This paper provides a strategic analysis of the manufacturing industry. To concretize the analysis, Good Mark, a manufacturing company in Hong Kong is used. The strategic assessment looks into the manufacturing industry trends based on a PESTEL Model. It further analyses the strategic groups in the manufacturing industry using Porter’s five forces model. The second part of this paper compares the resource-based view and the design school model or understanding of competitive advantage.
The manufacturing industry is largely money and labour intensive thus only companies or individuals with access to huge capital venture into the industry. Politicians and other market players have a lot of interest in the industry thus very many manipulative forces determine operations. However, a competitive advantage in this industry is depended on technological superiority. As discussed in the last section of this paper, building internal capacity or capabilities is the surest way of building a competitive advantage. Both the design school model and the resource-based view of competitive advantage are valid but the resource-based strategy building is more sustainable than a design school-based strategy process.
Industry analysis and Strategy
The strategy is generally understood as planning for success. Strategy in the organization consists of making both midterm and long term plans and looking for ways of guaranteeing the same (Ireland, Hoskisson & Hitt, 2008, p. 16). Therefore, the basic aim of the strategy is ensuring an organization achieves desirable results both in the midterm and long term. Success in the future is largely dependent on decisions or choices made in the present.
Different approaches or theories on how to go about strategy have been formulated. As presented by Whittington (2001), there are four major categories of strategic approaches. The four schools or theories of strategy, namely; classical, evolutional, process and system have different assumptions on which to base a strategic decision. Whichever the approach to strategy, the motivating end normally is that a company is able to fair favourably against competition; in delighting customers (Yergin & Stanislaw, 2002, p. 13). The different approaches to the strategy may proffer different outcomes; however, the push for strategy is prosperity, stability, or general competitiveness of a company.
For classical thinkers in the field of strategy, good planning by managers is the sure way to attaining a competitive advantage. Evolutionist thinkers define strategy as the capacity to meet correctly with environmental demands; Strategy provides an environmental fit and it is not about long term plans (Whittington, 2001, p. 4). Processualists agree with both the classical theorists and the evolutionists. They argue that strategy requires planning and survival propensity in an environment characterized by change. However, none of the two approaches in itself is capable of providing the optimal strategy (Kotler, 1997, p. 231).
Systemic strategy theorists posit that strategists are always informed by factors beyond profit maximization. The social context in which managers operate determines the driving motives in designing strategies. For instance, some managers design strategies that fulfil personal egos, serve nationalistic interests, or that can help them amass managerial power (Whittington, 2001, p. 5). Whichever the motivation to seek a strategy, industry analysis is an inescapable part of the strategic process (Rumelt, 1991, p. 45).
Manufacturing Industry in China: Industry Trends
To perfectly analyze an industry, the different factors that affect the industry have to be looked into. One easy way of identifying and analyzing factors affecting an industry is using the PESTEL or Global model of industry analysis. The PESTEL model requires the analyst to identify all the political, economic, social, technological, legal and economic factors affecting an industry (Ireland et al, 2008, p. 136).
China’s development is attributed to its robust manufacturing industry. Jilin Province in China is one of the big industrial centres in the whole of China. The manufacturing industry has been taking shape gradually. This industry became more visible and started to contribute more substantially to china’s gross domestic product in the late 1940s. By the late 1950s, the manufacturing industry in China had taken shape and was a concern in all the economic plans of the country.
Politics plays a critical role in the development of the manufacturing industry in China. Political decision made and alliances reached due to diplomacy efforts encourage the growth of certain sectors in the manufacturing industry. The policy plans by politicians or rulers are what laid the ground for the establishment of manufacturing industries. The first sector of the industry to emerge was automobile-related manufacturing. Later the metal-related manufacturing and basic chemical industry sectors emerged. Most of the first manufacturing industries were set up by the government and remained in the control of the government for a very long time.
Another role of politics in the development of manufacturing has been that of protectionism. China has been accused on several occasions by foreign business operators of being protectionist in its attitudes and policies (Johnson, 2009). The governments have been encouraging the Chinese to ‘buy china’ and shun foreign products or imports. Further, the government has invested heavily in stimulus packages that aim at bolstering Chinese manufacturers. This has helped towards the development of local industries and running out of any foreign interests in China.
These huge investments in the manufacturing industry are motivated by a political ambition; developing China into a vibrant superpower of sorts. The ambition to become a superpower due to economic and technological power has led to bad political blood between China and other powers e.g. the USA (Zhang, 2001, p. 112). International politics affects china’s industries. International political and economic struggle has led to a latent branding of goods made in china as fake or of poor quality.
Economic policies adopted have shaped trends in the manufacturing industry. For instance, in the early 1980s, most state owned manufacturing corporations were in trouble or collapsed due to adoption of market economy oriented policies. The near collapse of manufacturing industries in the early 1980s led to government instituting economic measures aimed at reviving the industries. Stimulus packages were designed and billions of dollars were pumped into re-innovation efforts. These efforts led to a turn around leading to manufacturing companies becoming world competitors by the year 2000 (Zhang, 2001, p. 72).
Social factors also affect trends in the manufacturing industry in a big way. Although the manufacturing industry is capital intensive, easy access and attitudes of man power makes a big difference. A great deal of development in china has its hinge in the socialist policies that facilitate the tapping into the great human capital readily available in china. Although, there was a shift from state ownership of companies in late 1970s to more private ownership, china has remained a socialism oriented country (Tucker, 2007, p. 1). The socialism pegged policies by the communist government have led to in-calculation of a patriotic spirit across the nation. Coupled with the ‘buy China’ campaign efforts, industries in china have grown at a phenomenal rate.
Technology plays a critical role in determining competitiveness in the manufacturing industry. The first manufacturing industries established in china were state owned. However, most of these industries did not perform well because they were technologically challenged. To revive and enable growth, government stimulus packages have been geared towards technical upgrading in manufacturing firms. Innovation and technological benchmarking has been at the heart of manufacturing firms’ growth.
One of the issues threatening growth of china’s manufacturing industry is global environmental concerns. A report by Pricewaterhousecooopers in 2006 indicated that carbon emissions from manufacturing activities were the chief contributors to global warming and climate change. China was pointed out at the greatest contributor to carbon emissions into the atmosphere (Pricewaterhousecoopers, 2006, p. 1). China as a country is accused of having been the major stumbling block at the Doha talks on climate change (Pomeroy, 2010). Going into the future, as climate change continues to affect and define business, going green will no longer be optional. The demands and calls that companies go green are likely to affect the development of Chinese manufacturing industry.
Legislation plays a critical role in determining what an organization can do and within what framework. Through legislation the government in china has been able to protect its manufacturing industries. Further, through legislating, investment in the industry is facilitated; an enabling environment for its thriving is built. However, internal operations in china have often prompted legislation in other countries that hurt the business potential of manufacturing firms in china. For example, in response to perceived currency manipulation by the Chinese government, the US passed legislations that would directly affect value of Chinese exports to the US.
Key Players in the Manufacturing Industry: Five Forces analysis
The manufacturing industry has many players, within and from without, that affect operations. Using Good Mark Industrial Limited, the role of different players in the manufacturing industry becomes clear. Good Mark is a manufacturing company based in Hong Kong (Good Mark Industrial Limited, 2007). The company manufactures plastic molds and mold decoration. The company also assembles electronic appliances or components. The company has been growing steadily since its inception in 1988 and currently boasts of robust operations in plastic molding, injection molding, injection machines and secondary processing activities such as mold decoration (Good Mark Industrial Limited, 2007).
Good Mark has enjoyed growth because the threat of substitute products is relatively minimal. It enjoys relative monopoly in its area of operation and manages to export to such countries as Japan and Malaysia. Some of the substitute products are made outside china and due to the ‘buy china’ campaigns, many people shun imports.
The threat of entry of new competitors in the manufacturing industry is minimal. This is because unlike other industries like hospitality, manufacturing is capital and technology driven. For a company to enter into manufacturing business, it needs huge capital and relevant technology. The new entrant threats that can worry Good mark are international brands from other countries like the US. However, due to protectionist government practices in china, such threats are minimal.
There are a number of competitors in the manufacturing industry. However, competitive rivalry is not as high in this industry as compared to say the hotel industry. In the plastic molding sector of the manufacturing industry, Good Mark has a number of rival companies. However, competition rivalry is mitigated that products produced by the different countries are totally differentiated. Each company has its own designs that are patented.
Different suppliers to the manufacturing industry have different bargaining power. Many manufacturing firms are well diversified meaning that they rely on many suppliers for different commodities. However, in the plastic molding industry, suppliers of say plastic raw materials are as few as the companies that do plastic molding. Therefore, supplier power and buyer power of the firms squares out somehow.
Considering buyer power with regard to Good Mark customers, their bargaining power is increased by variety in the market. However, due to product differentiation each company in the industry offers unique goods. This somehow mitigates buyer power in the industry.
Threats and Opportunities That Confront Firms in the Industry
Most manufacturing industries in china are still growing and expanding (Ruoen & Manying, 2002, p. 108). Good Mark as a company has continued to grow and is in the final stages of growth. The growth thrust at the moment lies in the internationalization strategies that most companies have adopted. Good Mark as a company has adopted the exportation strategy to internationalization. Most Chinese manufacturing companies have also adopted internationalization through exportation. Internationalization is one major opportunity area for Chinese firms. At the moment, all indicators show that China is focused on third world countries. By bolstering trade with third world countries that import much of manufactured products, sales will increase.
Another opportunity is occasioned by increasing technological advancement that helps processes in the industry. For example, through application of information technology strategies, manufacturing industries in china are able to reach customers globally. Good Mark Precision Industrial Limited on its website provides an enquiry form that customers can use to get more information about its products. Information technology applications ensure they are getting relevant feedback from customers and other interest groups.
Despite the opportunities for growth occasioned by internationalization and technological advancement, most Chinese industries are under the threat of intensified global competition. Countries like the US, having realized the growing economic potential of china are increasingly becoming adversarial in their trading patterns.
Another threat is posed by environmental concerns due to global warming. Unless other strategies of dealing with world climate concerns are adopted, Chinese firms growth will be affected in a big way. There is a likelihood of boy cots targeting Chinese products on environmental grounds. Finally, manufacturers use raw materials which are increasingly getting depleted. Energy conservation and finding sustainable raw materials sources is a key concern for most 22nd century firms.
Design School Model
The design school model or approach to strategy formulation aims at creation of a perfect fit that would help navigate the throes in the external environment. This school aims at gearing organization towards having every appropriate response to the external environment. There are different shades of the design model approach to strategy. However, generally, the market should determine the kind of responses an organization offers. The planning school focuses on forecasts based on established historical trends to make up road maps to be followed into the future (Mintzberg et al, 1998, p. 88).
The entrepreneurial model focuses on kind of leadership in the organization. For success, the model posits need for visionary and charismatic steps and guidance from an inspired leader. A third shade of the design model school is the positioning school. Theorists in this school advocate for proper analysis of industry and market. All decisions have to be based on well analyzed data (Mintzberg et al, 1998, p. 96). The analysis helps towards being able to position organizations properly in the industry. Other schools in the design model approach focus on growth thinking processes, knowledge management in the organization, power bases in the organization, cultural dictates, situational attributes or contingency or just processes in the organization.
Thinkers in the design model approach to strategic management advocate for close monitoring of the outside environment (Dess &Taylor, 2004, p. 53). They apply such models as five forces by Porter, value chain analysis, SWOT analysis, competitor analysis, Key success Factor monitoring and statistical approaches to problem solving (Dess &Taylor, 2004, p. 57). The models and statistical tools help in analysis and proper forecasting. A key aspect to this approach to strategy, therefore, is environmental scanning. The environment is monitored to identify issues or trends that can define the strategy formulation process.
Basing on the characteristics identified from the external environment, the organization is supposed to align itself accordingly (Kotler, 1997, p. 102). Changes in the external environment occur on many platforms. The changes can be political, economic, social, technological, environmental or legal. Whatsoever the change, a response has to be envisaged that will ensure the organization continues to operate optimally. Some strategies used in response to environmental changes include strategic partnership, diversification, acquisitions, mergers, liquidation or internationalization (Porter, 1980, p. 216). Whatsoever, the change, the strategy formulated has to give the organization a lead in the market.
The most commonly employed strategy is diversification. Diversification is where an organization invests in other unrelated business line for the purposes of mitigating external environment related risks. For example to hedge against environmental hiccups, a flower firm may invest in a dairy firm. This helps so that incase the weather does not favor flower growth, the dairy firm can continue to sustain the company.
Classical theorists and processualists support diversification because they identify it with optimal resource utilization (Grant, 2005, p.76). Systemic theorists identify diversified conglomeration with tendency towards managerial empire building. In case of diversification, classical theorists advise that the functioning of different divisions has to be optimized for efficiency and general competitive edge building. System theorists’ advice that strategists have to consider shareholders’ interest before diversification.
Another critical aspect that design school thinkers focus on is organizational structure and culture. The Organizational structure matters in determining strategy implementation success (Leontiades1987, p178). Evolutionists and classical theorists advocate for changing of organizational structure to match strategic needs. However the success of restructuring is largely depended on industry peculiarity.
Generally, processualists argue that organizations do not just change by decree, a lot of care and patience is required. One way of changing an organizations structure is developing divisions. Multidivisional set ups help in providing a general framework but also allowing for opportunities i.e. being able to effectively diversify (Leontiades, 1987, p. 185). Once division creation is successfully a systematic decentralization is the next logical step. Decentralization is important because, operation costs are reduced as hierarchical transaction costs are eliminated. Decentralization of functions ensure lean operations and closer, efficient management of operations (Whittington 2001, 102).
Resource Based View of Competitive Advantage
A competitive advantage or edge is achieved when a company is able to do things and create value in a unique way that can not be matched by competitor strategies or copied by competition. The source of competitive advantage therefore emanates from what the company has that competition does not have.
The resource based view of firms competitive advantage focuses on the internal capacity in an organization and the related advantages that can accrue the company in the market place owing the internal capability it has (Peteraf, 1993, p. 185). From the resource based view, the whole organization is understood to be a pool of capacity or capabilities. The strategy process aims at in an interconnected way applying an organizations capacity towards desired market presence, profitability and level of operations.
The word resource generally refers to the inputs into operations that are transformed or facilitate transformation of other inputs into valuable outputs. Resources and capabilities may exist in an organization in the form of tangible good or intangible capacities. Resources are best defined along the 5Ms of management i.e. man-hour, manpower, materials, methods, measurement and money. Resources and capacity is defined by an organization employees, capital base, unique skills, kind of methods and measurement procedures, technology (Sanchez & Heene, 2004, p 156).
Another critical point to note is that a competitive advantage is pegged on interplay or how resources are integrated. Single resources, no matter how awesome they are, left on their own cannot provide an organization with a competitive advantage. The competitive advantage is defined at the kind of synergy achieved through proper integration and deployment of organizational resources and capacity.
More importantly, resource based strategist posit that capability out of a capacity is a gradual development. Therefore, the more a capacity is employed and reinforced, the more developed it becomes. The more a capacity is developed, the more it becomes elusive for competition to outwit the organization on the basis of that capacity.
When doing a SWOT analysis based on the resource view of competitive advantage, focus is on strength of resources in the organization and what assets are in the environment that can be roped into the organization. Taking the example of Good Mark again, it has a number of strengths in terms of a well trained work force, equipment and tools. A competitive advantage can be built through ensuring the kind of skills employees have, the equipment and methods of working applied are top notch. It is critical for Good Mark Industrial Limited to continue improving its technological capacity through benchmarking globally.
Research and development are at the center of resource capacity optimization (Porter, 1980, p. 123). Classical theorists link innovation to research and development. Innovation is done with the market in mind (market oriented innovation.) The classical theorists, evolutionists, processualists and systemists, respectively, posit innovation, emergence, efficiency, and imperialism as the key movers in organizational growth (Whittington, 2001, p. 79). The Classical market oriented approach to growth relies heavily on market flexibility as well as organizational flexibility (Whittington, 2001, p. 80). Classical theorists advocate for use of given statistical techniques in strategic decision making. Such techniques include break even analysis, investment appraisal methods and sensitivity analysis (Whittington, 2001, p. 58).
In designing strategy for an organization, the basis has to be the unique capacity or resources that the organization has. Pegging strategy on resources and capacity in organization ensures a company achieves what is called economic rent. Economic rent refers to the value created beyond the value of capital that was employed towards the same. The utilization of company capabilities is more critical than structural analysis, plans or models. Research and planning go hand in hand.
The only challenge is that researches are not always accurate. Resource based theorists have doubted the relevancy and criticized hype given to market oriented innovation as a strategy to gaining competitive advantage. As an alternative to market oriented innovation, they encourage organizations to develop internal capacities so as to be able to meet with any challenge. For processualists, especially, Opportunities need to be defined in terms of the internal organizational capacities and not necessarily according to market needs (Whittington, 2001, p. 82)
Comparison between Design School Model and Resource Based Model
The resource based view differs greatly from the Design school model of strategy. The design school approaches to competitive advantage building focus on external factors and how they affect the company. The external environment is an important aspect of a business. The external forces or players in the external environment impact on business processes. Unless the external environment is properly monitored and factored in the business strategies, success becomes elusive.
The major difference between a resource based view and a design school model is that the internal environment and external environment are the locus of control, respectively. The difference in focus leads to different responses to threats and opportunities. Strengthening internal capacity leads to a more sustainable competitive advantage than merely designing responses to the external environment (Teece et al, 1997, p. 521).
The resource based view is more proactive while the design school model is more reactive. Although planning is a critical aspect in the design model, planning bases can make a plan more reactionary and proactive. If the plan is external environment oriented, it means that the external environment is controlling the organization. A more enviable position is where the organization controls the environment.
An organization can only control the business environment if the internal resources and capacity are optimized enough (Sanchez & Heene, 2004, p 161). Resource and capability optimization means that changes in the business environment meet a suited environment that harnesses the changes for prosperity. In entrepreneurship, preparation is a very critical requirement to being able to galvanize resources and use opportunities in the environment to satisfy human wants or needs. Preparation consists in building internal capacity such that when the opportunity occurs, one is ready for the same. Opportunities often come as challenges or problems. Therefore, only those with enough internal capacity or resources can ride on opportunities for awesome results.
Building internal capacity offers a more sustainable competitive edge (Wernerfelt, 1984, p. 179). The capacity is there to meet with whatsoever changes in the external environment. Basing strategy or competitive advantage purely on models that respond to the external environmental factors is very temporal in its nature. It means that when changes occur, new designs have to be developed again.
This paper presented an analysis of the manufacturing Industry in China. The PESTEL analysis of the industry indicates that politics of government intervention plays an important role in the development of the industry. Further, analysis established that the industry is technology driven and a competitive advantage depends largely on technological superiority supported by good planning in an organization.
The manufacturing industry in China is stable due to government policies and general socialism based culture. The government through its policies has been able to protect the young firms from international competitions but also supported them to grow to an extent that they are now international players. Manufacturing firms in China have great growth opportunities for growth through exportation of their produce to developing countries. However, environmental concerns and adversarial competition from developed countries is likely to check the growth of the firms.
A review on the resource based approach and design school approach to competitive advantage indicates that the resource based approach leads to a more sustainable competitive advantage. In the manufacturing industry, product differentiation is a critical feature that fends of competitor rivalry and buyer power. Product design and development is largely dependent on internal capacity. Once an organization has relevant resources and capabilities, it can deal more proactively with changes in the external environment.
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