The adaptive capacity of the firm as a key to European competitiveness

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Globalisation of business means that the structure of modern industry is based increasingly around competitive advantage, and that these competitive advantage are more and more based on knowledge, intellectual capital, and the management of information. These claims sound familiar. But their implications are not.

The adaptive capacity of the firm as a key to European competitiveness

Part I:

The dimensions of change in the competitive environment and the structure of the firm: the shift of paradigm toward the centrality of knowledge and intellectual capital

Introduction

The world is, of course, changing. The deregulation of markets: the proliferation of computers in home and workplace: the emergence of global brands: constant shifts in the definition of industries and the boundaries of the firm. The competitive environment is changing and with it the structure of the firm.

The purpose of this paper is to distinguish the essential from the evanescent. Some of what we see is, indeed, a fundamental change in the nature of the business environment. But we need to appreciate such changes without projecting every current trend into the indefinite future. A glance at the groaning shelves of the business section of the aircraft bookstall will confirm the difficulty.

There is one, overriding, theme in the arguments of this paper. It is that the globalisation of business means that the structure of modern industry is based increasingly around competitive advantage, and that these competitive advantage are more and more based on knowledge, intellectual capital, and the management of information. These claims sound familiar. But their implications are not. Worked through carefully, they contradict most popular assertions about business trends.

The structure of this paper is as follows. The early sections are concerned to describe the two factors which are, largely correctly, most often emphasised in analyses of changes in the nature of contemporary capitalism. These are the globalisation of markets and the central importance of information and its management.

Section 1 describes some key aspects of the globalisation of product markets, and the effect of this on the structure of firms. Section 2 deals with the effects of the globalisation of capital markets, and how this influences the structure of firms, financial and non-financial. Both sections emphasise that the consequences of these trends arise directly from the ways in which the differentiation of firms, and social and cultural environments, relates to their competitive advantage.

Section 3 asks how changes in information technology change the nature of firm organisation and sources of competitive advantage. Section 4 reviews more general changes in the nature and range of products available to consumers and asks how these influence firm organisation and sources of competitive advantage. Section 5 draws together the implications of sections 4 and 5 and describes how the origins of the differentiation have altered. Sections 6 and 7 develop some more specific consequences of these changes: widening inequalities of performance at industry, firm and individual level: opportunities for firms to focus on very limited portions of the value chain while yet deriving most of the competitive benefit associated with the process as a whole.

1. From national to global organisation

In major manufacturing sectors, the key elements in the transition from national to global organisation have now been in place for some time, as a consequence of the trade liberalisation which took place in the thirty years following the Second World War. The balance of the forces at work here varies from industry to industry, but automobile production exemplifies the general situation. In 1960, the industry was organised largely on the basis of national production for national markets. Components purchased locally and trade mainly took the form of export to countries too small to support indigenous manufacturers. Today, firms plan and operate on a global basis, sourcing both components and finished products internationally.

Some important features of this change should be noted. Although the influence of geography has diminished, it has not disappeared. Manufacturers still have some inclination to source locally. Indeed new “just-in-time” production techniques are of little value to a company if it has a to wait a long time for components to be shipped great distances. Production still tends to be biased towards the characteristics of a domestic market – compare the products of Mercedes and Volkswagen with those of Ferrari and Fiat. While these biases will erode over time, they are likely to persist indefinitely, even if in increasingly attenuated form.

Next (and contrary to common perception and belief) globalisation has not increased concentration in this industry: it has reduced it. The share of the largest firms in world automobile output has fallen steadily and substantially and there have been many new entrants to the industry. Two conflicting forces have been at work. Globalisation has worked against the interests of weak local firms. That is why there are many fewer European car manufacturers than there were. But globalisation has favoured firms with limited domestic markets but strong competitive advantages: Proton could not have become a viable producer if obliged to rely on the Malaysian market, Toyota, the most important new entrant, has achieved world leadership even though its home market is smaller than that of General Motors. The size of the domestic market has become less important than competitive advantage, which is why US firms have lost their earlier dominance.

In other industries, the balance of these forces has been different. In the large commercial aircraft market, weaker local firms have failed, which is why there is now only one manufacturer in the US and one in Europe. But the costs of entry are so high that no competition from (say) Japan or Korea, which might have been powerful, has emerged. Thus concentration in this sector has increased.

While globalisation has forced firms to organise internationally, it is still true that most companies retain a strong national identity. The few exceptions, such as Shell, Unilever and ABB – receive a degree of attention which emphasises their rarity. Indeed, it could be argued that the most effectively international companies, in this sense, are American corporations which have organised their overseas operations on a pan-European basis, as with Ford of Europe. For reasons I shall describe further below globalisation is likely to lag far behind operational globalisation.

While the process of globalisation is relatively advanced in automobiles, and many other manufacturing sectors, other industries are still at early stages of this process. These industries fall into two heavily overlapping groups. Trade liberalisation has been far less extensive in services than in manufacturing. In any event, the process of globalisation is intrinsically different between services and manufacturing. Many services, by their nature, require local delivery, and most of the value added associated with them arises where they are consumed. For most manufactures, however, the creation of value added can be substantially distant from the place of consumption. So although both McDonalds and Boeing are examples of globalisation, the implications of the two forms are very different, both for affected local economies and for the organisation of the firms themselves.

The second group of industries are those in which regulation and trade policies have imposed national organisation on industries even though such organisation is not, or has ceased to be, technically necessary. These industries include utilities, transport industries, defence and retail financial services. In all these cases, these traditional constraints on organisation are disappearing. But the process of evolution to a new structure will be a protracted one, because in all these industries there are very large incumbent advantages.

Although there is an unambiguous direction to the trends in these industries, their consequences vary considerably. For some – defence, retail financial services – there is the possibility that, as with automobiles and aircraft, the place of supply and the place of delivery can be quite unrelated. In utilities and (most) transport industries, on the other hand, most value added will continue to be locally generated. In telecommunications, where revenues increasingly come from value-added services rather than basic infrastructure, both these things are true simultaneously.

It will be seen that many of the loose generalisations about the effect of globalisation on industry structure and firm organisation which are widely circulated are unsustainable. Globalisation does not – necessarily – lead to increased concentration, or even require that firms operate globally, or impose either greater centralisation or greater decentralisation of operations. (Both these latter claims are commonly made). All these things depend on industry specific factors, particularly the nature of technology and the sources of competitive advantage.

There is, however, one absolutely clear generalisation. It is that the effect of internationalisation on all these industries – as with all cases of increased competition – is to substitute industry organisation based around competitive advantage for industry organisation based around history and geography. The US airline industry – which went through a twenty year transition from ossifying regulation to full competition – is widely regarded as a paradigm of the effect of increased competition on structure. During the transition, there was much new entry, little of it ultimately successful, and some established firms whose dominant position had once seemed impregnable – Pan American, Eastern – disappeared. The final outcome favoured some old firms which had competitive strengths, some new firms which were sufficiently successful to challenge these incumbents, and other newer smaller firms which established strong competitive advantages in particular niches. The overall outcome was probably as concentrated as the initial position, but differently concentrated. Similar developments are already ended in European aviation.

The key point, then, is that the main influence on firm structure and industry organisation in the changing competitive environment is the nature of firm- and industry-specific competitive advantage.

2. Global capital

The globalisation of capital markets, and its implications, is such an important aspect of changing contemporary capitalism that it deserves specific attention in its own right. It is the result partly of changes in technology, which have facilitated the instantaneous transmission of money and data around the world, and of changes in policy which have liberalised financial markets. The two interact since technological changes have made separate national policies harder to maintain for those countries that have sought to do so.

These developments have had immediate consequences for the financial services industry itself. Bond, money and foreign exchange markets are fully global and while there is still strong home country bias in equity investment – US institutions still invest predominantly in US stocks and this is true, mutatis mutandis, for other jurisdictions – equity markets too are rapidly becoming more international. This has been followed by the emergence of global firms in wholesale financial markets. As described above for other industries, competitive advantage has replaced history and geography as the main influence on industry structure.

In what is in some ways a rather curious exception to that general principle of the primacy of competitive advantage, retail banks, and increasingly European ones, have become major players in these wholesale markets. The main reason for this is the opportunity to use their underwritten retail deposit bases as collateral for more speculative activities in wholesale markets. This raises not only problems of regulation but of internal control and management within firms themselves and it is at present by no means clear how permanent this restructuring of the financial services sector will prove to be.

For the purposes of this paper, however, the more important questions concern the impact of financial market globalisation on non financial firms. The key issue is the following. In different national jurisdictions, different styles of firm organisation have emerged. These differences include differences in the relationship between investors and the firm, but extend to differences in the nature and expectations of relationships between firms and employees, and to the nature and extent of subcontracting relationships.

These different forms of capitalism generate distinctive capabilities and competitive advantages peculiar to their country of origin. The American model is well-suited to the organisation of capital markets. And the globalisation of capital markets is spreading that model around the world. But it is a form of organisation which is not always appropriate in other sectors and countries. Neither is it desirable in any case for the world to enjoy one universal model of capitalist organisation.

The American model is located at one end of the spectrum of types of firm organisation. American firms have a relatively diffuse shareholder base, associated with extensive and liquid equity markets, and considerable managerial autonomy This is nevertheless threatened, from time to time, in a rather public and confrontational way through hostile take-over and other external pressures. There is a hire and fire culture towards both senior managers and lower level employees. Firms tend to be vertically integrated: important sub-activities are generally under the ownership and control of the firm itself.

At the other end lies Japan, where equity shareholders are by contrast unimportant constituencies. Management is consensual, both within the firm and as between the firm and the wider community, and managerial accountability is to these local constituencies. Employment in large firms is long term, with flexibility provided by the different styles of management and operation of smaller firms. There is much less vertical integration and the boundaries of the firm and between firms are much less clear cut.

Europe lies somewhere in between, with different variants to be found within Europe itself. The United Kingdom is closest to the American end of the spectrum while German organisation has some affinities with Japan. France and Italy have distinctive features of their own: large companies are often closely associated with the state, smaller companies often function in collaborative networks.

These differences are increasingly frequently noted, and there is much debate about the merits and problems of different styles of capitalist organisation. While this debate is often illuminating, there is a sense in which the question at issue is fundamentally misconceived. These differences are the product of different patterns of historic and social evolution, and are closely bound up with other aspects of the cultures of which they are part. Not only is what is best for the United States not necessarily what is best for Japan, but the capacity of either to absorb transplanted practices from the other is quite limited.

And from a properly global perspective, these different models of firm organisation are associated with different kinds of competitive advantage for the businesses concerned. The record of US firms in pioneering innovation in almost all business sectors is enviable: but so is the dominance of German and Japanese firms in many fields of precision manufacture. And these differences are not fortuitous: they are the product of wider cultural differences which are embedded in firm structure. In line with the general economic principles of comparative advantage, the persistence of these differences works to the benefit of the world economy taken as a whole as well as to the advantage of the individual firms and countries concerned.

This perspective is substantially different from two conflicting, widely held positions. One is that forms of capitalism found outside the United States are essentially transitional and that development towards the US model is desirable and inevitable: the other that Europe has achieved a superior form of social and economic organisation which requires protection from alien neo-liberal values. Both views persist because there is an element of validity in both. The superiority of the Anglo-American as a model of capital market organisation means that the globalisation of capital markets spreads it round the world. However the performance of firms is the product of an interaction between capital, labour and product markets. In this broader context, homogenisation of markets through globalisation can work initially to the disadvantage of countries experiencing it and ultimately to the detriment of all. Competitive advantage is based on differentiation, and firm organisation is one important source of differentiation.

To the extent that capital market liberalisation diminishes this source of differentiation, it reduces competitive advantages at the level of both firm and nation.

3. The information age

That we live in an information age is perhaps the most reiterated truism about modern society. It is particularly difficult here to penetrate the hype and understand the specific consequences for business organisation.

Economic growth increases the complexity of products and widens the range of products which is available with the result that consumers have a growing need for information. These effects on the demand for information are at least as important as the more widely emphasised supply factors which come from the much reduced costs of processing and transmitting information. The central point is that the information processing capacity of individuals, limited by the only slowly changing capacity of the human brain, does not expand in line with the quantity of information which is either necessary or potentially available.

Take retail financial services. There is justified concern among regulators that consumers have been poorly advised and insistence on fuller disclosure is seen as a remedy. The results of this are generally disappointing: not only is it difficult to package the information in comprehensible or comparable form but consumers take little interest in it when it is provided. This should not come as any great surprise, although it does. Consumers have neither the ability nor the inclination to process such information: that is why they sought the services of intermediaries in the first place.

The main mechanisms for processing information in this market – as in others – are supplier reputation and intermediary services. Few customers buy complex products, such as automobiles, on the basis of detailed specifications of model characteristics: they rely on manufacturer brand. The problem which has arisen in retail financial services is that supplier reputations proved not to be well founded, which is in the end acting to the detriment of the suppliers concerned.

Branding and reputation have grown in importance as consumers have found increasing need of signals of these kinds to enable them to navigate their way through product complexity. Initially of relevance mainly in business to consumer transactions, branding and reputation have gained significance in business to business transactions. It is worth emphasising that these factors operate not only between firms, but within firms themselves.

Intermediation as a response to problems of information management takes many forms. Retailers have always provided intermediary functions, narrowing the range of potential products and offering quality and suitability certification. Some industries have always been dominated by professional intermediaries – medicine or travel, for example. Publishers have sought out material of relevance to particular audiences and marketed it to them. We can now add electronic search engines to the list of forms of intermediation.

Thus the view sometimes expressed that changes in information technology will reduce the demand for intermediation by enabling consumers to access information directly is probably the reverse of the truth. It is likely that changing technology will displace older inefficient forms of intermediation – for example, organised search procedures on the internet may be more useful than poorly qualified clerks in travel agencies. But it is improbable that self-diagnosis based on electronic browsing will greatly erode the market share of doctors. The public has for long had access to medical textbooks, and rarely availed itself of the facility: in this market, above all, people seek trusted intermediaries.

The more likely development is a tiering of intermediation. Doctors for example already have access to far more information than they had before, and will increasingly themselves need help – both personal and electronic – in managing that information.

There are other issues at play here too. Discussion of the information age naturally focuses, given the extraordinary pace of change in information technology, on information which can be communicated by electronic means. Of equal significance to modern business, however, is tacit knowledge: knowledge how, rather than knowledge that, in Polanyi’s famous distinction.

This is not “information” in the sense of physically readable, processable data. Indeed, the point here is that the role of innovation and information of this explicit kind is not necessarily the central factor in corporate success in the next century. The capacity of firms to replicate the innovations of their rivals is increased by the very fact of the greater availability of information. What is harder to replicate is the system which produces innovation in the first place and has the capacity to do so repeatedly. Such systems rely on tacit knowledge.

Tacit knowledge is commonly embedded in organisational routines, sustained by groups of employees, and may be developed without any necessary understanding on the part of senior management, or even by those who themselves hold it, of its significance. Its relevance is greatest in knowledge based firms, as in professional services or some high tech industries: it often forms the basis of competitive advantage for the widely recognised clusters of small co-operating entities – from Silicon Valley to the tie manufacturers of Como and the shoemakers of Varese. It is a powerful source of competitive advantage because it not only is not written down, but cannot be, and therefore is particularly difficult to replicate. So part of the importance of information technology is the social context in which information is exchanged.

In summary, the effects of the information age on competitive advantage will be to

· increase the extent to which competitive advantage arises from branding and reputation

· lead to rapid growth in intermediary services, concerned with the packaging, interpretation, selection and management of information

· increasingly favour firms and groups of firms whose competitive advantage is centred on the exchange of tacit information

4. The changing nature of products and value added

At the beginning of the twentieth century, the largest industrial companies in the world were US Steel (now USX), Exxon (then Standard Oil of New Jersey), J & P Coats (a textile manufacturer, and Pullman, which made railcars. Other leading manufacturing companies included Singer, International Harvester, and Armstrong-Whitworth. The equivalent list today includes Merck, the pharmaceutical company, Coca-Cola, Intel, Philip Morris and Microsoft.

This simple comparison exemplifies important and continuing changes in the nature of contemporary capitalism. At a very elementary level, the products of Merck, Coca-Cola, Intel, Philip Morris and Microsoft are all things you can carry around with you: US Steel, International Harvester and Pullman made products you could climb inside. The proportion of the value of output which is accounted for by raw materials has fallen dramatically. So has the proportion of that value accounted for by the value of physical labour. The major part of the value added by Merck, Coca-Cola, Intel, Philip Morris and Microsoft is established by design, research and development, intricacy of manufacture (whether controlled by robotics or human agency) and from branding.

Notice that this is true within the manufacturing sector itself. The shift in the structure of output from manufacturing to services, is often noted with concern, both in aggregate and in individual countries, but it merely parallels a similar change in the nature of manufacturing. While Merck, Intel, Coca-Cola and Philip Morris are all classified as manufacturing businesses, few workers in these companies go home in the evenings exhausted by physical labour: in contrast to the former employees of US Steel, Pullman or International Harvester. There is surplus capacity of undifferentiated manufacture of commodities, such as steel and mass-market automobiles: production of these goods is migrating to the developing world, and there are few profitable companies in these sectors.

Earlier I noted that the effect of liberalization in many industries was to allow firms based on genuine competitive advantage to outpace those based on advantages inherited by history. At the same time. the nature of those competitive advantages is changing too.

Changing patterns of output feed into the growth of, and changes in, competitive advantage. The leading manufacturing firms of a century ago produced largely undifferentiated products and were distinguished from their competitors mainly by their size. In so far as they held competitive advantages at all, they came mainly from scale economies and the market power that went with them.

The strength of firms like Merck, Intel, Coca-Cola, Microsoft and Philip Morris rests only incidentally in their size. In each case, it is clear that their size is the product of their competitive advantage, not the cause of it. And these competitive advantages rest in brands (Coca-Cola and Philip Morris), innovation and patent protection (Merck and Intel), control of standards (Microsoft). None of these knowledge based factors were of material significance for the market leaders at the beginning of the century.

5. The changing nature of competitive advantage

In general, competitive advantages are the product of distinctive capabilities – characteristics of firms which are hard to replicate even when competitors realise the benefit which they confer on those who possess them. In the main, factors such as size of market position do not form the basis of sustainable competitive advantage because they are replicable by firms which do not yet have the same size, or have not yet occupied the same market position, but which do have competitive advantages which are relevant to these markets.

The brands of Coca-Cola and Philip Morris, the innovations of Merck and Intel, and the exclusive rights which Microsoft holds to the MS-DOS operating system and the graphical user interface based on it are distinctive capabilities held by these firms. There are non replicable sources of competitive advantage. Historically, for many of the firms discussed above, competitive advantages were based on strategic assets – market power based on monopoly, with competitors excluded through the dominance of incumbents or statutory protection, or through trade restriction of a formal and informal kind, or from exclusive access to scarce factors. Competitive advantages of these kinds are much diminished, and, as globalisation increases, will continue to diminish.

While innovation was traditionally a source of competitive advantage, and remains so, it is increasingly the case that innovation has a short life cycle, is readily transmitted, and is easily replicable. The main exceptions to this are where intellectual property rules give strong protection to innovation, as in pharmaceuticals, although even here it may be that changes in the nature of the industry – with several firms developing products on the basis of a common body of fundamental research – will diminish this. Few product innovations can be protected from replication for long, and innovations in the financial services sector are generally immediately replicable. Often what appear as competitive advantages based on innovation are in fact competitive advantages which allow more effective exploitation of innovation, such as brands and reputation.

More commonly, competitive advantage now rests on aspects of the structure of relationships within and around the firm. Typically, the specific benefits of these relationships come from flexibility and co-operative behaviour, information sharing, and the creation of organisational knowledge. Such relationships may be with customers, sometimes through impersonal relationships such as brands and reputation, and sometimes through personal involvement: with the firm itself typically through organisational routines and the accessing of firm-specific knowledge; sometimes between firm and suppliers, as with sustained trust-based component provision or through the development of a labour market reputation which makes a firm attractive to certain types of employee; or among networks of firms which effectively share a common regionally based body of skills and knowledge.

6. Rents grow

The increasing rewards to be gained in the global market from certain competitive advantages at an individual and corporate level have consequences for degrees of inequality within societies.

Rents are the returns to competitive advantage. They are the difference between the earnings of a firm, or an individual, and what that firm or individual could obtain in their best alternatives. As competitive advantages became more significant, rents grow. As the market in which these competitive advantages can be deployed expands, rents grow further. In this way, globalisation and competitive advantage interact to widen the differentials between individuals and between firms.

The growth of international trade among developed countries has led to widening income differentials and to higher levels of unemployment everywhere. The broadening market generates greater demand for individuals whose abilities are hard to replicate – for example computer programmers, opera singers and biotechnologists. So the rewards these individuals can earn from their talents are bid up. Unskilled individuals are correspondingly becoming more easily replaceable because they have no unreplicable skills to offer. They can succeed in the labour market only by competing on price alone and accepting lower rewards for their labour. Although the connections between trade liberalisation and growing inequality and rising unemployment are controversial, the pressures described here are difficult to dispute.

What is true for individuals is true at the corporate level too. Firms with abilities which are hard to replicate – Microsoft with its proprietary standards, Italian fashion houses – find their rents bid up. Meanwhile, governments have absorbed low-skilled workers into the public sector in the vain attempt to arrest the decline of firms and even of whole industries, for example steel, automobiles and airlines, which have no competitive advantages.

This shift reinforces the value of competitive advantages at the corporate level. And as competitive advantages depend less on size, engineering and strategic assets, and more on organisational structures and on knowledge, competitive advantage becomes relevant in industries where firms had not previously thought in these terms. The recent mergers of the accountancy majors are instructive here. Audit is an easily imitated, undifferentiated, locally-produced product which corporations buy because they are obliged to. Where firms are operating in unfamiliar environments, an accountant’s brand name empowers it to add value relative to its other local competitors by taking advantage of the caution of these hesitant cross-border clients. Thus branding becomes dominant in an industry where producers traditionally regarded advertising as unethical.

The privatisation of public utilities has created a host of brands in areas where people have historically been uncomfortable with them. There will be opportunities in the next century to pioneer global brands in activities such as education. Many existing markets then present opportunities to companies whose distinctive ability lies in its ability to deliver a consistent product, to meet changing consumer needs and earn a reputation for this which is tied to a global brand.

7. Towards hollow corporations

This creates the potential for a radical shift in the relationship between manufacturing processes and the organisation of firms. If the rents associated with an activity derive from a competitive advantage based on brand or reputation or patent or standard or knowledge, it is only necessary for the firm to manage a small part of the process to earn the whole of that rent. Thus its share of the value added in the process may be completely disproportionate to their share of the process judged in terms of employment or other direct measure of the scale of the activity. This is the phenomenon of the hollow corporation

The profits of corporations like US Steel came from the sheer size of their operations. Today the position of firms focused on competitive advantages is very different. The largest corporations of the earlier years of the century thrived on low unit costs generated from long mass-production runs. General Motors’ dominance was based on economies of scale and its centralised management. But nowadays many successful firms do not necessarily build the products sold under their names, though still extract the rents from manufacturing processes that they do not control.

Coca Cola has control only of the syrup used in Coke, Nintendo owns the right to the standard in games consoles. Glaxo’s share of the value of Zantac, the anti-ulcerant, lay in its patent. Microsoft’s strength is not in its manufacturing capacity, but its proprietary standards in MS-DOS and Windows software, through which it adds value to the manufacturing capacity of others. Benetton adds value by co-ordinating of the manufacturing process. And so the hollow corporation thrives: none of these firms need to employ many people to make substantial profits.

The lessons here is not just that you do not make money without adding value. It is also that there are many more opportunities to add value, but through control, rather than ownership, of the value chain. In a fully competitive market, manufacturers, distributors, retailers and middlemen have the opportunity to earn in equal proportion to the cost and value of the services they provide. Vertical integration thus adds to profits only to the extent that it offers access to a new source of rents.

And since there are few opportunities for scale economies in the production of undifferentiated goods, there are going to be fewer rather than more industries in which control of the manufacturing chain is a source of added value. The largest companies of the next century will more resemble Microsoft, and add value to the manufacturing processes of others, than General Motors. Companies can concentrate solely on those activities in which have competitive advantage – they can float other activities away to other companies enjoying competitive advantages they lack.

Conclusions

To return to the central task of this paper, which of the changes underway in contemporary capitalism that are permanent? Which are ephemeral?

We can consider the changes under way in terms of three categories.

The evolving significance of national boundaries

· National boundaries do not become irrelevant. Their significance erodes as markets become more global and firm operations more dispersed. But the most persistent impact of nationality is on the cultural identity of corporations, which is often to an important degree bound up with the sources of competitive advantage. This will erode only slowly, and it may not be particularly desirable that it should erode.

· Technological advances in information processing do not necessarily mean that geographical concentration of firms will become less prevalent. Informal structures of relationships between firms which allows that sharing of tacit knowledge with trust acquaintances through face to face meetings is source of competitive advantage of growing importance.

· Liberalisation will have an effect only slowly in many industries where an advantage belongs to incumbents, but firms with genuine competitive advantages will increasingly be able to seek greater rents from their abilities in widening markets.

· Ultimately, competitive advantage replaces history and geography as organising principles of industry structure.

Scale – myth and reality

· It is not generally true that liberalization, globalisation and the explosion of information makes industries either more concentrated or more fragmented. The effects of liberalization on a particular industry depend upon the specifics of technology and the nature of supply and demand in that sector. The only generalization is that competitive advantage replaces commercial advantages inherited from history.

· Whilst it has become more important for firms to possess competitive advantages, many historic competitive advantages, in particular economies from scale, have diminished in importance because of the growing differentiation of products and the degree to which knowledge is embedded in products or important in distinguishing them.

· Firms can exit from activities in which they lack competitive advantage, whilst still adding value to a small part of, or even controlling, the manufacturing process.

· That firms do not employ many people to engage in arduous labour is not, in itself, a worry. A growing source of added value is tacit knowledge – both in terms of turning technical expertise in to commercial success, and in terms of organization techniques. However this increasing focus of firms on their particular competitive advantages rather than on whole process may reduce employment opportunities in advanced economies.

The information revolution

· People lack the mental capacity to process the growing mass of information available to them. The growing complexity of the marketplace has put a premium on the signalling devices of brands and reputation. It also will generate more intermediary services to process information about products.

· As the information economy progresses the knowledge content of products increases relative to their physical content. The increased complexity of such products, and their widening range, increases the need to provide product information to customers. Both these factors influence the structure of competitive advantage of firms.

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