chapter 4.determinants of national advantage, competitivenes

8/16/2019 Chapter 4.Determinants of National Advantage, Competitivenes

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Determinants of National Advantage,

Competitiveness.Reference: Michael Porter –

Competitive Advantage of Nations.A nation may achieve international success in an

industry ecause of four road attriutes that

shape the environment in !hich the local firms

compete or impede the creation of competitive

advantage.


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"hese are: #i. $actor Conditions – factors of production

such as s%illed laour or infrastructure

re&uired to compete in a particular industry.ii. Demand Conditions – the nature of home

demand for the industry's product or service.

iii. Related and (upporting )ndustries – the presence or asence in a nation of supplier

and related industries that are internationally

competitiveness.


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iv. $irm strategy, structure and rivalry –

the conditions in the nation governingho! companies are created, organised

and managed and the nature of domestic

rivalry."hese form the Diamond of Prof. Michael Porter


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$irm (trategy,(tructure and

Rivalry

Demand

Conditions

$actor

Conditions

Related and

(upporting

)ndustries


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Nations tend to succeed in industry or industrysegments !here the *diamond' is the most

favourale.

"he diamond is a mentally re#inforcing system. $ore+ample favourale demand conditions !ill not

lead to competitive advantage unless the stateof rivalry is sufficient to cause firms to respondto them.


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Competitive advantage ased on only one or t!o

determinants is possile in Natural Resource

)ndustries or industries re&uiring little

sophisticated technology or s%ills. (uch

advantage usually proves to e unsustainale

ecause it shifts rapidly and gloal

competitors can easily circumvent it.


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Advantages throughout the diamond arenecessary for achieving and sustainingcompetitive success in the %no!ledgeintensive industries that form the

ac%one of advanced economies.Advantage in every determinant is not a

prere&uisite for competitive advantage inan industry.


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"he interplay of advantage in many

determinants yields self#reinforcing enefits that are e+tremely hard for

foreign rivals to nullify or duplicate

"!o additional variales can influence thenational system vi-. chance and

government.


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Chance events are outside the control of

firms: pure inventions, rea%through in

asic technologies, !ars, e+ternal political developments, maor shifts in

foreign mar%et demand.


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/overnments at all levels can improve or detract

from national advantage. Antitrust policy can

affect domestic rivalry0 regulation can alter

home demand conditions0 investments in

education can change factor conditions0

government purchases can stimulate related

and supporting industries.


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/overnment policies implemented !ithout

consideration of ho! they influence the entire

system of determinants are li%ely to underminenational advantage as enhance it.


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$actor Conditions – all nations have factors of production. "hese are the inputs necessary tocompete in any industry – laour, araleland, natural resources, capital,infrastructure. 1o!ever, the factors mostimportant to competitive advantage in most

industries are not inherited ut are created!ithin a nation through processes that differ!idely across nations and among industries.


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1ence the rate at !hich these factors are created

and upgraded and made more speciali-ed to particular industries are important in the

development and maintenance of

competitive advantage.


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$actor 2ndo!ment1uman Resources – &uality, s%ills and cost

pf personnel ta%ing into account standard

!or%ing hours and !or% ethic.Physical Resources – aundance, &uality,accessiility and cost of a nation's land,

!ater, mineral or timer deposits, hydro#electric po!er sources. Climatic conditions,location and geographic si-e.


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3ocation relative to other nations that aresuppliers or mar%ets affects transportationcosts and the ease of cultural and usiness

interchange.4no!ledge Resources – the nation's stoc% of

scientific, technical and mar%et %no!ledge

earing on goods and services. 4no!ledgeresides in 5niversities, /overnment and private research institutions, statisticalagencies, etc.


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Capital Resources – the amount and cost of capitalavailale to finance industry. "he total stoc% of

capital resources in a country and the forms in

!hich it is deployed are affected y the nationalrate of savings and the structure of the national

capital mar%ets. "he gloali-ation of capital

mar%ets and the large capital flo! among nations

is slo!ly ma%ing national conditions more similar.1o!ever, sustantial differences remain.


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)nfrastructure – transportation andcommunication systems, mail and parcel

deliveries, payments in funds transfer, health

care, etc. "his also includes such things ashousing stoc% and cultural institutions !hich

affect the &uality of life and the

attractiveness of a nation as a place to liveand !or%.


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Competitive advantage from factors depend onho! efficiently and effectively they areemployed. 1o!ever, the value of particular

factors can't e dramatically altered y thechoice of technology.

1uman resources, %no!ledge and capital factors

are highly moile. (%illed people moveamong nations. 1ence, factor availaility ina nation is not an advantage if the factorleaves.


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1ierarchies among factors.6asic Advanced factors.

6asic factors include natural resources,

climate, location, uns%illed and semi#s%illedlaour and det capital.

Advanced factors include modern digital

communications, highly educated personnel7graduate engineers, computer scientists,university research institutes in sophisticateddisciplines8.


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6asic factors are passively inherited ortheir creation re&uires modest or

unsophisticated private or social

investment. (uch factors are either

unimportant to national competitive

advantage or the advantage they provideis unsustainale.


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1ence the returns to these factors are lo!"hus asic factors remain important ine+tractive or agricultural ased

industries 7timer, sugar8 and in these!hole technological s%ills are modestand are !idely availale. 2.g. in

construction of civil proects 7schools,apartments8 !ith lo! engineeringcontent.


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Advanced factors # these are the most

significant !ith respect to developingcompetitive advantage. "hey are neededto achieve the higher order advantages

li%e differentiated products and proprietary production technology 7e.g.copyrights, patents, etc.8. "hey are more

scarce since their development demandslarge and sustained investments in othhuman and physical capital.


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"hese factors are integral to the design and

development of a firm's products and processes as !ell as its capacity to innovate.2.g. Denmar%'s success in en-ymes reflects

a sophisticated scientific %no!ledge infermentation0 its success in furniture reflectsa pool of university trained furnituredesigns. 9apan's pool of engineers 7innumer much higher per capita than almostany other nation8 has een more important tothe success in the numerous 9apanese

industries than any other factor.


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/enerali-ed factors # these include the high!ay

system, a supply of det capital or !ellmotivated employers !ith a good generaleducation.

(peciali-ed $actors – these include narro!lys%illed personnel, infrastructure !ith specific properties, %no!ledge ases in particular

fields. 2+amples include, say, a scientificinstitute !ith e+pertise in optics0 a portspeciali-ing in handling ul% chemicals, a pool of venture capital see%ing to fund

soft!are companies.


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More advanced factors tend also to e more

speciali-ed though not in all cases, e.g. highlys%illed computer programmers, !hile anadvanced factor can e deployed in a range of

industries.(peciali-ed factors provide a more decisive and

sustainale ase for competitive advantage."hey are scarce.

/enerali-ed factors support a asic advantage andare usually availale in many nations and tendto e more easily nullified, circumvented or

sourced through corporate net!or%s.


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(peciali-ed factors are more focused and often

ris%ier, re&uire private and social investment."hey depend also on the e+istence of a aseof generali-ed factors. "hey are necessary in

the more comple+, strategic or proprietarycompany activities. "his ma%es themintegral to innovation (peciali-ed factorsare necessary at the international firm'shome#ase and less effective at a foreignsite. Relate this to the employers at ourmulti-national production outposts and what

is recognized at their northern headquarters.


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1ence, to sustain competitive advantage a

nation's firms must delierately set out tonullify or supplant today's asic factor

advantages even though they still persist.

Note ho!ever, that there is an importantdynamic attached to factor advantage. "he

standard of !hat constitutes an advanced

factor rises continually as the state of%no!ledge, the state of science and the state

of practice improve.


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2.g. the %no!ledge of an engineer, electrical, !ho

graduated in ;nly through continuous training andupgrading of s%ills could the ;


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"he rising !orld standard for factors means that

in order to maintain advantage for factors,not ust a one#time investment is necessary

ut continual re#investment to upgrade their

&uality. Advanced and speciali-ed factorsdemand the greatest, most sustainedinvestment in the most difficult#to#ma%eforms.

1ence, nations succeed in industries in !hichthey are particularly good at creating andupgrading the necessary factors.


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/overnments usually concentrate on providing

investments for factor creation that aregenerali-ed and asic. "he private sector hasan important role in factor creation to attain

factor advantage in most industries.$or e+ample, investments in asic research

!hile important in seeding possiilities for

commercial innovation !ill not lead tocompetitive advantage unless transmitted to,or further developed y, private sectorindustry.


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Surely, the disconnect between

our research institutions and

industry, and the lack of the use of

indigenous development anduse of advanced factors by

our private sector speaks volumes

about our lack of industrialcompetitiveness.


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(elective $actor Disadvantages – competitive

advantage can gro! out of the disadvantagein some factors. $or e+ample, lac% of lo!cost laour can determine innovation to

circumvent it.1ence, innovating around asic factor

advantages leads firms to upgrade y

developing more sophisticated competitiveadvantage 7li%e proprietary technology, oreconomies of scale due to more automatedfacilities8 that can e sustained longer and

!hich may also support higher prices.


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Apply this idea to our collapsed sugar

industry

"hus innovation to offset selective

!ea%nesses is more li%ely thaninnovation to e+ploit strengths.

Again apply this idea to our natural

resource industry.


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1o!ever, to innovate firms must have access to

appropriate human resource to supportinnovation in the industry, for e+amplesupportive home demand conditions. ithoutcommitment firms !ill cede competitiveadvantage. Also domestic rivalry !ill pressurefirms to see% more lasting advantage over theirlocal rivals. 1ence, other parts of the diamond

can influence a nation's firms to innovatearound a selective factor disadvantage ratherthan ta%e the easy !ay out of sourcing factorsfrom aroad.


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$or e+ample, American consumer electronics firms

faced !ith high relative laour costs moved tolocate laour intensive activities in Asiancountries leaving the product and production

process virtually the same. 9apanese rivalsfacing intense domestic rivalry and a maturehome mar%et set aout to eliminate laourthrough automation !hich involved the

reduction in the numer of components !hichfurther lo!ered cost and improved &uality.9apanese firms !ere soon uilding assemly

plants in the 5(, the place that the 5( firms had

sought to avoid.


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Demand Conditions – the second asic

determinant of national competitiveadvantage in an industry is home demand

conditions for the industry product or

service. "hese road attriutes are important – the composition, the si-e and pattern of

gro!th and the mechanisms y !hich the

nation's domestic preferences aretransmitted to the foreign mar%et.


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1ome Demand Composition – Nations gain

competitive advantage in industries orindustry segments !here the home demand

gives local firms a clearer or earlier picture

of uyer needs than foreign rivals can have.$urther, if home uyers pressure local firms

to innovate faster and achieve more

sophisticated competitive advantages thesecould force competitive advantage.


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"hough the mar%et is going gloal the firm is

clearly more attracted to the home mar%et. !ote then the disadvantage that a firm could

have that is totally e"port oriented #urther

the smallness of the local home market as in$%$, is clearly a disadvantage when

considering home demand. &ow then does

such a firm overcome this strike againstcompetitiveness'


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1ence, pro+imity to the right type of uyers is

important in developing national competitiveness.A nation's firms are li%ely to gain competitive

advantage in gloal segments that represent a large

or highly visile store of home demand utaccount for a less significant store in other nations.

(n $%$ we have a relatively large energy sector with

world class demands that are indeed &ome

)emand.


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Should our response to this not make for global

competitive advantage' *et to date it hasnot

Nations in !hich a segment is largest in asolute

terms may gain advantages in reapingeconomies of scale. 1o!ever, the asolutesi-e of segments !ithin a nation plays a

complicated role in competitive nationaladvantage since firms compete gloally andcan achieve large scale even if their homemar%et is small.


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$his is of e"treme relevance to us in the

+aribbean.

(ince a small nation can compete in a segment

!hich represents an important store of local

demand ut a small store of demand

else!here even if the asolute si-e of the

segment is greater in other nations.


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(ophisticated and Demanding 6uyers – A nation's

firms gain competitive advantage if domestic uyers are, or are among, the !orld's mostsophisticated and demanding uyers for the product or service. Pro+imity, oth physical and

cultural to these uyers, helps a nation's firms perceive ne! needs.

$he fact that $%$ has world class

processing firms on its soil and these areindeed demanding if they are to remaincompetitive can allow local firms to supply products and services to them and gain



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(ophisticated and demanding uyers could

pressure local firms to meet high standards.1o!ever, if the local firms do not respondthen, as in "B", the plants supply import

!hat they re&uire.1o!ever, if the demands of these sophisticated

uyers are especially stringent or

challenging ecause of local circumstances!hich are most prevalent in the industryaroad, the local firms have a productionopportunity to ecome competitive.


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Again in $%$ our geology is e"tremely difficult

compared with many other ports of the world.Should this not spur local companies into sophisticated e"ploitation procedures for the

energy sector'"he role of sophisticated uyers can also e

played y distriution channels. $or e+ample!hat is emerging is large po!erful chains ofstores especially in the 5( that assophisticated retailers can force manufacturersto introduce ne! models and reduce prices

and thus costs.


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1ence, via these sophisticated retailers a firm in

a small country can appear to e+tend itshome mar%et. aybe we can benefit by plugging into rice Smarts Retailer +hain

Also, if the nation's uyers for a product orservice are multinationals companies anadvantage is created for the nation's firms ecause the domestic 6uyers are also foreign

uyers.

1o!ever, the local firms !ill have to overcomethe uilt#in preference of the multinational to

uy from firms at its home#ase.


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Related and (upporting )ndustries

"he third road determinant of national

advantage in an industry is the presence in

the nation of supplier industries or related

industries that are competitive.

"he presence of international competitive

supplier industries in a nation create

advantages in do!nstream industries.


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# the first is via efficient, early, rapid and

sometimes preferential access to the mostcost effective inputs.

!ote our downstream steel industry

clearly did not benefit from its

pro"imity to (SA$. /hy' aybe

our downstream products were too

near those of (SA$.


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# more significant is the advantage the home#

ased suppliers provide in on#going co#ordination, i.e. lin%ages et!een the value

chains of firms and their suppliers are

important to competitive advantage. )t isclearly an advantage to have serious

management of suppliers neary.


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# most important enefit of home#ased

suppliers is the process of innovation andupgrading. Competitive advantage emerges

from close !or%ing relationships et!een

!orld#class suppliers and industry. $irmsgain &uic% access to information, ne! ideas

and insights and to supplier innovations. "he

e+changing of R B D and oint prolemsolving lead to faster and more efficient

solutions.


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Related )ndustries

"he presence of competitive industries that arerelated often leads to ne! competitiveindustries. Related industries are those in

!hich firms can co#ordinate or shareactivities in the value chain !hen competingor those !hich involve products that arecomplementary. An e+ample of it is thecomplementarity of the (ilicon alley firmshence their massive success over the standalone characteristic of the Route ? firms in

the 2astern 5(A.


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Also firms that produce computers and those

that produce application soft!are can thrivein this supporting environment.

$irm (trategy and Rivalry

"he fourth road determinant of national

competitive advantage is the conte+t in!hich firms are created, organi-ed and

managed as !ell as domestic rivalry.


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(trategy and (tructure of Domestic $irms.

No nation e+hiits uniformity across all firms ut the national conte+t creates sometendencies that are noticeale. $or e+ample,

in )taly many successful internationalcompetitors are relatively small or mediumsi-ed firms that are privately o!ned 7not onstoc% e+change8. )n /ermany, the topmanagement of many companies consists of persons !ith technical ac%grounds andcompanies are hierarchical in organi-ation

and management.


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No one managerial system is universally

appropriate, ut nations !ill tend to suceedin industries !here the management

practices and modes of organi-ation

favoured y the national companies are !ellsuited to the industries' sources of



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)talian firms are !orld leaders in a range of

fragmented industries 7lighting, furniture,foot!ear, farics, pac%aging machines8 in

!hich the economies of scale are either

modest or can e overcome through co#operation among loosely affiliated

companies. "hese companies are usually

dominated y a singly individual and canadapt e+tremely &uic%ly to mar%et changes.


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)n /ermany, the engineering and technical

ac%ground of many serving e+ecutives produce a strong inclination to methodical product and process improvement. "hese

characteristics lead to greatest success inindustries !ith high engineering content7optics, chemicals, comple+ machinery8, acareful development process, after#salesservice and hence re&uire a highlydisciplined management structure.


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/erman success is nearer in consumer goods

and services !here image mar%eting andrapid ne! feature and model turnover are

important to competition.

*ou may like to e"amine how firms are

organized in $%$ and seek to determine

what influences this.


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/oals

Company goals - these are most strongly

determined y o!nership structure, the

motivation of o!ners and holders of det,

the nature of the corporate governance and

the incentive processes that shape the

motivation of senior managers.

"he goals of the pulicly held corporations

reflect the characteristics of the nation's

pulic corporations.


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2.g. )n /ermany and (!it-erland, most shares

are held y institutions for e+tended periodsand are rarely traded. 3ong#term capital

gains are e+empt from ta+ation reinforcing a

prospective to hold shares for a sustained period.

Management of firms pay attention to the 6oard

ut day#to#day stoc% price movements are

most vie!ed as particularly important.


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"he 5( is the other e+treme. Most shares are

held y institution investors ut institutionsare measured on &uarterly and share priceappreciation. 1ence, institutions trade

fre&uently in order to reali-e capitalappreciation and account for the mosttrading in larger company stoc%s. 3ong#termcapital gains of investors are ta+ed at thesame rate as ordinary income shortening thetime hori-on of the investment.


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Many institutions, ecause they are managing

pension assets ta%e no account of ta+es ininvestment closures. hen compared !ithlo! transaction costs in the efficient 5(

mar%et more trading is encouraged.1ence, management responds to stoc% price

movements in the NE( ecause of the ta%e#over threat and the prevalence of stoc%options. )n practice, the only effective !ay toremove under#performing management oraffect corporate direction is through ta%e#

over.


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/iven the lac% of effective shareholdergovernance via the 6oard means that there is

little to counteract management ehaviour.

As a result, the rate of return standards forevaluating investments are higher in the 5(

than many other advanced returns. 54 is

nearer that of the 5(0 (!eden and 9apan arecloser to /ermany and (!it-erland.


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"he attitudes of det holders also influencecompany goals. An important differenceamong nations is the e+tent to !hich det

holders also hold e&uity in the companies.)n 9apan, /ermany and (!it-erland regulations

allo! an%s to hold corporate e&uity. 1ence,

lenders hold significant e&uity sta%es and play an important role in corporategovernance.


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6y holding oth 7det and e&uity8 an%s aremotivated to e concerned !ith long#termcompany health rather than short#term cash

flo! and interest coverage.$here is no need to question what thelocal 0anks are interested in

Nations !ill succeed !here the goals of theo!ners and managers match the needs of theindustry.


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/erman and (!iss circumstances favourindustries re&uiring modest initial ris%capital ut there is a need for heavy and

sustained investment and re#investment. 5(conditions favour entry into ne! industriesre&uiring ris% capital and competingindustries !here strong incentives for annual

profitaility are consistent !ith competitiveadvantage ecause of the nature of theirinvestment needs.


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1ence, the 5( does !ell in relatively ne!industries 7computers, soft!are and ne!services8 or ones in !hich e&uity funding of

many ne! companies feeds active domesticrivalry.

)n mature or less glamorous industries, capitalmar%et pressures and governance pressures!ill e prone to lead to harvesting ofcompetitive positive and inade&uate level ofinvestment to sustain improvement and

innovation.


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)n summary, the $inancialCulture of the nation and thegoals of the company and its

managers all affect the %ind ofindustries in !hich the nationcould e competitive.

aybe one can analyse the goals of firms andthe financial culture to get some feel of whatindustries or class of industries may best suit$%$.


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/oals of )ndividuals.

"he motivations of individuals !ho manage and

!or% in firms can enhance or detract from

success in particular industries.

"he Central concern is !hether oth are

motivated to develop their s%ills as !ell as

e+tend the effort necessary for creating and

sustaining competitive advantage.


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Clearly one important aspect is the re!ard systemfor employees. )t is important as to !hate+tent the !or%er is motivated y financial

gain and the nation's ta+ structure.)n (!eden the marginal ta+ rates are high and

people !or% not primarily to enhance theirincome ut to contriute to the company andenhance their sta%es. "his slo!s decision#ma%ing and limits ris%#ta%ing slo!ing successto certain %inds of industries.


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6onus compensation ased on individual performance and rapid promotion of

outstanding employees of say the 5(,

reinforce competitive advantage in some

%inds of industries ut not others

especially those re&uiring longaccumulation of s%ills and comple+ co#

ordination.


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)t is a ig motivation in the 5( to see% a fortune

on a ne! start#up via its sale. (!eden israrely successful in industries !here this

ehaviour is important.

Attitude to!ard ris%#ta%ing influences the ailityto achieve success in certain industries. )nsome nations li%e /ermany, (ingapore,

(!it-erland, a failure from ta%ing a usinessris% is vie!ed as a personal catastrophe, as in"B". )n other nations, a failure or t!o or!hatever is acceptale.


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Also immigration is !ell aligned to ris%#ta%ing.

1ence, countries that allo! immigrationhave seem an unusual proportion of ne!firms set up y ne! comers.

Domestic Rivalry.)t is often suggested that domestic rivalry among

firms is !asteful ecause it leads to

duplication of effort and from derivingeconomies of scale. 1ence, some call forchoosing national champions.


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)n gloal competition successful firms

compete vigorously at home and

pressure each other to improve and

innovate. Domestic rivalry is moreimportant as opposed to rivalry !ith

foreign companies !hen continuous

improvement and innovation are seen asthe essential aspects for competitive

advantage in an industry.


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ith a group of domestic rivals follo!ing

various competitive strategies, there is a

chec% against government intervention

that can stifle innovation or luntcompetition. hen there are fe! rivals

there is pressure for susidies,

guaranteed home demand or favoritismof a local firm. "hese do not foster

competitiveness.


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Competing domestic rivals %eep each other

honest in otaining government support./overnment contracts do not ecome aguaranteed mar%et for any one company ifthe competitors are prepared to fight for

piece of the pie.

)ntense domestic rivalry depends on ne! usiness formation to create ne!

competitors. Ne! usiness formation isimportant to upgrading of competitiveadvantage since it adds to the process of

innovation.


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Ne! entrants and *outsiders' !illing to ta%e

ris%s and ne! approaches to competing."here are t!o asic means for usiness

formation. >ne is the estalishment of

entirely ne! companies, 7either as spin#offsor the result of ne! ideas gained from

academic training or research8. "he other is

for a ne! usiness to e formed y internaldiversification into ne! industries y

e+isting firms.


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"he spin#off unloc%s a ne! product and process

innovation and can lead to serving ne!segments of the mar%et. $actor conditions in

the form of a pool of s%illed and specially

trained personnel are a pre#re&uisite forstarting ne! usinesses. Ris% capital is

re&uired especially in usinesses !hich

cannot e funded y personal resources. National culture and priorities can influence

the industries to !hich outstanding people

are attracted.


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"he 5( had many ne! start#up usinesses !hile 9apanhas a fe!. 9apanese researchers typically oin the

research staff of larger companies. $he best of us in$%$ go looking for a 1ob with the largercompanies, in particular to the #)( firms.

"he method via diversification is almost al!aysto!ards related areas of usiness. 4no!ledge andassets are transferred from the e+isting to the ne! usiness entering the prospects of competitive

advantage. "he fact that an e+isting firm !ishes todiversify into a related field is a potent source ofcompetitive advantage. )nternal entry and itsrelated cousin corporate venturing is common in

9apan, 4orea and /ermany.


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)nvention 2ntrepreneurship and Chance.

)nvention and 2ntrepreneurship drives nationaladvantage. National factor creation, demandconditions, supplier industries, etc., providethe environment that encourages innovation

and entrepreneurship. 6ut again, aninnovation may e completely disconnectedfrom the environment, as !as penicillin !hich

!as discovered in Canada, ut !ascommercially e+ploited in Denmar% and the5( that had the re&uired demand conditions,

i li d f t l d th d t

chapter 4.determinants of national advantage, competitivenes

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