Table of Contents
2 Literature Review on Competitive Strategy
2.1 An institution-based view on Competitive Strategy
2.2 An Industry-Based View on Competitive Strategy
2.3 A Resource-Based View on Competitive Strategy
3 The Indian Passenger Car Industry
3.1 Development of the Indian Passenger Car Industry
3.2 Status Quo of the Indian Passenger Car Industry
4 Analysis of Competitive Advantage in the Indian Small to Mid-Size Passenger Car Segment
4.2 Analysis of the Impact of the Date of Entry on Competitive Advantage
4.3 Analysis of the Impact of the Degree of Localization of the Value Chain on Competitive Advantage
This thesis analyses the competitive strategies of foreign OEMs in the Indian small to mid- size passenger car industry and explains why some companies were able to achieve a competitive advantage while others failed to do so. It can be said that two factors were crucial for gaining a competitive advantage in this industry: the date of resource commitment and the degree of localization in the value chain. A foreign OEM holds a competitive advantage to (1) a foreign OEM that entered at the same time but had a lower degree of resource commitment and to (2) a foreign OEM with the same degree of resource commitment but a later entry date. Moreover, a foreign OEM holds a competitive advantage to a foreign OEM with a lower degree of localization in the value chain.
List of Figures
Figure 1 - Competitive Strategy
Figure 2 - Date of Entry and Competitive Advantage
Figure 3 - Scenarios of Localization Strategies
Figure 4 - Passenger Car Market Share 2010 - 2011
Figure 5 - Date of Entry and Development of Annual Production Capacity
Figure 6 - Number of Sales Outlets 2011
Figure 7 - Development of Hours of Production per Vehicle - Maruti Suzuki 2001-2006
Figure 8 - Development of Maruti Suzuki’s Market Share 1998 - 2010
Figure 9 - Development of Sales per Segment 2001 - 2006
Figure 10 - Development of Maruti Suzuki’s Rural Sales Ratio 2007/08 - 2010/11
List of Tables
Table 1 - Date of Entry and Market Share
List of Abbreviations
Abbildung in dieser Leseprobe nicht enthalten
Peter Drucker once called the automotive industry the “industry of industries” (Drucker in Booz, 2011, p.1). Indeed for many nations the domestic automotive industry is of utmost importance because of its strong forward and backward linkages to other industries (Burange and Yamini, 2008). Moreover, the automotive industry is often referred to as one of the most globalized industries with a supply chain that is spread across the globe (Schmid and Grosche, 2008).
After the invention of the passenger car, industries in North America and Western Europe dominated worldwide production for many decades. In the 1970’s Japan rapidly developed the capability to build high-quality cars at very competitive costs and put Western car producers under severe pressure. These three regions - Northern America, Western Europe and Japan - called the Triad, were responsible for the main share of worldwide car production as well as car sales until the 1990’s (Müller, 2009). However, as a result of saturated markets and overcapacity in the Triad countries and an increasingly globalized world with booming economies in emerging countries, a major shift of car production has occurred. This shift of production did not only happen because of lower production costs in emerging countries but also because of a rapidly rising demand for passenger cars. Demand in emerging countries for vehicles increased tenfold compared to the triad countries and especially Asian countries rapidly developed their production of cars. It is anticipated that by 2014 the BRIC countries - Brazil, Russia, India and China - will account for 30% of global auto sales (Lang and Mauerer, 2010).
India opened its automotive industry to foreign companies in 1993 and has since seen an incredible growth in the size as well as in the efficiency of the industry (Ministry of Heavy Industries & Public Enterprises Government of India, 2006). After allowing foreign companies to enter the Indian automotive industry, the passenger car industry has developed from a small and inefficient industry to the sixth largest passenger car industry in the world (OICA, 2011). India’s passenger car production has increased at a CAGR of 17.6% during the past decade (Deloitte, 2012) and is expected to grow at CAGR of 9% (Lang and Mauerer, 2010) during the next years and become the third largest passenger car industry by 2030 (IBEF, 2010). Passenger car sales in India are dominated by the small to mid-size segment which accounts for about 90% of the entire market (Gupta and Shekhar, 2010). Automotive reports published by various consultancies, such as KPGM (2007, 2010), BCG (Lang, Loeser and Nettesheim, 2008; Lang and Mauerer, 2010), Booz (Sehgal, Ericksen and Sachan, 2009) and Deloitte (2012), have increasingly focussed on the Indian passenger car market and stressed its relevance for global OEMs. It is anticipated that India will emerge as the global production hub for small cars.
Due to the growing importance of the Indian passenger car industry it will be indispensable for a globally operating OEM to hold a strong position in the Indian passenger car market to be able to be successful on a global scale.
1.1 State of the Problem
The time when it was enough for a global original manufacturer to focus mainly on the home market are long gone. The world’s leading global Original Equipment Manufacturer’s already earned about 80% of their revenues outside their home country in 2007 (Schmid and Grosche, 2008). The ultimate aim of a global passenger car producer must be to define a corporate strategy broken into several competitive strategies for each of the countries it is operating in to gain a competitive advantage in each of them. However, markets differ from each other and a competitive strategy that worked in one country might not lead to above- average profits in another. There is simply no single recipe for success but companies need a deep understanding of the specific characteristics of a market to be able to define a successful competitive strategy.
The Indian passenger car market is now among the largest passenger car markets in the world (OICA, 2011). During the past 15 years, nine global OEMs have entered the small to mid-size passenger car market in order to benefit from the great opportunities of this rapidly growing market. However, as this thesis will show, the success of foreign OEMs in India varies greatly. A number of companies were able to gain a large share of the market quite easily in a short period of time, while others have been severely struggling to benefit from their presence in India. Globally successful OEMs such as Volkswagen or Toyota have only mediocre success while Hyundai or Suzuki could strengthen their global success because of their strong presence in India (See Table 1).
Academic work on the strategies of foreign companies in the Indian passenger car industry is with the exception of publications about the market leader Maruti Suzuki very limited (e.g. Ishigami, 2004; Becker-Ritterspach, 2006; Becker-Ritterspach, 2007; Becker- Ritterspach and Becker-Ritterspach, 2009; Chakraborty and Gutpa, 2009; Sinharay, 2010). Although it is widely accepted that the Indian passenger car industry will be one of the key car industries in the future, scholars have so far ignored to tackle the question why some foreign OEMs in India flourish while others struggle. Thus, it is reasonable to examine the strategies of foreign OEMs in the Indian small to mid-size passenger car industry and to analyse competitive advantage in this currently very buoyant industry.
1.2 Objective of the thesis
The aim of this thesis is to analyse the competitive strategies of foreign OEMs in the Indian small to mid-size passenger car industry and to explain why some foreign companies in this industry are more successful than others. Thus the key question that will be answered in this thesis is:
“ How could leading foreign OEMs in the Indian small to mid-size passenger car segment gain a competitive advantage? ”
This thesis will present insights to the competitive strategies of foreign companies in the small to mid-size passenger car industry and analyse why leading companies hold a competitive advantage and where this competitive advantage stems from.
The knowledge gained from this thesis will not only provide a picture of the past but be a valuable source for managers’ future decision-making in the Indian passenger car industry as well as for other industries and other emerging countries.
In order to be able to answer the main question of this thesis, the following procedure will be applied. In the first chapter an introduction to the topic will be given, stating the main question that will be answered in this thesis. Secondly, a literature review will explain the concept of competitive strategy and how companies can - in theory - gain a competitive advantage and state the two hypotheses that will be analysed in this thesis. In order to fully understand the underlying industry of this analysis, the third chapter will provide an overview of the development and status quo of Indian passenger car industry. Chapter four will focus on the analysis of the two main hypotheses.
1.4 Focus and Definitions
A company’s overall strategy is known as the corporate strategy which can be broken down into numerous business-level strategies or competitive strategies that can be described as an ‘internal road map’ that determines how a company wants to achieve its goals in a specific industry (Grant, 2010).
The ultimate aim of a company’s competitive strategy is to achieve a competitive advantage in an industry. This thesis will emphasize on the analysis of competitive advantage as a tool to evaluate the competitive strategies of the companies under examination. Barney (1991) defined (sustained) competitive advantage as the following:
“ A firm is said to have a competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors. A firm is said to have a sustained competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors and when these other firms are unable to duplicate the benefits of this strategy. ” (Barney, 1991, p. 102)
The Passenger Car Segment is part of the automotive industry. Basically, an automotive industry can be divided into Commercial Vehicles, Passenger Cars, Three-Wheelers and TwoWheelers (Ministry of Heavy Industries & Public Enterprises Government of India, 2006) According to a definition by the OECD, a passenger car is:
“ a road motor vehicle, other than a motorcycle, intended for the carriage of passengers and designed to seat no more than nine persons (including driver) ” (OECD, 2002, p.1) The Society of Indian Automobile Manufacturers (SIAM) classifies the passenger car segment into six sub-segments: mini (A1), compact (A2), mid (A3), executive (A4), premium (A5) and luxury (A6) (ICRA, 2011). This thesis focuses on the segments A1-A3, as these segments accounted for more than 90% of passenger car sales in 2010. The segments A4-A6 only add up to a minimal share of total passenger sales as they are only affordable by a very limited number of people in India. In 2010, for instance, a mere 50,000 cars were sold in the executive, premium and luxury segment (Gupta and Shekhar, 2010).
Furthermore, an automotive industry consists of two main parties on the supply side: Suppliers and Original Equipment Manufacturers (OEMs). Component Manufacturers or simply suppliers concentrate one the production of components for the OEMs and the aftermarket. OEMs or vehicle manufacturers on the other hand are assembling the components from different suppliers into a vehicle (KPMG, 2011).
A foreign OEM in the following context is any original equipment manufacturer that is assembling the final unit in India and had at least 50% of non-Indian ownership in 2011. The emphasis of this thesis is on the analysis of the competitive strategies of foreign companies and not Indian companies for two main reasons. Firstly, foreign OEMs that entered India had a resource base at the time of entry which allowed them to have a great competitive advantage in comparison to the relatively inefficient domestic companies which only had limited car expertise and thus foreign companies were the main driver for the development of the Indian passenger car industry and are now the dominant players in the industry. Secondly, the foreign companies under examination are global players that have already built subsidiaries in a number of countries and will do so in the future. This thesis demonstrates only one example of the competitive strategies of these global players in various markets - the example of India.
A foreign company can choose between a variety of options how to sell its products to a foreign market, ranging from exporting to a greenfield venture (Daft, 2010). This thesis focusses only on foreign OEMs that established foreign direct investment (FDI) in the form of a greenfield venture, a merger, an acquisition or a joint venture as these describe modes where a foreign company is operating in the foreign country instead of just selling to the foreign country.
The timeframe under examination of this thesis is 1983 until 2011, as the first foreign OEM - Suzuki - entered in 1983 (Maruti, 2011). An Indian passenger car market has already existed since the late 19th century but only on a very small scale (Ranawat and Tiwari, 2009). As a result the entry of Suzuki and the following growth to a relevant size of the Indian passenger car market will be used as the ‘birth’ of the Indian passenger car industry.
A company’s competitive strategy is one of the most confidential secrets of a company. The competitive strategy comprises how a company wants to compete against its rivals and reach a competitive advantage. Thus, very limited information is provided by a company on this topic.
Maruti Suzuki is the only company under examination that publishes annual reports. In relation to the other foreign OEMs under examination, only the parent companies publish annual reports but these reports contain only very limited information about the Indian subsidiaries. The sources that this thesis is based on are mainly publicly available sources and include annual reports, press releases, information provided on the company’s website, information provided by the company’s communications departments and newspaper articles about the companies under examination. It is important to note that the great majority of information used in this thesis is self-reported by the companies and might therefore be biased.
In-depth interviews with the executives of the companies being analysed would have certainly led to more accurate results. Reaching a company’s executives and persuading them to conduct an interview is, however, especially as a student almost impossible and was indeed impossible for the author of this thesis.
A company’s competitive strategy consists of a variety of decisions concerning a great amount of areas and activities of a business (Porter, 1980). It would go beyond the scope of this thesis to discuss every aspect of a company’s competitive strategy in detail and thus a decision on the focus on the most critical aspects in relation to gaining a competitive advantage in the Indian small to mid-size passenger car industry had to be made. The focus of this thesis is on areas that appear to be strongly related to a competitive advantage in India: The date when a company entered the industry and the degree of localization of the value chain of a company. Other parts of a company’s competitive strategy such as the strategy pursued in relation to collaborations surely influences a company’s success in an industry but will not be covered in this thesis.
Moreover, due to a lack of available data concerning the company’s profits, this thesis uses market share as an indicator of firm success. The use of market share as an indicator of success is, however, not undisputable. Lieberman and Montgomery (1988) stated that in the absence of data on profitability market share is a reasonable indicator of success as market share and profitability are strongly correlated. However one should keep in mind that a company could have a high market share and be unprofitable simultaneously. Moreover, this thesis uses the market share regarding the entire passenger car industry and not only the market share for the small to mid-size passenger car industry. However, as stated before, the sales in the small to mid-size passenger car industry represent almost the entire passenger car industry. The use of market share for the year 2010-11 also means that company success in this thesis is based on the foreign OEMs performance during one year. The use of the development of market share over time would have led to more accurate results in evaluating competitive advantage but historic data on market share was not available to the author.
2 Literature Review on Competitive Strategy
The main objective of the competitive strategy of a company or a business unit is to gain a (sustained) competitive advantage in an industry (Grant, 2010). Simple economic theory where no barriers exist does not know sustained competitive advantage. When a company earns economic rents1 in an industry, other companies will enter and eliminate any economic rents earned by companies and the market reaches equilibrium (Samuelson and Nordhaus, 2005). In theories were barriers, such as barriers to entry or barriers to imitation, are included, competitive advantage is possible over a long period of time as companies earning economic rents have barriers that protect their competitive advantage (Bain, 1956; Barney 1991)
Competitive strategies and the resulting competitive advantage have been the focus of a great amount of academic papers during the past decades. The basic question of work concerning competitive strategy by scholars during the past five decades has been “Why do firms succeed or fail”. First approaches concerning competitive strategy were the SWOT- Analysis and the SCP paradigm. The SWOT-Analysis helps a company to identify its strengths and weaknesses and the environment’s opportunities and threats and allows the company to base its strategy on these findings. The Structure, Conduct, Performance paradigm was the first theory that detected differences in the profitability of industries as a result of barriers to entry and claimed that industry structure is the main determinant of a company’s performance. (Faulkner and Campbell, 2006)
A company’s competitive strategy derives from three main sources: the impact of the institutions that a company is surrounded by, the pressure of an industry that the company operates in and the (potential) resources that a company possesses (Porter, 1998; Peng, 2010). In the following sections, these three approaches on competitive strategy - the institution-based view, the industry-based view and the resource-based view will be presented.
2.1 An Institution-based view on Competitive Strategy
The role and importance of an institution in an economy can be defined as the following:
“ Institutions have an essential role in a market economy to support the effective functioning of the market mechanism, such that firms and individuals can engage in market transactions without incurring undue costs or risks. ” (Meyer et al., 2009, p.63)
The basic idea of the institution-based view is that a company is operating in an institutional framework and thus its strategy is influenced by the institutions it is surrounded by. Therefore, a company has to understand ‘the rules of the game’ and adapt its competitive strategy to these rules (Peng, 2010). A country’s institutions have a significant impact on the economy of a country even larger than that of geography or trade (Rodrik et al, 2004). A company that establishes a subsidiary in a foreign country needs to understand the institutional framework in order to be successful. An institutional framework consists of both formal rules such as laws and regulations and informal rules such as norms or culture (Scott, 2008). Institutions - whether they are formal or informal - put constraints on a company’s behaviour and thus influence its competitive strategy (Peng, 2002). Different countries vary in their political systems, legal systems and economic systems (Peng, 2010). The impact of institutions might be felt by a company through the restrictions to its operations, tangible and intangible property rights and tax enforcements and regulatory regimes. An institutional framework can be described as successful if it manages to reduce uncertainty and ensure effective markets (Meyer et al., 2009). Many emerging countries fail to do so which leads to higher risk for market participants and as a result higher costs in doing business (Meyer, 2001).
The institution-based view is of utmost significance when used in relation to foreign companies operating in emerging countries where the institutional framework is somewhat in a developing process and strongly differs from those in industrialized countries. Meyer et al. (2009) argued that a foreign company’s entry strategy into an emerging market depends on the country’s institutional development and the companies need for local resources. Moreover it is argued that in an emerging market, where institutions are weak, a joint venture with a local partner is the most appropriate form of entry as a great deal of uncertainty for a foreign company can be reduced this way.
The overview about the development of the history of the Indian passenger car industry in chapter three in this thesis will demonstrate the great relevance of the institution-based view for the Indian passenger car industry. Indian institutions had an enormous impact on the strategies of domestic as well as foreign OEMs and institutional decisions made in the past strongly shaped the industry and the success of companies to the present day (See Chapter 3).
2.2 An Industry-Based View on Competitive Strategy
The Industry-based view claims that a company’s profit mainly depends on the industry it operates in (Porter, 1980). At a very early stage of defining one’s strategy, a company must decide where it actually wants to compete (Hambrick and Frederickson, 2005).
Porter’s Five Forces Model (Porter, 2008) analyses an industry’s attractiveness according to five key factors characterized as the entry of new competitors, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers and the rivalry among existing firms. After a company assessed the attractiveness of an industry, it needs to define how it can combat the five forces. Both steps are crucial as there are industries with different structures that offer different degrees of profitability but also within an industry there are different companies that earn different profits. Porter (2008) suggested that a company can successfully combat the five forces through the generic strategies - cost- leadership and differentiation in a broad or narrow scope. A company can either charge a lower price than its competitors while offering the same value for the customer or it can create superior value while charging the same price as competitors.
It should be noted that it is easier for rivals to reach parity with cost-leaders than with differentiators. Reaching a competitor’s operational efficiency can be achieved much easier and thus differentiation can be regarded as a more promising strategy for achieving sustainable competitive advantage. A wisely chosen position will put high costs on a company’s rivals in imitating that position. Only under very rare circumstances might a company be able to hold both, cost-leadership and differentiation, but this usually just leads to mediocre performance (Porter, 1980).
“ Competitive advantage is at the heart of any strategy, and achieving competitive advantage requires a firm to make a choice about the competitive advantage it seeks to attain and the scope within which it will attain it. Being “ all things to all people ” is a recipe for strategic mediocrity ” (Porter, 1998, p. 12)
2.3 A Resource-Based View on Competitive Strategy
There is evidence that profitability differs much more between businesses than between industries (Cool and Schendel, 1988; Rumelt, 1991; Hansen and Wernerfelt, 1989). The beginnings of the theory of gaining a competitive advantage through internal factors can be attributed to Penrose (1959), Wernerfelt (1984) and Barney (1986; 1991). The resource- based view of the firm has gone through a considerable amount of modifications and variations during the past three decades by a great amount of scholars using terms such as resources (Wernerfelt, 1984; Barney 1986; Barney, 1991; Peteraf, 1993), capabilities (Nelson and Winter, 1982; Teece, Pisano and Shuen, 1997), assets (Dierickx and Cool, 1989; Amit and Shoemaker,1993) or core competences (Prahalad and Hamel, 1990) to describe intrinsic factors that lead to a competitive advantage for a firm. Although scholars use a variety of terms, this thesis will only use the term ‘resources’ to describe tangible assets, intangible assets, activities, capabilities and competences alike.
A company’s resources can be categorized into physical capital resources, human capital resources and organizational capital resources. The resource-based-view assumes that resources are heterogeneously distributed among firms and immobile. Only this assumption can guarantee that a resource can be the source of competitive advantage (Barney, 1991). According to the so-called VRIO-framework, a resource needs to be valuable, rare, inimitable and ‘fit’ into an organization to provide a sustained competitive advantage (Barney and Hesterly, 2009). Especially the question if a company’s resource fits to the organization determines if a company can truly exploit the resource and as a result gain a sustained or just a temporary competitive advantage (Barney and Hesterly, 2009). In a rapidly changing environment a fifth characteristic - durability - which defines how easy a company’s resource is outdated, has proven to be important as well (Grant, 2010).
Amit and Schoemaker (1993) argued that a company needs strategic assets - a combination of resources and capabilities that respond to industry factors - to gain competitive advantage. However, when competitors learn to duplicate those assets, they will turn into entry assets and their possession can then only lead to competitive parity. Hence, a company that wants to be successful in the long-term continuously needs to be able to develop strategic assets.
The theory of core competences argues that companies already compete during the creation of competences and not only later in the market for products. It is claimed that, instead of structuring a company around diversified business units and end-products, a company should be structured around a few core competences. This allows a company to be flexible, respond to a rapidly changing environment and be prepared for the future (Prahalad and Hamel, 1990). Core competences are extremely difficult to copy and can easily be leveraged to other markets (Mascarenhas, Baveja and Jamil, 1998).
A more recent development in relation to gaining a competitive advantage is the theory of dynamic capabilities. It is argued that resources that allow a company to achieve a competitive advantage at one time might not do so at another point in time as a result of changing market conditions (Eisenhardt and Martin, 2000; Teece, Pisano and Shuen, 1997). Moreover, research has demonstrated that companies that are ‘lagging’ at one moment in time often catch up (Cockburn and Henderson, 2000). A company’s ability to constantly build new relevant resources in order to respond to a changing environment itself is already a resource - a dynamic capability (Faulkner and Campbell, 2006). Helfat and Peteraf (2003) noted that capabilities undergo different stages of a lifecycle. It is reasonable to assume that a key source of competitive advantage is the anticipation of and responsiveness to change (Eisenhardt and Martin, 2000).
When a company in an industry is earning above-average profits, its competitors will try to imitate or substitute the company’s resources to gain competitive parity (Barney and Hesterly, 2009). However, this can be an extremely difficult task because of various constraints. Causal ambiguity, for instance, means that a company’s managers do not precisely know from which resources the company’s advantage actually stems. Hence, for managers of rivals it is demanding to understand which resources to copy. (Lippman and Rumelt, 1982; Reed and DeFillippi, 1990). The social interrelations that generate a company’s competitive advantage are another difficult resource to copy by rivals. Social constructions such as a company’s culture can be valuable, rare and extremely difficult to duplicate. Even if analysed with utmost care, a rival might fail to develop the same corporate culture as a leading firm (Barney, 1986b). A number of barriers to imitation can be created through entering a market first. It is said that the first-mover can acquire, build and use specific resources before its competitors and thus gain a competitive advantage (Wernerfelt, 1984; Lieberman and Montgomery, 1988).
It should be noted that although a company is influenced by all three sources - institutions, industry and resources - a company’s influence on institutions and the industry is rather limited. A company might be powerful enough to have an impact on the activities of institutions such as the creation or amendment of laws (Peng, 2010). Similarly, a company might have the capability to influence the structure of an industry (Porter, 1980). However, a company has significantly more impact on its own resource base through building or acquiring resources. Therefore, the active part of a company’s competitive strategy stems from its resources that allow it to capture a strategic position which will then in the best case lead to a competitive advantage as shown in Figure 1. Thus, the following section will put emphasis on the resource-based view as this is the variable of a company’s competitive strategy that can be influenced to a great extent by the managers of a company.2.
Abbildung in dieser Leseprobe nicht enthalten
In the Indian small to mid-size passenger car industry two factors appear to be decisive in achieving a competitive advantage that can be seen as strongly related to the resource- based view: the date of entry and the degree of localization of the value chain. As a result, the theory of the date of entry and the degree of localization of the value chain and their impact on gaining a competitive advantage will be discussed in more detail in the following sections.
2.3.1 Date of Entry and Competitive Advantage
There seems to be a strong correlation between order of entry of companies into a market and their corresponding market share (Robinson, Kalyanaram and Urban, 1994). Companies that are first to enter a market have the opportunity to acquire, build and use resources earlier and might thus be able to build barriers to imitation before other companies enter the market (Wernerfelt, 1984). However, the first-mover is faced with uncertainty and the company’s evaluation of the future might turn out to be wrong (Wernerfelt and Karnani, 1987). The advantage or disadvantage incurred by an early mover has already been discussed by a number of scholars.
An early contribution to the first-mover advantage was the description of the experience curve. This theory developed by the Boston Consulting Group basically describes the effect that value added costs decrease by about 30% every time accumulated experience is doubled (Henderson, 1973). In the case that the first-moving company can keep its experience proprietary it gains a sustained competitive advantage (Spence, 1981).
Wernerfelt (1984) argued that a company that is first in using specific resources has more experience in the usage of these resources and has thus already created barriers to imitation when other companies enter the market. The first-mover achieves reduced costs because of his experience curve in using the resources more efficiently than those companies that start using these resources at a later date. Wernerfelt and Karnari (1987) stated that the first-mover can decide to ‘bet’ on specific resources or spread his risk on a variety of resources to achieve a competitive advantage. Moreover small firms are more prone to be first-movers, as larger firms can afford to ‘wait and see’.
One can even argue that being the first-mover in a number of favourable markets itself is a resource - a dynamic capability.
The theory of path dependency describes that ‘history matters’ in achieving a competitive advantage. Due to path dependency, a decision made at one point in time might put a company into a favourable position in the future and competitors can - if at all - only achieve competitive parity at extremely high costs and a lot of time. History has already demonstrated that a company can sustain a competitive advantage over a long period of time just because it was at the right place at the right time (Nelson and Winter, 1982).
According to Patterson (1993) a company can gain a long-term competitive advantage through the creation of temporal strategic barriers which include entry barriers, mobility barriers and isolating mechanisms. The stronger the temporal strategic barriers, the longer an advantage for the first-mover will exist.
Porter (1998) claimed that the first-mover can even define the competitive rules of an industry for the future. Advantages for a first-mover include, among others, building reputation, pre-empting an attractive strategic position, creating switching costs for buyers, selecting attractive channels, starting first on the experience curve, accessing favourable facilities, defining standards, establishing beneficial relations to institutions and securing contracts on scarce inputs. The first-mover advantage is greater for products that are bought infrequently.
Dierickx and Cool (1989) stated that the possession of resources at one time can result in a competitive advantage in the future. Building resources such as plants, reputation or a strong corporate culture can take a long time. Later entrants will always lag behind the earlier mover in possessing relevant resources (time compression diseconomies). A rationally acting first-mover has a larger amount of resources and as a result of this vast resource base new resources can be acquired or built much faster than competitors can (Asset Mass Efficiency). Some resources can only be developed as a result of resources already possessed by a company and competitors not having the initial resource face a substantial disadvantage (Interconnectedness).
Lieberman and Montgomery (1988) argued that a company is ‘the first’ as result of its resources, foresight or just pure luck. A firm’s resource base significantly influences the time of entry. Strong resources in product development would suggest an early entry, while strong resources in marketing would suggest a later entry. The competitive advantage of the first-mover can arise from technological leadership, pre-emption of assets or buyer switching costs. In the case of technological leadership the advantage of the first-mover arises from the experience curve and to a limited degree from patents. In the case of pre- emption of resources the first-mover is in the position to get assets at a lower price than later entrants such as prime materials, strategic locations, labour, strategic market position, retail outlets or distribution networks. The first-mover can also gain a pre-emption advantage through investments in plant and equipment which results in greater capacity and lower unit costs before other firms can start building capacity. Finally a first-mover advantage can arise from buyer switching costs where a later entrant incurs relatively high costs in attracting customers as some are already customers of the first-mover (Lieberman and Montgomery, 1988).
A new product in the market with a small advantage will usually not make customers switch brands. The advantage offered by a new product must be perceived as fundamental to make customers switch products. Moreover the fear of loss of benefits from an existing product prevents customers from switching (Gourville, 2003). At times customers are reluctant to switching brands just because they are used to the first brand that has satisfied their needs. (Schmalensee, 1982). According to Carpenter and Nakamoto (1989) the first-mover can shape the consumer’s preferences aligned with its own offerings.
Castro and Chrisman (1995) claimed that there is a strong relationship between the date of entry of a company and competitive strategy in an industry and that this relationship has a significant impact on the financial performance of a company in an industry.
Academic work on the effect of the date of entry into a foreign market on a company’s performance showed positive as well as negative effects of an early entry. The great amount of research on the relationship between the date of entry and the success of a company focussed on the U.S. market and was based on data from the PIMS database (Lieberman and Montgomery, 1988; Kerin, Varadarajan and Peterson, 1992).
The date of entry of a (multinational) foreign company into an emerging country has only been the focus of a limited number of studies. A study by Yadong Luo and Peng (1998) on the first-mover advantage in transitional economies revealed that on average early entrants are more successful than later entrants. Moreover, it was stated that there is a strong first- mover advantage in the Chinese automotive industry, as later entrants had difficulties to reach a competitive production volume. Research by Pan and Chi (1999) and Luo (1997) on foreign entrants into the Chinese market revealed that foreign companies that entered China at an earlier date were more profitable than foreign companies which entered China at a later date. According to Pan, Li and Tse (1999) the date of entry of a foreign firm entering China had a significant impact on the company’s market share but only a weak effect on profitability. Similarly, Cui and Lui (2005) claimed that a first-mover in China enjoys a market share but no profitability advantage. Especially pre-emptive factors represent greater opportunities and thus greater importance in emerging markets compared to industrialized countries (Luo, 1997).
The amount of research on the first-mover advantage in relation to the Indian market is very low. Johnson and Tellis (2009) demonstrated that on average companies that entered India early after 1991 were more successful than later entrants.
Distinguishing between a first-mover advantage and other side effects that lead to a company’s success in an industry is a difficult task. Cui and Lui (2005, p.32) argued that “ without consideration of the moderating effects of these industry- and firm-level factors, the impact of first mover advantages could be overestimated ” Cui and Lui (2005) named as moderating effects: industry growth, industry competition, firm size, entry mode and resource commitment. They basically argued that first-mover companies in high growth industries, that are of relative large size, faced with intense competition, entering in the form of a joint venture and making large resource commitments are more likely to achieve a competitive advantage .
Under some circumstances, a late mover might find itself in a better position than an early mover. A number of first-mover disadvantages or late-mover advantages can arise from benefiting from the investments done by the first-mover (free-riding), vanishing of market uncertainty, technological discontinuities and early movers that became slow and inflexible in their activities (Lieberman and Montgomery, 1988). Additionally, the first-mover might be faced with high pioneering costs, low-cost imitations by competitors, unfavourable changes in the environment or a focus on the ‘wrong’ resources (Porter, 1998). Matthews (2002) stated that late-comers will be most successful if a great number of resources that are not rare, imitable and transferable are prevalent in an industry and if the late-comer can significantly leverage resources and learn.
A summary of the theories on the first-mover (dis)advantage is demonstrated in figure 2. A company’s time of entry into a market depends on its resource base and on environmental conditions. The relation of a company’s resource base to the environmental condition determines if it should enter early or late. The limited time when the firm’s resources fit to the environmental conditions is known as the strategic window where a company should consider a market entry (Abell, 1978). A first-mover might benefit from a number of potential advantages summarized as economic factors, pre-emptive factors and social factors and is influence by moderating effects. If the first-mover advantages outweigh the late-mover advantages the first-mover achieves a competitive advantage in an industry.
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The presented theories which state that the first-mover into a market can gain a competitive advantage through acquiring, building and using resources before competitors can, is the basis of the first hypothesis of this thesis.
H1: A foreign OEM that entered the Indian small to mid-size passenger car market earlier has a competitive advantage to later entrants
2.3.2 The Degree of Localization of the Value Chain and Competitive Advantage
McKinsey and Company developed the concept of viewing a company as a sequence of activities - the business system - to be able to successfully formulate a strategy. This tool allows a manager to analyse every part of the business separately in order to configure the various activities in such a way that they lead to a competitive advantage. The business system consists of technology, product design, manufacturing, distribution and service activities (Gluck, 1980; See Appendix A).
Porter (1998) developed a similar theory and named the sequence of activities performed by a company the value chain. A company’s competitive strategy should focus on configuring the activities within the value chain in a way that it can either reach cost-leadership or differentiation. A competitive advantage then arises as a result of the company’s ability to use its resources and capabilities to perform different activities or as a result of the company’s ability to perform activities in a different way. The entire value chain needs to be configured according to the strategic position of the company - differentiation or cost- leadership. A company’s value chain may create value for the customer at lower costs than the value chain of competitor’s or create higher value than the value chain of competitors to achieve a competitive advantage. It is essential to note that the activities in the value chain are not mutually exclusive but interlinked and one activity influences the others. A reduction in the costs of inputs, for instance, might increase the costs of manufacturing.
According to Porter (1998) a value chain consists of primary activities which have a direct relation to output such as inbound logistics, operations, outbound logistics, marketing & sales and services and of supporting activities (See Appendix A). A company’s value chain is embedded in a value system, which consists of the various value chains of the companies in the supply chain from exploiting raw materials to the value chain of the final consumer.
There are four basic competitive scopes that need to be considered for a company’s value chain. The segment scope refers to the varieties of products and buyers, the vertical scope refers to the degree of activities being outsourced, the geographic scope refers to the regions served and the industry scope refers to the range of industries served by the value chain. In the context of this thesis - OEMs operating in a foreign country - especially the vertical scope and geographic scope are of great importance. The vertical scope of a value chain describes the extent to what degree activities are performed by the company itself or purchased from external business partners. A company might perform the entire value system to the final consumer or only perform a limited number of specific activities in the value system. The geographic scope of a value chain determines the amount of different regions that are served by the value activities (Porter, 1998). Nowadays, due to low barriers to trade, a number of companies perform different activities in different geographic regions to exploit advantages provided by various regions (Peng, 2010). Beneficial geographic interrelations of the activities of a company’s value chain can be a source of cost-leadership or differentiation (Porter, 1998).
Although Porter (1998) did not relate his idea of the value chain to the resource-based view, the quality of activities performed by a company depends on the company’s resources. Porter described his theory of the value chain as an “ activity-based view of the firm ” (Porter, 1998, p xvi) which indicates the close connection to the idea of the resource-based view of the firm. Thus, explaining competitive advantage through a company’s value chain is similar to explaining competitive advantage through a company’s resources. After all, both are internal factors.
In today’s world of relatively low barriers to trade, a company’s value chain is not restricted to national boundaries anymore. Thus, a company does not only have to decide how it performs the activities of its value chain to be able to reach a competitive advantage but also where the various parts of its value chain should be performed. A company can decide between the two extremes of performing the entire value chain centralized in its home country or fully decentralize the activities of its value chain to different countries (Schmid and Grosche, 2008) There is limited empirical evidence that a high degree of localization in the value chain provides a source for competitive advantage in the production of low cost cars. Schmid and Grosche (2008), for instance, described Renault’s production of the low cost car Logan in Romania, where a high degree of local sourcing led to great success.
The Boston Consulting Group has developed a localization framework to analyse a globally operating company’s degree of localization of its R&D, sourcing, manufacturing and sales activities (Lang, Loeser and Nettesheim, 2008). The consultancy published a report in 2008, where it focussed specifically on the localization of suppliers and OEMs in China and India and a report in 2010, where it analysed the localization of suppliers and OEMs in the BRIC countries. The reports revealed that the degree of localization of foreign automotive suppliers and OEMs in India is rather low. (Lang, Loeser and Nettesheim, 2008; Lang and Mauerer, 2010)
As shown in figure 3 at the one extreme, a company might simply export its products and centralize all activities at its headquarters. At the other extreme, a company might be divided into different parts spread around the world, which have a considerable amount of responsibility and decision-making power.
1 Economic rent = Profit > Cost of Capital
2 Of course, managers can decide which industry to enter but this is not of concern in this thesis as the companies under examination have already chosen the Indian passenger car industry.