The Export Competitive Advantage Differences Between High and Low Performance Companies: The Case of Turkey

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5 The Export Competitive Advantage Differences Between High and Low Performance Companies: The Case of Turkey Mehmet Haluk Köksal, American University of Beirut, Lebanon Engin Özgül, Dokuz Eylul University, Turkey Delivering higher value to customers is vital for success in international markets. Companies operating in export markets should create competitive advantages derived from company skills, and resources. This study investigates the competitive advantages, resources, and skills differentiating high- and low-performing exporting companies in Turkey. Its findings show that brand image, product quality, and the cost of goods sold have a strong impact on company performance in export markets, as do export managers skills, experience, and knowledge. The study revealed that being customer oriented differentiates successful companies from unsuccessful ones. Some conclusions and implications for export managers are offered. Introduction Exporting became an important internationalization strategy for companies and national economies in the world markets with the expansion of globalization and economic integration among countries. It is claimed by many researchers that exporting positively affects levels of employment, foreign exchange revenues, industrial development, and national prosperity (Leonidou & Katsikeas, 1996, p. 518; Morgan & Katsikeas, 1997, p. 667) whilst also improving the performance of companies profitability, sales volume, and market share. Facilitating exports is especially vital for developing countries, like Turkey. Improving exports is given special attention in developed countries. Promoting exports for Turkish companies has a huge importance for the Turkish economy since it has many diverse manufacturing sectors potentially suitable for export, whilst generally having a continuous trade deficit and recovering from two major economic crises November 2000 and February In 2005, total export value was $73,389 million and import value $116,537 million. The trade deficit in the same year was $43,147 million and the balance of trade 63.2 percent (SIS, Foreign Trade Annual Developments). Therefore, it is important for companies to understand the effect of competitive advantages derived from resources and skills on the company s performance in international markets. It would also help the national economy to become stronger and competitive in the world. Competitive Advantage of Exporting Companies It is seen that some of the companies are more successful than others in many industries. The literature explaining the performance difference between the outperforming companies and others, and the factors providing this superior position for those companies in the market goes back to early days. Developments in the strategic management during the 1980s concentrated on the relationship between the strategy and macro environment. The most outstanding examples of these studies were ones analyzing the industry and explaining the macro environmental factors effecting competitiveness of the company by Porter (1980). Although company resources together with value chain were linked with macro environment of the company, the emphasis in these studies was given to macro environment in the determination of company strategy (Nanda, 1996, p. 97). This approach has been criticized because it neglected company resources and became product-market oriented. The competitive advantage model based on resources started to be developed with the studies by Wernerfelt (1989) and Rumelt (1984) that built on Penrose s study (1959). The competitive advantage model based on resources states that the company s internal environment based on resources and capabilities is as important as the macro environment in the achievement of strategic targets. Porter (1980) urged companies to build sustainable competitive advantages. A competitive advantage can be defined as a position of superiority in an industry or market in which a company develops in comparison with its competitors. Competitive advantage is a company s ability to perform in one or more ways that competitors can not match. However, such superiority depends on how customers perceive it since they are the ones that make a company s operations and progress possible. Therefore, companies should compete on superior customer value 53

6 delivery through making the best usage of their resources and capabilities (Srivastava, Fahey & Christensen, 2001, pp ). Companies can create three types of competitive advantage through employing resources and capabilities. Porter (1985) proposed generic strategies by which a company can develop a competitive advantage and create a defensible position in the marketplace. These strategies are: overall cost leadership, differentiation, and focus. Bharadwaj, Varadarajan and Fahy, (1993, p. 86), expressed that resources and capabilities provide competitive advantages for companies by leading to either lower costs or differentiation. They are essentially ideal types and difficult to achieve. However, although it is generally suggested that companies should focus on only one of the competitive strategies, they can find themselves in a position of having both cost and differentiation advantage. Day and Wensley (1988) suggested a framework to explain the nature of competitive advantage. They divided the concept into three components: sources, positions, and performance outcomes. They conceptualized the concept in terms of a chain, starting from sources of competitive advantage, leads to a positioning in the market, and performance consequences of positioning. Hunt and Morgan (1995) indicated financial, physical, legal, human resources, organizational, communications, and relational resources as the sources of competitive advantage. They added learning mechanism into their approach later on. According to their approach, learning is the feedback between financial performance of a company and resources (Hunt and Morgan, 1996). Hooley, Greenley, Cadogan, and Fahy (2003) advocated a model which includes marketing support resources, namely market orientation; and managerial capabilities; and market-based resourcescustomer linking capabilities, market innovation capabilities, human resource assets, and reputational assets. These in turn affect the overall financial performance through creating superior customer performance, and creating superior market performance. Barney (1991) claimed that company resources and capabilities should be valuable for the improvement of company effectiveness and productivity and not to be acquired, copied, and easily strategically substituted by the competitors. Companies should continuously invest in resources and capabilities since they can be depreciated by the competitors attack. Morgan, Kaleka and Katsikeas (2004) refer resources to firm-controlled asset stocks that constitute the raw materials available to the firm s export venture business units. Being able to provide financial resources with the appropriate conditions creates competitive advantage through decreasing costs, developing better products, and providing a better service to customers in the export markets. Appropriate financial resources enable companies to make the necessary investments for the activities designed to give superior service in the export markets. Large companies can allocate more and qualify human resources for better service offerings. The experiential resources more experience with exporting and export markets decrease the production cost owing to economies of learning, and they also decrease the selling price to customers. Experiential resources lead to better products through having good market and customer information. The more experienced export companies can provide better service before and after sales. The manufacturing capacity of companies is one of the indicators of economies of scale. The export potential for large companies is generally high due to their scale. Large scale can provide a competitive advantage through lowering the price of their export products (Knight & Liesch, 2002, p. 982). Physical resources are the tangible assets, other than labor and cash, that are used by firms to produce and market goods and services. Having superior physical resources for exporting companies, such as modern equipment and technology, has a positive impact on lowering production costs. Superior physical resources also lead to new and more advanced products and providing better services to customers, such as speed and reliability in the distribution of products. Morgan et al. (2004) define capabilities as the organizational processes by which available resources are developed, combined, and transformed into value offerings for the export market. Being market oriented acquiring and disseminating market information inside the company and developing strategies according to information collected from the export markets enhances company performance in the marketplace. For example, collecting foreign market information lowers the costs and also provides information for better products and services. Ethiraj, Kale, Krishnan and Singh (2005, p. 32) explain that as software companies work with their clients over time they develop several client-specific patterns of interaction that become cost-effective through repeated interactions. Companies collecting information on export markets can develop products that satisfy customers needs better than the competitors (Harmsen & Jensen, 2004, p. 543). Developing and maintaining close relationships with the customers facilitates the understanding of customers needs in export markets. Designing products that can be easily manufactured using new technologies decreases production costs. Companies new product development capabilities have a significant impact on the competitive differential advantage through developing products tailored for the export markets (Bharadwaj, et al., 1993, p. 89; Harmsen & Jensen, 2004, p. 543). Harmsen and Jensen (2004, p. 544) found that product development is seen as the most central competence in the Danish food industry. Having good relationships with suppliers has a positive impact on the manufacturing of more quality products for the export 54

7 markets. Likewise, having good relationships with suppliers can increase and maintain the service level given to the customers through providing inputs on time. Methodology Purpose The purpose of the study is to determine the export competitive advantage differences between high- and lowperforming companies. In order to investigate the differences between the companies, the study examined the competitive advantages, resources, and skills leading to competitive advantages in the marketplace. The effect of each competitive advantage, resource, and skill on company performance was analyzed separately in order to identify the discrimination effects of each variable. Sample and Data Collection The research sample consists of manufacturing companies in the Aegean Region, Turkey. The reason for choosing the Aegean Region is that it is Turkey s second most important region in terms of the number of manufacturing companies and also export volume. It was thought that researching this region s export competitive advantages would give more insight to those individuals and institutions concerned with the subject and be of direct benefit to them. The database of the İGEME (Export Promotion Center of Turkey) was used to determine the population frame for the research. It was determined from İGEME s 2000 list that 350 Aegean Region companies were exporting. After sending the questionnaire to all these companies, 98 were completed and returned, therefore, the study reached an almost 28 percent response rate. Measures The face-to-face interview method with the companies export managers using a pre-tested questionnaire was employed. The model developed by Kaleka (2002) was used in the preparation of the questionnaire, the first part of which was related to demographic information about the companies. In the second part, the managers were asked to assess their companies export competitive advantages such as brand image, quality, packaging, product accessibility, and cost per unit of production compared to their biggest competitors in the export market on the 5 point Likert scale (5: better,, 1: worse). This section included a total of 11 competitive advantage items. The third part of the questionnaire asked managers to indicate their companies level of export skills compared to their biggest competitors in the export market on the 5 point Likert scale (5: better,, 1: worse). This part of the questionnaire covered 12 items such as making contacts in the market, reaching important market information, developing new products, improving existing products, and developing close relationships with suppliers. In the fourth part of the questionnaire respondents were asked to rate their companies resources allocated to exporting activities, such as total financial resources of the company, export managers exporting experience and knowledge, use of modern technology and equipment, number of export employees out of total employees, number of export markets served by the company, and so on, compared to their biggest competitors in the export market on the 5 point Likert scale (5: better,.., 1: worse). This section included ten resource items. The questionnaire concluded by asking the managers to indicate their companies performance compared to their biggest competitors in the export market in terms of sales, market share, and profit on the 5 point Likert scale (5: better,..,1: worse). Findings Most of the companies in the sample are years old. More than 40 percent of the companies had over 99 employees, and 35.7 percent had Of the companies, 30.4 percent have been carrying out exporting activities for 5-9 years, and 28.3 percent for years. Most of the companies (57.3 percent) included in the research are exporting their products to between 1-5 countries and 25.1 percent are exporting to between Just over half the companies (51 percent) allocate 1-20 employees to exporting activities, and 36.9 percent of the companies allocate more than 60 percent of total financial resources to it. Discriminant analysis was employed in the analysis of the data since the purpose of the study is to determine the competitive advantage, resources, and skills that differentiate the high-performing companies from the unsuccessful ones. The stepwise method and procedure was preferred in order to determine the discriminatory power of the variables. Before applying discriminant analysis to the data, reliability analysis was employed to the groups of variables and it was found that they all represent high values. The reliability analysis results are given in Table 1. Table 1. Results of Reliability Analysis Group Variable No. of Variables α Competitive Advantage Cost Product Service Skills Informational Customer Relationship

8 Product Development Supply Chain Resources Experimental Physical 1 - Finance Scale Performance It was determined that the discriminant equations related to three dimensions were found reliable; and it was identified that some sub-dimensions can differentiate successful companies from unsuccessful ones. According to the discriminant analysis results provided in Table 2, brand image in the international markets, product quality, and cost of products sold are the factors affecting the companies success abroad. In the same vein, the capabilities differentiating successful companies from unsuccessful ones are being able to understand customers needs and wants, building close relationships with them, and reaching appropriate suppliers. The resources determining the success in the export markets are the export and other managers export knowledge. Table 2. Summary of Competitive Advantage, Skill, and Resource Attributes Differentiating Firms with a High Level of Performance from Firms with a Low Level of Performance Number of Variables Canonical Correlation Correctly Classified % Wilks Lambda* Competitive Advantages Product quality.669 Brand Image.660 Cost of goods sold.646 Skills Understanding customers needs and.767 requirements Development of close relationships with.751 customers Reaching adequate sources of supply.703 Resources Export managers exporting experience and.759 knowledge Other departments managers exporting.756 experience and knowledge * p<0.001 In the determination of the relative importance of discriminating variables given above, as the indicator of discriminatory power, it is not advisable to rely on the standardized power of the variables (Hair, Anderson, Tatham & Black, 1995). Standardized coefficients only allow an ordinal interpretation of variable importance. The coefficients are not appropriate in assessing the relative discriminatory power of the variables included in the analysis (Green, Tull & Albaum, 1988, p. 524). As a result of the limitations associated with the standardized coefficients, there have been suggestions to use alternative methods. For example, Hair et al. (1995) suggested the use of discriminant loadings (i.e. the correlations between each independent variable and the discriminant function) as an alternative approach to evaluate relative discriminatory power. Green et al. (1988) recommended a more appropriate measure of relative discriminatory power or importance by using the following equation: I j = K j ( X j1 X j 2 ) Here: I j = the importance value of the jth variable K j = unstandardized discriminant coefficient fort the jth variable X jk = mean of the jth variable for the kth group In addition, Green et al. (1988) suggested the computation of the relative importance weight of each variable to provide a more valid and useful interpretation of the relative discriminatory power of the independent variables. The relative importance weight of a variable 56

9 shows the importance of the variable to the sum of the importance values of the variable (Green et al. 1988, and Ogunmokun et al. 2005). The relative importance (R j ) of a variable can be determined by the following equation in Green et al. (1988) and in Ogunmokun et al. (1999): R I j j = n j= 1 I j Using the above formula, the calculation performed to estimate the relative importance of the discriminating variables identified between high- and low-performing firms are presented in Table 3. Table 3. Relative Importance of Values of the Competitive Advantage, Marketing Skills and Resources Which Discriminate Between the High Performing and Low Performing Firms Standardized Coefficient Unstandardized Coefficient (K j ) Importance Values (I j ) Differences in Group Means (X j1 -X j2 ) Relative Importance (R j ) Competitive Advantages Brand Image Product Quality Cost of goods sold Skills Understanding customers needs and requirements Development of close relationships with customers Reaching adequate sources of supply Resources Export managers exporting experience and knowledge According to Table 3, brand image abroad is the most important differential variable in the competitive advantages, which explains almost 40 percent of the total discrimination. Therefore, having a good brand image in international markets can create a striking competitive advantage. The second important competitive advantage is the quality of export products perceived by the customers. The companies stressing product quality provide more successful results in the marketplace than others, and the product quality variable explains 36 percent of the total discrimination. The third important competitive advantage is related to the companies cost structure. Selling price to customers significantly differentiates the performance of the companies and explains 24 percent of the total discrimination. The ability to understand customer needs and wants is the most important variable explaining 60 percent of the total discrimination. Another significant capability is the development and maintenance of strong relationships with the customers in the international markets and this explains 53 percent of the total discrimination. These variables with high relative values reflect the requirement for market orientation as the business marketing approach in the export markets. Just one variable, the export managers knowledge, explains all the discrimination. This result spotlights the importance of the companies human capital. Conclusions, Limitations, and Directions for Future Research The study examined the export competitive advantage differences between high- and low-performing companies. According to the model in the study, companies should create competitive advantages derived from specific capabilities and skills in order to compete in international 57

10 markets. The study attempted to identify the competitive advantage factors differentiating successful companies from unsuccessful ones. The brand image was found to be the most important competitive advantage factor leading to success in the export markets. Perception of the brand by foreign consumers certainly makes a difference between high- and low-performing companies. Another significant competitive advantage factor is the product quality. Developing and marketing high quality products differentiates the successful companies from unsuccessful ones in the international markets. The last important factor creating competitive advantage is the cost of goods sold in the export markets. It indicates that the cost effectiveness of the company s operations leads to lower costs. This inevitably gives the company more pricing flexibility, which is important for competing in international markets. The study also investigated the skills and resources differentiating high performers from low performers in the export markets. The strongest company skill is the ability to understand consumers needs and wants. The second is developing strong relationships with the consumers in the marketplace. Hooley, et al. (2003) found that customerlinking capability leads to superior customer performance, and also customer-linking capability is strongly associated with company performance. Developing strong relationships with customers in the export markets provides a cost advantage (Yee & Ogunmokun, 2001, p. 272). These skills complement each other and show that the companies should adopt consumer- and market-orientation approaches in their operations in the export markets (Ling-Yee, 2004; Cadogan, Diamantopoulos & Siguaw, 2002; Akyol & Akehurst, 2003; Rose & Shoham, 2002). The study findings revealed that the export managers knowledge is the important resource that differentiates successful export companies from unsuccessful ones. This result indicates that export managers knowledge about markets and operations is a very important factor for success in the international markets. Ogunmokun & Ng (2004) supported this finding with their study that marketing expertise is one of the discriminating factors between high- and low-performing companies. Entering into the different markets and competing in those markets requires various managerial skills, experience, and knowledge. Companies should focus, therefore, on enhancing the exporting skills and experience of the managers. There are some implications of the findings for managers. First of all, companies should build and maintain a good brand image in the international markets. Second, they should develop and sell high quality products. Third, they should also be effective and productive in their operation in order to lower the cost of the products sold in the export markets. Companies should build adequate resources to create competitive advantages in the international markets. They should continuously invest in their export managers skills and experience base. For export skills, there are also some implications for the company managers from the study findings. First, they should invest in the informational skills of the company. This means that companies should be market-oriented and collect, disseminate, and react to the information they garner from the export markets. Companies should be customer-oriented as well as market-oriented. Market scanning, and developing and maintaining good relationships with foreign customers have a positive and strong effect on the performance of the company. The research has some limitations. First, it was carried out only on companies operating in Turkey s Aegean Region. 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