ABOUT THIS CONTENTChapter summary from Porter's book, Competitive Advantage of Nations, used in my core MBA strategy class.
Source: Competitive Advantage of Nations by Michael Porter
Table of Contents
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.
- 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
- 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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