Boards and executives should understand how location can effectively determine competitiveness, claims professor Torger Reve at BI Norwegian Business School.
KNOWLEDGE @ BI: Strategy in action
In the field of strategy firms derive their competitive advantage both from external and internal factors. External factors include access to natural resources, strong market position, favorable regulations, and location in strong international clusters. Internal factors include unique technology, patents, internal competencies, or strong leadership.
Most business executives tend to favor the internal competitiveness explanation, arguing that good external positioning is the result of strong entrepreneurship, visionary leadership, excellent strategies, or sometimes pure luck. Whatever the reasons for success in the market place, leaders of successful companies typically take the praise.
This article focuses on how competitiveness is derived from favorable location. Location decisions are much more than a simple investment calculation. Location determines access to resources, access to customers, access to suppliers, access to competence and access to research and development. Location effectively determines the firm’s operational costs, but more importantly, location also determines the competence position and innovative capabilities of most companies.
- Read also: Network of advantages
The Location Paradox
The location paradox was highlighted by Jeff Imelt, CEO of General Electric, who recently visited Norway, announcing that GE would locate more of its subsea offshore oil and gas operations in Norway.
Although Norwegian engineers are among the most expensive, it is hard to find the same level of engineering competence and innovative capabilities elsewhere. It is not so much salary costs that determine technological competitiveness, it is the quality of the people that matters, he said. What makes this quality so high?
It is not the quality of the engineering education and training is higher in Norway. It is rather the engineering experience from working with advanced subsea projects that makes them unique. It is also the effective way Norwegian engineers work together, avoiding the traditional disciplinary siloes that is so typical in engineering elsewhere.
Norwegian companies have flatter organizational structures, and the authority distances are low. This produces higher innovativeness. Open Innovation is no big news to Nordic companies, as have been well documented in the research by the Scandinavian network scholars.
The theoretical base for how location builds competitiveness is found in economic geography (Krugman 1991) and in economic strategy (Porter 1990). Paul Krugman (1991) talks about economic agglomerations, while Michael Porter (1990) talks about industrial clusters. Both phenomena capture the effect of sharing knowledge (positive knowledge externalities).
This means that firms generate parts of their competence position from the other industrial actors where they are located, being it customers, suppliers, competitors, universities, and institutions for collaboration (IFCs). Institutions for collaboration are cluster organizations like the Norwegian Centers of Expertise (NCEs) that have been established regionally in cluster industries such as drilling technology, subsea technology, maritime technology, systems engineering and cancer diagnostics and treatment.
The parade examples
The parade examples of strong knowledge clusters are Silicon Valley in IT and Boston in biotechnology and life sciences. In my large study of Norwegian clusters competing globally (Reve & Sasson 2012), three strong industrial clusters were identified: Offshore technology, Maritime technology and Seafood. I term these industries ‘Ocean Industries’, and they form the core of Norwegian industrial competitiveness.
In fact two sets of industries were identifies as the main drivers of Norwegian industrial competitiveness. The primary drivers were the three ocean industries (offshore, maritime and seafood), being Global Knowledge Hubs. The secondary drivers are Complementary Knowledge Industries, such as Finance, Information technology and Knowledge intensive services.
Global knowledge hubs
Why are Global Knowledge Hubs superior locations for knowledge intensive companies? Global Knowledge Hubs are the locations where technological development and innovation take place. These locations are the places where the best qualified engineers and specialists are attracted to work. The advanced suppliers and service providers have to be there because this is also where their customers are. Having many competitors at each vertical level of an industry at the same location, increases competition and reduces costs. Since factors costs tend to be high, firms have resort to innovation competition to survive.
Boards and executives should understand how location can effectively determine competitiveness, taking advantage of locational resources, getting involved in alliances, knowledge networks , and organizations for collaboration (IFCs). Thus global firms need to be locating in several international clusters in order to optimize both competence and cost advantages.
- Krugman, Paul (1991), Geography and Trade, Boston: MIT Press
- Porter, Michael (1990), The Competitive Advantage of Nations, Boston: Harvard University Press
- Reve, Torger & Amir Sasson (2012), Et kunnskapsbasert Norge, Oslo: Universitetsforlaget
This article is published in BI Strategy Magazine 2013/2014, an English/Norwegian language public outreach magazine published by the Depratment of Startegy and Logistics at BI Norwegian Business School.