Table of Contents
1. Purpose of the Research
2. Theoretical Background
2.1 Defining competitiveness
2.2 Level of analysis
2.3 Concepts of competitiveness assessment
2.4 Choosing a suitable model
2.5 Revealed Comparative Advantage
2.6 Porter´s Diamond Model
2.6.1 Determinants and Variables
2.6.2 Relationship among the determinants
2.6.3 The determinants as a system
2.7 Competitive Strategy
2.7.1 The competitive environment
2.7.2 Generic Strategies
3.2 Theoretical framework
3.4 Case study approach
3.5 Organizational framework
3.6 Data Collection
3.6.1 Competitive Assessment
3.6.2 Strategy Assessment
3.7 Data analysis
3.9 Reliability and Validity
4. Results and Analysis
4.1 Diamond model
4.1.1 Factor Conditions
4.1.2 Related and Supporting Industry
4.1.3 Demand Conditions
4.1.4 Firm strategy, structure and rivalry
4.2 Revealed comparative advantage
List of Figures
List of Tables
List of Abbreviations
Vorarlberg is marked by the legacy of the traditional textile and clothing industry. In the last decades the industry in the region has faced increasingly fierce competition especially from Asian rivals which depleted the number of companies in the industry segment. Nevertheless, the regional industry has been more resilient than industries in other European regions. This study examines the competitive- ness of the location for the textile and clothing industry using the diamond framework by Porter (1990). Furthermore, viable strategies from the regional firms were analyzed. The results reveal strength in two determinants of the diamond, whereas differences among the different sub-segments of the industry could be observed. Concerning strategic alignment niche market orientation is employed by the majority of the firms even though a clear assignment to a generic strategy of Porter (1985) in the most cases is difficult.
1. Purpose of the Research
The textile industry in Vorarlberg is closely related to the industrial history of the region. The textile tradition in Vorarlberg dates back to the 13th century, nevertheless the actual origin of the modern textile industry began in the early 19th century with the first mechanical spinning mills. Getzner, Hämmerle, Rhomberg, Ulmer and other traditional “textile families” were responsible for the development of the modern textile industry into the 20th century (Bergman & Lehner, 1998).
Between the years 1970 - 1995 a structural change provoked a shift from the textile industry dominated region and led to decreasing number of people employed in the industry whereas the workforce of the metal and electric industry increased. This time span was also characterized by efficiency ad- vancement which led to a higher automation level in the production process (Vorarlberger Textil- und Bekleidungsindustrie, 2012). Until 1994 the textiles and clothing industry fell under the legal fore of the Multifiber Arrangement from the United Nations enabling each country to impose quantitative quotas on imports of the textile and clothing products. Subsequently the MFA was replaced by the Agreement of Textile Clothing from the World Trade Organization which set out a transitional process for the removal of the quotas policy (Bilalis, et al., 2006).
Following the final stage of liberalization of global trade in textiles and clothing on January 1 2005, the end of the quota constrained trade governed by the MFA, clothing imports to Europe from China surged rapidly and unit prices dropped (World Bank, 2006; Francois, Manchin, Norberg & Spinanger, 2007). Regardless of the ten year adjustment process that had accompanied the staged phase-out of quotas under the Agreement on Textiles and Clothing the result was serious for many European manu- facturers whose markets were very rapidly undercut leading to a sharp increase of imports from China by more than 100% in various categories of clothing (Pickles & Smith, 2011). According to Curran (2008) the surge of Chinese imports to the EU was basically a result of back-loading of quota removal in the EU to the most sensitive clothing products as an approach in which the EU industry tried to protect its production capabilities in Europe. Furthermore, these agreements have contributed to the formation of a new business landscape and textile companies throughout Europe can no longer depend on intergovernmental bilateral agreements in order to ensure long-term growth (Bilalis, et al., 2006).
Nowadays, the textile industries within the European Union are characterized by very intense interna- tional competition from exported goods of newly industrialized countries. Particularly China is profit- ing from its low wages and social charges giving them a considerable competitive advantage (Bilalis et al., 2006). Concerning the clothing industry, labor remains the determining element in the produc- tion process and probably represents the most important cost factor in the manufacturing of clothing (Bilalis, et al., 2006). These developments have become increasingly a problem for the textile and clothing industry in Vorarlberg and have provoked the relocation of production plants (Vorarlberger Textil- und Bekleidungsindustrie, 2012). More recent developments in the textile sector have been marked by prominent bankruptcies such as the cases of Gasser Kunert GmbH and the F.M. Hämmerle (Wirtschaftsblatt, 2012). Lately the regional textile industries put efforts towards a transformation which is more knowledge intensive and high tech production of so called smart textiles. These devel- opments are supported by the new network with the both electronic industry and universities which are intended to contribute to the research being done (Wirtschaftskammer Vorarlberg, 2012).
The European textile industry is facing a progressively more competitive business environment which has been marked by more difficult market conditions driving many companies out of business (Bilalis, et al., 2006). Currently, the European industry remains very vulnerable in terms of labor cost differ- ences across world regions (Olson, Ibsen & Westergaard-Nielsen, 2012). According to the basic prin- ciples of comparative advantage mainly those industries which are low-skilled and labor intensive will migrate to those countries that have labor markets which feature an abundant supply of specifically that factor. Clothing production is an archetypal example of such an industry using low-priced labor to manufacture and assemble garments has been a pervasive feature of the textile and clothing industries, making them simultaneously mobile and global in scope (Taplin & Winterton, 2004). The textile and clothing industry has definitely been one of the most dynamic and geographically mobile industries; making it one (Dicken, 2007) which has often been seen as a prototype of supply chain and production flexibility (Pickles & Smith, 2011). Traditionally, companies have sought manufacturing sites that offered cheap, often accommodating labor and built their competitive position upon cost compression through low wages (Taplin & Winterton, 2004).
In the past decades, newly industrialized countries have usually selected textiles and clothing as indus- tries which provide them with a position on the industrialization ladder, allowing them to gain valua- ble industrial work skills whilst generating foreign exchange earnings through export led growth poli- cies (Dicken, 2007). Hereby cheap labor serves as a competitive tool for the developing country (Jin & Moon, 2006). Governments in such countries have repeatedly stimulated the growth of these industrial sectors through direct or indirect subsidies (Taplin & Winterton, 2004). Taplin & Winterton (2004)
illustrate that when wages rise and corresponding operational costs surge, as they certainly do, the jobs move to lower cost sites elsewhere. This has led to mixed outcomes in the countries that lose jobs. On the one hand, consumers regularly profit from lower clothing products and obviously more variety without necessarily sacrificing quality. On the other hand workers with few transferable skills suffer job loss and often periods of long unemployment as a result of the factories moving overseas (Taplin & Winterton, 2004). This industrial decline in one country corresponds to the job growth and industri- al development in another (Taplin & Winterton, 2004). Further, it is argued that as long as clothing manufacturing continues to be an industry with minimal capital requirements and a low level of tech- nical innovation, the barriers to entry will remain low, provoking jobs to migrate to low cost labor sites. Therefore, the clothing industry is perceived as a sunset industry for high wage economies as jobs will unavoidably and ultimately disappear following intensified competition from enterprises in low-wage economies (Bonacich et al., 1994; Taplin & Winterton, 1997; Jones R., 2002). After elimi- nating quotas in 2005 the industry faces challenges such as an increasing number of skilled nations producing an overcapacity of goods and a deflation of world market prices (Parrish, Cassill, &
Oxenham, 2006). At present, the country with the greatest capacity for capturing the largest share of the world market is China. It is able to produce quality products efficiently at comparatively low costs threatening the textile and clothing industries in those countries unable to solely compete based on price. Consequently, companies located in these countries are looking for ways to remain competitive (Parrish, Cassill, & Oxenham, 2006).
The textile and clothing industry has responded by restructuring and modernizing its production and organization of work. This process has been going on since the late seventies or early eighties, and has caused several changes in the industry such as the reorientation towards more innovative and high- quality products, design and fashion (Olson, Ibsen & Westergaard-Nielsen, 2012). Nevertheless, in many cases this has involved a form of dislocation of labor intensive production tasks to other coun- tries (Stengg, 2001). These changing market conditions have depleted the number of European textile and clothing firms in the past decades. The global trend did not stop at the borders of the region of Vorarlberg thus the number of companies operating in the industry has minimized as well. Neverthe- less, the region has seemingly be able to handle the new circumstances better than other European regions and still maintains higher numbers in terms of employment in this sector and gross production value than the average throughout Europe (Amt der Vorarlberger Landesregierung, 2010). This pre- sent study aims to assess the competitiveness of the region for this very same industry posing the fol- lowing research questions:
How competitive is the region of Vorarlberg as a location for textile and clothing companies?
Can strategy orientation explain the success of regional textile and clothing companies to a certain extent?
The purpose of this research is to examine where Vorarlberg has a competitive advantage as a location for the textile and clothing industry. It aims to explore what constitutes to the competitiveness of the region enabling the regional industry to successfully compete with fierce international competition. In addition, the intent is to identify suitable strategic alignments for regional companies in the textile and clothing industry. Due to the variety of models in the literature available which are able to explain competitiveness on various levels the first step is to target the identification of a suitable model to assess the competitiveness of the region for the textile and clothing industry.
2. Theoretical Background
2.1 Defining competitiveness
Despite the fact that competitiveness has been addressed from numerous different perspectives (Kennedy, Harrison, Kalaitzandonakes, Peterson, & Rindfuss, 1997) no single definition has gained universal acceptance either among economist or among management theorists (Kancs & Kielyte, 2001). Frequently dismissed as irrelevant or unimportant by economists like Krugman (1994) who once called it “ a dangerous obsession” and, on the other hand, highlighted as the key to superior per- formance by companies, industries and economies (Porter M. , 1990) the concept of competitiveness remains an elusive one (Neary, 2006). The widespread use in academia and industry cannot hide the fact that researchers have failed to come up with a consensus concerning the meaning of competitive- ness (Flanagan, Lu, Shen, & Jewell, 2007).
Nevertheless, competitiveness has become a fundamental force in the economic perspective of today. Across countries and regions there is an ambition to improve the competitiveness of nations, industry sectors and individual units (Ramoniene & Lanskoronskis, 2011) . In the literature the term “competitiveness” conveys a different meaning being applied to an individual company, sector or economic activity within a region or country (Balkyte & Tvaronavičiene, 2010).
On a company level, competitiveness is described as the ability to produce the right goods and services of the right quality, at the right time, at the right price. In essence, this means that customer needs are met more effectively and efficiently in one company than do other companies (Edmonds, 2000). According to Porter (1990) competitive advantage is the ability of a company to make products that provide more value to the customer compared to rival products and furthermore lead to higher sales and profits for the company. In general, competitiveness can be seen as the ability of an organization to compete successfully with its commercial rivals (Law, 2009) or “the ability of a firm to design, produce and or market superior to those offered by competitors, considering the price and nonprice qualities” following the definition of (D'Cruz & Rugman, 1992).
On a national level the notion of competitiveness has come into increasing use (Jenkins, 1998). Inter- national Management Development and World Economic Forum are annually publishing their “World Competitiveness Yearbook” ranking the leading economies in terms of indicators of national competitiveness. The World Economic Forum (2011) defines competitiveness as
“The set of institutions, policies, and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the sustainable level of prosperity that can be earned by an economy” (p.4).
This implies that more competitive economies tend to be capable of producing higher levels of income for their citizens; moreover the productivity level determines the rates of return also attained by investments in an economy (World Economic Forum, 2011). According to the WEF, the rates of return are the fundamental drivers of growth rates of an economy and therefore the more competitive economy is expected to grow faster in medium to long run.
According to the National Competitiveness Council (2003) competitiveness is:
[. . .] “the ability to achieve success in markets leading to better standards of living for all. It stems from a number of factors, notably firm level competitiveness and a supportive business environment that encourages innovation and investment, which combined lead to strong productivity growth, real income gains and sustainable development”(p.4).
Regardless of the frequent usage, the definition of competitiveness at a national level suffers from a lack of clarity compared to company or industry competitiveness. The concept of national competi- tiveness is even denied by some doubting economists such as Paul Krugman (1994) who concludes that:
“Competitiveness is a meaningless word when applied to national economies. And the obsession with competitiveness is both wrong and dangerous” (p.44).
Further Krugman (1994) argues that companies compete in the market only as industries in different countries compete in the world market, but, concerning the nature of international exchanges, he claims that the notion of competing countries does not make sense. According to Porter (1990) seeking to describe competitiveness at the nation level is the answer to the wrong question. He proposes rather an investigation of the competitiveness of nations within specific industries or industry segments and furthermore points out those companies are those that compete in the international markets not nations or industries themselves.
Garelli (2006) describes two very different definitions for the concept of competitiveness. Firstly he argues that competitiveness analyses the way nations and enterprises manage the entirety of their competencies to attain prosperity or profit. Secondly he defines competitiveness of nations as a field of economic theory, which analyses policies and facts that form the ability of a nation to maintain and create an environment which sustains more value creation for its enterprises and more prosperity for its citizens. The author assumes that economic value is only created by enterprises, whereas nations can establish an environment that supports or hinders the activities of enterprises but cannot directly generate economic value added.
2.2 Level of analysis
The level of analysis is crucial to describing the target of competitiveness such as individual, company, industry and country that researchers intend to describe or explain (Peng, Lee, & Tan, 2001). According to Rousseau (1985) it is “the level to which generalization are made.”
Competitiveness has been studied and assessed at several levels: country (Jones, 1994; Murtha & Lenway, 1994; Enright, Scott & Leung, 1999) regional (Uysal, Chen & Williams, 2000), industry (Roth & Morrison, 1992; Mitchell, Shaver & Yeung, 1993; Contractor, Hsu & Kundu, 2005; Fetscherin & Alon, 2007) and network/group (Peng, Lee & Tan, 2001).
Figure 1 Classification of competitiveness research areas. Source: Balkyte & Tvaronavičiene, 2010
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Willinoughby (2000) distinguishes three levels of competitiveness assessment. The Micro Level focuses on assessing competitiveness on a company level, the Meso Level studies competitiveness on a regional basis, whereas the Macro Level concentrates on the national and international level. Porter (1980, 1990) argued that competitive advantage can be found at industry and country levels. Essentially, Porter described competitive advantage as a multilevel construct, which should be studied at different levels (Peng, Lee, & Tan, 2001).
Peng, Lee, & Tan (2001) on the other hand argue that individual cases are too specific and may not be applicable to an entire industry based on a single country. Fetscherin & Alon (2007) emphasizes the advantages of analyzing competitiveness at the industry levels which provides greater detail and a better understanding of the competitive dynamics of an industry compared to the analysis on a country or company level for various reasons:
- the examination of the degree of specialization for a given industry enables the identification of a comparative (dis)advantage of a national industry;
- allows the international comparison of the degree of specialization and rate of growth in an in- dustry; and
- permits the comparison with other industries.
2.3 Concepts of competitiveness assessment
A large number of theories and models have been developed aiming to explain and assess the competitiveness of industries today, however, there are only partially able to do so in a coherent way (Kancs & Kielyte, 2001). Duren, Martin & Westgren (1991) present three related schools of thought which have gained more recognition than any other in the last few decades providing concepts for measuring and analyzing competitiveness, those being neo-classical economics, economics of industrial organization and economics of strategic management (Kancs & Kielyte, 2001). Before choosing a suitable model for the competitive assessment the three alternative theories will be discussed.
Favored by neo-classical economics, the theory of comparative advantage predicts trade flows that occur as a result of relative cost differentials between regions or countries, indicating that countries which are competitive in producing goods and services also have relative cost advantages (Kennedy, Harrison, Kalaitzandonakes, Peterson & Rindfuss, 1997). Regarding the competitiveness of the indus- try, the point of view held by neoclassical economics is that an industry is competitive in homogenous product a when compared with a homogenous product B if it has a relative cost advantage in produc- ing and marketing product A (Kancs & Kielyte, 2001). Kancs & Kielyte (2001) name measuring costs, productivity and drawing inferences from the market shares. Drawing inferences from changes in market share are, according to Duren, Martin & Westgren (1991) the most useful contribution of neo- classical economics to assess competiveness given that market shares reveal relative total economic performance. Conversely, neoclassical economics does not sufficiently explain the qualitative differ- ences in products, relative marketing and service abilities and the dynamics by which industries achieve competitiveness (Duren, Martin, & Westgren, 1991).
Industrial organization deals with, according to the definition of Cabral (2000), the workings of mar- kets and industries, especially the way companies compete with each other. Hereby, the existence of a causal link structure, conduct and performance (S-C-P) is considered as the main hypothesis. Kancs & Kielyte (2001) stress the importance of rivalry among companies within an industry, where a higher degree of rivalry equals an increase of competitiveness as one of the most necessary paradigm, pointed out by the school of industrial organization. Further, they argue that at its extreme, economics of in- dustrial organization derives from the theory of monopoly and monopsony, favoring the measure of competitiveness in terms of welfare gains or losses. In doing so, it has fostered considerably the avail- ability of quantitative data at the industry level according to the authors. Conversely, some severe limitations are constraining the explanation power of the S-C-P paradigm by comprising the lack of convincing of evidence a highly concentrated structure of industry which leads to higher profits, faulty presumption, economies of size, results in anticompetitive behavior and the inability to handle the dynamics of competitiveness (Bain, 1968; Scherer & Ross, 1990).
Primarily, through the work of Michael Porter in the 1980s, the strategic management approach has advanced significantly in the last two decades in terms of analyzing and explaining competitiveness (Kancs & Kielyte, 2001). Concentrating on the competitiveness of an industry relative to its suppliers, buyers and other threats, Porter (1985) tries to identify how a company should configure itself in order to increase competitiveness. Later on, Porter (1990) extended the definition of competitiveness center- ing primarily on the industry within a nation relative to its international counterparts which is now known as an international competitiveness. Kancs & Kielyte (2001) states that strategic management research is conducted generally using the case studies of companies, industry segments and industries. Furthermore, the value of studying the dynamics of the changes in the competitiveness of an industry has been pointed out. Nevertheless, according to Miller (1988) strategic management has yet to ad- vance to the point where it provides a generalized, statistically testable hypotheses, therefore, it cannot be used to predict the effects of public policy and management decisions on the competitiveness of an industry. Within a framework of strategic management the possession of competitiveness is associated primarily with the formulation of strategy of a company. Hence, the success of business depends most- ly on the establishment of appropriate relationship variables such as marketing and production and, furthermore, investment decisions with exogenous environmental variables (Kancs & Kielyte, 2001).
2.4 Choosing a suitable model
Measuring and ranking competitiveness require a clear conceptual framework, drawing on the accu- mulated knowledge about competitiveness and its sources (Porter, Ketels, & Delgado, 2007). This study employs a strategic management approach, namely the diamond model from Porter because of several reasons:
Firstly, out of the three approaches discussed in the previous section, Kancs & Kielyte (2001) refer to the strategic management approach as the strongest one concerning the explanatory power. The dia- mond model from Porter, especially, has been widely used as a tool for competitiveness analysis and has attracted interest widely from business and political communities conceivably due to its compre- hensive nature (Siggel E. , 2006). The multitude of factors and influencing competitiveness and the inclusion of static and dynamic aspects make the model suitable in terms of the holistic approach this study aims to employ.
Secondly, strategic management research is conducted mainly by using case studies of companies, industry segments and industries (Kancs & Kielyte, 2001) and, therefore, fits the scope of this present study. It is a level of analysis proposed by many scholars who consider this level of analysis as beneficial in terms of detail and understanding of competitive dynamics (Fetscherin & Alon, 2007).
Thirdly, several studies concerning the competitive assessment and analysis of the textile and clothing industry have employed the diamond model of Porter (Jin & Moon, 2006; Shafaei, 2009; Watchara- vesringkan, Karpova, Hodges & Copeland, 2010), to investigate the factors affecting the competitive- ness of the leather industry (Shafaei, Shahriari & Moradi, 2009) and, further, to assess implications of the demand conditions for textile and clothing industry competitiveness (Lee & Karpova, 2011) show- ing that the model is applicable and proposed by scholars for competitive assessment in this very same industry.
The Revealed Comparative Advantage Index (RCA), an important economic indicator of competitive performance, was chosen as an addition to the diamond model in order to test the construct on validity, following the approach of Shafaei, R. (2009). Considering the above mentioned aspects, the diamond model from Porter and RCA are considered as appropriate in terms of the quantitative as well as quali- tative assessment of the textile and clothing industry and are therefore being used as assessment tools in the present study. The following section is dedicated to specifically introducing the two models.
2.5 Revealed Comparative Advantage
The Revealed Comparative Advantage is an empirical measure used to identify to which degree a giv- en nation specializes in the export of a certain product, compared with a set of reference nations (Rodrigo, 2009). Several scholars have applied this method to measure the competitiveness of indus- tries (Shafaeddin, 2004; Havrila & Gunawardana, 2003; Fertö & Hubbard, 2001). The RCA is defined as follows:
where, RCAij is the revealed comparative advantage index for industry j of nation i, Xij denotes the exports of industry j of nation i, Xit refers to the total exports from nation i, Xwj equals the global exports of industry j, and Xwt represents total world exports (Shafaei R. , 2009). As evident in the formulation an RCA exceeding the value of one reflects the situation where the concentration of a given product in the exports of a nation is higher than the weight of this product in world exports (OECD, 2011). A situation regarded as an indication of revealed comparative advantage would ac- cordingly be expected of a nation having a larger share in export of those products which are produced with resources which factors it holds in relative abundance (OECD, 2011). Shafaei (2009) concludes that if the RCA of a product yields an improved trend in a particular period that foreign demand for said product as well exports of the product have increased. Contrastingly, he concludes that, if the RCA of a product has a declining trend in a particular period then foreign demand for said product exports has diminished (Shafaei R. , 2009).
2.6 Porter´s Diamond Model
In The Competitive Advantage of Nations (1990) Porter aims to answer the question “why do nations achieve international success in a particular industry?” According to Porter (1990) the answer can be found in four attributes of a nation shaping the environment in which local companies compete that stimulate or hinder the creation of competitive advantage. Those attributes include factor conditions, demand conditions, related and supporting industries as well as firm strategy, structure and rivalry (see figure 2).
Figure 2 The Determinants of National Advantage. Source: Porter (1990)
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The following four determinants create individually and as a system the context in which firms are born and compete: the availability of resources and skills necessary for competitive advantage in an industry; the information that shapes what opportunities are perceived and the directions in which resources and skills are deployed; the goals of the owners, managers, and employees, that are involved in or carry out competition; and the pressure on firms to invest and innovate.
He argues that firms gain competitive advantage:
- where the firms home base enables and supports the most rapid accumulation of specialized as- sets and skills, often only because of greater commitment.
- in industries when their home affords better ongoing information and insights into product and process needs.
- when goals of owners, managers, and employees support intense commitment and sustained investment.
In conclusion, the success of nations in certain industries is a result of a challenging and dynamic envi- ronment, which stimulates and pressures firms to upgrade and extend their advantages over time (Porter M. , 1990). It is suggested that nations are expected to prosper where the national diamond, as he refers to the determinants of a system, is the most favorable. The diamond is defined as a mutually reinforcing system where the effect of one determinant is contingent on the state of the others. Thus, fortunate demand conditions will not lead to competitive advantage if the rivalry is not sufficient to cause firms to respond to them. Advantages in a specific determinant can generate or increase others whereas advantage in each determinant is not a precondition for the competitive advantage in an in- dustry. Furthermore, the interplay of the advantages in many determinants produces self-reinforcing benefits that are extremely difficult for foreign rivals to neutralize or to copy. In addition, Porter intro- duces two variables that can influence the national system in significant ways and are essential to the theory: chance and government. Following, the determinants and the two variables are presented in greater detail.
2.6.1 Determinants and Variables
Every nation possesses what economists have named factors of production, which are the inputs nec- essary to compete in any industry such as labor, cultivable land, natural resources capital and, infra- structure (Porter M. , 1990). According to the standard theory of trade, trade rests on factors of pro- duction where nations are endowed with differing stocks of factors. Hence, nations will export those goods which make intensive use of factors which are relatively well endowed. Porter identifies hierar- chies differentiating between basic factors (natural resources, climate, location, and demographics) and advanced factors (communication, infrastructure, sophisticated skills, and research facilities). Ad- vanced factors are most significant for the competitive advantage and developing these demands large investments in both human and physical capital whereas basic factors are passively inherited or their creation requires modest unsophisticated private or social investment (Porter M. , 1990). It is contrary to the concept of international competitiveness which defines competitive advantage as a result of factor abundance besides disadvantages in factors that cannot be overcome because technology is seen as a given.
Porter (1990) argues that disadvantages in basic factors (e.g. labor shortages, lack of domestic raw materials) create pressure to becoming innovative despite these deficiencies.
The second determinant of a national competitive advantage in an industry Porter (1990) introduces is home demand conditions for the product or service of an industry. Although home demand through its influences, can confer static efficiencies the far more significant influence are dynamic, shaping rate and character of improvement and innovation by firms (Porter M. , 1990). Porter presents three broad attributes of home demand which are critical. Firstly, the composition (or nature of buyer needs) of home demand whereby a firm can benefit from the understanding of buyer needs accessible due to its proximity. Secondly, the size and pattern of growth of home demand can anticipate international and not needs domestic needs, reinforcing national advantage in an industry. Thirdly, mechanisms by which the domestic preferences of a nation are transferred to foreign markets. Porter (1990) argues that several home demand conditions can reinforce each other and have their ultimate importance at different stages of the evolution of an industry. The most significant attributes of home demand are those providing initial and continuous stimulus for investment and innovation and moreover, for the ability to compete over time in more and more sophisticated segments (Porter M. , 1990). Nonetheless, the effect of demand conditions depends on the other part of the diamond as well. Without strong do- mestic rivalry, rapid home market growth or a large home market may induce complacency rather than stimulate investment. Additionally, without the presence of appropriate support industries probably lack the ability to respond to demanding buyers.
Related and Supporting Industries
Industry investments in advanced factors of production are expected to have spillover benefits beyond the restrains of that industry (Grant, 1991). According to Grant (1991) one of the most persuasive find- ings of the study undertaken by Porter was the tendency of successful industries within each nation to be grouped into so called “clusters” of related and supporting industries which Porter defined as the third determinant of competitive advantage. The textile and clothing sector within Germany, including high quality cotton, wool and synthetic fabrics, dyes skirts dyes, synthetic fibers, sewing machine nee- dles and a wide range of textile machinery is seen as such a cluster (Grant, 1991). Porter (1990) states that competitive advantage in some supplier industries confers potential advantages on firms within a nation in many other industries due to the production inputs which are widely used and are vital to innovation and internationalization. Hereby economies which are external to particular firms and in- dustries are internalized in the industry cluster (Grant, 1991). According to Porter the existence of internationally competitive supplier industry creates advantages in downstream industries in several ways.
The first one is through efficient, early, rapid and occasionally privileged access to the most cost- effective inputs. Nevertheless, in global competition machinery, components as well as other inputs are available on the global market resulting in the view being held by Porter that the availability is much less significant when compared to how effectively they are used or the terms of ongoing coordi- nation provided by home based suppliers. As possibly the most crucial benefit of home based suppli- ers, the process of innovation and upgrading is illustrated where competitive advantage emerges from close working relationships among world suppliers and the industry. Suppliers help firms devise new ways and opportunities to apply technology while firms gain fast access to information, new insights and ideas as well as supplier innovation (Porter M. , 1990). In addition, firms have the opportunity to influence the technical efforts of a supplier serving as a test site for development work. Exchange and joint problem-solving lead to a faster and more efficient solution. Furthermore, Porter mentions that suppliers tend to be a channel for transferring information and innovations from firm to firm allowing to accelerate the pace of innovation within the whole industry. Another aspect is the presence of relat- ed industries in which firms can coordinate or share activities in the value chain or those involving complementary goods (e.g. software and hardware). In conclusion, Porter emphasizes that the benefits of home based and suppliers and related industries depend on the rest of the diamond. Without access to advanced factors, home demand conditions signaling appropriate directions of product change, or active rivalry, proximity to international successful suppliers probably only provides few advantages.
Firm strategy, structure, and rivalry
Finally, Porter (1990) presents the fourth determinant affecting competitive advantage in an industry comprising the nature of domestic rivalry and the setting in which firms are created, organized and managed. According to Porter (1990) goals, strategies and methods of organizing firms in industries differ extensively among nations. Significant differences in management practices and approaches arise in areas such as training, background and orientation of leaders; group versus hierarchical style; the strength of individual initiative; the tools for decision making; the nature of relationships with customers; the ability to coordinate across functions; the attitude toward international activities, as well as the relationship between labor and management create advantages and disadvantages compet- ing in different types of industries (Porter M. , 1990). Moreover, he points out sharp differences among nations concerning the goals firms seek to achieve and, furthermore, motivation of employees and managers.
- Quote paper
- Manuel Galehr (Author), 2012, Competitive assessment of Vorarlberg as a location for the textile and clothing industry, Munich, GRIN Verlag, https://www.grin.com/document/263435