The Competitive Advantage Of Nations

V. The Competitive Advantage of Nations

A. Overview

Ð'* Porter is a famous Harvard business professor. He conducted a comprehensive study of 10 nations to learn what leads to success. Recently his company was commissioned to study Canada in a report called "Canada at the Crossroads".

Ð'* Porter believes standard classical theories on comparative advantage are inadequate (or even wrong).

Ð'* According to Porter, a nation attains a competitive advantage if its firms are competitive. Firms become competitive through innovation. Innovation can include technical improvements to the product or to the production process.

B. The Diamond - Four Determinants of National Competitive Advantage

Ð'* Four attributes of a nation comprise Porter's "Diamond" of national advantage. They are:

a. factor conditions (i.e. the nation's position in factors of production, such as skilled labour and infrastructure),

b. demand conditions (i.e. sophisticated customers in home market),

c. related and supporting industries, and

d. firm strategy, structure and rivalry (i.e. conditions for organization of companies, and the nature of domestic rivalry).

a. Factor Conditions

Ð'* Factor conditions refers to inputs used as factors of production - such as labour, land, natural resources, capital and infrastructure. This sounds similar to standard economic theory, but Porter argues that the "key" factors of production (or specialized factors) are created, not inherited. Specialized factors of production are skilled labour, capital and infrastructure.

Ð'* "Non-key" factors or general use factors, such as unskilled labour and raw materials, can be obtained by any company and, hence, do not generate sustained competitive advantage. However, specialized factors involve heavy, sustained investment. They are more difficult to duplicate. This leads to a competitive advantage, because if other firms cannot easily duplicate these factors, they are valuable.

Ð'* Porter argues that a lack of resources often actually helps countries to become competitive (call it selected factor disadvantage). Abundance generates waste and scarcity generates an innovative mindset. Such countries are forced to innovate to overcome their problem of scarce resources. How true is this?

i. Switzerland was the first country to experience labour shortages. They abandoned labour-intensive watches and concentrated on innovative/high-end watches.

ii. Japan has high priced land and so its factory space is at a premium. This lead to just-in-time inventory techniques (Japanese firms can't have a lot of stock taking up space, so to cope with the potential of not have goods around when they need it, they innovated traditional inventory techniques).

iii. Sweden has a short building season and high construction costs. These two things combined created a need for pre-fabricated houses.

b. Demand Conditions

Ð'* Porter argues that a sophisticated domestic market is an important element to producing competitiveness. Firms that face a sophisticated domestic market are likely to sell superior products because the market demands high quality and a close proximity to such consumers enables the firm to better understand the needs and desires of the customers (this same argument can be used to explain the first stage of the IPLC theory when a product is just initially being developed and after it has been perfected, it doesn't have to be so close to the discriminating consumers).

Ð'* If the nation's discriminating values spread to other countries, then the local firms will be competitive in the global market.

Ð'* One example is the French wine industry. The French are sophisticated wine consumers. These consumers force and help French wineries to produce high quality wines. Can you think of other examples? Or counter-examples?

c. Related and Supporting Industries

Ð'* Porter also argues that a set of strong related and supporting industries is important to the competitiveness of firms. This includes suppliers and related industries. This usually occurs at a regional level as opposed to a national level. Examples include Silicon valley in the U.S., Detroit (for the auto industry) and Italy (leather-shoes-other leather goods industry).

Ð'* The phenomenon of competitors (and upstream and/or downstream industries) locating in the same area is known as clustering or agglomeration. What are the advantages and disadvantages of locating within a cluster? Some advantages to locating close to your rivals may be

i. potential technology knowledge spillovers,

ii. an association of a region on the part of consumers with a product and high quality and therefore some market power, or

iii. an association of a region on the part of applicable labour force.

Ð'* Some disadvantages to locating close to your rivals are

i. potential poaching of your employees by rival companies and

ii. obvious increase in competition possibly decreasing mark-ups.

d. Firm Strategy, Structure and Rivalry

1. Strategy

(a) Capital Markets

o Domestic capital markets affect the strategy of firms. Some countries' capital markets have a long-run outlook, while others have a short-run outlook. Industries vary in how long the long-run is. Countries with a short-run outlook (like the U.S.) will tend to be more competitive in industries where investment is short-term (like the computer industry). Countries with a long run outlook (like Switzerland) will tend to be more competitive in industries where investment is long term (like the pharmaceutical industry).

o What about Canada?

(b) Individuals' Career Choices

o Individuals base their career decisions on opportunities and prestige. A country will be competitive in an industry whose key personnel hold positions that are considered prestigious.