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THE COMPETITIVE ENVIRONMENT IN THE MARKET

Liberalization
Removal of or reduction in the trade practices that thwart free flow of goods and services from one nation
to another. It includes dismantling of tariff (such as duties, surcharges, and export subsidies) as well as
non-tariff barriers (such as licensing regulations, quotas, and arbitrary standards).

Globalization

'Globalization' refers to 'a process of removing government-imposed restrictions on movements between

countries in order to create an "open", "borderless" world economy' (Scholte 2000: 16). The process of
globalization includes opening up of world trade, development of advanced means of communication,
internationalization of financial markets, growing importance of MNC’s, population migrations and more
generally increased mobility of persons, goods, capital, data, technology, knowledge and ideas. Ideally, it
also contains free inter-country movement of labor.
In context to India, this implies opening up the economy to foreign direct investment by providing
facilities to foreign companies to invest in different fields of economic activity in India, removing
constraints and obstacles to the entry of MNCs in India, allowing Indian companies to enter into foreign
collaborations and also encouraging them to set up joint ventures abroad; carrying out massive import
liberalization programs by switching over from quantitative restrictions to tariffs and import duties,
therefore globalization has been identified with the policy reforms of 1991 in India.

Competitive environment in market

In last few decades the process of globalization and liberalization of the world economies has forced the
companies around the globe to change the manner in which they were doing business. Previously, most of
the companies were working on the philosophy that customer will buy the product which they
manufacture, irrespective of its quality and cost. Due to minimal competition the customers were forced to
buy the product of quality, cost and features produced by the manufacturers and at the time dictated by the
manufacturers. But the things have changed in last few years. Wave of liberalization are sweeping all over
the world, breaking political barriers, integrating world capital and financial markets, opening up
international markets and freeing import of technology and raw material from the previously regulations
practiced under license raj. The current business environment can be characterized by expanding global
competition, increasing variety of products and lower demands. New opportunities and challenges are
thrown up. The opportunities are in the form of increasing the sales and profit by exploring the customers
in the massive global market. The new economic scenario has also brought risk of increased competition.
Corporations well equipped with technology and tools of management to adjust the new situations can
take advantage of opportunities to meet the competition. Incompetent and ill-equipped companies will find
it difficult to service and they will be forced to exit from the scenario prevailing in the world market as per
the rules of nature known ‘survival of the fittest’.
The new uprising in the manufacturing goods and service sector have pushed great challenges for
manufacturing industries. The challenges are in form of maximization of efficiency in operations,
optimum utilization of plant capacity, minimization of cost of operations, quality of products and services,
reduced inventories, optimum use of resources, and reduction of production wastes. The goal of

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manufacturing enterprises will be to develop, fast responsive and customer focused techniques that
maximize the manufacturers return on all resources- capital, materials, equipment, facilities, personnel,
energy and most importantly, time.
Each manufacturer works for some predefined business objectives like maximization of profit, market
share, growth etc. To meet these business objectives and to improve their competitive advantage the
companies have to offer superior performance compared to their competitors in, one or more of the
following areas:
• Innovation
• Quality
• Efficiency
• Responsiveness towards customer demand.

The companies can improve their performance in the aforementioned areas by technological up gradation
or by focusing on their strategies pertaining to continuous improvement in all the aspects of business and
simultaneously developing and refining the manufacturing processes by minimizing the wastes present in
the different levels of the organizations. Technological up-gradation requires higher investments in
developing manufacturing facilities and associated support systems and breakeven point is achieved in
long run only. Due to the risk associated with technological up-gradation, large numbers of companies
have adopted the second option of continuous improvement to ameliorate their competitive position in the
market.
Continuous improvement of the manufacturing process aims to minimize the wastes present in the system
right from the design to dispatch and distribution. The companies which are capable of driving out the
hidden waste from their operations will have sizable competitiveness compare to their counterparts.
Various manufacturing management philosophies adopted by companies for continuous improvements
are:
• Total quality management,
• Theory of constraint,
• Lean manufacturing,
• Agile manufacturing,
• Six sigma,
• World class manufacturing etc.

INDIAN CONTEXT
Indian economy was in deep crisis in July 1991, when foreign currency reserves had plummeted to almost
$1 billion; Inflation had roared to an annual rate of 17 percent; fiscal deficit was very high and had
become unsustainable; foreign investors and NRIs had lost confidence in Indian Economy. Capital was
flying out of the country and we were close to defaulting on loans. Along with these bottlenecks at home,
many unforeseeable changes swept the economies of nations in Western and Eastern Europe, South East
Asia, Latin America and elsewhere, around the same time. These were the economic compulsions at home
and abroad that called for a complete overhauling of our economic policies and programs. Major measures
initiated as a part of the liberalization and globalization strategy in the early nineties included the
following:

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• Devaluation: The first step towards globalization was taken with the announcement of the devaluation
of Indian currency by 18-19 percent against major currencies in the international foreign exchange
market. In fact, this measure was taken in order to resolve the BOP crisis
• Disinvestment-In order to make the process of globalization smooth, privatization and liberalisation
policies are moving along as well. Under the privatization scheme, most of the public sector
undertakings have been/ are being sold to private sector
• Dismantling of The Industrial Licensing Regime At present, only six industries are under
compulsory licensing mainly on accounting of environmental safety and strategic considerations. A
significantly amended locational policy in tune with the liberalized licensing policy is in place. No
industrial approval is required from the government for locations not falling within 25 kms of the
periphery of cities having a population of more than one million.
• Allowing Foreign Direct Investment (FDI) across a wide spectrum of industries and encouraging
non-debt flows. The Department has put in place a liberal and transparent foreign investment regime
where most activities are opened to foreign investment on automatic route without any limit on the
extent of foreign ownership. Some of the recent initiatives taken to further liberalise the FDI regime,
inter alias, include opening up of sectors such as Insurance (upto 26%); development of integrated
townships (upto 100%); defence industry (upto 26%); tea plantation (upto 100% subject to divestment
of 26% within five years to FDI); enhancement of FDI limits in private sector banking, allowing FDI
up to 100% under the automatic route for most manufacturing activities in SEZs; opening up B2B e-
commerce; Internet Service Providers (ISPs) without Gateways; electronic mail and voice mail to
100% foreign investment subject to 26% divestment condition; etc. The Department has also
strengthened investment facilitation measures through Foreign Investment Implementation Authority
(FIIA).
• Non Resident Indian Scheme the general policy and facilities for foreign direct investment as
available to foreign investors/ Companies are fully applicable to NRIs as well. In addition,
Government has extended some concessions specially for NRIs and overseas corporate bodies having
more than 60% stake by NRIs
• Throwing Open Industries Reserved For The Public Sector to Private Participation. Now there
are only three industries reserved for the public sector
• Abolition of the (MRTP) Act, which necessitated prior approval for capacity expansion
• The removal of quantitative restrictions on imports.
• The reduction of the peak customs tariff from over 300 per cent prior to the 30 per cent rate that
applies now. Severe restrictions on short-term debt and allowing external commercial borrowings
based on external debt sustainability.
• Wide-ranging financial sector reforms in the banking, capital markets, and insurance sectors,
including the deregulation of interest rates, strong regulation and supervisory systems, and the
introduction of foreign/private sector competition.

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WORLD TRADE ORGANIZATION

.
Formation 1 January 1995
Headquarters Geneva, Switzerland
The WTO has 153 members, accounting for over 97% of world
Membership
trade.
Official languages English, French, Spanish [1]
Director-General Pascal Lamy
Budget 182 million Swiss francs (approx. 141 million USD)
Staff 625[2]
Website www.wto.int

The World Trade Organization (WTO), is the only international organization dealing with global rules
of trade between nations. Its main goal is to ensure that trade flows as smoothly, predictably and freely as
possible.
At the heart of the system – known as the multilateral trading system – are the WTO’s agreements,
negotiated and signed by a large majority of the world’s trading nations, and ratified in their parliaments.
These agreements are the legal ground-rules for international commerce. Essentially, they are contracts,
guaranteeing member countries important trade rights. They also bind governments to keep their trade
policies within agreed limits to everybody’s benefit.
The result is assurance. Consumers and producers know that they can enjoy secure supplies and greater
choice of the finished products, components, raw materials and services that they use. Producers and
exporters know that foreign markets will remain open to them.
The World Trade Organization deals with the rules of trade between nations at a near-global level; it is
responsible for negotiating and implementing new trade agreements, and is in charge of policing member
countries' adherence to all the WTO agreements, signed by the bulk of the world's trading nations and
ratified in their parliaments. Most of the WTO's current work comes from the 1986-94 negotiations called
the Uruguay Round, and earlier negotiations under the GATT. The organization is currently the host to
new negotiations, under the Doha Development Agenda (DDA) launched in 2001.
The WTO is governed by a Ministerial Conference, which meets every two years; a General Council,
which implements the conference's policy decisions and is responsible for day-to-day administration; and
a director-general, who is appointed by the Ministerial Conference. The WTO's headquarters is in Geneva,
Switzerland.

PAST PRESENT AND FUTURE

The World Trade Organization came into being in 1995. One of the youngest of the international
organizations, the WTO is the successor to the General Agreement on Tariffs and Trade (GATT)
established in the wake of the Second World War (1947), and continued to operate for almost five decades
as a de facto international organization..

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So while the WTO is still young, the multilateral trading system that was originally set up under GATT is
well over 50 years old. The past 50 years have seen an exceptional growth in world trade. Merchandise
exports grew on average by 6% annually. Total trade in 2000 was 22-times the level of 1950. GATT and
the WTO have helped to create a strong and prosperous trading system contributing to unprecedented
growth. The system was developed through a series of trade negotiations, or rounds, held under GATT.
The first rounds dealt mainly with tariff reductions but later negotiations included other areas such as anti-
dumping and non-tariff measures. The 1986-94 Uruguay Round – led to the WTO’s creation.
The negotiations did not end there. Some continued after the end of the Uruguay Round. In February 1997
an agreement was reached on telecommunications services, with 69 governments agreeing to wide-ranging
liberalization measures that went beyond those agreed in the Uruguay Round.
In the same year, 40 governments successfully In the same year, 40 governments successfully concluded
negotiations for tariff-free trade in information technology products, and 70 members concluded a
financial services deal covering more than 95% of trade in banking, insurance, securities and financial
information.
In 2000, new talks started on agriculture and services. These have now been incorporated into a broader
work programme, the Doha Development Agenda (DDA), launched at the fourth WTO Ministerial
Conference in Doha, Qatar, in November 2001.
The agenda adds negotiations and other work on non-agricultural tariffs, trade and environment, WTO
rules such as anti-dumping and subsidies, investment, competition policy, trade facilitation, transparency
in government procurement, intellectual property, and a range of issues raised by developing countries as
difficulties they face in implementing the present WTO agreements.

WTO AGREEMENTS
How can you ensure that trade is as fair as possible, and as free as is practical? By negotiating rules and
abiding by them. The WTO’s rules – the agreements – are the result of negotiations between the members.
GATT is now the WTO’s principal rule-book for trade in goods. The current set were the outcome of the
1986-94 Uruguay Round negotiations which included a major revision of the original General Agreement
on Tariffs and Trade (GATT). The Uruguay Round also created new rules for dealing with trade in
services, relevant aspects of intellectual property, dispute settlement, and trade policy reviews. The
complete set runs to some 30,000 pages consisting of about 30 agreements and separate commitments
(called schedules) made by individual members in specific areas such as lower customs duty rates and
services market-opening.
Through these agreements, WTO members operate a non-discriminatory trading system that spells out
their rights and their obligations. Each country receives guarantees that its exports will be treated fairly
and consistently in other countries’ markets. Each promises to do the same for imports into its own
market. The system also gives developing countries some flexibility in implementing their commitments.
The agreements fall into a structure with six main parts:
• The Agreement Establishing the WTO
• Goods and investment (the Multilateral Agreements on Trade in Goods including the GATT 1994
and the Trade Related Investment Measures)
It all began with trade in goods. From 1947 to 1994, GATT was the forum for negotiating lower
customs duty rates and other trade barriers; the text of the General Agreement spelt out important
rules, particularly non-discrimination.

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Since 1995, the updated GATT has become the WTO’s umbrella agreement for trade in goods. It has
annexes dealing with specific sectors such as agriculture and textiles, and with specific issues such as
state trading, product standards, subsidies and actions taken against dumping.

• Services — the General Agreement on Trade in Services

Banks, insurance firms, telecommunications companies, tour operators, hotel chains and transport
companies looking to do business abroad can now enjoy the same principles of freer and fairer trade
that originally only applied to trade in goods. These principles appear in the new General Agreement
on Trade in Services (GATS). WTO members have also made individual commitments under GATS
stating which of their services sectors they are willing to open to foreign competition, and how open
those markets are.

• Intellectual property — the Agreement on Trade-Related Aspects of Intellectual Property Rights

(TRIPS)
The WTO’s Intellectual Property Agreement amounts to rules for trade and investment in ideas and
creativity. The rules state how copyrights, patents, trademarks, geographical names used to identify
products, industrial designs, integrated circuit layout-designs and undisclosed information such as
trade secrets – “intellectual property” – should be protected when trade is involved.

• Dispute settlement (DSU)

The WTO’s procedure for resolving trade quarrels under the Dispute Settlement Understanding is vital
for enforcing the rules and therefore for ensuring that trade flows smoothly. Countries bring disputes to
the WTO if they think their rights under the agreements are being infringed. Judgements by specially-
appointed independent experts are based on interpretations of the agreements and individual countries’
commitments.
The system encourages countries to settle their differences through consultation. Failing that, they can
follow a carefully mapped out, stage-by-stage procedure that includes the possibility of a ruling by a
panel of experts, and the chance to appeal the ruling on legal grounds. Confidence in the system is
borne out by the number of cases brought to the WTO – more than 300 cases in ten years compared to
the 300 disputes dealt with during the entire life of GATT (1947-94).

• Reviews of governments' trade policies (TPRM)

The Trade Policy Review Mechanism’s purpose is to improve transparency, to create a greater
understanding of the policies that countries are adopting, and to assess their impact. Many members
also see the reviews as constructive feedback on their policies.
All WTO members must undergo periodic scrutiny, each review containing reports by the country
concerned and the WTO Secretariat.

MISSION, FUNCTIONS AND PRINCIPLES

The WTO's stated goal is to improve the welfare of the people of its member countries, specifically by
lowering trade barriers and providing a platform for negotiation of trade. Its main mission is "to ensure
that trade flows as smoothly, predictably and freely as possible". This main mission is further specified in
certain core functions serving and safeguarding five fundamental principles, which are the foundation of
the multilateral trading system. The WTO/GATT system is founded on non-discrimination, with its twin
faces of Most-Favoured-Nation and National Treatment principles.

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Functions
Among the various functions of the WTO, these are regarded by analysts as the most important:
• It oversees the implementation, administration and operation of the covered agreements.
• It provides a forum for negotiations and for settling disputes.
Additionally, it is the WTO's duty to review the national trade policies, and to ensure the coherence and
transparency of trade policies through surveillance in global economic policy-making. Another priority of
the WTO is the assistance of developing, least-developed and low-income countries in transition to adjust
to WTO rules and disciplines through technical cooperation and training. The WTO is also a center of
economic research and analysis: regular assessments of the global trade picture in its annual publications
and research reports on specific topics are produced by the organization. Finally, the WTO cooperates
closely with the two other components of the Bretton Woods system, the IMF and the World Bank.

PRINCIPLES OF THE TRADING SYSTEM

The WTO establishes a framework for trade policies; it does not define or specify outcomes. That is, it is
concerned with setting the rules of the trade policy games. Five principles are of particular importance in
understanding both the pre-1994 GATT and the WTO:
1. Non-Discrimination. It has two major components: the most favoured nation (MFN) rule, and the
national treatment policy. Both are embedded in the main WTO rules on goods, services, and
intellectual property, but their precise scope and nature differ across these areas. The MFN rule
requires that a WTO member must apply the same conditions on all trade with other WTO members,
i.e. a WTO member has to grant the most favorable conditions under which it allows trade in a certain
product type to all other WTO members. "Grant someone a special favour and you have to do the same
for all other WTO members." National treatment means that imported and locally-produced goods
should be treated equally (at least after the foreign goods have entered the market) and was introduced
to tackle non-tariff barriers to trade (e.g. technical standards, security standards et al. discriminating
against imported goods).
2. Reciprocity. It reflects both a desire to limit the scope of free-riding that may arise because of the
MFN rule, and a desire to obtain better access to foreign markets. A related point is that for a nation to
negotiate, it is necessary that the gain from doing so be greater than the gain available from unilateral
liberalization; reciprocal concessions intend to ensure that such gains will materialize.
3. Binding and enforceable commitments. The tariff commitments made by WTO members in a
multilateral trade negotiation and on accession are enumerated in a schedules (list) of concessions.
These schedules establish "ceiling bindings": a country can change its bindings, but only after
negotiating with its trading partners, which could mean compensating them for loss of trade. If
satisfaction is not obtained, the complaining country may invoke the WTO dispute settlement
procedures.
4. Transparency. The WTO members are required to publish their trade regulations, to maintain
institutions allowing for the review of administrative decisions affecting trade, to respond to requests
for information by other members, and to notify changes in trade policies to the WTO. These internal
transparency requirements are supplemented and facilitated by periodic country-specific reports (trade
policy reviews) through the Trade Policy Review Mechanism (TPRM). The WTO system tries also to
improve predictability and stability, discouraging the use of quotas and other measures used to set
limits on quantities of imports.

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5. Safety valves. In specific circumstances, governments are able to restrict trade. There are three types
of provisions in this direction: articles allowing for the use of trade measures to attain noneconomic
objectives; articles aimed at ensuring "fair competition"; and provisions permitting intervention in
trade for economic reasons.

AGREEMENT ON AGRICULTURE (AoA)

The AoA came into effect with the establishment of the WTO at the beginning of 1995. The AoA has
three central concepts, or "pillars": domestic support, market access and export subsidies.

Domestic support
The first pillar of the AoA is "domestic support". The AoA structures domestic support (subsidies) into
three categories or "boxes": a Green Box, an Amber Box and a Blue Box. The Green Box contains fixed
payments to producers for environmental programmes, so long as the payments are "decoupled" from
current production levels. The Amber Box contains domestic subsidies that governments have agreed to
reduce but not eliminate. The Blue Box contains subsidies which can be increased without limit, so long as
payments are linked to production-limiting programmes.
The effect of these subsidies is to flood global markets with below-cost commodities, depressing prices
and undercutting producers in poor countries – a practice known as dumping.

Market Access

"Market access" is the second pillar of the AoA, and refers to the reduction of tariff (or non-tariff) barriers
to trade by WTO members. The 1995 AoA required tariff reductions of:
• 36% average reduction by developed countries, with a minimum per tariff line reduction of 15% over
five years.
• 24% average reduction by developing countries with a minimum per tariff line reduction of 10% over
nine years.

Least Developed Countries (LDCs) were exempted from tariff reductions, but either had to convert non–
tariff barriers to tariffs—a process called tariffication—or "bind" their tariffs, creating a "ceiling" which
could not be increased in future.

Export subsidies

"Export subsidies" is the third pillar of the AoA. The 1995 AoA required developed countries to reduce
export subsidies by at least 35% (by value) or by at least 21% (by

AGREEMENT ON TECHNICAL BARRIERS TO TRADE (TBT)

Also known as the TBT Agreement is an international treaty of the World Trade Organization. It was
negotiated during the Uruguay Round of the General Agreement on Tariffs and Trade, and entered into
force with the establishment of the WTO at the end of 1994.
The object of the TBT Agreement is to "to ensure that technical negotiations and standards, as well as
testing and certification procedures, do not create unnecessary obstacles to trade".

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THE IMPACT OF THE WORLD TRADE ORGANISATION (WTO)

The WTO was meant to take an integrated approach to many trade related matters: securing full
employment, reducing tariffs which stand in the way of economic growth, protecting workers' rights,
preventing undue domination and manipulation by big companies (competition policy), assisting weaker
economies in gaining access to capital and technology, and managing commodity trade.

Negative effects of globalization on Indian industry have been:

1. Rise in demand for labor and the rise in wage rates leading to some increase in costs.
2. Weakening power of the trade unions over labor in emerging industries and growth sectors like IT,
entertainment, internet and mobile services, airlines, banking, insurance, banking services.
3. Too much competition in the market leading to continuous pressure on raising productivity,
enhancing consumer service, improving product quality, in order to survive.
4. 4.Voluntary retirement for many public sector units.
5. Too many sales person chasing customers.
6. Too many cars on the road and traffic congestion.
7. Growth of consumerism.
8. Instability in profits due to too much choice among customers.
9. Shortage power and infrstructure affecting industrial expansion.
10. Closure of inefficient units supplying costly and shoddy products and loss of jobs.
11. Two years of large increase in textile industry jobs followed by large loss of jobs due to Rupee
appreciation making Indian industry uncompetitive.
12. Problems of dealing with uncertainty in the international market in terms of demand, supply and
prices.

Positive effects

Globalisation is partly related to WTO. Since globalisation is inevitable, WTO negotiations has come into
sharper focus. Impact of whatever little progress India has made towards globalisation has been
significantly positive to Indian industry. Notwithstanding the low level of globalization of Indian
economy, the impact of globalization has been highly positive in all most all spheres of economic and
social life and virtually no negative effect. The process of globalization has helped Indian economy to
grow rapidly: in the last 10-12 years, India's economic growth has been high, exports have boomed,
incidence of poverty has been reduced, employment has surged, begging by India for economic aid has
stopped, long-term inflation rate has gone down, scarcity of goods have disappeared, the quality of
products available have improved substantially and overall India has become progressively vibrant and
internationally competititive. Indian companies are setting up companies abroad; India has better
technological development for the benefit of the common man (mobiles, road transport, cheap clothes, etc
- only because of globalisation.

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Effect of globalisation on Indian industry has been very positive,

1. Though some industrial firms with the baggage of high cost, inefficient plants and processes inherited
from the past because of closed economy's government dictated industrial policies and priorities had to
face serious problems in the beginning. But soon most of the industries have become more and more
efficient, customer focussed and improved their international competetiveness in terma of costs, prices,
product quality and variety.
2. Industrial growth has been very high and strong during the past decade because of globalisation.
3. Exports have increased tremendously.
4. Indian industries are also expanding abroad.
5. Foreign companies have substantially increased their investments in Indian industries.
6. Wages of industrial labour has increased substantially as they have become very productive.
7. Lock out and strikes have declined to insignificantly low levels because industrial labor is happy.
8. Those who cannot be efficient and past their prime age tio retrain themselves in modern methods and
processes have been retired with very attractive voluntary retirement schemes.
9. The trade unions are finding it difficult to influence industrial workers into agitation because labor has
started benefiting from the positive fallout of globalization on the prosperity and growth of the
industrial sector.
10. Talented and merited labor is commanding premium compensation in the labor market. Several new
type of industries have also come up. Small scale industries of the past has fast grown into medium
scale companies.
11. Incidence of industrial sickness has gone done drastically.
12. However, the communists will not agree to this view because with industrial workers becoming richer
following increasing demand for and the wages of industrial labor resulting from liberalisation and
globalisation.

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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 value 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:

Resources

Cost Advantage
Distinctive Value
or
Competencies Creation
Differentiation Advantage

Capabilities

A Model of Competitive Advantage

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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 and 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.
Another important decision is how broad or narrow a market segment to target. Porter formed a
matrix using cost advantage, differentiation advantage, and a broad or narrow focus to identify a
set of generic strategies that the firm can pursue to create and sustain a competitive advantage.

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
of vertical activities including those of 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).

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THE COMPETITIVE ADVANTAGE OF LOCAL FIRMS IN DEVELOPING

ECONOMIES: THE CASE OF BAJAJ OF INDIA

INTRODUCTION
As many of the developing nations of the world have begun to liberalize their economies,
local firms operating in those countries face a new and challenging environment. Many
of the developing countries of the world practiced protectionist economic policies in order to
allow local industry the opportunity to survive and grow. Economic reform brings the threat
of foreign competition, and many local companies feel as if they are not able to meet the
challenge from more established and efficient MNCs. While consumers in the
developing economies benefit from a greater choice of product, local providers face a variety
of challenges from their new competitors.

ADVANTAGES OF MNCs
Many MNCs enjoy the benefits of having strong international brands and the proven ability
to market those brands. Previous international experience has provided the ability to market
to diverse customers. In addition to strong brands and superior marketing skills,
multinationals usually have strong financial abilities and proven management skills.
Multinationals from advanced economies can compete against local firms using better
technology. Finally, multinationals often have the advantages that come from economies of
scale and economies of scope. The ability to produce more efficiently due to having larger
operations and the ability to transfer resources across company areas produce a strong
competitive advantage for multinationals.

ADVANTAGES OF LOCAL FIRMS

With so many disadvantages, it may seem hopeless for local firms to attempt to compete
with large foreign competitors. As Dawar and Frost (1999) point out, while the foreign
multinational does pose a significant threat, and some local firms will not be able to survive
the threat, the situation is far from hopeless for local firms. Local firms bring a number of
advantages, and those advantages are often hard for foreign firms to duplicate.
One of the most significant advantages possible for the local firm is a cost advantage.
Whereas the foreign firm may have the advantage of economies of scale, the local firm has
been operating in the developing country and has often had to be creative with its operations
in order to reduce costs. The local firm is an expert in cost reductions in that local economy.
At the same time, the local firm has already developed a distribution channel, and has
established itself in the consumer’s mind. Creating a competing channel of distribution
can be an expensive undertaking for the multinational.
The local firm has an intimate knowledge of the local market and can fine- tune its product
offerings to the needs of that market. Capitalizing on local tastes and preferences can be a
strong competitive advantage. Foreign marketers may be skilled at international marketing,
but the local firm has knowledge of the local market and its culture that would take time for
the multinational to acquire. The local firm can also appeal to consumer’s sense of
nationalism in order to promote its product over that of the foreign multinational.

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THE CASE OF BAJAJ AUTO

In the early 1990s India began a program of economic reform. The Indian constitution,
created in 1947, stated that India would have a socialist economic system. Foreign
competition and investment was discouraged by protectionist governments. With the Indian
economy on the verge of collapse, changes in public policy were enacted. Foreign
competition and investment began to enter India.
Bajaj Auto began with India’s struggle for independence. The company’s founder, Jamnalal
Bajaj worked with Mahatma Gandhi in India’s struggle for independence from Britain
(Budhiraja, Ghoshal, and Bauman 2002). In the beginning the company imported two and
three wheel scooters from Italy. After more than a decade Bajaj was given a license from
the Indian government to manufacture the Italian scooters. In 1971 the company began to
manufacture its own brand of scooters, the Bajaj brand.
Bajaj now produces in three product groups: scooters, motorcycles, and three wheelers. The
company is competitive in all three product categories, however, the strongest market
position is in three wheelers. Bajaj produces a motorized rickshaw and has almost the
entire market share in India for this product. The motorized rickshaw is a popular
transportation vehicle in India and
is often used in lieu of a taxi. Bajaj still retains the dominant market position in scooters in
India, however, market share eroded with the introduction of foreign competitors. Scooters
from Japan made significant inroads into Bajaj’s scooter market, however, this is a declining
product concept in India as average incomes continue to rise in the country. Increasingly,
Indian consumers are demanding motorcycles instead of scooters. Bajaj produces three
levels of motorcycles for the Indian market: entry, executive, and premium. The company
has a strong market position in the entry and premium markets and the Japanese dominate in
the executive market. Bajaj faces stiff competition in the motorcycle market from Japan.
Honda, Suzuki, Kawasaki, and Yamaha as all have established themselves in India.
With these strong foreign competitors attempting to reach their customers, Bajaj had to create
its own competitive advantage. One of the strengths Bajaj possesses is its reputation for
inexpensive and durable products. Indian consumers give Bajaj the highest ratings for
product quality and durability (Kanabayashi 2001). Bajaj also has an extensive distribution
and service network throughout India. Over the years Bajaj has been able to create
over 400 dealerships and over 1,300 service centers in both urban and rural areas of
India.
No manufacturer knows the Indian market better than Bajaj. It has developed
products that fit with Indian needs and can draw on the Indian consumer’s sense of
national identity. In many developing countries consumers want products that are
inexpensive, yet durable and reliable. Bajaj knows this fact and produces products that
appeal to the basic needs of its market. As Rahul Bajaj states: “If your customers want
stainless steel, don’t give them platinum” (Budhiraja, Ghoshal, and Bauman 2002). This
intimate knowledge of the local market has allowed Bajaj to produce and market its
products in ways foreign competitors find difficult to duplicate.
Bajaj went from producing a standardized product in a heavily protected market (a market
with a ten year waiting period) to a strong global competitor. The transformation of Bajaj
Auto is a model for other producers in developing countries to follow. The company has
developed capabilities in research and development that emphasize what Indian consumers
want. Bajaj maintains close relationships with its suppliers and strives for efficiency at
every turn. The company has developed improved engine performance and product styling
that best fit the Indian market. It has developed its own version of total quality

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management and constantly looks for improvements for itself and its suppliers (Annual
Report 2003).
The case of Bajaj Auto shows that local firms can compete with foreign multinationals. While
Bajaj cannot relax and feel confident that its success is assured, the company has made an
impressive transformation and currently competes with the strongest firms in the world in its
local market. The success of Bajaj provides important lessons for others. The company has
been able to successfully defend its market by following simple guidelines. First, Bajaj gives
consumers what they want. With a greater understanding of its local market, Bajaj has been
able to produce products that are desired by its consumers. Secondly, Bajaj pays constant
attention to cost reduction and efficiencies. For example, the company has developed wind
power to generate electricity for its manufacturing operations. To be competitive against
stronger firms, local companies must be creative. Lastly, Bajaj strives for
improvements. The company knows that in order to survive it must be better tomorrow than
it is today. The past practices in India of subsidized inefficiency are gone, and the
environment is constantly changing. Bajaj Auto provides an excellent example of a local firm
that was not fearful of foreign competition, and one that developed its own competitive
advantage in order to prosper in its transition economy.

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MANUFACTURING STRATEGY

Strategy has been defined as: “The determination of the basic long-term goals and the
objectives of an enterprise, and the adoption of courses of action and the allocation of resources
necessary for carrying out these goals."
Such a broad definition of strategy covers a multitude of decisions from "What business should
we be in?" to "How can manufacturing contribute to the competitive advantage of this
business?"
Recognizing this has led to the idea of a hierarchy of strategy with three major levels Strategy
Formulation:
• Corporate Strategy – what set of businesses should we be in?
• Business Strategy – how should we compete in a given business?
• Functional Strategy – how can various functions (manufacturing, finance, marketing,
product development etc.) contribute to the competitive advantage of the business?
At the outset, certain key word need to be defined:
• Vision statement- What is the organization as a whole trying to accomplish?
• Strategy- How will the organization accomplish it?
• Plans and policies- What are the organization’s operating rules and parameters?
The starting point for manufacturing strategy is the development of a corporate strategy see
fig.1. Corporate strategy starts with the mission statement, which covers a wide range of
business activities. A typical mission statement might be “to provide our customers with top
quality consumer products”.

MISSION

OBJECTIVES
Financial, Market, Manufacturing, Product Development

ENVIRONMENTAL SCANNING
Economic, Government and Legal issues

INTERNAL STRENGTH AND WEAKNESS ANALYSIS

CORPORATE STRATEGY

Figure:1

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After mission formulation, objectives are set for the firm, objectives centered around financial
and market goals, manufacturing and product development goals. Financial goals include
objectives for ROI and other profitability measures. Marketing goals include such issues as
market share and growth. Product development goals address technology content and level of
product design complexity. Finally manufacturing objectives now center on the ways that
manufacturing will provide a strategic advantage to the firm.
The next stage is environmental scanning which comprehends the conditions under which the
corporate strategy will be formulated. Typical conditions include the economy, government and
legal issues etc. Each of these conditions is changing and evolving so, constant evaluation of
critical issues is a must. They provide the boundaries and opportunities that the firm faces.
The next step of corporate strategy formulation which is very important for manufacturing
strategy formulation is internal strength and weakness analysis. This analysis bring to the
strategy table a careful evaluation of what the firms does well in each functional area and
various limitations of the firm in those functional areas. Does the firm, for example have excess
cash or very low debt? Does the firm have strong distribution system or an exceptional field
sales force? Is the firm able to offer a wide range of new products rapidly? Does it excel in
technological design of products? What strategic advantage does the manufacturing operations
provides? Is manufacturing strong in delivery, reliability, or delivery speed, or quality
conformance, or flexibility or low cost? Any of these may generate a strategic advantage for the
firm. It provides not only with input that will be critical to the formulation of firm strategies in
market place but this analysis also provides an analysis of the state of the current manufacturing
deployment and its corresponding strategy.
Once all these factors have been analyzed and understood, corporate strategy can be formulated.
Corporate strategy is usually formulated by providing two or more alternative directions for the
firm. This provides the firm with flexibility for strategy execution.
Corporate strategy is not a one time activity but more of a dynamic, evolving activity. Over
time, both internal and external conditions change. The firm must constantly analyze and assess
the match between existing corporate strategies and current market and manufacturing
conditions. All strategies need adjustment over time, since change is the most permanent feature
of today’s business world.
The outcome of corporate strategy is co-ordinate goals and objectives for various functional
areas of the corporate. Manufacturing strategy is one such functional strategy.

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Manufacturing strategy can be defined as “a coordinated set of objectives and action

programmes applied to a firm's manufacturing function (deployment of manufacturing
resources) and aimed at securing medium and long term, sustainable advantage for firms over
that firm's competitors”. The manufacturing function requires a strategy to ensure a match,
between the company's business strategy and the existing and future abilities of the production
system.
Manufacturing strategy deals more often with internal issues rather than external issues.
However, external issues like needs and wants of customers and suppliers issues are also
comprehended in manufacturing strategy. A manufacturing strategy is defined by a pattern of
decisions, both structural and infrastructural, which determine the capability of a manufacturing
system and specify how it will operate to meet a set of manufacturing objectives which are
consistent with overall business objectives.
Structural decisions are those that are infrequently made and usually involve capital acquisition
of some kind. They are called ‘hard’ and address issues like facilities and process technology.
The infrastructural decisions are called ‘soft’ and address issues like people, organization
structure and systems. These decisions are made quite frequently, evolve over time and
comprehend a constantly changing set of circumstances. These decisions are often made by
middle level and lower level management as opposed to hard decisions which are made often by
upper level management. Table 1 summarizes the strategic decision areas suggested in the
literature.

Category Decision Areas Scope

Structural Capacity Total capacity, capacity flexibility, shift patterns, temporary
Decisions subcontracting policies
Facilities Location, number and size of sites, focus of manufacturing
resources, allocation of tasks to sites
Process technology / Equipment, automation, connectedness, integration, technology choice,
Production equipment configuration of equipment into lines, cells, etc., maintenance policies and the
potential for developing new processes in-house , implementation,
subcontracted development
Vertical Integration Strategic make vs. buy decisions, supplier policies, supplier relationship,
supplier development, extent of dependence on suppliers, network behaviour

Infra- Human resources recruitment, training and development, culture and

structural management style
Decisions Quality quality assurance and control policies and practice, defect
prevention, monitoring, intervention
Production planning computerization, centralization, decision rules, production
and materials control and order, material control systems
Organization structure, reporting levels, support groups, accountability and responsibility

Performance Financial and non-financial performance measurements and links to

measurement recognition and reward systems
New product design for manufacturing guidelines, introduction stages, organizational
introduction aspects e.g. manufacturing role in concurrent engineering

Table 3: Strategic Decision Areas comprising a Manufacturing Strategy

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Corporate strategy

Coordinated goals and objectives

Manufacturing Strategy

Structural and Infrastructural

decisions

Implementation goals and objectives

Manufacturing actions

Outcomes & Measures

Figure: 2
The output of the formulation of the manufacturing strategies includes goals and objectives. The
Manufacturing objectives are derived from the manufacturing strategy, and then manufacturing
policies/actions are developed to address these objectives. Manufacturing objectives cover such
things as cost, quality, delivery and flexibility and usually there are trade-offs between them. In
order to support the manufacturing objectives trade-off decisions are also required in a number
of key areas such as:
• plant and equipment;
• production planning and control;
• labor and staffing;
• product design / engineering; and
• Organization and management.

Objectives Scopes of the objectives

Cost refers to cost related factors in the production and delivery of products, i.e. internal costs (e.g.
material, labour, facilities, technology, equipments and overhead costs)

Quality refers to achieving the company defect rate targets, i.e. manufacturing of products with high
quality and performance standards
Delivery refers to achieving delivery targets, i.e. meeting delivery schedules
dependability
Delivery refers to achieving delivery targets, i.e. reacting quickly to customer orders to deliver fast
speed
Flexibility refers to the ability to cope with change or uncertainty and variety, i.e. reacting to changes in
product, changes in product mix, modifications to design, fluctuations in materials, changes in
sequence and volume
Others refers to after-sale service, advertising, broad distributions and broad product line

Table 2: Manufacturing objectives and their scopes

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The actions are specifically related to the configuration and deployment of resources. Based on
the manufacturing objectives decisions are made as to type of system to use, how the operations
will be organized and how process and facilities will be chosen to support the strategic
initiatives of the firm.
The result of the action by manufacturing function results in some outcome. A number of
measures are used to gather the effectiveness of the firms strategy and its specific actions. They
serve to show the degree to which manufacturing has succeeded in achieving deployments that
support strategic initiatives in general, and give operational feedback on specific actions that are
part of implementation of the overall resource deployment strategies. The measurements like
improvement in ROI, % reduction in lead time, % reduction in Inventory, % reduction of defect
etc. are central part of manufacturing strategy process. If there is any deviation from the
objective set than manufacturing actions will be re-defined/re-set to achieve these objectives.

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