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
- Nature of competition and sources of competitive advantage differ widely among industries and segments.
- Global competitors often perform some activities in the value chain outside from their home country.
- Firms gain and sustain competitive advantage in int’l competition via improvement, innovation and upgrading (altering the basis of competition)
- Firms that gain competitive advantage in an industry are often those that no only perceive a new market need or the potential of a new technology but move EARLY and most aggressively to exploit it.
Determinants of National Advantage
There are four determinants:
- Factor conditions- (i.e. position in skilled labor)
- Demand conditions- (home vs foreign)
- Related and supporting industries- presence/absence of int’l competitive ones
- Firm Strategy, structure and rivalry-(re: conditions of government and creation, organization, mgmt and nature of domestic rivalry)
Factor Conditions & Demand
Inputs necessary to compete (labor, land, natural resources, capital, infrastructure). Nations are endowed with different factors, which relate to the competitive advantage role of those firms in the market. Stock of factors is less important that the rate at which these are applied and grown.
Factor Endowment Categories
A firm will gain competitive advantage if they possess low cost of high quality factors of the particular type needed in its industry, but mainly depends on how efficiently and effectively these are deployed.
- Human Resources-Quantity, skills, cost of personnel
- Physical Resources-abundance, accessibility, quality, location of physical resources
- Knowledge Resources-stock of trained people, university and market knowledge.
- Capital Resources- amt and cost of capital available to finance industry.
- Infrastructure-type, quality and user cost of inf. Available that affects competition (i.e. transportation system, health care, etc.)
Hierarchies among Factors
Two particular distinctions stand out:
- Basic vs. Advanced Factors- basic factors are passively inherited (i.e. Climate, location, debt capital, labor skills) or their creation requires small social investment. Advanced Factors (educated personnel, university research, advanced technology) are necessary to achieve higher-order advantages (i.e. proprietary technology or differentiated products)
- Specificity of Factors- Generalized factors are available in most nations, providing rudimentary types of advantages (i.e. a highway system, supply of debt capital). Specialized factors provide more decisive and sustainable bases for competitive advantage because they require more focused, riskier social and private investment, therefore are more scarce (i.e. narrowly specialized trained personnel).
The most significant and sustainable advantage can be attained with possession of advanced and specialized factors. Factors need to be constantly upgraded and specialized for sustainability.
- Nations succeed in industries where they are very good at creating and upgrading the factors (i.e. investment to develop university resources and scientist skills by government).
- Different nations, invest in different factors-creating and upgrading mechanism, usually extending to industries which support their economy.
- Not all factors can be obtained and fully supported.
Selective Factor Disadvantages
Sometimes, abundance or low cost of a factor drives to its inefficient deployment. Needs for basic factors can be eliminated via innovation (i.e. skilled labor vs automation). The returns from factor-saving innovations can far exceed their cost and yield second-order benefits. When innovating around a basic factor, firms are led to upgrade. Innovation to offset selective weaknesses is more likely than that to exploit strengths. The most obvious case of selective disadvantage is where local firms experience high absolute cost of a factor compared to foreign rivals.
Home Demand Composition
Its most important influence on competitive advantage is via the mix and character of home buyer needs. A product usually reflects home market needs, so where foreign and domestic needs diverge, the home market usually dominates.
- Segment Structure of Demand – In most industries demand is usually segmented. What is most important is the size or the segments for economies of scale. The segment structure at home will shape the nation’s firms priorities. (i.e. Airbus created large, multiple seat aircrafts to “shuttle” passengers between European cities…non-existent in US due to distance between cities).
- Sophisticated and Demanding Buyers- Cultural and physical proximity allow for firm perception of new needs. These buyers pressure to meet high standards. National passions will usually translate into internationally competitive industries (i.e. Italy and cars, British and gardening)
- Anticipatory Buyer Needs- Home demand can be an early indicator of future widespread buyer needs (benefit of having sophisticated and demanding buyers at home). These needs will benefit the firms only if the needs are anticipated elsewhere. (i.e.. American craving for credit and credit card variety)
Demand Size and Pattern of Growth
- Size of Home Demand- large size is advantageous if can lead to economies of scale or learning (especially in high capital investment firms such as those with large R&D requirements). Size is an advantage if encourages investment and re-investment (dynamism). A large home market need may not necessarily be re-applicable to the foreign markets (i.e. Finnish large demand for ice breaker boats).
- Number of independent buyers – high number of consumers will lead to a more dynamic environment and information flow.
- Rate of Growth of Home Demand-high growth drives firm’s confidence to invest in expanding, a key winner when technological upgrading can lead to competitive advantage (i.e. large demand of home appliances in Italy led to industry growth and subsequent success in European appliance market).
- Early Home Demand – can lead to quick growth and experience accumulation resulting in first mover advantage in an industry on an international basis.
- Early Saturation – home saturation motivates continued innovation and growth to compete and upgrade and reduce cost/pricing of products. It also pressures for home industries to entry foreign markets in the search for incremental business and sustainable growth.
Internationalization of Domestic Demand
Home demands conditions can contribute to pulling products abroad:
- Mobile or Multinational Local Buyers – The domestic buyers are also foreign buyers, leading to creating a foreign demand for a product.
- Influences on Foreign Needs – Home demand can be transferred to foreign countries by visiting trainees, demonstration effects, cultural dissemination via media and political alliances/historical ties.
The Interplay of Demand Conditions
It is important that domestic rivalry among competitors and supporting industries exists so that they are motivated to upgrade and move abroad. (i.e. Japanese T.V. industry was saturated earlier than the US, and they were forced to upgrade their products to penetrate foreign markets, resulting in their move to a leadership position abroad)
Related and Supporting Industries
The success of an industry directly links the success of its supplier firms, because one needs to other to determine its competitive advantages.
Competitive Advantages in Supplier Industries
Local industries with international success provide efficient and cost effective access to inputs. However, the most important advantage of home-based int’l suppliers is on-going coordination and the process of innovation and upgrading close to home. These benefits do not happen automatically: firms need to work together to gain the benefits. To note, not all of the suppliers need to be local, or local global competitors to obtain competitive advantage.
Competitive Advantage in Related Industries
- Related industries involve industries which can share (computers and application software) or those in which firms can coordinate activities in the value chain when competing.
- National success in an industry is likely if the nation has comp. Adv, in a number of related industries (i.e. Japan was successful in copiers, photo equipment, and telecommunications, and ended up being the leader in the fax industry).
Firm Strategy, Structure, and Rivalry
Strategy and Structure of Domestic Firms
- Nations will succeed in industries where management practices and modes of organization favored by the national environment are well suited to the industries’ sources of competitive advantage. (i.e. Italian successful firms are small and focused, in Germany, successful firms are led by technical people with methodical inclinations)
- Attitudes toward diff. things, usually learned in school or at home (culture) can be aspects of a nation that will have a direct effect in the way firms are managed.(i.e. Italians are family-business oriented)
- Willingness to travel, learn languages of government policy in a nation can affect its global growth possibilities.
Nations will succeed in industries where goals and motivations are aligned with the sources of competitive advantage.
- Company Goals – will depend on:
- being public or private
- characteristics of public capital markets nationally and internationally
- rate of return standards of the nation
- nation’s market for risk capital
- the company’s commitment to the industry
- the attitudes of debt holders
- the required level of investment for upgrading or market entry
- the need for funds.
- Reward Systems (very varied across nations)
- Nation’s tax structure
- Pay and Promotional practices
- Attitude towards wealth (Americans more wealth-driven that say, Swedes)
- Relationship between manager and employee (skill upgrade, communication of new ideas)
- Professional/Technical training and pride
- Individual’s geographic preferences
- Attitude towards risk-taking
- Cultural beliefs
- Immigration levels
- Competitive advantage can result when an industry becomes a notable occupation or takes on national importance.
- Size of the pool will vary depending on the type of education its national talent chooses.
- Nations tend to be competitive in activities that are admired or depended upon. (i.e. Italy – fashion, US and entertainment business)
The goals of firms are reflected in the nature of the commitment of capital and human resources to an industry. The goals of employees are reflected in their commitment to a profession. However, committed firms/employees may fail, because the appropriate technology or skills necessary in the industry may be lacking.
- Having strong competition at home drives firms to pursue upgrading and innovation, enter foreign markets to increase market of fill capacity, and even creates stronger survivors for the global market.
- Not having competition at home may lead to complacent attitude or not being prepared to succeed among global rivals who may have strong competition at home. Home-based geographic concentration of competitors contributes to magnify domestic rivalry benefits because information flows more efficiently and contributes to the dynamism of the whole national industry vs. global competitors. Its benefits are even greater when considering the effect they can have in the pool of home-based supplier availability and growth.
- Significant cooperation among domestic competitors is not good because it retards the process of innovation and focus on striving for growth and newness.
New Business Formation
Vital to create new competitors and upgrading of competitive advantage. New competition drives success of an industry in the global market. New business emerge from new creations/spin-offs or from internal diversification into new industries by established firms.
The Role of Chance
- Chance has had a lot to do with success (no control by firms). Chance events are related to acts of pure invention, technological discontinuities, discontinued input costs, shifts in financial markets or exchange rates, surges of regional or world demand, politics, wars.
- Chance allows for shifts in competitive positions. Can nullify advantages of previous leaders and open the way for new firms/nations to take a local or global lead.
- Chance events have asymmetric impacts on different nations.
Invention, Entrepreneurship and Chance
The environment of a nation or the determinants (i.e. demand, etc) can actually lead to the development of an industry in a particular place, therefore, invention is not necessarily by chance. Having the invention, however, does not mean that the nation will be able to develop an industry from it because it may lack some factors that are key to the success of that industry, leading to appropriation of inventions by other nations.
The Role of Government
Government’s real role in national competitive advantage is in influencing the 4 determinants. Its positive or negative influence can have a significant impact in the success of an industry or a firm in the nation. Government policy can be in turn influenced by the 4 determinants.
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