Limitations:
1. The position carries no authority to hire or fire without reference to the supervisor.
2. All capital spending must be approved by the company President.
Q2.
THEORY OF COMPETITIVE ADVANTAGE
When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable competitive advantage.
Michael Porter identified two basic types of competitive advantage:
- Cost Advantage
- Differentiation Advantage
A Competitive Advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables the firm to create superior for its customers and superior profits for itself.
Cost and Differentiation advantages are known as positional advantages since they describe the firm’s position in the industry as a leader in either cost or differentiation.
A resource-based view emphasizes that a firm utilizes its resources and capabilities to create a competitive advantage that ultimately results in superior value creation. The following diagram combines the resource-based and positioning views to illustrate the concept of competitive advantage:
MODEL OF COMPETITIVE ADVANTAGE
Resources and Capabilities:
According to the resource-based view, in order to develop a competitive advantage the firm must have resources and capabilities that are superior to those of its competitors. Without this superiority, the competitors simply could replicate what the firm was doing and any advantage quickly would disappear.
Resources are the firm-specific assets useful for creating a cost or differentiation advantage and that few competitors can acquire easily. The following are some examples of such resources:
- Patents & Trademarks
- Proprietary know-how
- Installed customer base
- Reputation of the firm
- Brand equity
Capabilities refer to the firm’s ability to utilize its resources effectively. An example of a capability is the ability to bring a product to market faster than competitors. Such capabilities are embedded in the routines of the organization and are not easily documented as procedures and thus are difficult for competitors to replicate.
The firm’s resources and capabilities together form its distinctive competencies. These competencies enable innovation, efficiency, quality, and customer responsiveness, all of which can be leveraged to create a cost advantage or a differentiation advantage.
Cost Advantage and Differentiation Advantage:
Competitive advantage is created by using resources and capabilities to achieve either a lower cost structure or a differentiated product. A firm positions itself in its industry through its choice of low cost or differentiation. This decision is a central component of the firm’s competitive strategy.
Value Creation:
The firm creates value by performing a series of activities that Porter identified as the value chain. In addition to the firm’s own value-creating activities, the firm operates in a value system or vertical activities including those or upstream suppliers and downstream channel members.
To achieve a competitive advantage, the firm must perform one or more value creating activities in a way that creates more overall value than do competitors. Superior value is created through lower costs or superior benefits to the consumer (differentiation).
India’s Success in Software
India has received much attention recently on the prowess of its software industry, prompting Bill Gates to proclaim that “India is likely to be the next software superpower.” For the better part of a decade, India’s software industry has been growing at 50 percent annually, starting from a small base in 1990. By 2000, the software sector’s output had grown to $8 billion and exports had risen to $ 6.2 billion. More than 800 firms, located in cities like Bangalore, Hyderabad, Pune, Chennai, and New Delhi provided a range of software services, mostly targeted at foreign customers. The United States accounted for nearly 60 percent of Indian software exports, followed by Europe with 23.5 percent and Japan with just 3.5 percent. India’s software industry grew out of the pioneering efforts of companies like Tata Consultancy Services, in the aftermath of IBM’s departure from India in 1977 over policy differences with the government. These firms undertook small projects overseas for multinational firms, and slowly climbed up the value chain as their reputations were established. Although low-end work, such as maintenance of legacy systems or projects associated with the millennium bug (Y2K) and euro conversion accounted for about 20 percent of export revenues in 2000, the Indian industry has moved up the technology ladder over time. One indicator of that shift is the fact that more than half of the software development centers in the world with Carnegie Mellon University’s CMM Level-5 rating are located in India. The first company in the world to obtain this distinction was an Indian company, Wipro, and companies like Citicorp, GE, Honeywell, IBM, and Motorola had their only CMM-certified operations in India rather than the U.S. By 2000, more than 200 of the Fortune 1000 companies were outsourcing their software requirements to Indian software houses, and in software services “made in India” was becoming a sign of quality, according to an MIT expert. By 1999, 41 percent of software services were provided in India rather than on-site at the client’s location, compared to only 5 percent in 1990, indicating a growing confidence in India-based service provision. Indian software companies also became the favorite of the stock market, accounting for seven of Asia’s top 20 growth stocks. Two recent analysis of India’s IT industry underline the country’s potential. A study by Goldman Sachs in 2000 projected that India would capture 5 percent, or $30 billion, of the $585 billion of the IT services market by 2004, up from just 1.6 percent in 1999. Another study by McKinsey & Company projects the Indian software and services industry’s output to rise to $87 billion in 2008, of which $50 billion would be exported. Two-thirds of the increase is projected to come from new growth opportunities in IT-enabled services, such as call center operations, transcription, and design and engineering services. The number of Indian software companies listed on the stock exchange in 2008 is projected to quadruple to 400, with a combined market capitalization of $225 billion. By then, software and IT-related services are expected to employ 2.2 million people. However, as in the past, McKinsey expects Indian firms to account for most of the future growth: only $5 billion in FDI is anticipated to achieve the 2008 projections for IT sector output and exports. The dot-com bust in the U.S. will not affect the Indian IT-sector’s growth, which relies mostly on the outsourcing of existing activities rather than on future growth of e-commerce. Even if McKinsey’s growth projections for 2008 are met, India’s share of the U.S. software market will be only 4.1 percent, although Field observes that, “India enjoys first-to-market advantage and owns anywhere from 80 percent to 95 percent of the U.S. offshore market [for software services].”
India’s Competitiveness in Software:
India has done well in software because that industry makes intensive use of resources in which India enjoys international competitive advantage, while making less intensive use of resources in which India is at a comparative disadvantage. Figure 1, drawing on Porter, depicts India’s diamond of competitive advantage in this sector.
Software makes intensive use of human capital, and India has several advantages in this regard.
First, India produces the second largest annual output of scientists and engineers in the world, behind only the United States.
Second, this labor pool is relatively cheap.
Third, the English language capability of Indian graduates facilitates interaction and collaboration with programmers in the United States or Europe.
In this respect, Indian graduates enjoy a decisive advantage over their Chinese counterparts, who are otherwise nearly as numerous and cost competitive as Indian programmers. A large and sophisticated network of educational institutes supplies the human capital required by the software industry. The Indian Institutes of Technology, which admit one student for every 100 applicants, churn out first-rate graduates, who today are sought out by firms from all over the world. Many of its graduates migrated to the United States for higher education and jobs and form part of the social network that nurtures the Indian software industry. Other institutions include the Indian Institutes of Information Technology, the Indian Institute of Science, a network of regional engineering schools, and the Indian Institutes of Management. These public institutes have been joined by private institutes, such as NIIT and Aptech, that together produce nearly 100,000 IT professionals annually, a figure that is projected to increase to half-million by 2006. The credit goes to economic liberalization; private schools are augmenting the government’s efforts to expand the supply of students to meet the anticipated needs of the software industry. Just as important as what software needs is what is does not need—namely, capital, and a well-developed physical infrastructure. Rapid declines in IT hardware prices and import tariffs in the 1990s sharply lowered capital barriers to entry. This allowed a new entrepreneurial class to commence bootstrap operations and then to rapidly scale up. Rapid technological change in IT hardware meant that latecomers like India were not locked into older generation technologies, and could instead leapfrog technologies. And in terms of infrastructure, all that is necessary to connect the Indian software worker with foreign customers is a telecommunications hook-up and an occasional overseas trip. Many state governments have created software technology parks in which the necessary infrastructure is readily available and is of vastly superior quality to that found elsewhere in the country. Notable examples include Bangalore’s Electronic City and Hyderabad’s HITEC City, which offer not only office space and communications links but housing and other social amenities as well. It has been much easier to improve telecommunications links and air transport services than it has been to upgrade India’s roads, ports, power supply, and rail transportation—all of which are necessary to boost Indian manufactured exports. Ghemawat and Patibandla note that Indian garment exports are hampered by the lack of high quality local suppliers, and the inability to respond quickly to foreign customers. The other leading goods export sector, gems and jewellery, seems also to have hit a plateau, with limited prospects for rapid growth. The Indian government has begun only recently to create Special Economic Zones, similar to those in China, that lie outside the country’s customs territory and enjoy full flexibility of operations. That is why it is expected that tradable services like software, rather than manufactured goods, to be the engine of India’s export growth in the coming decade. The third node of Porter’s diamond—rivalry—has been strong in the Indian software industry—possibly because the industry was not subject to industrial licensing by the central government, and by and large the India government’s policies have been facilitative, at least relative to other sectors. Overseas Indians, who return to start new companies, supply venture capital, or act as angel investors, fuel new venture formation. Recognizing the possibility that more Indian firms will want to list in foreign stock exchanges, NASDAQ has opened only its third foreign office in Bangalore, India. However, Porter’s diamond model does not readily explain India’s software success in terms of demand conditions—if one takes that to mean domestic demand, which is not nearly as large or sophisticated as overseas demand. To understand how the Indian software could become internationally competitive despite being 12,000 miles away from Silicon Valley, one must recognize the unique features of software that make co-connection a good enough alternative to co-location, and the many bridging mechanisms that link supply and demand.
“INDIA’S POSITION IN THE RAPID PHASE OF GLOBALIZATION”
‘Competitive edge acquired by specific industries in various countries in global markets has not come from mere ‘laissez faire’. Advantage is rather the outcome of deliberate policies of
governments that develop those specific industries in a competitive way.’
-Michael Porter, Competitive Advantage of Nations
In recent times, the concept of globalization has nearly overtaken all other streams of economic policies throughout the world. It has put its effects, directly or indirectly, on practically all the major macro-economic policy decisions of the governments everywhere. Never in recent history, such a powerful phenomenon affected developing countries, their financial and trade institutions as well as their policies, as the globalization policy is currently up to. This process has presented an entirely new flow of thinking towards foreign investment, trade, technology etc., which, as a result of it, are geared to play a role of significance as never before. The perception that a country’s progress depends not only on the size of its domestic resources, but to a considerable extent, on what it can obtain from other countries, is much stronger today than ever in the past.
What is Globalization?
The core of globalization lies in freeing a country’s economic frontiers to allow unrestricted international trade in goods and services, entry and exit of foreign capital and technology and giving the foreign investors a treatment similar to that given to domestic investors. In its essence, the term globalization refers to the integration of economies of the world through uninhibited trade and financial flows, as also through mutual exchange of technology and knowledge.
The Pre-Globalization Period in India (1951 – 1991)
India got her freedom from the British Empire on 15th August 1947. But it was not till 1951 that India’s Federal Constitution was ready, general elections were held and the first duly elected government under Prime Minister Jawaharlal Nehru took power in New Delhi. The year 1951 marks a turning point in India’s history in another important way as well. It was the year, in which the process of economic planning was initiated, with the First Five Year Plan starting that year on 1st April. This exercise had been undertaken with some long-term goals for India’s economy, its growth rate, food production, infrastructure-development, employment generation and reduction in regional imbalances etc. The plan model was largely based on (Soviet) Russia’s growth model, but was somewhat modified to take account of differences in the nature of the two economic systems. This model remained the basis of planning in India for the first four Five Year
Plans.
In core terms, the Plan model highlighted two things:
a) Importance of capital goods industries: these industries were expected to supply the basic productive capacity of the Indian economy in times to come and were, thus, to provide a solid foundation for India’s future growth. With the main objective of India’s plans being self-sufficiency in practically all fields of production in the next twenty-five years, the hub also was to produce everything under the sun within India.
b) Crucial role of the state: the state (central and state governments together in India’s federal setup) was expected to play a pioneering role by investing heavily in agriculture, industries and infrastructure for the overall development of the economy. An implication of this strategy was that in India’s economic development, private sector was to play only a secondary role. The importance of the public sector was made further clear in the Industrial Policy Resolutions of 1948 and 1956, which highlighted the responsibility of the government in matters concerning promotion, assistance and regulation of the development of industry. During the first four plans, relatively big investments were made on the establishment of capital goods sector under public ownership and a large industrial capacity created. This was particularly true for steel, cement, heavy machinery, heavy electricals, engineering goods, transport equipment, fertilizers etc. In infrastructure, power generation was given the top priority, followed by railways, road construction, irrigation network, housing and communications.
The Creeping Globalization of the Eighties
Thus, when India’s new and the youngest Prime Minister Rajiv Gandhi (1985-89) came to power, globalisation got its first firm support. Rajiv was convinced of the need to march with the changing time. With clear signals of a liberal regime emerging from him in his various policy statements, ‘economic reforms’ soon became the buzzword of the day. Rajiv Gandhi’s government introduced various reforms in the shape of a) promoting exports by lowering tariffs, b) rationalizing the tax system to provide greater incentives for growth and c) liberalizing the government regulation of private industry. So, it was Rajiv Gandhi who is credited with ushering a new era and instilling fresh air in economic thinking in India. Like his grandfather, Jawaharlal Nehru, Rajiv had an idea of making India a modern and a strong economy. This process was encouraged by a powerful and very vocal lobby for globalization in India, which had also emerged by then. This lobby included the influential sections of Indian society like nations’ top CEO's in industries, exporters and importers, and above all, the Indian Diaspora (Non-Resident Indians or NRIs) in the Western countries. To them, globalization appeared something as a bonanza in the form of new business opportunities in a globalized India. Indian industrialists, who had so far failed to invest in research and development and were losing the battle for market share, were ready for globalization in the fond hope of partnering with MNCs that would enable them to stabilize or expand their sinking business ventures.
Globalization in India (1991-2003): The Present Phase
Globalization in India, as is being implemented now, is thus a reflection of India’s strong desire to undo some of the mistakes of the past and venture into a new world-system. In order to make the process of globalization smooth, privatization and liberalization policies are moving along with as well. Under the privatization scheme, most of the public sector undertakings have been/ are being sold to the private sector. Under the liberalization scheme, a liberal, investor-friendly regime is replacing the previous restrictive policy regime. Other examples of economic reforms include reduction in protection levels, reforming the banking, insurance and the power sectors, price-decontrols, a significant reduction of fiscal deficit through reduction in budgetary subsidies, changes in the labour laws, liberalizing the exit policy and so on. As far as globalisation is concerned, the policy-roadmap was ready before the Indian government. The roadmap followed what is now popularly called ‘the standard IMF-WB-WTO menu’. The essence of this ‘menu’ contains steps such as opening-up of the economy to foreign trade, investment and technology, and to provide MNCs free access to most of the sectors in the economy by lifting all restrictions. It also includes removal of barriers on imports and pursuance of a free trade policy as specified under the WTO (World Trade Organization) agreement. Prior to 1991, FDI in India was limited to 40 per cent of joint ventures, except in a few high-tech areas. Its approval itself was very time consuming and arbitrary. In 1991, the government established a Foreign Investment Promotion Board (FIPB) to provide single-window approval for projects. In 1996, new guidelines were issued extending automatic approval for ventures with up to 51 per cent foreign equity in 13 major industries and adding automatic approval for foreign equity up to 74 per cent in nine industries, predominantly in infrastructure area. In three mining industries, how ever, not more than 50 per cent foreign equity was allowed, while in some limited circumstances, the new regulations permitted even 100 per cent foreign equity. The criteria for FIPB were codified and published for those areas where automatic approval was to be guaranteed. A Foreign Investment Promotion Council (FIPC) was also created that year to further encourage FDI. In January 1997, India opened its $36 billion government securities market to FII's (Foreign Institutional Investors) taking the first step towards selling of government debt in overseas markets. By the end of March 1997, there were 427 FII's operating in India. In 1997, the government announced the goal of increasing FDI inflows to India's to $10 billion a year by the year 2000. As far as tariff rates were concerned, during 1991-96, under the Rao government, they were significantly reduced from an average of 85 per cent to 25 per cent, and practically all the quantitative controls were also rolled back. The rupee was also made convertible on trade account.
WESTERN INTERNATIONAL UNIVERSITY
NEW DELHI CAMPUS
COURSE CODE: INB 643
INDIVIDUAL ASSIGNMENT NO. 1
FACULTY: Ms. SAVITA GAUTAM
DATE OF SUBMISSION: SUBMITTED BY:
27TH OCTOBER’2004 NEHA SAXENA
