Global Competitiveness and Strategic Alliances

The Global Competitiveness Report (GCR) is a yearly report published by

the World Economic Forum. Since 2004, the Global Competitiveness
Report ranks countries based on the Global Competitiveness Index. The
Global Competitiveness Index integrates the macroeconomic and the
micro/business aspects of competitiveness into a single index.
The report "assesses the ability of countries to provide high levels of
prosperity to their citizens. This in turn depends on how productively a
country uses available resources. Therefore, the Global Competitiveness
Index measures the set of institutions, policies, and factors that set the
sustainable current and medium-term levels of economic prosperity.
Since 2010, Switzerland has led the ranking as the most competitive
economy in the world. The United States, which ranked first for several
years, fell to fifth place due to the consequences of the financial crisis of
20072010 and its macroeconomic instability.

Description
Since 2004, the report ranks the world's nations according to the Global
Competitiveness Index. The report states that it is based on the latest
theoretical and empirical research. It is made up of over 110 variables, of
which two thirds come from the Executive Opinion Survey, and one third
comes from publicly available sources such as the United Nations. The
variables are organized into twelve pillars, with each pillar representing an
area considered as an important determinant of competitiveness.
One part of the report is the Executive Opinion Survey which is a survey of
a representative sample of business leaders in their respective countries.
Respondent numbers have increased every year and are currently just
over 13,500 in 142 countries (2010).
The report notes that as a nation develops, wages tend to increase, and
that in order to sustain this higher income, labor productivity must
improve for the nation to be competitive. In addition, what creates
productivity in Sweden is necessarily different from what drives it in
Ghana. Thus, the GCI separates countries into three specific stages:
factor-driven, efficiency-driven, and innovation-driven, each implying a
growing degree of complexity in the operation of the economy.
In the factor-driven stage countries compete based on their factor
endowments, primarily unskilled labor and natural resources. Companies

compete on the basis of prices and sell basic products or commodities,

with their low productivity reflected in low wages.
There are twelve pillars of competitiveness.

These are:
1. Institutions
2. Appropriate infrastructure
3. A stable macroeconomic framework
4. Good health and primary education
5. Higher education and training
6. Efficient goods markets
7. Efficient labor markets
8. Developed financial markets
9. The ability to harness the benefits of existing technologies
10. Its market size, both domestic and international
11. by producing new and different goods using the most sophisticated
production processes 12. Innovation
To maintain competitiveness at this stage of development,
competitiveness hinges mainly on well-functioning public and private
institutions (pillar 1), appropriate infrastructure (pillar 2), a stable
macroeconomic framework (pillar 3), and good health and primary
education (pillar 4).
As wages rise with advancing development, countries move into the
efficiency-driven stage of development, when they must begin to develop
more efficient production processes and increase product quality. At this
point, competitiveness becomes increasingly driven by higher education
and training (pillar 5), efficient goods markets (pillar 6), efficient labor
markets (pillar 7), developed financial markets (pillar 8), the ability to
harness the benefits of existing technologies (pillar 9), and its market size,
both domestic and international (pillar 10).
Finally, as countries move into the innovation-driven stage, they are only
able to sustain higher wages and a higher standard of living if their
businesses are able to compete by providing new or unique products. At
this stage, companies must compete by producing new and different
goods using the most sophisticated production processes (pillar 11) and
through innovation (pillar 12).
Thus, the impact of each pillar on competitiveness varies across countries,
in function of their stages of economic development. Therefore, in the
calculation of the GCI, pillars are given different weights depending on the
per capita income of the nation. The weights used are the values that best

explain growth in recent years. For example, the sophistication and

innovation factors contribute 10% to the final score in factor and
efficiency-driven economies, but 30% in innovation-driven economies.
Intermediate values are used for economies in transition between stages.

The 12 pillars of competitiveness

First pillar: Institutions (Public and private)
It is determined by the legal and administrative framework within which
individuals, firms and governments interact to generate income and
wealth in the economy. The importance of a solid institutional
environment has become even more apparent during the current crisis;
given the increasingly direct role played by the state in the economy of
many countries .The quality of institutions has a strong bearing on
competitiveness and growth. It influences investment decisions and the
organization of production and plays a central role in the ways in which
societies distribute the benefits and bear the costs of development
strategies and policies. It goes beyond the legal framework. Government
attitudes toward markets and freedoms, and the efficiency of its
operations,
are
also
very
important:
excessive
bureaucracy,
overregulation, corruption, dishonesty in public contracts, lack of
transparency and trustworthiness. Proper management of the public
finances is also critical to ensuring trust in the national business
environment .An economy is well served by businesses that are run
honestly, where managers have strong ethical practices in their dealings
with the government, other firms and the public. Private sector
transparency is indispensable to business, and can be achieved through
the use of standards as well as auditing and accounting practices that
ensure access to information in a timely manner.
Second pillar: Infrastructure
Extensive and efficient infrastructure is an essential driver of
competitiveness. It is a key to ensuring effective functioning of the
economy, as it determines the location of economic activity and the kinds
of activities or sectors that can develop in a particular economy. Welldeveloped infrastructure reduces the effect of distance between regions,
resulting on the integration of the national market and connecting it at low
cost to markets in other countries and regions. The quality and
extensiveness of infrastructure networks has an impact on economic
growth and reduces income inequalities and poverty. In this regard, a welldeveloped transport and communications infrastructure network is a pre
requisite for the connection of less-developed communities with core
economic activities and basic services. Effective modes of transport for
goods, people, and services (such as quality roads, railroads, ports, and

air transport) enable entrepreneurs to get their goods and services to

market in a secure and timely manner, and facilitate the movement of
workers to the most suitable jobs. Finally, a solid and extensive
telecommunications network allows a rapid and free flow of information,
which increases overall economic efficiency by helping to ensure that
businesses can communicate.
Third pillar: Macroeconomic stability
The stability of the macroeconomic environment is important for the
overall competitiveness of a country. Macroeconomic stability alone
cannot increase the productivity of a nation, but economy cannot grow in
a sustainable manner unless the macro environment is stable. The
government cannot provide services efficiently if it has to make highinterest payments on its past debts. Running fiscal deficits limits the
governments future ability to react to business cycles. Firms cannot
operate efficiently when inflation rates are out of hand.
Fourth pillar: Health and primary education
A healthy workforce is vital to a countrys competitiveness and
productivity. Poor health leads to significant costs to business, as sick
workers are often absent or operate at lower levels of efficiency.
Investment in the provision of health services is thus critical for a clear
economy. The quantity and quality of basic education given to the
population: Basic education increases the efficiency of each individual
worker. Moreover, workers with little formal education can perform only
simple manual work and find it much more difficult to adapt to more
advanced production processes and techniques. Lack of basic education
can therefore become a constraint on business development, with firms
finding it difficult to move up the value chain by producing moresophisticated or value-intensive products. For the longer term, it will be
essential to avoid significant reductions in resource allocation to these
critical areas
Fifth pillar: Higher education and training
Quality higher education and training is crucial for economies that want to
move up the value chain beyond simple production processes and
products. In particular, todays globalizing economy requires economies to
nurture pools of well-educated workers who are able to adapt rapidly to
their changing environment. This pillar measures secondary and tertiary
enrolment rates as well as the quality of education as assessed by the
business community. The extent of staff training is also taken into
consideration because of the importance of vocational and continuous onthe-job training (neglected in many economies) for ensuring a constant
upgrading of workers skills to the changing needs of the evolving
economy.
Sixth pillar: Goods market efficiency

Countries with efficient goods markets are well positioned to produce the
right mix of products and services given supply-and-demand conditions,
as well as to ensure that these goods can be most effectively traded in the
economy. Healthy market competition, both domestic and foreign, is
important in driving market efficiency and thus business productivity, by
ensuring that the most efficient firms, producing goods demanded by the
market, are those that thrive. The best possible environment for the
exchange of goods requires a minimum of impediments to business
activity through government intervention. For example, competitiveness is
hindered by extreme taxes and by restrictive and discriminatory rules on
foreign direct investment (FDI). The economic slowdown, with the
consequent drop in trade and rise in unemployment, has increased the
pressure on governments to adopt measures to protect domestic firms
and jobs. For cultural reasons, customers in some countries may be more
demanding than in others. This can create an important competitive
advantage, as it forces companies to be more innovative and customer
oriented and thus imposes the discipline necessary for efficiency to be
achieved in the market.
Seventh pillar: Labor market efficiency
The efficiency and flexibility of the labor market are critical for ensuring
that workers are allocated to their most efficient use in the economy and
provided with incentives to give their best effort in their jobs. Labor
markets must therefore have the flexibility to shift workers from one
economic activity to another rapidly and at low cost, and to allow for wage
fluctuations without much social disruption. Efficient labor markets must
also ensure a clear relationship between worker incentives and their
efforts, as well as the best use of available talentwhich includes equity
in the business environment between women and men.
Eighth pillar: Financial market sophistication
An efficient financial sector allocates the resources saved by nations
citizens as well as those entering the economy from abroad to their most
productive uses. It channels resources to those entrepreneurial or
investment projects with the highest expected rates of return. Business
investment is critical to productivity. Therefore economies require
sophisticated financial markets that can make capital available for privatesector investment from such sources as loans from a sound banking
sector, well-regulated securities exchanges, venture capital, and other
financial products. The banking sector needs to be trustworthy and
transparent, and financial markets need appropriate regulation to protect
investors and other actors in the economy at large.
Ninth pillar: Technological readiness
This pillar measures the agility with which an economy adopts existing
technologies to enhance the productivity of its industries, as it has
increasingly become an important element for firms to compete and

prosper. ICT access (including the presence of an ICT-friendly regulatory

framework) and usage are essential components of economies overall
level of technological readiness .Firms operating in the country have
access to advanced products and blueprints and the ability to use them.
Among the main sources of foreign technology, FDI often plays a key role.
FDI has declined by an estimated 15% in2008 with further deterioration
expected for 2009, especially for developing countries. The level of
technology available to firms in a country needs to be distinguished from
the countrys ability to innovate and expand the frontiers of knowledge.
That is why we separate technological readiness from innovation.
Tenth pillar: Market size
The size of the market affects productivity because large markets allow
firms to exploit economies of scale. International markets have become a
substitute for domestic markets, especially for small countries. There is
vast empirical evidence showing that trade openness is positively
associated with growth. Trade has a positive effect on growth, especially
for countries with small domestic markets. Thus, exports can be thought
of as a substitute for domestic demand in determining the size of the
market for the firms of a country.
Eleventh pillar: Business sophistication
Business sophistication provides higher efficiency in the production of
goods and services, increasing productivity and enhancing a nations
competitiveness. Business sophistication concerns the quality of a
countrys overall business networks as well as the quality of individual
firms operations and strategies. The quality of a countrys business
networks and supporting industries is important. When companies and
suppliers from a particular sector are interconnected in geographically
proximate groups, efficiency is heightened, greater opportunities for
innovation are created, and barriers to entry for new firms are reduced.
Individual firms operations and strategies (branding, marketing, the
presence of a value chain, and the production of unique and sophisticated
products) all lead to sophisticated and modern business processes.
Twelfth pillar: Innovation
In the long run, standards of living can be expanded only with innovation.
Innovation is particularly important for economies as they approach the
frontier of knowledge. Although less-advanced countries can still improve
their productivity by adopting existing technologies or making incremental
improvements in other areas, for those that have reached the innovationdriven stage of development, this is no longer sufficient to increase
productivity. Firms in these countries must design and develop cuttingedge products and processes to maintain a competitive edge. This
requires an environment that is conducive to innovative activity,
supported by both the public and the private sectors. In particular, this
means sufficient investment in research and development (R&D)

especially by the private sector, the presence of high-quality scientific

research institutions, extensive collaboration in research between
universities and industry, and the protection of intellectual property. It
shows the importance of R&D.

The interrelation of the 12 pillars

Although the 12 pillars of competitiveness are described separately, this
should not obscure the fact that they are not independent: not only are
they related to each other, but they tend to reinforce each other. For
example, innovation (12th pillar) is not possible in a world without
institutions (1st pillar) that guarantee intellectual property rights, cannot
be performed in countries with a poorly educated and poorly trained labor
force (5Th pillar), and is more difficult in economies with inefficient
markets (6th, 7th, and 8th pillars) or without extensive and efficient
infrastructure (2nd pillar). Although the actual construction of the Index will
involve the aggregation of the 12 pillars into a single index, measures are
reported for the 12 pillars separately because offering a more
disaggregated analysis can be more useful to countries and practitioners:
such an analysis gets closer to the actual areas in which a particular
country needs to improve.

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Factors that determine International

Competitiveness
International competitiveness is a measure of the relative cost of goods /
services from a country. Countries which can produce the same quality of
goods at a lower cost are said to be more competitive.

1. Relative Inflation
If the inflation rate is relatively lower than other countries, then over time
you become more competitive because your goods will be increasing at a
slower rate. For example, in the post war period Japan and Germany had
relatively lower inflation rates than major competitors; this helped them to
become more competitive.
During that period, inflation in Greece fell from close to 5% to below 2%.
Greece will became slightly more competitive in this period
2. Productivity
Productivity is a measure of output per input. The most common measure
would be labour productivity. For example, with improved technology and
education, a country can enjoy higher labour productivity and therefore
produce goods at a lower cost. Higher labour productivity is the key to
increasing competitiveness and living standards at the same time.
Example, German v/s Italian labour productivity
During 1990-2005, Italian labour productivity growth tended to lag behind
Germany, leading to lower competitiveness of Italian exports.
Between 1990 and 2005, Germany labour productivity increased by 25
base points. UK labour productivity increased by 35 base points showing
that the UK had faster improvements in labour productivity during this
period.
3. Exchange Rate
Movements in the exchange rate will determine competitiveness. For
example, a sharp depreciation will make exports cheaper and more
competitive. An increase (appreciation) in the exchange rate makes the
foreign currency price more expensive.
Often movements in the exchange rate reflect relative costs. For example,
if a country has lower inflation, this will lead to an appreciation in the
exchange rate, making exports relatively more expensive. Thus a floating
exchange rate helps to maintain relative competitiveness levels.
However, sometimes economies can artificially maintain a lower value of
the exchange rate to maintain competitiveness. For example, China has
been accused of exchange rate manipulation. China buys large quantities
of US securities; this causes an increase in the value of the dollar and
helps to keep the Yuan undervalued. Therefore, this helps Chinese exports
to be more competitive and explains the large Chinese current account
surplus
Competitiveness in the Euro - In the Euro, countries have a permanently
fixed exchange rate - they cannot devalue to restore competitiveness.

Therefore divergences in labour costs and productivity will have a bigger

impact on competitiveness than in a floating exchange rate.
4. Tax Rates
Tax rates on labour and corporations will be a factor in determining
competitiveness. For example, higher labour taxes will increase the unit
cost of labour faced by firms, leading to lower competitiveness.
5. Cost of Doing Business
It is argued that countries with more labour market regulations and
regulations about doing business will have higher costs and lower
competitiveness. For example, the difficulty in gaining planning
regulations to expand a factory
The World Bank produces a list of countries which are the 'easiest places
to do business'. The criteria include factors such as flexibility of labour
markets, degree of regulations, and protection of private property.
Top 10 Ease of doing business
Singapore
Hong Kong
New Zealand
United States
Denmark
Norway
United Kingdom
South Korea
Iceland
Ireland

6. Infrastructure
A key factor in determining competitiveness is the cost of transport. For
example, some argue the UK's competitiveness is undermined by
bottlenecks in transport, such as limited airport capacity in London and
traffic jams on major roads.

THE 10-P FRAMEWORK FOR GLOBAL

COMPETITIVENESS
The 10-P framework for globalization symbolizes the aspirations and
needs of employees and organizations in the new competitive settings. It
comes a long way from the initial impetus provided to the subject by
Michael Porter in his book Competitive Strategy (1980), and goes beyond
his purely industrial organization perspective. The framework
operationalizes the 4-Diamonds for a nations competitive advantage of
Porter. The 10-P framework integrates theory of strategic management
and practice of business policy and provides a structure for the practicing
manager to evaluate competitiveness at regular intervals.
The 10-P framework explores a fine `fit between the soft and hard
strategic choices. It seeks a self-motivated network of stakeholders who
are able to self-actualize a high sense of satisfaction, self-worth, liberty
and freedom in business organizational settings.
True to the vision of a world-class organization, the central fulcrum in the
framework is a PEOPLE-ORIENTATION-both inside and outside the
corporation. This approach presents a humane perspective to issues at
hand and differentiates between a `satisfying approach and an
`excellent approach. It realizes and reflects that modern economies and
corporations thrive mainly on innovation in all respects of valueaugmentation-creative thinking at the design stage, ensuring production
at highest efficiency and minimum costs, and satisfying the customer in a
most effective manner.
The rest of the 9-Ps are levered in a highly interactive mode with People
and amongst themselves. A change in any of the Ps affects performance
of the other levers and therefore the final outcome for the organization.
The 9-Ps are: Purpose, Perspective, Positioning, Plans (and policies),
Partnerships, Products, Productivity, Politics, and Performance (and
profits). The 10-P framework is appropriate for auditing strategic
competitiveness, a monitoring emerging opportunities and threats,
devising a value-based action-plan and executing it in the context of
globalizing organizations.

1. PEOPLE
Organization is people: An organization is created by the people, it exists
for the people, and continuously draws sanction from the people. From
this humane perspective, the primary objective of an organization can
only be to add value to the society by serving it with value augmented
products. The people-focus implies that the primary purpose of an

organization can never be to provide employment at the expense of

customers or society in general-a drill routinely exercised in Third World
countries, and especially in India by many public sector and government
organizations during the height of regulated economic regimentation.
Similarly, retrenchment of people (hire and fire) cannot be accepted as a
no-holds-barred
practice
for
maximizing
organizational
profits!
Retrenchment is a myopic and non-creative response to the problem of
cutting costs and improving productivity. The corporate manager in the
new paradigm has the unenviable role of maximizing `people orientation
as well as `task orientation. In these emerging work values, each
employee is empowered to take decisions under certain norms. For
instance, under Just-in-Time culture, an ordinary shop-floor worker is
empowered to stop the whole machine assembly line if he finds that the
product quality has gone out of control.

2. PURPOSE
Organizational purpose as used in strategy-making sense is
interchangeable with mission, vision, core competence, strategic intent,
and basic values. It is important not merely to produce and sell products,
but to produce and sell quality products, without fail. Not only from the
production side, but also from the distribution side, we must constantly
review whether our customers are satisfied with our products and whether
customers are satisfied with our service. We must be perfect in satisfying.
Organizational purpose must be explicitly stated. An organization must
enjoy social sanction by serving socially useful purpose. Purposeless
organizations are liable to drift and become marginal in the course of
time. A sense of purpose is important for other organizational reasons,
including facilitating interpersonal processes and formalization of
relationships (the other characteristic of an organization). Globalization
connotes dynamic human will for achieving larger social and human
purposes.

3. PERSPECTIVE
Strategic management begins with a statement of clear perspective. Topmanagement perspective is not a bunch of hunches. Organizational
perspective must be well-researched. In facing global competitive
challenges, it is important that the firm possesses a global perspective,
even though it might be competing and managing locally. Failure to
develop an in-depth perspective results in missed opportunities. Polemical
debates arise from lack of appreciation of multiple perspectives.
Some of the techniques for improving the perspective horizon and thereby
quality of decisions are: scenario-building, process consultation, in-house
training programmes, job rotation, and cross-functional teams.

4. POSITIONING
An important di0mension in achieving world-class competitiveness relates
to the positioning of the firm. This dimension has high interface with
organizational purpose, planning and perspective, resulting in definitional
confusion. Positioning of the firm is distinct from positioning of products in
marketing. The term has remained mostly confined to abstract strategic
management literature despite its obvious criticality to practice. An
important dimension in strategy is to understand `where am I, `why am I
here, `where do I want to be, and `how do I reach there. In other words,
the strategic manager has to ascertain the existing position and future
positioning of the firm. Positioning means the place in the industry which
the firm would like to occupy in relation to its competitors from the
perspective of the consumers. Does the firm compete on lowest-cost,
mass-production, high-technology basis? Does it differentiate itself from
others on the basis of superior and value-augmented products, or on highethic practices, employee policies, etc., which are unique in the industry?
Once `positioning choice is made, many process and product related
decisions flow.

5. PARTNERSHIPS
The partnership approach suggests a sense of belief and trust in other
persons capabilities and skills. It opens the doors for people to look
beyond the usual routined responses, and create an environment where
people voluntarily come up with innovative solutions for seemingly
intractable problems. Partnership is a perspective as well as a position.
Partnership has softer (intangible) and harder (tangible) dimensions.
Going beyond the softer side of partnership-approach, development of
long-term partners for weak competitors is essential for deriving
sustainable advantages. Suppliers, bankers and other investors,
employees, government, technology collaborators, transporters, and
distributors do have a stake in the firms well-being (and vice versa) and
therefore have to be treated as key resources. In this approach, the
perspective is that there can be no profits at the expense of any resource.

6. PRODUCTIVITY
Global competitiveness is largely an expression of firms relative
productive efficiency. A countrys prosperity is indicated by the amount of
value-added goods that are produced/made available for consumption.
Labor productivity is generally the accepted measure of value addition
with the assumption that the same individual would have different
capacities in different technological environments and organizational
contexts. A key managerial decision that vitally effects the firms overall

productivity pertains to capital intensity of the project in terms of

investments in land, building and machinery. This decision also affects
leverage position of firms.
Leverages are of two types: the first, called the degree of operating
leverage (DOL), is the firms commitment to fixed overhead expenses
irrespective of business done. The second, degree of financial leverage
(DFL), is the way the firms funds are distributed, for example, the debtequity ratio. The degree of combined leverage (DCL) of the firm is the
product of its DOL and DFL.

7. PRODUCT
A product is a package of information which the customer interprets in his
mind while going through the process of consumption. Therefore, the
concept of any product must start with the customer in mind, and end
with his total satisfaction. In this definition all products are ultimately
services converted into information. Beyond quality, products must offer
customers a satisfaction to a level where they become the best salesmen
for the company forever.
8. PLANS (AND POLICIES)
The thrust of the 10-P framework is to integrate peoples personal growth
and development with organizational objectives through excellent allround quality. The premise is that the tasks are executed with finesse by
satisfied and motivated people. To ensure that people remain aligned with
the common sense of purpose and do not drift, the organization must
have a clear, documented statement of objectives and broad plans. A
firms `plan must contain a clear mission statement on the way it
proposes to serve the customer.

CII-EXIM Bank Model of Competitiveness for

Business Excellence
CII and Export Import Bank of India have, in 1994, jointly established the
CII-EXIM Bank Award for Business Excellence, with the aim of enhancing
the Competitiveness of India Inc. The Award is based on the
internationally recognized EFQM Excellence Model.
CII-EXIM Bank Award for Business Excellence
Large Organisations
Small & Medium Businesses
The Excellence Model provides a holistic management framework to
organizations to achieve Excellence. A large number of organizations
have successfully used this model to
Define Excellence as a common language across the organization

 Develop an integrated approach for achieving

competitiveness
Review and improve Strategy, Processes and Performance
Identify and share good practices
Helps build functional managers into Business Leaders

sustainable

Participating in the Award programme will benefit organizations in many

ways, including,
- Providing an external perspective on the current status on the
organisations performance and practices
- Giving insight into organizational performance, beyond financial
performance
- Measuring progress on the journey of excellence, and,
- Helping compare with best-in-class organizations
The following types of organisations are eligible to participate in the Award
programme:
- Large Business Organisations
- Operating Units of Large Business Organisations
- Small and Medium Business Organisations
CII ensures that the model remains dynamic and contemporary to
management thinking. Both CII and EFQM are committed to researching
and updating the model with practical and academic inputs drawn from
organizational experiences across the world.
CII believes that organizations which will use the Excellence Model for
internal improvements, and the CII-EXIM Bank Award programme for
external validation, will truly be enabled in refining and improving their
practices and performance, for achieving higher levels of excellence

UNIT II
Role of Quality And Productivity In Achieving World
Class Competitiveness
Quality as a Competitive Tool

A product is a quality product if it conforms to the design and customers'

expectation. Design quality refers to how closely the characteristics of a
product or service meet the needs and wants of customers. Conformance
quality refers to the performance of a product or service relative to its
design and product specifications. Total quality management (TQM) is the
unyielding and continuous effort by everyone in the firm to understand,
meet, and exceed the expectations of customers.
Certain characteristics of most TQM are:

Focusing on satisfying the customer

Striving for continuous improvement
Fully involving the entire work force
Actively supporting and involving top management
Using unambiguous and objective measures
Recognizing quality achievements in a timely manner
Continuously providing training on total quality management.

The definition of quality is often a hotly debated topic. While it may seem
intuitive, when we get right down to it, "quality" is a difficult concept to
define with any precision. The most fundamental definition of a quality
product is one that meets the expectations of the customer. However,
even this definition is too high level to be considered adequate. In order to
develop a more complete definition of quality, we must consider some of
the key dimensions of a quality product or service.
Dimensions of Product and Service quality
Dimension 1: Performance
Does the product or service do what it is supposed to do, within its defined
tolerances? Performance is often a source of contention between
customers and suppliers, particularly when deliverables are not
adequately defined within specifications. The performance of a product
often influences profitability or reputation of the end-user. As such, many
contracts or specifications include damages related to inadequate
performance.
Dimension 2: Features
Does the product or services possess all of the features specified, or
required for its intended purpose? While this dimension may seem
obvious, performance specifications rarely define the features required in
a product. Thus, it's important that suppliers designing product or services
from performance specifications are familiar with its intended uses, and
maintain close relationships with the end-users.

Dimension 3: Reliability
Will the product consistently perform within specifications? Reliability may
be closely related to performance. For instance, a product specification
may define parameters for up-time, or acceptable failure rates. Reliability
is a major contributor to brand or company image, and is considered a
fundamental dimension of quality by most end-users.
Dimension 4: Conformance
Does the product or service conform to the specification? If it's developed
based on a performance specification, does it perform as specified? If it's
developed based on a design specification, does it possess all of the
features defined?
Dimension 5: Durability
How long will the product perform or last, and under what conditions?
Durability is closely related to warranty. Requirements for product
durability are often included within procurement contracts and
specifications. For instance, fighter aircraft procured to operate from
aircraft carriers include design criteria intended to improve their durability
in the demanding naval environment.
Dimension 6: Serviceability
Is the product relatively easy to maintain and repair? As end users
become more focused on Total Cost of Ownership than simple
procurement costs, serviceability (as well as reliability) is becoming an
increasingly important dimension of quality and criteria for product
selection.
Dimension 7: Aesthetics
The way a product looks is important to end-users. The aesthetic
properties of a product contribute to a company's or brand's identity.
Faults or defects in a product that diminish its aesthetic properties, even
those that do not reduce or alter other dimensions of quality, are often
causes for rejection.
Dimension 8: Perception
Perception is reality. The product or service may possess adequate or even
superior dimensions of quality, but still fall victim to negative customer or
public perceptions. As an example, a high quality product may get the
reputation for being low quality based on poor service by installation or
field technicians. If the product is not installed or maintained properly, and
fails as a result, the failure is often associated with the product's quality
rather than the quality of the service it receives.

Difference between Product and Service Quality

One is quality of the service and the other is quality of the product.
Product quality usually includes features, performance, defects etc.
Service quality includes delivery time, knowledge of delivery personnel
etc.
The Quality of the product is more important. If the quality of your product
is in line with the standards of the region that your product is sold in then
there would be no need to waste money on customers that complain
because they think they can. I earn an income from companies who waste
money on stroking customer egos.

Role of Information Systems in Building

Competitiveness
Overview
Competitive Advantage in any industry or business venture is achieved
when one particular organization performs more effectively and/or
efficiently than the others in the same category. This Competitive
Advantage does not have to be all encompassing of the industry and may
only cover small segments. A Competitive Advantage is achieved when
an organization can do any one thing, process; function, etc. more
effectively and or efficiently than others in that industry segment or in
some cases across the entire industry. Whether the organization employs
a low cost strategy, cost/price differentiation, or what have you there is a
Information System supporting the function. A well planned and executed
Information System is imperative in today's business world. Well planned
and executed Information Systems are key tools for the task of obtaining
a Competitive Advantage. Planning for and developing a successful
Information System falls under the strategy step of the critical success
factors (Newkirk, Lederer, & Johnson, 2009).
In most industries there is often a company that is far ahead of the game.
These companies are the leaders of their field and tend to set the bar for
their competitors. These companies are said to have competitive
advantages. It has been argued if the result of their success is due to
access to resources that others do not have or if it is because of superior
knowledge and information assets (Laudon & Laudon, 2006). Regardless,
these companies seem to have a better grasp on the principles of gaining
competitive advantages.
The introduction of technology into the business community has
dramatically changed business practices and how advantages are gained.
Information Systems, which is comprised of hardware, software, data,
people, and procedures, is used to produce information that may allow a
company to gain competitive advantage by producing insights that lead
to actions. These insights and actions, when used efficiently, is one
possibility that allows companies like Wal-Mart and Google to stand above
the rest and expand its business capabilities far above the heads of its
competitors.
Strategic Planning for Information Systems

Business Systems Planning began back in the 70's and continues today
with an eye toward the competition and, how the system will enable the
organization to improve business functions. As stated earlier a good
planning precedes all system development. In an article written by
Lederer & Sethi, they outlined seven steps for the planning process with
one of the steps being the SWOT (Strengths, Weaknesses, Opportunities,
and Threats) analysis. A good Information System development &
planning strategy should begin with a SWOT analysis of the organization.
This SWOT analysis should take place rather swiftly as the market and
therefore business itself is fluid and changes quickly so systems must be
flexible and easily improved (1998).
One major aspect of strategic planning is planning for information
systems. Proper planning relies on the appropriate integration of a
companys business objectives and its plan for information systems
(Thompson & King, 1997). The information system is utilized to assist an
organization in reaching elements stated in its strategic plan. Having
good information systems and operating data is an important part of
executing a strategy successfully (Thompson, Gamble, & Strickland,
2006).
Although not spelled out in this order or context one must know the who,
what, when, where, why, and how an information system will aid or
benefit an organization in order for the system to work for the
organization. Proper management of the information system
development is critical for success. During the information system
planning phase one needs to identify these critical elements to ensure
system success. All business ventures begin with planning and all
planning begins with a clear vision of where you want to go with the
system or business process. The ultimate goal of any information system
is to improve business processing or some other function which also
improves profit (Phillips, 2005).
A critical step in strategic planning for information systems is the proper
definition of the problem being solved. Porters value chain model can
assist with defining and analyzing areas that are likely to have a strategic
impact on competitiveness (Porter, 1996). Once this definition is
determined, a properly designed Information Systems can adequately
execute a successful strategy that meets the planned business
objectives. According to OBrien (2005), the strategic role of information
systems is to use information technology to develop products, services,
or capabilities that give an organization a significant advantage over its
competitors.
Aligning Information Systems Planning with the Business Plan

The alignment of information systems planning with the business plan

tends to be a critical issue for organizations. The degree of alignment can
determine the successes and/or failures of the actual information system.
Information systems planning, also known as ISP, is described as being
the process of establishing objectives for an organizations computing
needs and identifying applications the organization should potentially
implement (Thompson & King, 1997). It is considered paramount that IS
strategies are in align with business strategies in order for a business to
not only be successful, but to survive (Cragg, & Tordova, 2011). Different
views have been undertaken on how the business should reach
IS/Business alignment. One perspective is to let the IS infrastructure and
decisions be driven by business strategies and decisions. Another would
be the enhancement of IS could provide the business with new ways to
make a profit and optimize existing business strategies.
Some companies, such as Proctor & Gamble, Progressive, and Vanguard
Group, have taken the concept of Business/IS alignment even further with
a newer approach, convergence. Convergence has employees rotate jobs
between the IT and Business departments (even CFOs with CIOs) in
order to facilitate an encompassing understanding of both sides of the
operation. At Progressive, IT employees are required to understand how
the insurance business works in order to provide better service on
customer websites and implement changes quickly if needed. Neither
side of the organization drives the goals of the other in a convergence
alignment, yet there is one goal that both sides work to achieve in unison
(King, 2010).
Information Systems as a Competitive Advantage
According to Thompson et al (2006), a competitive advantage in an
organization is defined as having the majority of buyers preferring the
organizations products or services over the competition when the bias is
strong.
Information systems are created to solve problems, provide information,
make organizations more efficient or create a new business. It is
contended that gaining competitive advantage via IS is not as simple as
investing in the latest IS/IT available, but rather developing the
IS/business capability of the organization as a whole. Cultivating the
organizations IS capability provides long term sustainability because the
company is able to better identify IS/business opportunities, implement
changes according to business needs, and create information
systems/process that are harder for competitors to imitate. Merely
investing in the latest technology or using the newest systems is not

sustainable in the long run because IT/IS is continuously and rapidly

evolving. (Ward, & Preppard, 2004)
In Management Information Systems by Effy Oz, there are eight ways to
gain competitive advantage:
1. Reducing cost
2. Raising barriers to market entrants
3. Establishing high switching costs
4. Creating new products or services
5. Differentiating products or services
6. Enhancing products or services
7. Establishing alliances
8. Locking in suppliers or buyers
Examples of Organizations that use Information Systems as a
Competitive Advantage
1. Dell has created a build-to-order system that allows customers to
build and customize their computer online. They also have a
process that allows them to ship the custom computers rapidly. Dell
has become a low cost producer from their information systems
(OBrien, 2005).
2. The one-click purchasing (customers enter shipping and credit card
information only once for current and future purchases) of Amazon
gives them a competitive advantage over other shopping sites. This
technology was patented in 1999 and for a fee this technology is
now being used by other sites such as Barnes & Noble. (Course
Technology, 2009)
3. Progressive enhanced services by allowing insured customers the
ability to file a claim online, track the claims progress and offering
a free service called Total Loss Concierge Service. This Concierge
Service uses their information system that contains details about
the insureds totaled car. As Progressives system is now connected
with car dealerships and financial institutions, they can offer aid in
the purchase of 0a new vehicle for their customers. (Course
Technology, 2009)
4. Microsoft Windows is an example of high switching costs. Most of
the computer users use Windows as their operating systems when
they use computers first time. It will be very time-consuming for
those users to switch to Macintosh, which is another operating
systems, because of the unfamiliarity.
5. Hilton Hotels uses information systems to store detailed
information about regular guests, in order to determine guest

preferences and the likelihood of that guest being a future

customer (Laudon & Laudon, 2006).
6. iPhone was a new product that gave Apple a competitive
advantage over other cell phone manufactures.
7. The name of L'Oral illustrates differentiate products or services.
Consumers buy L'Oral products because they believe these
products to be superior to the competition.
8. Amazon and Target have established an alliance. When you go to
Targets web site you see Powered by Amazon.com as Target
utilizes Amazons information systems. Target pays an annual fee
plus a percentage of web site purchases to Amazon for information
systems use.
9. Walmart uses IS to check inventory and order supply when
needed. Walmart also buys hugh quantity of goods from suppliers
to lock in suppliers.
10.
McGraw-Hill, the textbook publisher, created Primis in the
1990s in order to offer professors a means to tailor the information
provided in the textbooks. This gave them a competitive advantage
over companies who could only supply a set-in-stone standard
textbook (Venkatraman, 1993).
Summary
Let us think of an organization's information system development
planning and strategy as one might think of a plan for a vacation. An
individual or a family for that matter would never contemplate a vacation
without first determining a place to visit (location), a budget to plan with
(efficiency) and a goal for the trip (effectiveness). An organization must
determine a reason (location) for the creation of the information system.
A vacation planner must determine who will be involved in the vacation.
The organization must also determine who will be involved in the system
and what roles the players will have. The ultimate objective of the
vacation is to have fun whereas the goal of the information system is to
tie business process to function and profit. In order for a vacation to be
considered effective and efficient it must accomplish a minimum of rest
and relaxation (effectiveness) and stay within the budget allocated by the
planning body (efficiency). The information system must accomplish
these same effectiveness/efficiency goals as determined during the
planning process. These goals must be tied to the required performance
needs of the system as determined by what the organization is trying to
achieve with the system (Cassidy, 2006).

Industrial Clusters and Business Development

Defining Industry Clusters
WHAT ARE INDUSTRY CLUSTERS?
Industry clusters are geographic concentrations of competing,
complementary, or interdependent firms and industries that do business
with each other and/or have common needs for talent, technology, and
infrastructure. The firms included in the cluster may be both competitive
and cooperative. They may compete directly with some members of the
cluster, purchase inputs from other cluster members, and rely on the
services of other cluster firms in the operation of their business.
Clusters may get their start in any number of ways. For example, a
cluster may form around a large competitive firm, such as Medtronic in
the Twin Cities or Microsoft in Seattle. The presence of and support of a
major research institution may spur the development of a cluster, such as
the information technology clusters in Silicon Valley and the Boston area.
Special infrastructure conditions or resources may also support the
development of industry clusters. Examples include the wood products
cluster in northern Minnesota, the wine industry in northern California,
and tourism in southern Florida.
Industry clusters are dynamic entities. They may change as the industries
within them change or as external conditions change. For example, as the
computer hardware industry changed, the Twin Cities and Boston
hardware clusters lost prominence in their states economies and
nationally. Both areas are trying to rebuild their information technology
clusters around new firms and new technologies. Sometimes an industry
cluster will spawn an entirely new cluster. The aerospace cluster in

Southern California has spawned several other clusters that rely on

related engineering skills and technologies.
An important characteristic of clusters is that they are centered on firms
that sell outside the local, state, or even national market. These exporting
firms are driving forces in a regional or state economy. They bring money
into the area and support many local industries.
Clusters may include government, non - profit organizations, educational
institutions, and other infrastructure and service providers whose
presence is the key to the strength of the cluster. The California wine
cluster provides a good example of the complex nature of an industry
cluster. The cluster includes 680 commercial wineries and several
thousand independent grape growers; suppliers of grape stock, irrigation
and harvesting equipment, barrels, and labels; specialized publishers,
public relations firms, and advertising agencies; world-renowned
programs at the University of California; the Wine Institute; and special
committees of the California senate and assembly.
An industry cluster is an interconnected group of industries and firms. It
differs from trade associations, which may have a narrower membership
and focus. A trade association, for example, may include the members of
a single industry and focus entirely on lobbying. By contrast clusters are
agglomerations of regional industries and interdependent firms that are
key to the success of the industry in the state.
Organized industry clusters contribute broadly to the well-being of the
region by addressing workforce recruitment and training issues,
developing needed infrastructure, and establishing research and training
programs at universities and technical colleges, to name a few.
INDUSTRY CLUSTERS AND COMPETITIVENESS
Harvard Business School Professor Michael Porter has examined industry
cluster in cities, regions, states, and internationally. Based on his
research, he developed the Diamond of Advantage, a model that offers
insights into industry clusters and competitiveness. Porter contends that
regions develop a competitive advantage based on their firms' ability to
continually innovate, and that economic vitality is a direct product of the
competitiveness of local industries.
The factors that drive innovation and a cluster's growth include:
FACTOR CONDITIONS: such as a specialized labor pool, specialized
infrastructure, and sometimes selective disadvantages;
HOME DEMAND: or local customers who push companies to innovate,
especially if their needs or tastes anticipate global or local demand;

RELATED AND SUPPORTING INDUSTRIES: nationally competitive local

supplier industries that create business infrastructure and spur innovation
and spin off industries;
INDUSTRY STRATEGY, STRUCTURE AND RIVALRY: intense rivalry among
local industries that is more motivating than foreign competition, and a
local "culture" that influences individual industries attitudes toward
innovation and competition.
In addition to these conditions, Porter includes the roles of government
and chance. Historical accident and/or government actions tend to play
significant roles in the development or location of industry clusters.
Benefits of an Industry Cluster Strategy
An industry cluster strategy offers a state or region several benefits and
opportunities. A clear benefit is the ability of industry, government, and
education and to work cooperatively to strengthen both state and
regional economies. This leads to more efficient and effective use of
public and private resources and helps a region or state develop strong
and dynamic clusters. These clusters will spawn additional economic
growth. A cluster strategy can also help a region or state address critical
issues such as human capital and workforce development, infrastructure
planning and development, and rural and community development.
OPPORTUNITIES CREATED THROUGH A STATEWIDE INDUSTRY CLUSTER
STRATEGY
An industry cluster strategy offers significant opportunities for a state or
region by highlighting key business relationships and linkages. States and
regions are often motivated to adopt an industry cluster strategy as a
result of a crisis: high unemployment, a recession, a stagnant economy,
real estate collapse, or loss of a key industry. However, states and regions
can also be enhanced by the opportunities created through cluster-based
approaches. Examples of some of the opportunities created are
summarized below.
The development and improvement of infrastructure often requires largescale investment and planning. There is invariably more work to do than
resources available to do it.
An industry cluster strategy helps a state or region set priorities for these
major investments and ensures that infrastructure is appropriately
developed to ensure the greatest effectiveness and efficiency. For
example, if Minnesotas information technology cluster is an important to
the states economy, then significant and appropriate investment in
telecommunications infrastructure and workforce development may be
beneficial to spur cluster growth. Similarly, if a key cluster in a rural

region is having difficulty shipping its large equipment out of the area,
efforts such as road improvements could be made to facilitate product
distribution. The pay-off is healthier industries that generate more
economic activity and, thus, provide tax revenue for additional
infrastructure investments.
In Minnesota, a workforce shortage hinders the growth of some
industries. By working collaboratively in industry clusters, government,
education, and industry can take steps to address this problem. Industry,
government, and education can respond to shortages by providing
training and promoting research that enhances productivity. Employees
and the region overall will benefit from enhanced skills and higher wages
as their productivity increases.
It makes sense for rural regions to focus on strengthening existing
industries. By supporting and developing strong clusters that promote
exchange and collaboration among firms and cooperation with
government and education, rural regions strengthen their own
economies. Regions can strengthen existing industries, develop an
attractive business climate, and foster new business growth by
maintaining a strong regional economic base and investing in the skills of
the new and incumbent workforce. In a strong cluster, entrepreneurs may
leave larger firms to create their own businesses. This trickle-down effect
of 10 new firms tends to complement and/or compete with existing firms,
which in turn stimulates innovation and cluster growth.
Politicians, business leaders, and taxpayers often talk about the need to
streamline government, avoid duplication of services, and make
government more responsive. An industry cluster strategy provides a
state or region with the opportunity to accomplish all of these objectives,
particularly in the area of economic development. By working with
clusters, governments coordinate their economic development efforts.
With regard to training, instead of creating a variety of programs around
the state to train precision manufacturing workers, educational
institutions can work with industry to determine the key needs, develop
the curriculum, and deliver it in regions where demand exists. This saves
time for educators and industry and helps ensure that students receive
the latest training and develop transferable skills.
A cluster approach also offers industry an opportunity to expand in
international markets and create joint ventures. Those industries already
selling to or working with firms abroad can help open the doors for other
cluster members. Their complementary products might also be marketed
jointly. Firms within the cluster might form joint ventures to meet market
needs outside the country or may partner with firms in clusters elsewhere

to produce new products. An isolated firm working on its own and relying
just on government export assistance is not going to have the same
opportunities as an entire cluster working to expand its international
presence.

UNIT III

India slips in global competitiveness

India has dropped three ranks from last year in the global competitiveness report released by the
World Economic Forum, underscoring the political and economic logjam that has stymied growth
and led to widespread criticism of the government.
Now 59th on the list, India has slid 10 places since it peaked in 2009. Once ahead of Brazil and
South Africa, the country now trails them by 10 ranks, and is lagging behind China by 30,
according to The Global Competitiveness Report 2012-2013.
Lack of basic infrastructure, the report said, is the single biggest hindrance to doing business,
well ahead of corruption and bureaucracy.
Other key indicators holding India back include low education and health standards (101 rank),
poor transportation, the insufficient reach of information and communications technology, poor
energy infrastructure, supply, and transport.
D.K. Joshi, chief economist at rating and research firm Crisil Ltd, recommends aggressive and

decisive action on the part of the government to improve Indias economic situation.
First of all there needs to be more clarity on the tax front. Secondly, there needs to be better
clarity on the land acquisition front. And thirdly, the government needs to immediately remove the
bottlenecks to growth, Joshi said. Overall, more policy action needs to be taken for
improvement.
Investor confidence has been shaken in recent months by government proposals to tax
transactions retrospectively; infrastructure projects have been set back by bureaucratic red tape
and problems in land acquisition.

The study ranks 144 countries according to the index, which is defined by the set of institutions,
policies and factors that determine the level of productivity of a country based on 12 categories
for a comprehensive picture of its competitiveness.
The report is mixed on Asian economies. Overall, the Asia-Pacific region continues to be one of
the fastest growing in the world and maintains its improvement in terms of economic
performance. Economies, including Singapore, Hong Kong, Japan, Taiwan, China, South Korea
and Australia, rank within the Top 20. Singapore continues to be the second most competitive
economy behind Switzerland, and Hong Kong rose two places and now ranks ninth.
Japan and Australia are ranked 10th and 20th, respectively. China, while dropping three ranks
since the last report, continues to lead the BRIC (Brazil, Russia, India, China) countries at 29th
place, and Malaysia was placed highest among developing Asian economies at 24th place.
However, not all Asian countries are doing well. Bangladesh (118), Pakistan (124) and Nepal
(125) continue to be near the bottom of the index, and Vietnam dropped 10 places to 75th.
The report also raised concerns about inadequate transport and energy infrastructure,
widespread corruption, bureaucracy and poor technological adoption.

Indias ranking reflects the recent spate of scandals and growing discontent over corruption.
Public trust in government has dropped over the past three years and frustration among the
business community over lack of reforms is on the rise. In terms of its macroeconomic ranking,
India is criticized for its large public deficit, and has the highest debt to gross domestic product
ratio among the BRIC countries.
It (Indias growth story) has already gone away. I myself have experienced it in investor meets
overseas. They say get your house in order first, said Shourie. There is complete fiscal
irresponsibility (of the government) in the minds of the investors. The target of fiscal management
has not been met. Populist schemes like (the rural jobs plan) are the ones that have led to the
deficit and the government has no strength to curtail these kinds of measures.
On a positive note, the report noted that Indias inflation is now in single digits. The country also
rated somewhat highly in terms of innovative (41) and sophisticated (40) businesses.
As in the past, the top rankings went primarily to European countries, including Switzerland,
Finland, the Netherlands, Sweden, Germany and the UK. The US dropped two places to 7.
One should also remember that many other countries are also slipping in their ranking, said
Crisils Joshi. In general, the business environment around the world is getting tough. To be fair,
there are some positive things also being considered at least in India such as (a review of...)
GAAR.
GAAR, or general anti-avoidance rules, is aimed at transactions that have been entered into in
order to avoid taxes. The government set up a committee to review GAAR, after the move led to
complaints by industry that it would discourage overseas investment.

Strategic Options for Building Competitiveness

Porter's Generic Strategies

Choosing Your Route to Competitive Advantage

Which do you prefer when you fly: a cheap, no-frills airline, or a more
expensive operator with fantastic service levels and maximum comfort?
And would you ever consider going with a small company which focuses
on just a few routes?
The choice is up to you, of course. But the point we're making here is that
when you come to book a flight, there are some very different options
available.
Why is this so? The answer is that each of these airlines has chosen a
different way of achieving competitive advantage in a crowded
marketplace.
The no-frills operators have opted to cut costs to a minimum and pass
their savings on to customers in lower prices. This helps them grab
market share and ensure their planes are as full as possible, further
driving down cost. The luxury airlines, on the other hand, focus their
efforts on making their service as wonderful as possible, and the higher
prices they can command as a result make up for their higher costs.
Meanwhile, smaller airlines try to make the most of their detailed
knowledge of just a few routes to provide better or cheaper services than
their larger, international rivals.
These three approaches are examples of "generic strategies", because
they can be applied to products or services in all industries, and to
organizations of all sizes. They were first set out by Michael Porter in
1985 in his book Competitive Advantage: Creating and Sustaining
Superior Performance. Porter called the generic strategies "Cost
Leadership" (no frills), "Differentiation" (creating uniquely desirable
products and services) and "Focus" (offering a specialized service in a
niche market). He then subdivided the Focus strategy into two parts:
"Cost Focus" and "Differentiation Focus". These are shown in Figure 1
below.

The terms "Cost Focus" and "Differentiation Focus" can be a little

confusing, as they could be interpreted as meaning "A focus on cost" or
"A focus on differentiation". Remember that Cost Focus means
emphasizing cost-minimization within a focused market, and
Differentiation Focus means pursuing strategic differentiation within a
focused market.
The Cost Leadership Strategy
Porter's generic strategies are ways of gaining competitive advantage in
other words, developing the "edge" that gets you the sale and takes it
away from your competitors. There are two main ways of achieving this
within a Cost Leadership strategy:
- Increasing profits by reducing costs, while charging industryaverage prices.
- Increasing market share through charging lower prices, while still
making a reasonable profit on each sale because you've reduced
costs.
Remember that Cost Leadership is about minimizing the cost to the
organization of delivering products and services. The cost or price paid by
the customer is a separate issue!
The Cost Leadership strategy is exactly that it involves being the leader
in terms of cost in your industry or market. Simply being amongst the
lowest-cost producers is not good enough, as you leave yourself wide

open to attack by other low cost producers who may undercut your prices
and therefore block your attempts to increase market share.
You therefore need to be confident that you can achieve and maintain the
number one position before choosing the Cost Leadership route.
Companies that are successful in achieving Cost Leadership usually have:
- Access to the capital needed to invest in technology that will bring
costs down.
- Very efficient logistics.
- A low cost base (labor, materials, facilities), and a way of
sustainably cutting costs below those of other competitors.
The greatest risk in pursuing a Cost Leadership strategy is that these
sources of cost reduction are not unique to you, and that other
competitors copy your cost reduction strategies. This is why it's important
to continuously find ways of reducing every cost. One successful way of
doing this is by adopting the Japanese Kaizen philosophy of "continuous
improvement".
The Differentiation Strategy
Differentiation involves making your products or services different from
and more attractive those of your competitors. How you do this depends
on the exact nature of your industry and of the products and services
themselves, but will typically involve features, functionality, durability,
support and also brand image that your customers value.
To make a success of a Differentiation strategy, organizations need:
- Good research, development and innovation.
- The ability to deliver high-quality products or services.
- Effective sales and marketing, so that the market understands the
benefits offered by the differentiated offerings.
Large organizations pursuing a differentiation strategy need to stay agile
with their new product development processes. Otherwise, they risk
attack on several fronts by competitors pursuing Focus Differentiation
strategies in different market segments.
The Focus Strategy
Companies that use Focus strategies concentrate on particular niche
markets and, by understanding the dynamics of that market and the
unique needs of customers within it, develop uniquely low cost or wellspecified products for the market. Because they serve customers in their
market uniquely well, they tend to build strong brand loyalty amongst
their customers. This makes their particular market segment less
attractive to competitors.

As with broad market strategies, it is still essential to decide whether you

will pursue Cost Leadership or Differentiation once you have selected a
Focus strategy as your main approach: Focus is not normally enough on
its own.
But whether you use Cost Focus or Differentiation Focus, the key to
making a success of a generic Focus strategy is to ensure that you are
adding something extra as a result of serving only that market niche. It's
simply not enough to focus on only one market segment because your
organization is too small to serve a broader market (if you do, you risk
competing against better-resourced broad market companies' offerings.)
The "something extra" that you add can contribute to reducing costs
(perhaps through your knowledge of specialist suppliers) or to increasing
differentiation (though your deep understanding of customers' needs).
Generic strategies apply to not-for-profit organizations too. A not-for-profit
can use a Cost Leadership strategy to minimize the cost of getting
donations and achieving more for their income, while one with pursing a
Differentiation strategy will be committed to the very best outcomes,
even if the volume of work they do as a result is lower. Local charities are
great examples of organizations using Focus strategies to get donations
and contribute to their communities.
Choosing the Right Generic Strategy
Your choice of which generic strategy to pursue underpins every other
strategic decision you make, so it's worth spending time to get it right.
But you do need to make a decision: Porter specifically warns against
trying to "hedge your bets" by following more than one strategy. One of
the most important reasons why this is wise advice is that the things you
need to do to make each type of strategy work appeal to different types
of people. Cost Leadership requires a very detailed internal focus on
processes. Differentiation, on the other hand, demands an outwardfacing, highly creative approach.
So, when you come to choose which of the three generic strategies is for
you, it's vital that you take your organization's competencies and
strengths into account.
Use the following steps to help you choose.
Step 1:
For each generic strategy, carry out a SWOT Analysis of your strengths
and weaknesses, and the opportunities and threats you would face, if you
adopted that strategy.
Having done this, it may be clear that your organization is unlikely to be
able to make a success of some of the generic strategies.

Step 2:
Use Five Forces Analysis to understand the nature of the industry you
are in.
Step 3:
Compare the SWOT Analyses of the viable strategic options with the
results of your Five Forces analysis. For each strategic option, ask yourself
how you could use that strategy to:
- Reduce or manage supplier power.
- Reduce or manage buyer/customer power.
- Come out on top of the competitive rivalry.
- Reduce or eliminate the threat of substitution.
- Reduce or eliminate the threat of new entry.
Select the generic strategy that gives you the strongest set of options.
Porter's Generic Strategies offer a great starting point for strategic
decision making.
Once you've made your basic choice, though, there are still many
strategic options available. Bowman's Strategy Clock helps you think at
the next level of details, in that it splits Porter's options into eight substrategies. You can also use USP Analysis and Core Competence Analysis
to identify the areas you should focus on to stand out in your
marketplace.
Key Points
According to Porter's Generic Strategies model, there are three basic
strategic options available to organizations for gaining competitive
advantage. These are: Cost Leadership, Differentiation and Focus.
Organizations that achieve Cost Leadership can benefit either by gaining
market share through lowering prices (whilst maintaining profitability) or
by maintaining average prices and therefore increasing profits. All of this
is achieved by reducing costs to a level below those of the organization's
competitors.
Companies that pursue a Differentiation strategy win market share by
offering unique features that are valued by their customers. Focus
strategies involve achieving Cost Leadership or Differentiation within
niche markets in ways that are not available to more broadly-focused
players.