Climates of Global Competition

Maria Bengtsson

• Publisher: Routledge
• Year: 2003
• ISBN:
  9781135298425
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Climates of Competition studies the innovations and manoeuvres of geographically proximate competitors to further understand the nature and dynamics of competition.
Through case-studies of manufacturers competing for shares in three industrial markets - agricultural machinery, processing equipment and heavy lifting equipment - a detailed picture of the nature of competition emerges.
By combining questions of geography with those of corporate strategy, this study provides an advanced analysis of the relationship between competition and corporate learning processes.

1. Domestic Rivalry

Why is competition desirable? The most common response to that question is that competition is needed in order to obtain an effective allocation of resources and to govern consumer interests. A third reason has been put forward during the last decade, but one that can be traced back to Adam Smith (1776; 1976), namely that rivalry is an important driving force behind innovativeness and development within firms and industries. However, the dynamics of competition may vary between different types of competition; competition in some cases can provide the pressure and dynamics that are needed for the development of new solutions and innovations, whereas in others it can hinder development within an industry. The above question can therefore be rewritten as two questions; ‘What characterises different contexts of competition?’, and ‘How does the nature of competition affect the dynamics within the industry?’.

Different contexts of competition have been distinguished within economic theory based on the structural conditions of an industry, but the dynamics of competition have not been researched further. During recent years, more process oriented studies have been able to state that proximity between competitors is of importance to the dynamics of an industry, but the question of how and why such dynamics develop and function has not been fully considered. This question will be treated in this book, and it will be shown that different climates of competition emerge in different contexts of competition, and that the character of the climate can explain why competition in some cases stimulates and in others hinders firms in the creation of new solutions and innovativeness.

INTERNATIONAL INTEGRATION AND NATIONAL COMPETITION

The background to this book can be found in the debate that has arisen about the importance of national conditions for the development of companies and industries. During the last few decades, the industrialised society has become integrated internationally, and both the development of firms and the development of industries are often described from an international perspective. Empirically this can be exemplified by the increased integration within Europe, by increased direct investment abroad, deregulated capital markets, etc.¹ Theoretically, and to a greater extent now than previously, company development is linked to a company’s opportunities of exploiting the advantages that are on offer in the global environment (cf. amongst others Lamb, 1984; Bartlett, 1986; Hood and Vahlne, 1988; Reich, 1991 and Taylor, 1991).

Thus, the discussion on the restructuring of industries into interdependent international systems, as well as its consequences for company action and for the development within the industry, can today be found in literature that focuses on the increased internationalisation or globalisation of industries. To the extent that different national conditions and their importance for the development and the competitiveness of industry have been considered, these discussions have mostly concentrated on interest rates, the level of wages, and other macro-economic variables. National conditions are thus limited to being a variable that is not possible to affect by the strategic action of companies within an industry.

The national industrial environment, and its importance for the development of the firm and industry has then almost been ignored. Leontiades (1989), for example, considers that industrial globalisation implies that the conditions of the national market almost completely lose importance as a result of the increased competition across borders. National solutions for companies are replaced by international solutions. However, as will be shown here, it is not clear that international integration results in the decrease in importance for business of the national industrial environment. Rather, there is cause to consider the importance of national conditions for the development of industry in more detail.

To emphasise geographical proximity and national conditions for industrial development in a world that is becoming increasingly globalised may seem paradoxical. However, a partly new train of thought has emerged during the last few years which claims that national conditions are of crucial importance for companies’ international competitiveness, even though companies and industries are internationalised to a high degree (cf. Enright, 1992; Lagnevik et al., 1992; Lagnevik, 1993; Porter, 1990; Sölvell et al., 1991 and Zander and Sölvell, 1991). Porter explains this in the following way;

The home nation influences the ability of its firms to succeed in particular industries. The outcome of thousands of struggles in individual industries determines the state of a nation’s economy and its ability to progress…nations fail where firms do not receive the right signals, are not subject to the right pressures, and do not have the right capabilities. (Porter, 1990:xiii and 1990:68)

Porter (1990) argues that geographical proximity is of great importance for development within a country or an industry. He shows that a dynamic and challenging industrial environment contributes to the development of competitive advantages. If the dynamics of the industrial environment are weakened, companies will to a greater extent locate strategically important functions to other countries with more favourable conditions. The importance of considering the industrial environment as a whole is emphasised, as the different constituents of an environment support each other, giving rise to synergy effects.²

Geographical proximity between actors in an industrial environment means that these actors operate under the same cultural and geographical conditions. This contributes to the development of advanced and specific factors of production (cf. Porter, 1990). Openness and proximity between companies give rise to synergy between industries and technologies within a country. Proximity to domestic competitors can become a subtle driving force behind action consisting of prestige and pride relative to an actor’s competitors. Proximity to customers within the domestic market, which in most of the industrialised western world demands advanced solutions, stimulates product development in the company.

The importance of studying the conditions of the national market increases at the same rate as the increase in international integration. However, the focus of this book does not lie in the development of international competitiveness or in industrial development. What is interesting here is Porter’s (1990) conclusion that proximity is of importance for the dynamics of internationally competitive industries.

PROXIMITY AND DIVERSITY IN COMPETITION

Domestic rivalry is considered the most important explanatory factor in Porter’s (1990) analysis. Through the demands and the pressure brought about by competition in the home market, companies are stimulated or forced into taking innovative action that results in the development of companies and industries. Companies develop strength and competitiveness by exploiting specific and advanced national factor endowments, by satisfying sophisticated and demanding home buyers, by establishing relationships with internationally competitive suppliers in a nation, by sharing activities in technology development, and by manufacturing with related industries. The presence of domestic competitors in the national arena can lead to domestic rivalry, which creates a pressure for the individual companies to explore these national advantages better than their competitors do. The core of this type of reasoning is that vigorous domestic competition between geographically proximate companies gives rise to a pressure to improve and innovate, i.e. to dynamics. Diversity in competition is also seen to be central. Porter (1990) considers that in the presence of many local competitors, the pressure to create improvements and innovations in operations relative to competitors becomes greater.

These are effects of competition that can be observed externally. Internal effects, as pre-conditions for the external effects, consist of increased information, and knowledge and awareness of one’s competitors. Porter (1990) is of the opinion that both geographical proximity and diversity are necessary for both internal and external effects of competition to arise. Proximate competitors are able, within a short space of time, to observe each others’ moves and counter-moves, enabling them to rapidly imitate each others’ products. Information about and surveillability of competitors (i.e. the ability to keep watch over the actions of one’s competitors) also becomes more efficient, as the mobility of individuals increases insights into the competing companies. Psychological factors, such as prestige and pride, also stimulate companies to compete actively and to be innovative in their actions. In this way, proximity sharpens the ‘struggle’ between competitors, and therefore increases the dynamics within an industry. Without domestic rivalry, companies become passive.

The argument that creativity and innovativeness are stimulated by factors that are fixed locally, and which are therefore immobile or impossible to replicate can be found in Porter (1990), but appeared previously in Marshall’s (1920) discussions on the localisation of industry.³ Ethno-geographical theory also sees specific social and cultural conditions that stimulate the exchange of information and spreading of technology between companies as developing in the local environment (cf. Asheim, 1991).⁴ The importance of cultural proximity is stated, for example, by Törnqvist (1990), who claims that proximity eases the exchange of information, which is crucial for creativity (see also Sangenburg and Pyke, 1991). Krugman (1991) offers a similar reasoning, stating that the spreading of technology is stimulated if the information flow is facilitated in local environments. Törnqvist (1986) describes the information that is necessary within creative environments in the following way;

Information that is not well structured and homogenous, that does not follow well established, formal information channels, and where the transference of information cannot be considered a flow of information, leads to creative processes. This type of information requires direct personal contact in continuously new combinations and unexpected constellations. It is the opportunities to link together fragmentary pieces of tacit information in new ways that are important.

(Törnqvist, 1986; page 381, translated)

Törnqvist means that the density and openness of the national environment are important because, through these characteristics, the national context offers meeting places for random contacts. These random contacts provide opportunities to combine new pieces of information and fragments of new ideas, which in turn stimulate creativity. The opportunity to combine new fragments of information is central in bringing about innovative action.

The development of competence is also facilitated and stimulated by geographical proximity between competitors.⁵ If a technological foundation is developed in one country, for example through higher technological education, experience, and an ability to solve technical problems, this knowledge is difficult to copy, and is therefore geographically bound, despite technology in itself being mobile. Dahmén (1988) follows a similar train of thought, in that the core of what he calls development blocks is difficult to imitate, and therefore cannot be assumed to be mobile.⁶ In the stimulation of innovative action due to proximity, the location of competitors’ strategic bases to advanced and demanding industrial environments is of importance, according to Porter (1990). The term strategic base is used here to indicate the crucial strategic functions of a company, such as strategic management or product development.

One consequence of the proximity argument is that the advantages of proximity gained within a country cannot be gained internationally.⁷ Competition in national markets is therefore, according to Zander and Sölvell (1991), of great consequence for companies that have achieved a high degree of internationalisation. If a company is operational internationally, the advantages that a company can receive from its home base can be expressed in a wider geographical area. Geographical proximity in areas that could be described as a company’s strategic base is therefore of particular importance for the company, whether or not the company competes within a national or international market.

THE NATURE AND DYNAMICS OF COMPETITION

It can be concluded that proximity between competitors is considered to be of particular importance for the dynamics of competition. However, Porter (1990) does not scrutinise the concept ‘competition’ to any great depth. He claims that proximity and diversity are important, but the variety of industry-specific competitive conditions in general have been excluded from his treatment of competition. Previous studies that I have been involved in indicate that the nature of competition shifts between different internationally competitive industries, and this has inspired me to further study industries with a large degree of internationalisation in order to obtain a deeper understanding of the nature and dynamics of competition. Competition can vary as a result of both structural conditions and the process of competition, and it is therefore of interest to further analyse such variations.

The Structure of Competition

Industrial Organisation Theory (IO-theory) distinguishes between different types of imperfect markets by relating a number of structural variables to action within an industry. By analysing the structure of an industry based on variables such as the industry’s costs structure, the degree of vertical integration, the intensity of research and development and the degree of differentiation, the prediction of behaviour in an industry is assumed to be possible. Dependence between actors in an imperfect market, however, means that the result of action is not completely predictable, even though it can be assumed (based on IO-theory) that structure affects the individual company’s action, and thereby has importance for the interaction between competitors.

Less importance is ascribed within IO-theory to the national or international geographical space in which competition is conducted, or to changes over time. The fact that time as a variable is not included in such studies means that competition is not placed within its historical context (cf. Lazonick, 1991), and that the dynamics that arise from the action of competitors over time are not studied. It should be mentioned, however, that the dimension of time is considered to some respect by the inclusion of Game Theory in the theoretical reasoning (cf. Tirole, 1988). Even so, companies are assumed to act rationally after a number of periods, based on the game rules that emerge. This means that it becomes possible to identify connections between the structure of competition and competitive behaviour.

Based on the discussion so far, it can be stated that different kinds of connections can be identified between different contexts of competition and the effects of competition. The structure of an industry is related to behaviour within an industry, and proximity between competitors is related to the emergence and growth of international competitiveness. However, understanding of how competition functions is limited, i.e. which inherent mechanisms exist in different contexts of competition and how these may change over time. The following research question is therefore addressed in this book:

What characterises different types of competition between proximate competitors, and how does the nature of competition affect the dynamics of different contexts of competition?

The Process of Competition

To increase understanding of the nature of competition and its inherent dynamics, it is not sufficient just to distinguish different types of competition. The process aspects of competition should also be considered. Three such aspects, which are part of what here is termed the process of competition, can be assumed to be of importance for the structures and behaviour patterns that can be observed at an industry level. These three aspects are 1) the interpretations and conceptions of competition that develop within the individual company, 2) the individual company’s actions, its competitive moves, which directly or indirectly affect the company’s competitors, and 3) the interaction between competitors, i.e. the competitive plays that occur within an industry.

It is important to base an understanding of company action on the perception of competition. Company action is described within economic theory as rational, which is possible only if it is the connection between structure and behaviour in an industry that is described. The study at the heart of this book, however, requires that consideration be given to the fact that individuals act under uncertain conditions. Not only the present, but also the past and the future affect action. The future is uncertain, but earlier experiences reduce this uncertainty (cf. Weick, 1979). It is therefore of interest to gain an understanding of competition through the interpretations and experiences of individuals regarding competition. There are a number of methodological...