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

ABOUT THIS CONTENT

Chapter summary from Porter's book, Competitive Advantage of Nations, used in my core MBA strategy class.
Subject: Strategy/Frameworks
Source: Competitive Advantage of Nations by Michael Porter

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.

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