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Summary: Changing Patterns of International Competition
The fact that a firm is multinational says little if anything about its international strategy except that it operates in several countries
What does international competition mean for competitive strategy?
Many strategy issues for a international company = issues for a domestic company
Analysis of industry structure competitors Understanding the consumers & buyers value Diagnostic of elative cost position Establishment of sustainable competitive advantage
Patterns of International Competition (setting international strategy)
Industry is the arena in which competitive advantage is won or lost
Pattern differs from industry to industry
Multidomestic:
competition in each country independent of competition in each other country competition occurs on a country-by-country basis competitive advantage -> one-time transfer of know-how from its home
base to foreign countries adoption of intangible assets (inmateriel) outcome determined by conditions in each country International Industry = Collection of essentially domestic industries
Challenge: balance between international activities as an overall system &
Maintain some country perspective
Causes of Globalization
Industry is global if there is some competitive advantage to integrating activities on a worldwide basis
Two types of competitive advantage:
Low relative cost (performing activities efficiently) Differentiation (performing at comparable cost in a unique way)
Ultimate Value:
What buyers are willing to pay for what the firm provides Includes physical product & ancillary services or benefits
Value chain:
Collection of discrete activities performed to do business that occur within the scope of the firm -> value activities
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Primary activities: Physical creation of the product/service Delivery & marketing to the buyer Support after sale
Support activities:
Provide inputs or infrastructure (support of primary activities) Procurement -> obtaining of purchased input Technology -> design of product, creating & improving way of various
activities in the value chain HR -> recruiting, training development of personnel Firm infrastructure -> general management, accounting, legal, finance,
strategic planning
Activities are connected = linkages
The way one activity is perform affects the cost or effectiveness of other activities
Connections with o Suppliers (VC that provide purchased inputs) o Channels (VC through which product passes) o Buyers (VC in which product is employed)
Value system = larger stream of activities -> creation of competitive advantage
Competitive Scope
Breath of activities the firm employs together in competing in an industry
Four basic dimensions of competitive scope:
Segment scope (range of segments a firm serves, e.g. product varieties)
Industry scope (range of industries the firm competes in) Vertical scope (activities performed versus suppliers & channels) Geographic scope (geographic region the firm operates in )
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Shapes the configuration of the value chain
How activities are performed Whether activities are shared among units
International Configuration & Coordination of activities
= how to spread activities in the value chain among countries
Downstream activities (e.g. Marketing & Sales, Service)
More related to the buyer -> location of buyer Create competitive advantage -> country specific
Firms reputation Brand name
More multidomestic pattern of international competition
Upstream & support activities:
Decoupled from where the buyer is located Create competitive advantage -> entire system of countries Global competition -> optimization of location and scale
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Two key dimensions of how a firm competes
Configuration Coordination
- WHERE each activity is performed - HOW activities are performed - Concentration (one location serving world) - options range from none to high - Dispersion (every activity in each country)
market presence in many countries and some export and import of components and end products are characteristic of most global industries
Configuration/Coordination and Competitive Advantage
Factors for concentrating an activity in one or a few locations -> dispersion
Economies of scale in the activity (-> how many sites) Proprietary learning curve in the activity (-> how many sites) Comparative advantage in where activity is performed (->where) Coordination advantages of co-locating linked activities such as R& D
and production (-> where) Structural characteristics -> concentration costs Local product needs differ -> no advantages of scale or learning from
one-site operation Greater responsiveness Cheaper transport, communication and storage costs Governments (support)
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Minimizing exchange risk, political risk (Dispersion of risk) Coordination allows sharing of know-how among dispersed activities,
reinforce a firms brand reputation with buyers through ensuring a consistent image and approach to doing business worldwide
Coordination allows to serve products in a consistent way & enhance leverage with local governments
Increase Transaction costs of coordination -> long distances, language problems & cultural barriers to communication
Country subsidiaries often view each other more as competitors than collaborators
Configuration/Coordination and the Pattern of International Competition
Competitive advantage from a global strategy differs among industry
Technology development Local autonomy in sales & marketing
Firms choice of international strategy involves a search for competitive advantage form configuration/coordination throughout the value chain
Firm may standardize (concentration) some activities and tailor (disperse) others
Global Strategy vs. Comparative Advantage
Traditional view:
Competitive advantage grows out of where a firm performs activities Location -> source of potential advantage decoupling comparative
New approach:
Not only involves production activities BUT also applies to other activities in the value chain
Comparative advantage is specific to the activity and not to the location of the value chain as a whole
Global firm can spread activities among locations to reflect different preferred locations for different activities
How a company performs worldwide Economies of scale, proprietary learning, differentiation within
multinational buyers are NOT tied to countries BUT to the configuration and coordination of the firms worldwide system
Global Platforms
= country is a desirable global platform in an industry if it provides an environment yielding firms domiciles in that country an advantage in competing globally
Country = platform and NOT a place where all firms activities are performed
Comparative advantage -> perform particular activities in the industry (e.g. skilled workers, advanced infrastructure)
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Characteristics of a countrys demand Size Timing of its demand Sophistication and power of buyers & channels Product features & attributes demanded
Benefits of local demand conditions
First-mower advantages Demand for product varieties that will be sought after in international
markets
Interaction between:
conditions of local supply composition and timing of country demand economies of scale learning in shaping international success
IMPORTANT: unleashing innovation in the proper direction NOT passive exploitation of static cost advantages in a country shift rapidly and be overcome
Strategic Implications of Globalization
Global industries -> overall system matters as much or more than country
Role of coalitions in global strategy
Coalition is a long-term agreement linking firms but falling short of merger
Interfirm relationships Coalition linking firms in the same industry based in different countries
increase of importance Way of configuring activities in the value chain on a worldwide basis
jointly with a partner Two firms from developed countries are teaming up to serve the world -
> beyond marketing activities Coalitions can be a transitional state in the adjustment of firms to
globalization -> reflecting the need of firms to catch up in technology, cure short-term in balances between their global production networks & exchange rates
Accelerate process of foreign market entry Partner wants to do things in its own way
Organizational structure (importance in globalization)
Challenge to find balance between coordination & configuration Balance country dimension & global dimension
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Summary: Deconstructing clusters: chaotic concept or policy panacea?
Clusters and the reassertion (Wiederbehauptung) of location
Competitive advantages -> localized + concentration form highly specialised skills and knowledge, institutions, rivalry, related businesses and sophisticated customers (Porter)
Increasing global economic integration -> heightened regional and local specialization -> allows firms to agglomerate to benefit from local external economies of scale
Falling transportation costs & trade barriers
Clusters = analytical concept BUT also key policy tool
Clusters worldwide fade -> sort of academic and policy fashion item
OECD sees innovative clusters as drivers of national economic growth +
Key policy tool for boosting national competitiveness
Why clusters
Clusters: Availability of skilled labour Growth of supporting and ancillary trades Specialization of different firms
Success of a nations export firms depends on a favourable national competitive diamond of four set of factors
Firm strategy Structure and rivalry Factor input conditions Demand conditions
The more related -> greater productivity -> intensity of interaction with the competitive diamond is enhanced by clusters
Why is Porters work so successful?
Concentration & promotion on the determinants of competitiveness
Discussion is framed in terms of the economics of business strategy
Frameworks for understanding competition that bridge the gap between theory and practice
Cluster theory not only for managers BUT also microeconomic (approach to economic development for governments)
Business- and-policy friendly writing style Celebrated international profile
Nature of the cluster concept itself
Admits a very wide spectrum of industrial groupings & specializations, demand-supply linkages, factor conditions
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Claims to be based on fundamental processes of business strategy, industrial organization & economic interaction
Cluster idea has = way of thinking about national economy / template or procedure -> purposes of understanding and promoting competitiveness and innovation
Incompleteness -> charm of obscure objects of desire / elastic interpretations
A chaotic concept ?
Vague definitions -> result conceptual and empirical confusion
we know what they are called, but defining precisely what they are is more difficult
Porters definition of clusters:
Geographic concentrations of interconnected companies, specialised suppliers, service providers, firms in related industries, and associated institutions in particular fields that compete but also co-operate
Firm must be linked in a way -> vertical (buying and selling chains) & horizontal (complementary) + involvement of social relationships
Clusters are geographically proximate groups of interlinked companies
Value-creating benefits through networks
Problems of these definitions
Lack of clear boundaries (industrial & geographical) What level should a cluster be defined What range or related or associated industries & activities should be
included What is the spatial scale / geographical range? (key weakness) Existence of clusters appears to be in the eye of creator No essential self-defining boundaries Embedding clusters in a broader and dynamic theory of competition
than encompasses cost & differentiation + recognition of the world of global factor and product markets (clusters are self-reinforcing)
Too superficial Lacking specificity Difficult to measure Not really independent
What sort of theory for what sort of clusters?
How far can the full complexity of economic, social and institutional factors underpin cluster formation, development and success while be reduced to a concept of competitiveness?
To what extent is it possible to construct a universal theory of cluster formation, dynamics and evolution while covering wide range of cluster types without being to general?
How far does Porters cluster theory really illuminate the socio-institutional processes?
Nations and regions dont compete with each other in the same way firms do -> analogy between a company and a nation or region is false
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Equating competitiveness with productivity -> invitation for confusion
Is a region more competitive because it is more productive or Is more productive because it is more competitive?
Important clusters are orientated to external trade
Using term local clusters to describe non-tradable local services is misleading
Nothing to do with competitiveness
Generalizing clusters is a problem clusters cant be explained in the same way
Many varieties in clusters: Type Origin Structure Organization Dynamics
Combination of ideas from different perspectives -> different way of interpretation
Agglomeration theory to social network theory
Three main cluster models theories (Gordon)
Pure agglomeration (Zusammenballung) + Modern urban economic Industrial complex counterparts of regional economics minimize
transaction costs Social network model strong long networks of inter-personal relations
& trust BUT this model has no
o Specification o Models never fit reality exactly
Clusters theory ought to be able to specify a priori how different sorts of cluster are likely do develop under different conditions
Co-existence is the role
For global economy key resource for competitiveness depends on:
Localized processes of knowledge creation in which people and firms learn about new technology, to trust and exchange information
o Role of tacit knowledge is increasing
BUT
Distinction between different forms of knowledge less clear Not precise in what tacit knowledge is and how it acts as a source of
competitive advantage
Abstraction of clusters from the rest of the economic landscape -> isolation and self contained entities -> assumption that no non-clustered firms exist which is false
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Clusters maybe create competitive blind spots -> limitation of innovation potential + inflexibility
Field of competition is just the field within they are acting
Selective empirics and the cluster creation game
Porters cluster maps are simplistic and unexplained
No agreed method for identifying and mapping clusters Result: use of different data and different methods to identify Ways of measuring:
o Take large scale geographical units (e.g. states and regions)
o Employment of location quotients to measure concentration -> indicate the presence of clusters
BUT
only suggest the existence and location of possible clusters
Clusters raise Productivity Innovativeness Competitiveness Profitability Job creation (where clusters are located
BUT
Where is prove? Not enough extensive studies
It seems to be impossible to support reject clusters definitively with empirical evidence, as there are so many
Ambiguities Identification problems Exceptions Extraneous factors
Clusters policy: hard targets or fashion labels
Clusters policies fit in well with a growing trend towards the decentralization of policy responsibility and a focus on the indigenous potential of localities and regions -> this extraordinary needs explanation
Standard rationale for cluster policies -> promotion of the supply of local and regional public goods which are absent due to market failure
Encourage dialogue between firms (exchange information, pool resources) -> development of a stronger collective identity
Collective marketing -> raising awareness of the regions industrial strengths
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Provide local services for firms (financial advice, marketing, design services -> ensure to meet local needs e.g. links with universities
Fill gaps and strengthen demand and supply links
BUT
Decentralized promotion of local indigenous economic potential does not depend on a cluster approach
Which firms should be left out? -> Where are boundaries? Most clusters do not identify working clusters Quick diagnoses are not able to identify weak links in local value chain No answer to how inter-regional distribution issues should be
approached
Potential dangers associated with promoting clusters
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Summary: Defining and measuring relocation and outsourcing of production
Driving forces for relocation or outsourcing:
Technological development and economic growth in Eastern Europe, Asia & South America
Improved international business communication Lower transport costs
Value added chain can be broken up with each stage located wherever it is most profitable to operate
Comparative advantages - PAST
Relative advantage = all parties involved specialise in producing the goods and services -> aggregate production of all countries will grow
Taking advantages of relative advantages jobs will disappear in sectors which have relative disadvantages (importing sectors), while jobs are created though exports in sectors where the country has relative advantages
Comparative advantages - Present
Flow of capital to low labour cost countries to maximise return on investment
Creation of new jobs but only in low labour countries Some countries win while others lose
Effects on the national economy
Two important conclusions:
General economic gains
o Low labour cost countries generated productivity and lower inflation -> basis for a more expansive monetary policy
o Long-term - > strong economic growth & increase in employment levels
o Contribution to innovation development
Adjustment problems General economic gains are only realised if there is a system for
adjustment that enables the affected individuals to obtain employment in more productive business
Driving forces?
Find new resources and skills (skills-driven)
Access advanced technology Specialised skills Good infrastructure Raw materials
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Access to markets (market-driven)
Firms interest in entering a specific regions market and its potential growth
Benefit from differences in the cost base in different countries (cost-driven)
Labour costs
increase market share through acquiring similar businesses in larger or growing markets
ability to recruit personnel with the right skills is most important
being close to customer
Distinction between
Internationalisation carried out to access skilled labour or cost savings Motivation to access a specific market
What is the attraction of host countries?
Technological and economic development which has taken place in Eastern Europe, Asia and South America
Offer high quality at low cost
Fast economic growth in developing countries
Investments in education, research, development -> more diversified production landscape
Improved technology
Lower transportation costs
International activities of companies
Lack of clear definition between different forms of international activity
Model of international activities by firms including relocation and outsourcing of production
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Example section A
Company in Sweden employs construction workers from Latvia instead of using a Swedish contractor
Example section B:
Company in Sweden decides to close a department responsible for technical support and relocate the function to its subsidiary in India
Example section C:
Company in Sweden manufactures drugs at its U.S. subsidiary in order to sell the production in the local market. Local production substitutes exports from Sweden.
Example section D:
Company in Sweden imports ICT-related business functions from a third party supplier located in India to support its expanding business
Example section E:
A company in Sweden imports ICT-related business functions for a subsidiary in India to support an expanding business in Sweden
Example section F:
A company in Sweden manufactures pharmaceuticals at its subsidiary in the U.S. in order to sell the production locally. This business has no effect on exports from Sweden to the U.S.
Examples section G:
Company improves the efficiency of its business in Sweden Stock market in the financing of corporations Much closer links between industry and the banking sector Traditional definition of the triad has tended to ignore these institutional
factors
Outsourcing
Company transfers an activity to a third party supplier which it has previously been carried out in-house -> company has an on-going need of the activity
Either to a supplier in Sweden or abroad
Delegation of tasks or jobs from internal production to an external entity, such as a subcontractor -> more temporary basis
Practice of subcontracting manufacturing work to outside and especially foreign or non-union companies -> more temporary basis
Wish to concentrate on its core business
Cost reduction
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Increased flexibility Reduced financial risks
Activity is transferred to another company and the original company loses control and in principle cannot change its decision
Offshoring
Allocation of jobs abroad
The practice of companies outsourcing operations overseas, usually to less-developed countries with the intention of reducing costs
Relocation of activity abroad which is done within the company (offshore in-house sourcing)
OR
Transfer abroad of the activity to a third party company (offshore outsourcing) Change of geographical location is termed relocation when it takes place within the same
organisation
Relocation of production within the same organization can take place domestically and to and from a country abroad
Company has control over the activity and change the decision it has made
Summary: Clusters and the new economics of competition
Clusters: critical masses in one place of unusual competitive success in particular field
Clusters are not unique -> highly typical = Paradox
Enduring dauerhafte) competitive advantages in a global economy lie increasingly in local things knowledge, relationships, motivation that distant rivals cannot match
Competitive advantages -> making more productive use of inputs -> requires continual innovation
What happens inside companies = important BUT business environment outside companies plays a vital role
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Role of locations has been long overlooked
What is a Cluster
Geographic concentrations of interconnected companies and institutions in a particular field
Encompass an array of linked industries and other entities important to competition
Extend downstream to channels and customers and laterally to manufactures of complementary products and to companies in industry related by skills, technologies or common inputs
Use of synergies
Boundaries:
Linkages and complementarities across industries and institutions that are most important to competition
Promote both, competition & corporation
Without competition a cluster will fail Competition can coexist with cooperation occur on different
dimensions / different players
Kind of new spatial organizational form between
Arms length markets on the one hand Hierarchies / vertical integration
Why clusters are critical to competition
Modern competition depends on productivity
How companies compete, NOT the particular fields they compete in Influenced by the quality of the local business environment
e.g. infrastructure, well-educated employees, legal systems
clusters affect competition in three broad ways:
Increased productivity Driving direction and pace of innovation -> future productivity growth Stimulating the formation of new businesses
Clusters & Productivity
Operate more productively in sourcing inputs
Accessing information, technology and needed institutions
Coordination with related companies
Measures and motivate improvements
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Existing pools of specialized and experienced employees -> lowering transaction costs
Deep and specialized supplier base -> source locally -> lowering transaction costs, minimizes inventory, eliminates importing costs
Proximity improves communication + market is easier to supply
Outside specialist are often more cost effective and responsive
Complementarities
good performance by one can boost the success of the others products complement one another in meeting customers need optimization of collective productivity
Joint marketing mechanism
trade fairs marketing delegations
Buying risk is lower -> one location provides alternative suppliers
Rivalry is highly motivating -> desire to look good in the local community
Managers are able to compare costs and employees performance with other local companies
Clusters and Innovation
Better window on the market than isolated competitors
Making site visits & frequent face-to-face contact
Capacity and flexibility to act rapidly
Local suppliers and partners involved in innovation process -> better match with customers requirements
Clusters and New Business Formation
E.g. new suppliers proliferate within a cluster -> concentration on customer base lowers risks & spot market opportunities
Individuals working within a cluster can more easily perceive gaps in products around which they can build businesses
Needed assets, skills, inputs, staff often available
Lower risk premium on capital
Birth, Evolution and Decline
Clusters may also arise from unusual, sophisticated or stringent local demand
Clusters can arise from one or two innovative companies
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Implications for Companies
Companies today must forge close linkages with buyers, suppliers and other institutions
Four issues to the strategic agenda
Choosing location -> based on total systems costs & innovation potential NOT on input costs alone
Every product needs a home base -> most vibrant cluster will offer the best location
Engaging locally
Personal relationships, face-to-face contact, sense of common interest, and insider status
Working collectively
Summary: Strategic (Make versus Buy)
Concentrate on a set of core competences -> provide unique value
Strategically outsource other activities -> no strategic need or capabilities
need of combine these two approaches
Benefits are:
Maximize returns on internal resources by concentrating investments and energies
Well-developed core competencies -> barriers against competitors
Full-utilization of external suppliers investments, innovations, and specialized employees
Decrease risks, shortens cycle times, lowers investments, creates better responsiveness to customer needs
Core competency strategies
sticking to your knitting -> cutting back to fewer product lines
Contract out significant support activities with a number of independent suppliers and alliance partners
Analysis must go beyond looking at traditional product or functional strategies to the fundamentals of what the company can do better than anyone else
The essence of core competencies
Creation of unique value and find activities which managers could more effectively buy externally
1. Skills or knowledge sets, not products or functions
Intellectual skills that create a maintainable competitive edge
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Products can be too easily copied Competencies tend to be sets of skills that cut across traditional
functions
Knowledge-based activities generate most of the value in services and manufacturing
2. Flexible, long-term platforms capable of adaptation or evolution
Build dominating skills in areas that the customer will continue to value over time
Flexible skill sets and constant, conscious reassessment or trends
3. Limited in number
Target two or three activities in the value chain most critical to future Cannot be best at every activity in the value chain Each skills requires intensity and management dedication that cannot
tolerate dilution (Verwsserung)
4. Unique sources of leverage in the value chain
Market imperfections or knowledge gaps that a company is uniquely qualified to fill
Where investments in intellectual resources can be highly leveraged
5. Areas where the company can dominate.
Perform some activities which are important to the customers more effectively than anyone else
More power to bear on a selected sector than any competitor can Outside suppliers, specialized in specific skills, underlying a single
element in the value chain -> can become more proficient than companies spreading its efforts over the whole value chain
Each company is in competition with all potential suppliers or each activity in its value chain
6. Elements important to customers in the long run
Analyzing its customers value chains -> identification of specialization -> provide activity at lower costs or more effectively
7. Embedded in the organizations systems
Firm must convert these competencies into a corporate reputation or culture that outlives stars
Core competencies must be captured within the companys systems -> firms systems become its core competencies
Pre-eminence for core competencies Intellectual leadership tends to attract the most talented people Peripheral activities -> not critical to the companys competitive edge
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Strategic outsourcing
Most supplier markets entail some risk for buyer and seller with respect to
Price Quality Time & or other key dimensions Economic performance is shaped by the entire social system of
production NOT just specific principles of management styles and work practices
Outsourcing entails unique transaction costs
Searching Contracting Controlling Recontracting
Three main questions:
Potential for obtaining competitive advantage in activity taking account of transaction costs
Potential vulnerability (Verletzlichkeit) that arise from market failure if the activity is outsourced
How can we alleviate vulnerability by structuring arrangements with suppliers to afford appropriate controls
Potential for competitive edge and strategic vulnerability is high = high degree of control -> NOT when active and deep market of supplier firms
Find balance between independence and incentives for the supplier versus control and security for the buyer
Competitive Edge (Wettbewerbsvorteil)
By performing an activity internally (cheaper, better, in a more timely fashion, unique capability) on a continuing basis
Transaction costs
Internal transaction costs & external sourcing costs
Internal production -> long-term basis -> back up its decision with continuing R&D, personnel development and infrastructure investments -> should at least match the best external supplier
Costs for headquarters and support costs of constantly managing the insourced activity
Vulnerability (Verwundbarkeit)
Many supplier & mature market standards and terms -> potential buyer is unlikely to be more efficient than the best available supplier
No sufficient depth in the market -> powerful suppliers can hold the company ransom (erpressen)
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Benefit by producing internally rather than undertaking training, investment, codesign expenses -> support weak suppliers to better performance
Lack of information available in the marketplace or from individual suppliers
Problem occurs when a supplier has unique information capabilities
Three types of asset specificity create market imperfections calling for controlled sourcing solutions rather than relying on efficient markets
Site specificity
sellers have located costly fixed assets in close proximity to the buyer -> lower transportation & inventory costs
Technical specificity
One or both parties must invest in equipment -> can be only used by parties in conjunction with each other -> low value in alternative uses
Human capital
Employees must develop in-depth sills -> specific to a particular buyer or customer relationship
Degree of sourcing control
High potential for vulnerability & competitive edge -> tight control is indicated
Control through:
Establishing specified procedures that permit direct involvement in limited stages of a partners activities
Strategic questions:
1. Internal production in the long run? Willingness of back-up investments! Critical to defend our core competencies?
2. Can we license technology or buy know-how? 3. Can we buy item as an off-the-shelf product from a best-in-world supplier?
Long-term option? 4. Establishment of joint development project with knowledgeable supplier? 5. Long-term development or purchase agreement -> secure source of supply &
good interest in knowledge? 6. Acquisition & Management of best-in-world supplier? -> if not, joint venture? 7. Establishment control & incentives -> reduction total transaction costs below
those of producing internally?
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Flexibility versus control
whether to make or buy an activity than it is how to structure internal versus external sourcing on an optimal basis
Strategic benefits versus risks
through strategic outsourcing -> lower long-term capital investments & leverage key competencies
Important strategic benefits
greater flexibility
reduction of companys design-cycle times (multiple best-in-class suppliers work simultaneously on individual components
spread of companys risk for component & technology department across a number of suppliers
Buyer is not limited to its own innovative capabilities + quality improvement
Outsourcing has become a major strategy to leverage internal technical capabilities and to tap the rapid response and innovative capabilities of small enterprises
Focus on very few sources, interdependent relationships, hold on to high value-added activities that are crucial to quality
Strategic risks
Loss of critical skills or developing the wrong skills
Address both needed long-term competencies and strategic vulnerabilities before embarking on outsourcing
Loss of cross-functional skills
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Interactions among skilled persons in different functional activities -> developing of unexpected new insights or solutions -> less likely through outsourcing
Company has to ensure that its remaining employees interact constantly and closely with its outsourced experts
Different locations may make close cross-functional teamwork more difficult
Loss of control over a supplier
Suppliers priorities do not match the buyers Bypass the buyer directly in the marketplace Careful definition, limitation & implementation of means to remedy
external conflicts are critical
New management approaches
Much more professional and highly trained purchasing and contract managers
Greatly enhanced logistics information system -> elevated to corporate strategic levels
IT systems -> monitoring and executive interactions for the design, financial, advertising, public relations .
Summary: Sweden in the New Economic Geography of Europe
Sweden growths based on:
Vigorous expansion of the private sector Increased entrepreneurship in new industries Fiscal discipline Credible policy of price stabilisation
Deregulation, dismantling of trade barriers & emergence of a pan-European capital market (all nations of Europe)
Enormous potential for winning new markets Enhancing efficiency in production Developing new products / services
Strategic functions such as corporate management, finance and R& D are concentrating in a few European centres
Highly qualified labour drawn to these centres
Significant elements in the new pattern of development:
New entrepreneurship and growth in small and medium-sized enterprises more important role
New IT are changing the logic of business and structure of market -> sharpens competition -> raise pace of change
Deregulation, competition and the dismantling of public sector monopolies -> making room for new players
Europe is replacing the home country
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New European strategies which have consequences for:
Location of production Distribution Service centres
increased mobility of capital, skills and entrepreneurship
to maintain and upgrade competitiveness and innovational ability, companies need to be in a local environment characterised by strong links between
Education Research Development Specialised labour Venture capital Innovative suppliers & demanding customers
The great recovery and then what?
Positive development in Sweden can be explained in terms of recovery after the deep crisis at the beginning of the 1990s
Structural reforms Reorientation of stabilisation policy towards price stability and fiscal
discipline Demographical shock when number of pensioners will climb steeply ->
need of rapid economic growth & higher overall savings
On the threshold (Grenze) of a new economy?
Digital revolution affects
Functioning of markets Distribution of goods & services Availability and pricing of information Organisation of production Entire way of life
Sweden, especially Stockholm region, has been designated a leader in IT and telecommunication
Even with a comparatively advanced position in a number of high tech area, Swedish companies and regions are engaged in intense competition with other companies and regions for
Human capital Talent Venture capital Business investments
policy must be based on awareness that vital factors of production and tax bases are becoming more and more mobile and more and more sensitive to differences between countries
competition for human capital be expected to intensify in future
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Forces shaping Europes new economic geography
Deregulation & internationalisation -> sharper division of labour & increasing regional specialisation in Europe
Concentration of certain industries and activities in specific regions
location of future business activity in Europe determined by two opposing types of forces and the interplay between them 1. Forces of concentration
mainly an expression of the type of gains from agglomeration that are associated with clusters
growing cities densely populated regions of Central Europe attract industries that are dependent on geographical proximity to
customers, specialised labour and quick access to information
2. Forces of dispersion
Europe mobility has shown a tendency to decline Natural resources are not mobile at all Other costs of crowding arise Economic activity moves to factor of production instead of vice versa
Three scenarios for the future economic geography in Europe
Geographical diversity
Where trade in goods allows each region to make the most of its comparative advantage -> BEST
Centralisation
Labour and business gradually move to the regions of Europe where activity is most concentrated
Leave behind depopulated regions
Polarisation
Economic activity agglomerates in highly productive central clusters
Home region with poor employment rates and low wages -> WORST
How large companies are changing the structure of Europe
Locational strategies play a crucial role in the process of global restructuring
Direct investments affect
Demand for labour, skills and transfer of knowledge Capital formation Growth in the host countries Improved access to foreign markets -> investments, production, exports
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policy should stimulate investment by both domestic and foreign companies in highly productive activities in Sweden
Crucial factors behind decisions of companies on the location:
Sensitivity to labour cost -> result of increasingly integrated and competitive markets
Dynamic clusters environment & large market Low corporate tax & low public spending levels High-quality education system Legislation fostering efficient competition
in the longer run -> relatively high wages can be counterbalanced by conditions that economic policy is in a position to influence
Tax rate Strong clusters High skills levels
Cluster dynamics local environment that foster success are essential
existence of strong clusters creates competitive advantage in the new economic geography of Europe
characteristics are:
Capacity for perpetual innovation & upgrading goods and services Continued specialisation & upgrading of human capital Production that creates the factors of production
Clusters dynamics build on:
Stimulating competition & rivalry between companies in the local environment
New entry in the form of new businesses and spin-off companies Continuous development of increasingly specialised input goods Proximity to demanding customers Links to technologically related industries
these conditions within the local environment + free and substantial mobility between clusters (and the rest of the world)
clusters need to be able to attract companies, venture capital and international leaders with relevant skills
Stages in the growth of a cluster
1. Heroic phase 2. Concentration and vertical integration 3. Renaissance dynamic cluster
Sweden more than just Stockholm
Swedish clusters largely concentrated in the Stockholm region -> Europes most attractive region for IT activities
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Increasing geographical concentration of economic activity is related to growing share of employment in private services
Concentration in the major cities -> enables a sparsely populated country like Sweden to generate cluster dynamics in the knowledge-intensive industries of the future
Clusters arise spontaneously -> result of changes in demand or technology
Efficient labour and housing markets are fundamental requirements for good regional development
High wages and rents are necessary ingredients to attract competent labour and construction
Corporate strategies for success in the new economic geography
Globalization vs. localisation
Describes forces at work in the environment in which companies operate
Innovativeness vs. competitiveness
Characterise the means of chosen by companies for building long-term competitive advantages
Establishing a competitive advantage composed of both global presence and high cost-effectiveness -> maintain cost-effectiveness by concentrating different production lines in different countries and from there selling worldwide -> take full advantage of increasing returns of scale
Local producers are given preferential treatment -> protectionism
Strategy: be multi-domestic -> has more than one domestic market
cost-effectiveness is not enough
long-term competitive advantage is based primarily on innovativeness
Strategy for success:
Ensure innovativeness by building up insider positions in one or more leading local clusters
Ensure competitiveness by means of global strategy for current production and marketing
Promotion of local clusters environment by cooperating with institutions of higher education, cultural institutions
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Economic policy in the new economic geography
Threats
Lack of popular support for the economic policy U-turn Deficiencies in the implementation and follow-up of the economic policy
reform Changing demands on the economy resulting from a digital revolution New element in the new economic geography is the mobility of
production factors
one eye on the capacity to participate successfully in the international division of labour and specialisation
one eye on the ability to build up domestic local environments that are highly attractive to internationally mobile production factors
stable macroeconomic environment
continuity in inflation targeting fiscal discipline chances in taxation of capital & corporate tax rates
education & research -> high international standards
local infrastructure
becoming officially bilingual
offering the potential for at least half a dozen geographically distinct clusters of international stature
Summary: An inquiry into the nature and causes of the wealth of nations
Division of labour
greatest improvement in labour due to the division of labour
What manner it operates in some particular manufactures
proportional increase of productive powers of labour
called furthest in countries with highest degree of industry -> improvement
Three different circumstances:
Increase of dexterity (Fingerfertigkeit) -> increase of quantity Saving time Invention of a great number of machines -> facilitation & reduction of
labour -> higher attention -> faster learning
One man is doing the work of many
Without the assistance and co-operation of many thousands -> no supply of products / services
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Principles giving occasions to the Division of Labour
Propensity (Neigung) to exchange one thing for another -> just common -> accidental concurrence of passion in the same object at that particular time
Need of cooperation and assistance of great multitudes -> for own advantage -> bargaining -> own interest, self-love
Difference of talents comes to be taken notice of and widens by degree
Division of Labour is limited by the Extent of the Market
Market small -> no person can have any encouragement to dedicate himself entirely to one employment