Building global competitiveness answer to our economic problems
The competitiveness of Sri Lankan products and services has assumed great importance in view of the fact that the country has been burdened with rising balance of payments deficits and external debt. These have become serious problems since Sri Lanka (SL) cannot hope to solve them in the near future by following import substitution policies as done now or by promoting tourism or foreign employment. SL has a very small domestic market. It is for this reason domestic demand cannot drive economic growth. It has therefore to depend on foreign demand or exports; this cannot happen unless SL improves its competitiveness with the rest of the world.
Competitiveness
According to the Global Competitiveness Index, 2012/13, SL’s overall competitiveness ranking out of 144 countries is 68 (52 in previous year) vs Singapore 2, Hong Kong 9, Taiwan 13 and Malaysia 25.
So we now have to define what this competitiveness of our nation over other countries is. According to the Collins Dictionary of Economics, cost advantages are of two types: a) “absolute cost advantages, that is lower costs than competitors at all levels of output and b) relative cost advantages, that is cost advantages related to the scale of output through the exploitation of economies of scale in production (as in large scale production which is one of the ways of improving productivity) and marketing”. These definitions of competitiveness are well known. What is not well known, according to the same dictionary, is that competitiveness is also derived from, a) “ability to offer products that are regarded by customers as having unique qualities or as being functionally better than competitors’ products and, b) advantages derived from psychological images built into a product by associated advertizing and sales promotion” i.e. differentiation.
New vehicles at the Colombo Port
SL cannot hope to export on the basis of absolute or relative cost advantages or by improving productivity simply because countries such as China could do very much better. So the alternative is to build national competitiveness over the rest of the world on the basis of differentiation of our products and services exported, while trying to reduce their costs and improving productivity, which is far behind that of other countries.
Before discussing differentiation it is necessary to know how costs can be reduced and productivity improved. Costs and prices including the interest rates and the exchange rate in SL can and must be stabilised by reducing the government budget deficits and by controlling the money supply. However, SL cannot achieve competitiveness by this means alone even if productivity is improved, (that is reduction of unit costs by lessening the use of inputs in the production of outputs or producing higher quantities of outputs from the same amount of inputs by resorting to large scale production). But productivity which is low in SL as shown by the following indices has definitely to be upgraded to improve competitiveness. It is however, not sufficient. Differentiation has to take place.
i. Labour Productivity, SL’s labour productivity per hour was- US $6.7 (in agri. 1/3 of this) vs $15.0 in Malaysia, $40.2 in S’pore –APO Productivity Data Base 2012; total factor productivity data not available.
ii. Land and Agricultural Productivity, Value added per worker in agriculture in SL was US$ 966 as against $6680 in Malaysia, $5692 in Mauritius, $ 40,385 in Japan , 2007-11, (World Bank).
Differentiation
Differentiation of a product, service or of the activities of an entire firm takes place using innovation which is “linked with creativity and creation of new ideas… and turning them into (marketable) reality” according to the Chartered Management Institute Dictionary of Business and Management. In addition to differentiation of products and services, differentiation may apply to management systems, production processes, and the assets of an organization. Differentiation is most often undertaken to create a unique value to satisfy the needs of customers in order to earn higher returns as well as to avoid imitation by competitors. So the first thing that should be done before differentiation is to study the needs of customers and what competitors are doing to satisfy these needs.
There is a view that only technology is necessary to undertake differentiation. This is incorrect. One of the requirements is just “psychological images built into the product” as mentioned in the above Collins’ dictionary definition of differentiation; (for example washing and polishing a secondhand car before selling it would enable the seller to sell it at a higher price). Another is creative ability by itself or when driven by a strong sense of motivation particularly by a leader. This motivation could be due to competitive pressures created by the reduction of tariffs and other levies at the point of import. In other words the high import tariffs and other levies now imposed to encourage import substitution and the various cumbersome procedures involved with exporting could induce an indifference to innovation and differentiation.
Means of creating differentiation
The top managers of a company could examine past data and ask what its major customers see as sources of differentiation of its business from its competitors- always work backwards from the customer needs and what the competition offers before undertaking any differentiation. Then ask several other questions like, “are they truly distinctive?, measurable against competitors?, relevant to (the value that the company should) deliver to core/loyal customers?, mutually reinforcing?, and clear at all levels of the company?” (The Great Repeatable Business Model, Chris Zook and James Allen , Harvard Business Review, November 2011). Tetra Pak for instance adopts the principle that its packages should save more for the customers than it costs them. This principle is made known to everyone in the firm from the frontline to the production line and the value chain, mutually reinforcing among all activities for the purpose of delivery of a unique value to customers; as markets shift and customer preferences and competition change from time to time, direct feedback from customers and the competition is established to review the differentiation for the purpose of any change.
Challenge to differentiation
C.K. Prahalad and Gary Hamel in their article in the HBR, August December 2012, titled ‘The Core Competence of the Corporation’, when talking about the decline of competitiveness of Western corporations, say “ What is harder ….to acknowledge, is how little added momentum companies actually get from political or macroeconomic relief”. They then appear to challenge the theory of differentiation, “Western and Japanese , survivors of the first wave of global competition , are all converging on similar and formidable standards of product cost and quality…..but less and less important as sources of differential advantage. In the long run competitiveness derives from an ability to build….. the core competencies that spawn unanticipated products”. Then they cite the core competence of a number of Japanese companies such as Canon in precision mechanics, fine optics and micro electronics that enabled it to manufacture various types of cameras, printers and video systems that beat the competition. Having identified core competencies, they recommend that companies should invest in needed technologies, identify projects and people who possess the necessary skills, forge alliances with companies that lead in relevant technologies etc. They continue to emphasize that such products “should make a significant contribution to the perceived customer benefits”. They add finally, that “a core competence should be difficult for competitors to imitate….because of the “comprehensive pattern of internal co-ordination and learning”! Is not this what Porter and others state in their theory of differentiation?
What SL should do?
SL companies should certainly differentiate products, services as well as activities of firms not only to prevent imitation by competitors but also to gain premium returns. In this effort they should build core competencies with the backing of the state. For instance in the case of tea and other agricultural exports core competency in bio technology should be built perhaps over a 10 to 15 year horizon to turn out even unanticipated products and services, of course after studying customer needs and preferences, while upgrading productivity. Several fields like this should be developed particularly in manufacturing where SL could make a breakthrough perhaps with the help of a country like Japan and to create well paying jobs and earn higher returns from exports.
In the meantime companies could develop differentiating capabilities in traditional ways after studying markets with the help of the R& D incentives made available by the government and the support of the universities, which too could be funded by the state specifically for this purpose. In addition to these strategies, SL needs to attract investors particularly FDI who possess the necessary technologies, skills and market access to produce/manufacture products and services for export, by creating a conducive environment. The present environment is quite negative with poor governance, very poor law and order conditions, rising crime, the continuing ethnic conflict and investment policies being changed from time to time, as seen by the index shown below. Just two moves that could make a vast difference for the better is the restoration of the 17th Amendment to the Constitution with its Constitutional Council and Independent Commissions and the implementation of the major LLRC recommendations. Besides these, the government could improve education for providing the technical and soft skills such as communication, creativity and motivation to achieve goals demanded by businesses. If there is a delay in doing this government could import the necessary skilled labour as a temporary measure.
OECD CRC Index
The OECD current Country Risk Classification (CRC) dealing with political and credit risk (wars, revolutions, civil disturbances, expropriation, capital and exchange controls) 2013 for SL is 6 and the previous also being 6, Somalia and Zimbabwe carrying 7 and 7 respectively. For S’pore it is 0 and 0, Malaysia 2 and 2, India and Thailand 3 and 3.
So improving competitiveness in SL involves improving the investment climate drastically, removing the anti export bias, maintaining macroeconomic stability and incentives for differentiating activities, products and services to satisfy higher paying customer segments of the world market by promoting innovation for differentiation and building core competencies.
(The writer is a veteran economist)