What is external competitiveness, and what factors shape an organization's external competitiveness?

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External competitiveness refers to how well a company compensates its employees when compared to its competitors. For example, consider two factories—if one factory pays its workers $200 per shift and the other factory pays $300 per shift, then obviously working for the second factory would be more appealing than working for the first.

There will be a number of factors which shape an organization's competitiveness. The first will be how well established the business is. A start-up is likely to be able to pay far less than a well-established company, which would make them less externally competitive. Conditions in the market will also play a factor. For example, if the factory is making designer shoes, but the economy is on a downturn, then less people will be buying designer shoes. That means that the demand will be lower and therefore the factory will be making less money. That may mean that they are not in a position to be externally competitive when recruiting new employees.

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External competitiveness refers to how competitive a business is in its organization's pay (or compensation) in relation to its competitors. If an organization pays more to its employees (including all the components of the compensation package such as base pay, options, benefits, etc.) than its competitors, it will have better chances of attracting better talent and retaining it. However, this may result in higher labor cost and (possibly) reduced profits.

There are a number of factors that affect external competitiveness of an organization. These include,

  • Labor market factors (nature of supply and demand),
  • Product market factors (degree of competition and level of product demand) and
  • Organizational factors (such as strategy, type of industry, size, individual manager, etc.).

For example, if the supply of talent is high and demand is low, talent can be attracted and retained at much lower compensation, as compared to the situation when supply is low and demand is high. Similarly, if a  business has monopoly, then even a lower compensation will be competitive, as compared to a highly competitive market (say, e-commerce), where very high compensation may be required for retaining talent.

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It is always good to start with definitions. In business, a external competitiveness refers to the dynamic system in which a business or company competes and functions against other businesses and companies. To put it another way, if there are many companies that offer the same product or service, then the environment is externally competitive. 

Here is an example. If you are thinking about starting a coffee shop in New York City, you will find out quickly that the market is saturated by chains like Starbucks and old establishments. Therefore, we would say that the market is competitive. However, if you are going to start an airline service to the Ivory Coast, where there are not too many flights, you would say that market is not very competitive. Based on this, you might want to go into fields that are not too competitive, but the downside is that there probably will be little demand. As a consequence, your business might not succeed.

The main factors that shape a company's ability to compete is twofold. 

First, if the market is saturated, it will be harder for a company to succeed. The competition might be too fierce. 

Second, the costs of a company to bring about a service or product is also important. If a company can manage to cut costs, then they will get more market share as they undercut competitors. 

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