Competitiveness

Competitiveness is a set of factors that decide the productivity of a country, business, or similar entity. Productivity is important because it affects income and growth, which impacts society. Increased competitiveness equals more productivity and wealth and therefore higher quality of life. Measures of competitiveness include export quotient (foreign sales divided by output), market share, and profitability. A company, country, or industry evaluates competitiveness in terms of how well it can provide products or services more efficiently than its competitors can. This evaluation considers competition without benefits such as protections and subsidies. An industry or business must be self-sustaining without artificial support to be competitive. Measuring a nation's competitiveness at the industry level—how well the industry overall compares to the same industry in other countries—generally provides a more accurate picture than evaluating the success of individual companies. While some industries in a country may be competitive, others may not be, so it is unreasonable and impractical to expect all industries to be competitive. A nation may measure competitiveness in terms of level and growth of standard of living, productivity, and foreign market penetration.

Background

Early economies were local and straightforward. A business or trade offered goods or services, which members of the community either bought or did not. If a tailor, for example, opened a business to compete with another established shop, the one that offered the best product for the best price would prosper and might drive the other out of business. Competition could force both businesses to offer better service or lower prices, which would benefit customers. A lack of competition could allow a business to charge any price that the market would bear because customers needing the good would have no choice unless they wished to produce the item themselves.

An environment in which one business has no competition is called a monopoly. Monopolies can exert great power over consumers and lead to inflated prices and inferior products. They also can decrease competition, since no other companies may want to compete with the monopoly.

Larger settlements and cities developed economies in which people could trade for items. A farmer could trade grain for an ox, for example. Eventually trade expanded, and people traveled across Eurasia to procure goods such as gemstones, linens, and spices. Cities that provided the goods others wanted became wealthy. Trade continued to expand as explorers opened new trade routes around the globe.

During the twentieth century, global trade expanded significantly. Assembly lines led to the growth of mass production. Increased automation and computerized systems further improved production lines, increasing output.

Some countries faced concerns about trade imbalance, forcing businesses and industries to reconsider competitiveness in the global economy. In the latter half of the century, for example, Asian countries developed significant manufacturing industries. Automobiles, electronics, and other products were produced inexpensively, and these cost consumers in Western countries far less than the products produced in their home countries. Many businesses responded by outsourcing production and customer service jobs to countries where they could pay low wages. Businesses were more competitive on pricing, but workers in their home countries faced rising unemployment.

In the twenty-first century, many businesses faced further difficulties following the recession of 2008. To counter this, companies reduced the size of their workforces to increase profitability and remain competitive. While some businesses prospered and were able to become more competitive during the COVID-19 global pandemic, others were forced to reconstruct, modify, or even close their companies. According to the Bureau of Labor Statistics (BLS), from February 2020 to March 2021, approximately 9.5 million jobs were lost in the United States due to the pandemic. Many small businesses, particularly, were hit hard and struggled to stay afloat. Freelance advisors and companies like Up Work Inc., technology companies like Microsoft and Zoom, and online retail platforms like Shopify were able to remain the most competitive during that time, according to Yahoo Finance.

Overview

Competitiveness is most important on a national level because of the impact on its people. A nation with competitive industries sees improved incomes and well-being. The Global Competitiveness Report 2016–2017 from the World Economic Forum ranked 138 economies. It ranked Switzerland as first, followed by Singapore, the United States, the Netherlands, and Germany. Switzerland, like many advanced countries, has developed and nurtured innovation, which encourages long-term growth. The country also invests in its people, who enjoy a top-rated education system. This human capital is a significant contributor to the country's competitiveness. Workers are trained and retained, so Switzerland does not experience the brain drain, or mass exodus of workers, many other countries see.

Companies can work to maintain a competitive advantage by developing business strategies. Leadership can develop a unique strategy or employ one of three methods: cost leadership, differentiation, and price strategy. Cost leadership focuses on producing goods at the lowest cost in the industry. This involves buying the highest-quality raw materials for the best possible price. Production is also important; the company must employ the best workers to produce the best items. Cost-cutting measures often occur at the management level in the form of lower wages. In producing high-quality goods at the lowest price, businesses seek to improve market share.

Differentiation involves either offering products no competitor in the market makes or changing perceptions about the product to differentiate it from others similar items. This strategy may require advertising campaigns and marketing efforts to change customers' ideas about a company's products and perceive them as better than similar products.

In price strategy, a business could offer its product at a low price to gain market share, or penetration, and gradually increase the price to the standard rate. A company could use an economy pricing strategy by producing a very low-priced item. A promotional pricing strategy could involve discounted prices for a limited time, such as offering a buy one, get one free deal to boost sales.

American academic Michael E. Porter developed five forces to evaluate competitiveness and attractiveness of a market by looking at an industry's strengths and weaknesses. His forces, published in the Harvard Business Review in 1979, include competition, potential of newcomers in the industry, supplier power, customer power, and the threat of other products supplanting them.

A sixth force, complementary products already on the market, was added during the 1990s. By understanding the forces and one's position in the market, Porter said, a business could make adjustments to take advantage of strengths and improve in areas where the business or product is weak. For example, customers may have the power to drive prices down by choosing other products. Suppliers may respond to high demand for raw materials by raising prices, and a strong competitor may have the power to purchase a larger share of materials if suppliers report a shortage. Businesses and industries may be able to increase competitiveness by understanding and adjusting to the market using these and other tactics.

Competitiveness in the twenty-first century has caused great concern about monopolies. For example, into the late 2010s, only two companies controlled more than half of US sales in music and e-books. Monopolies such as these cause competition to suffer, prices to increase, and choice to decrease. Big Tech monopolies such as Google, Meta (parent company of Facebook and Instagram), Apple, and Amazon have faced antitrust lawsuits for anticompetitive practices.

In 2020, the World Economic Forum paused the index rankings of the Global Competitiveness Report and instead focused on recovery and revival in light of the pandemic. The report provided analysis of historic competitive trends and recommendations for future prosperity.

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