Paper Session I-B - The Competitive Advantage of Florida Firms in Aerospace

This paper provides an analysis of the sustainable competitive advantage of Florida firms as they compete in the aviation/aerospace sector, with special emphasis on the space industry. First, the theory of comparative advantage is reviewed, as well as its relevance to the theory of firm-level competitive advantage. Next, after a brief review of local history, recent actions taken by Florida policy makers will be reviewed to serve as “grist for the mill” of economic theory. Florida’s actions in light of theory will then be framed and implications offered. Introduction: Comparative Advantage In 1776, Adam Smith wrote the Wealth of Nations, which presented a philosophy that has become a mainstay of modern economic thought. As an argument against mercantilism, he asserted that nations should invest their resources into producing goods that, because of natural endowments, can be produced efficiently. This is still the basis of free-trade philosophy, and referred to as comparative advantage. More specifically, the theory of comparative advantage suggests that a country should specialize in the production of those goods it produces most efficiently, and that goods that it produces less efficiently should be bought from other countries, even if it produces these goods more efficiently than the country from which they are bought [1. ] A country may be more efficient, or in other words, have an absolute advantage, in producing a number of goods as compared to another country. However, this efficiency would vary with the different products. As a result, the country would have a comparative advantage in producing those products in which it has a higher absolute advantage, over those that pose a lower absolute advantage. In light of this, the combined total production if the comparative advantages is higher than it would be if all these products were produced in the same country where they were consumed. In essence, when two countries engage in trade, they can increase their combined production of the products being traded and consumers in both countries can consume more of these goods. Strategic Management theory is concerned with how firms compete, and how managers can achieve sustainable competitive advantage vis-à-vis rival firms [2. ] On a global scale, of course, competition across borders is now rampant. Yet economic conditions are not homogenous worldwide, and comparative advantage still exists in many places and in many forms. While much of the discussion infers that the political borders of nations bound comparative advantage, it is more correct to focus on economic regions. A relevant economic region can be bounded by the nation, of course, but sometimes multi-nation regions are the right perspective, and sometimes within-nation regions are the right perspective. Given the readership of this paper, it will view Florida as an economic region, within which firms vie to use its comparative advantages in aviation/aerospace to achieve global competitive advantage. Competitive Advantage In 1990 Michael Porter published his theory of international competitive advantage that has become the most popular framework for diagnosing why firms succeed or fail, as a function of where they are located [3]. A summary of the theory and its implications follows. Porter’s research question was, given the limitations of existing theories to diagnose advanced and complicated industries, what is it about a firm’s location that can be a source of sustainable competitive advantage? Here, competitive advantage was defined as a firm’s ability to earn aboveaverage profits over time. His research found that though there are many reasons, they can be summarized in terms of four major factors that can thought of as a “dynamic diamond. ” The Dynamic Diamond. The first corner of the diamond is Factor Conditions. Economists study industry in terms of factors of production such as land, labor and capital. “Land” refers to all basic material resources their abundance, quality, accessibility, and cost and also climate, location, and so forth. “Labor” refers to human resources – the quality, skill level and cost of labor and also national culture, work ethic, and the like. “Capital” refers to money, and firms need access to money in order to invest in the future. But it also refers to the cost of that capital, as firms must produce revenues in excess of all costs in order to survive. Therefore capital involves the whole financial system that affects the business climate of risk versus return. To the traditional list of factors, Porter added “Infrastructure,” referring to the quality of transportation and communications systems, ease of making all sorts of business transfers and deliveries, and even housing and cultural factors. The above factors could be more simply categorized as being basic or advanced, and generalized or specialized. Basic factors might be thought of those that are naturally endowed, such as raw resources, climate, and location. Advanced factors might be thought of as those that are created, such as educational systems, communications systems, and efficient financial markets. Generalized factors may be thought of as those that can be used across industries, such as financial markets. Specialized factors are those specific to a particular industry, such as a unique base of scientific/engineering knowledge. Porter found that an important source of sustainable competitive advantage is the presence of advanced, specialized factors. While specialized factors are riskier investments than generalized factors, their very rareness gives them potential that is not easily copied. Similarly, while basic factors can be the source of low-cost advantage, low-cost is a strategy that can usually be imitated. Advanced factors are more the source of value-addition through differentiation, a more defensible strategic intent. The second corner of the diamond is Demand Conditions. Competitive advantage generally is found where local demand conditions are so tough that competing firms are forced to continuously upgrade, just to survive locally. The ability to survive in a tough local market confers an obvious ability to compete well internationally. The local market should be the most sophisticated in the world, and if scale economies are present in the industry, local demand should be proportionately large. Localness comes into play in the sense that physical closeness amongst firms makes joint developments more flexible, especially in industrial markets. Also, the market being assumed is one that is “ahead” of markets elsewhere in terms of being able to anticipate global demand. And where the rate of growth of technology is relatively fast, being in the middle of it can confer an advantage. Also influential is the kind of firm. The presence of locally-owned multinational firms can create “pull” in foreign markets, and the presence of alien-owned multinational firms can create an widespread emulation of local ways of doing business. The third corner in the diamond is Related and Supporting Industries. Competitive advantage in one industry can be linked to competitive advantage in other industries. For example, a world-class supplier base can affect the cost, quality, deliverability etc. of advanced factor inputs such as components and systems. Supplier industries can also be the real locus of technological innovation and upgrading, especially where suppliers and buyers are more or less co-located and can establish tight relationships. Proximity also affects transportation costs, but less obvious is that it also affects the ability to transfer information. Related industries (other than suppliers) can be the source of technological interdependency, spillover, and pull-through effects. The greater the complexity and number of related industries, the greater the potential for competitive advantage because complexity is very difficult and costly to copy. The fourth corner of the diamond is Firm Strategy, Structure and Rivalry. Ultimately, it is not industries that compete, nor it is nations or states that compete. The basis of competition is between firms industry, economic region and nation are contexts. Most people understand the basics of competition, but some of the driving forces are subtle. For example, a company’s ownership structure has much to do with its strategic goals. Stockholders, for example, are interested in seeing high economic gains to their investments; state-owned firms are driven by more political and social forces. The result has much to do with evaluations of risk, return, and investment decisions. Local conditions can also create powerful perceptions as to the national priority of an industry, and the related history of a locality is virtually impossible to replicate. Evolution. Porter noted patterns in the evolution of national competitive advantage that he summarized in four phases. Of course, not all industries go through all four phases, and some industries stay “stuck” in one phase without advancing to the next. The first phase is the Factor-Driven phase. Often, the initial development of competitive advantage is anchored in factor conditions. Competitive advantage can be found through a local abundance of an otherwise scarce, highly-demanded resource; simply a “matter of supply and demand. ” The trouble with this strategy is its vulnerability to changes in demand, or the ability for firms elsewhere to “invent around” their disadvantages. The next phase is the Investment-Driven Phase. Regions wishing to industrialize beyond a dependence on natural resources need massive, dedicated and long-term investments from governments and industry in order to “come up to par” in specified industries. In this phase, competitive advantage is typically sought through strategies that emphasize large market share, large production volumes, and economies of scale and learning that drive down costs. But a pure low-cost advantage is always vulnerabl