, took the campaign a notch higher by authourising an embossment on made in Ghana goods with a special logo. When international businesses develop products and services which are sold across the world and achieve brand loyalty like Apple products, Toyota vehicles of the Lexus, V8 and V6 brands, televisions and household appliances by Samsung, their products achieve brand loyalty due to their durability and price competitiveness.

In that case, they outcompete the products of other companies and are said to have leveraged on what is called in international business “competitive advantage”.

What is competitive advantage?

The concept of competitive advantage in international business is when a firm gains the ability to outperform its foreign and domestic rivals by offering superior value through lower costs, unique product differentiation or placing a special focus on its supply chain processes. In the circumstances, the firm is able to capture a significant share of the market leaving its competitors in the shade.

Activating competitive advantage in international business

In the operations of international businesses, they leverage on factor cost differentials across the various countries where they operate in labour costs, raw materials, supply chain operations to even out their production processes leading to increased profitability. Michael Porter, a US academic has posited that firms achieve competitive advantage by leveraging on certain advantages which he terms “ cost leadership” which means offering lower prices, “differentiation” meaning offering high quality and uniquely branded products and “focus” meaning targeting specific niche markets. Michael Porter further expands on his prognosis of international firms gaining competitive advantage through technological leadership by a successful deployment of AI, big data and deploying R&D in their production processes to achieve superior product quality.

In seeking to maximize competitive advantage in business, Michael Porter also emphasises the placement of premium by international businesses on human capital which involves putting in place facilities for the training of highly skilled labour force as well as devising strategies and giving of incentives to attract top talent.

Klaus Meyer and Mike Peng, accomplished scholars in international business and management propose six methods of competitive advantage by which international businesses achieve competitive edge and help them gain brand loyalty for their products. They propose that international businesses should leverage on size to achieve economies of scale which is to the effect that, as the firms exploit their size with their higher production capacity in their plants dotted around the world, they eventually achieve a reduction in the unit cost of production which enables the firm to sell at competitive prices.

They cite the example of pricing in the car industry where firms leverage on their competitive advantage by selling more cars from their various plants around the world which eventually evens out their cost recovery in R&D, which forms a big component in their cost build up. Other competitive advantages to be gained by global companies on account of their dispersed locations are in supply chain, innovation and knowledge management, huge customer base and diversification of risk.

Since international businesses source materials to be deployed in their production processes around the world, international businesses with their size are able to exploit cost differentials which eventually aid in the pricing of their goods as against companies whose supply networks are limited.

They also have the ability to source raw materials of specific quality in far flung areas. Due to the spread of production facilities at different locations, international businesses have the flexibility of locating component units of their operations in different countries in response to changes in circumstances in their areas of operation. Not long ago, it was reported that PZ Cussons had relocated its production unit in Ghana to Nigeria in response to high operational cost. Some international businesses in Ghana were also reported to have located their operations to other countries in response to changes in their factor cost build up.

According to Mike Peng and Klaus Meyer, a major advantage which enhance the competitive advantage of international businesses is their ability to diffuse their R&D capabilities to connect with global R&D centres of excellence which are located in places like Silicon Valley in California in the US which is famed for IT development, biotechnology development in Cambridge, England, Kobe in Japan, Singapore, Bangalore in India, Beijing in China among other places etc. By tagging on to world renowned centres of excellence in R&D, it aids with innovation in the development of new products in conformity with customer tastes and preferences.

A competitive advantage which inures to the benefit of an international business is the reduction in its risk profile resulting from shifts or turbulence in its sales revenue generated from its operations around the globe. Since it is not likely that all the operational bases of an international business may suffer shifts in demand occasioned by a recession, outbreak of natural disasters, pandemics etc, an international business could shift a business in a country which may be suffering from some of these draw backs to a country which may be experiencing a boom in economic activities.

This will even out its revenues from its overall operations in contrast with a single country entity operation which suffers a disruption to its business from the occurrence of a recession, natural disaster or a pandemic.

Warren Buffet, the US financier describes competitive advantage in international business as “economic moat”. By this, he means a company having built a long lasting sustainable barrier which insulates it against competition by its rivals like a defensive barrier. He describes the defensive barrier which a company gains through sustainable competitive advantage as being gained through brand power, switching costs, network effects or low cost production.

He posits that when a company successfully gains competitive advantage in these areas, it is able to protect its share of the market and generate high returns on capital as contrasted with its competitors. Warren Buffet declares that achieving sustainable competitive advantage inures to companies with dominant brands and “efficient cost-advantaged companies with global scalability”.

Warren Buffet relates the “economic moat” analogy in attaining sustainable competitive advantage in international business to a moat which was a defensive barrier which was dug around castles in mediaeval times to ward off enemies. In the modern era, economic moat protects a business against competitors through the following medium-Intangible assets which consist of brands, patents, government licences and assurances etc which ward off competitors.

This is particularly applicable in the pharmaceutical industry. An international business becoming a moat can also be achieved through cost advantage of economies of scale as a result of being able to produce large volumes and therefore able to cut out competitors on account of being price competitive when customers feel reluctant to switch from a product or service that they are accustomed to due to the inconvenience involved. That advantage inures to the company whose good is patronised as having become an economic moat.

Other economic moat benchmarks can be achieved through what Warren Buffet calls network effect and efficient scale. By network effect, he means the value that a good or service achieves with increased use. This is particularly the case with social media sites which accrues increased benefits to the user when it is used by many people like Facebook, LinkedIn etc. Also, companies can achieve competitive advantage through becoming an economic moat by efficient scale production. This is where companies serve limited markets where there are only few operators.

Because of this,potential competitors are naturally barred from the market. This relates particularly to the pharmaceutical industry where a pharmaceutical company produces drugs for diseases that only affect a limited number of patients.

International businesses with competitive advantage

Some companies which have achieved the “economic moat” status in international business through their brand quality, economies of scale, switching costs and network effects include Amazon for unrivalled logistics, economies of scale; Walmart for cost leadership with the mantra, “Always low prices” and massive supply chain efficiencies; Visa/MasterCard, powerful network effects; Pfizer-high value patents and R&D capability; Coca-Cola, dominant global brand and extensive distribution network; Nike-brand power, marketing and product innovation.

Competitive advantage for local businesses

It is to be noted that though the concept of competitive advantage and its accompanying model of economic moat largely relates to worldwide dominant companies, local businesses which apply the principles relating to becoming economic moat can also become household names in Ghana and possibly in Africa. A local company like Kasapreko which sells its products in several African countries and has achieved brand quality in Nigeria, Kenya, Uganda, South Africa and other countries with its Alomo Bitters and Storm Energy could strive to become the Ghanaian “economic moat”.

The writer is a lawyer and the Principal of Akyeampong & Co, Corporate and International Business Attorneys with special focus practice in Commercial, Corporate, Banking, Finance, Insurance, International Business, International Trade, Intellectual Property and Mining Law.

Email:   [email protected]

The post Exploiting competitive advantage in international business appeared first on The Business & Financial Times.

Read Full Story