Porter’s Chapter Summaries – Chapter 1: The Need for A New Paradigm

Key Questions to Ask

• Ask why firms in a particular nation can create and sustain competitive advantage instead of why some nations fail or succeed
• A nation’s standard of living in the long-term depends on its ability to attain a level of productivity in the industries in which its firms compete
• We lack a convincing explanation of the nation’s influence in the success of the firms located in that nation.

Conflicting Explanations

• It is far form clear what the term “competitive” means to a nation
• There are different arguments about what is it that affects competition including:
• Macroeconomic phenomena
• Function of a cheap/abundant labor
• Differences in management practices
• Possession of bountiful national resources
• Government Policy

Asking the Right Questions

• The principal economic goal of a nation is to produce high and rising standards of living. This depends on productivity = output value x unit labor
• At the national level, competitive concept = national productivity because it has to continually upgrade itself.
• International Trade allows for increased or threatened productivity
• No nation can be competitive on everything
• What is important for economic prosperity is national productivity. The pursuit of competitiveness is defined as trade surplus, a cheap currency or low unit labor costs. (These contain many traps and pitfalls.
• The mix of industries exporting is more important than the average export share of the nation.
• For competitiveness we must look at productivity and its growth rate, focusing on specific industries and segments.
• Porter’s Central Task: Explain why firms in a nation can compete successfully against foreign rivals in particular segments and industries.
• To achieve competitive success firms must have lower costs or products that command premium prices.
• To sustain advantage they need to achieve more sophisticated advantages over time: productivity growth.

Classical Rationales for Industry Success

• Comparative Advantage: nations all have equivalent technologies but differ in their endowment of so-called “factors” of production such as land, labor, natural resources, capital, etc.

The Need for a New Paradigm

Comparative advantage based on “factors” is not enough to explain trade patterns:

• Changing Competition
• Technological Changes – level of technology in different industries differs markedly between firms in different nations.
• Comparable Factor Endowments
• Globalization-Factors are available equally and globally

Fleeting Advantages – today, advantages can be fully overcome by competitors very quickly, due to the rapid tech changes among other.

Threads of a New Explanation – has to do with economies of scale and multinational’s success.

Toward a New Theory of National Competitive Advantage

• The search is for the decisive characters of a nation that allow its firms to create and sustain advantage in particular field
• Companies are very dependent on a strong home nation because it is the source of skills and technology
• The questions is how can firms gain advantage by changing constraints

Porter’s Study

• Focused on gaining and sustaining competitive advantage in sophisticated industries and segments
• In each nation, he identified all internationally successful firms, the history of competition in particular industries, export trends, and outbound foreign investment.