Competitive Advantage of Nations

Author: Michael PorterPresenter: Wesley Shu

Prepared for EMBA, Feng-Chia University

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Eroded Early Mover Advantages

• Customer relationship• Scale economies• Loyalty of distribution channels

All can be overtaken by competitors if not improved.

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Global Competitiveness Report

• Composition of GCI

• GCI Ranking

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Sustainability

The only way to sustain a competitive advantage is to upgrade it.

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• Why companies capable of

innovation in some nations?• Why do they pursue improvements,?• Why are they able to overcome the

substantial barriers?

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The Diamond of National Advantage

Firm Strategy, Structure, and Rivalry

DemandConditions

Related and Supporting Industries

FactorConditions

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Factor Condition

Availability of resources and skills necessary for competitive advantage in an industry

e.g., Skilled Labor or Infrastructure

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Demand Condition

Home market – the information that shapes the opportunities that companies perceive and the directions in which they deploy their resources and skills.

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Related & Supporting Industries

The international competitiveness of supplier industries & other related industries

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Firm Strategy, Structure, & Rivalry

The conditions governing how companies are created, organized, and managed, and the nature of domestic rivalry

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Factor Conditions

A nation does not inherit but instead creates the most important factors of production to form the backbone of any advanced economy.

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Factor Conditions

The rate and efficiency with which a nation creates, upgrades, and deploys the factors is more important than the volume.

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Factor Conditions

A factor must be highly specialized to an industry’s particular needs to support competitive advantage.

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Factor Conditions

Highly specialized factors come from world-class institutes that create and then upgrade them.

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Factor Conditions

Selective disadvantages can prod a company to innovate and upgrade – e.g., high land costs, labor shortage, or the lack of local raw materials lead companies to innovating and upgrading to compete.

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Factor Conditions - Disadvantage

The following conditions have to be met for disadvantage-advantage transformation to work:

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Factor Conditions - Disadvantage

Signal companies and companies innovate in advance of rivalsFavorable conditions in other aspects of the diamondCompany commitment

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Demand Conditions

• Home demand gives companies clear and early picture of emerging buyer needs

• Demanding buyers

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Demand Conditions

The character of home demand is more significant than the size.

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Characters of Demand Conditions

• Market segment is larger or more visible than in foreign countries.

• Buyers are more sophisticated.

• Buyers’ needs anticipate or even shape those of other nations

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Characters of Demand Conditions

Exporting values and tastes as well as products

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Related & Supporting Industries

Those who are internationally competitive can provide competitive production methods and trigger innovation and upgrading.

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Firm Strategy, Structure, & Rivalry

Corporate Structure &

Nature of

Domestic RivalryNationalCircumstances& Context

Firm Strategy

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Firm Strategy, Structure, & Rivalry – Germany

Stric

tly hierarchical

organization &

management practices

with technical background

top managers

NationalCircumstances& Context

Technical Oriented Industries

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Firm Strategy, Structure, & Rivalry – Italy

Family owned, medium

size companies with

sophisticated tasteNationalCircumstances& Context

Consumer goods & services

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Firm Strategy, Structure, & Rivalry

Domestic rivalry to stimulate competition, creating pressure on companies to innovate and improve

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The Diamond as a System• The effect of one point often depends

on the state of others. E.g., sophisticated buyers & human resources

• Each point can reinforce others. E.g., domestic rivalry promotes improvement in all the other determinants.

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The Diamond as a System• Nations are rarely home to just one

competitive industry – clusters of industries.

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The Role of Government

• Catalyst and Challenger

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The Role of Government

But in politics, a decade is an eternity. Consequently, most governments favor policies that offer easily perceived short-term benefits, such as subsidies, protection, and arranged mergers – the very policies that retard innovation.

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The Role of Government

• Focus on specialized factor creation.• Avoid intervening in factor and

currency markets.• Enforce strict product, safety, and

environmental standards

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The Role of Government

• Sharply limit direct cooperation among industry rivals.

• Promote goals that lead to sustained investment

• Deregulate competition• Enforce strong domestic antitrust

policies

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Focus on Specialized Factor Creation

• General factors rarely produce competitive advantage, e.g., secondary education system, broad national concern such as health care.

• Specialized apprenticeship programs, university research efforts linked with industries, private company investment ultimately create the factors that will yield advantage.

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Avoid intervening in factor & currency markets

• E.g., lower factor cost• E.g., currency devaluation

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Avoid intervening in factor & currency markets

• E.g., lower factor cost• E.g., currency devaluation

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Sharply limit direct cooperation among industry rivals

• Companies rarely contribute their best scientists and engineers to cooperative projects.

• Divert company attention and resources from proprietary research

• Value of cooperative research: Signal the importance of emerging technical areas

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Company Agenda

• Create pressures for innovation• Seek out the most capable competitors

as motivators• Establish early-warning systems –

translate into early-mover advantages• Improve the national diamond

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Company Agenda

• Welcome domestic rivalry• Globalize to tap selective advantages

in other nations• Use alliances only selectively• Locate the home base to support

competitive advantage

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Improve the National Diamond

• Form clusters – work with its home-nation buyers, suppliers, and channels

• Take explicit steps to create specialized factors