Michael Porter and the Competitive Advantage of Nations

Porter asks the question, Why does a nation become the home base for successful international competitors in an industry?10 For example, he asks, Why is Switzerland a leader in pharmaceuticals and chocolates? Why is Germany a leader in luxury cars and chemical production? Why is Finland a leader in mobile phones? Why is Japan a leader in automobile production? Porter rejects the notion that comparative advantage is sufficient to explain world trade. More importantly, he sees trade theories based on existing endowments as assuming away what managers do to compete: strategize, improve technology and management practices, and differentiate products. As such, he is more concerned with what makes industries competitive in different national settings and how companies can take advantage of these conditions. Porter sees four broad areas in a nation that lead to international competitive companies in different industries. These include:

Firm strategy, structure, and rivalry: how a company is run and how it competes. Related and supporting industries: the existence of suppliers and related talents. Demand conditions: the home country demand for the industrys output. Factor endowments: similar to HO theory but with additional possibilities.

He argues that these areas form a national diamond of interrelated factors, and that an industry must have advantages in most or all to achieve and maintain competitive success. Following figure shows a picture of the national diamond as illustrated by Porter. He argues that these areas form a national diamond of interrelated factors, and that an industry must have advantages in most or all to achieve and maintain competitive success. Following figure shows a picture of the national diamond as illustrated by Porter.

Figure 1.1: Porters National Diamond: Determinants of National Competitive Advantage

Firm Strategy, Structure, and Rivalry : No one management system is appropriate for all industries, and different countries support different types of management. For example, in Germany, many top executives hold PhDs in technical areas and this produces a superior ability to improve product designs and production processes. Porter contrasts this with the US management emphasis on finance, to which he attributes the US decline in some manufacturing industries. Also important for developing internationally competitive companies is the existence of high levels of rivalry in a domestic industry. This competition drives companies to achieve superior performance just to compete locally. For Porter, national competition is a driver of innovation, and this innovation makes these companies better international competitors. Without such rivalry, companies are more likely to stay in their domestic market. For example, the local competition in Japan for at-panel TV displays is erce. Four companies dominate the Japanese market: NEC, the Fujitsu/Hitachi consortium, Pioneer, and Matsushita Electric, Japans largest consumer electronics company. This competition at home helps drive innovations in at- panel display technologies and manufacturing efficiencies. In turn, it makes these companies better competitors in the world market. Related and Supporting Industries: When suppliers are superior and more innovative, companies in the industry are more likely to gain knowledge about the processes of innovation and upgrading from these relationships. That is, suppliers help companies see new methods of operations and perceive opportunities to use new technologies. This is a spin-off of ideas and innovations from one industry to another. For

example, Italian rms produce the majority of the jewelry-making machinery in the world. Italian jewelry-manufacturing companies such as New Silver in Vicenza, Italy, are leaders in the gold and silver jewelry industry in part because they have more ready access to the latest jewelry-producing machines. Porter discovered that internationally competitive industries in a country tend to cluster into groups of related industries. Often this cluster is in one geographical area. Related industries transfer knowledge and innovation to each other. For example, many Japanese companies are world leaders in the production of synthetic textile bers. The technologies used in producing these synthetic bers are similar to those used in the production of textiles made from silk. This just happens to be another industry in which the Japanese are internationally competitive. Italian furniture makers are among the worlds leading suppliers (see the case study). Demand Conditions: The core design of products usually first reflects the nature of the home countrys demand. For example, to accommodate highly congested areas, high fuel costs, and a strong cultural value for quality, Japanese consumers have demanded smaller, high-quality and highly efficient automobiles. For example, when Toyota introduced its hybrid (gas and electric) sedan Prius, its success set the stage for world competition with hybrid technology. Not surprisingly, Japanese automobile manufacturers are among the world leaders in many areas of automobile production, including hybrid technology. Porter argues that companies gain competitive advantage when the demand in the home country gives them a clearer or earlier picture of buyer needs from other nations. Factor Endowments: Porter also argues that created and not inherited factors are the most

important for competitive success. He calls these created factors the specialized factors of production, and they include skilled labor, capital, and the countrys infrastructure. Non-key or general-use factors are unskilled labor and raw materials. He does not see these factors as leading to competitive advantage because companies can easily get these inputs. For example, although Japan and Korea have little natural endowments of raw materials such as iron ore or coal, they get these on the world market. Instead, they use their endowments of skilled and motivated labor to produce worldwide competitive products. Because specialized factors

such as educating a skilled workforce require heavy and sustained investments, they are difficult to imitate. Hence, countries like Germany, even with the most highly paid workers in the world, can have competitive companies because the German educational system does an excellent job at producing technologically skilled workers. Approximately 70 percent of German secondary school graduates continue in some type of specialized occupational training. Many times this combines on-the-job training paid for by companies with part-time vocational education paid for by the government.

A look at the Italian furniture manufacturing cluster in Milan The furniture industry in Milan, Italy, shows extensive cooperation among material suppliers, component manufacturers, and furniture producers. Over 6,500 small to medium-sized wood furniture companies cluster in the Brianza area and 7,200 small to medium-sized non-wood furniture companies cluster in the Cantu area. Both of these clusters are close to Milan. Thousands of small business suppliers and subcontractors that are highly specialized support them. Italian companies such as Driade, Magis, and Kartell can compete globally because these clusters of suppliers, subcontractors, and associated human resource talents allow for the diffused factory concept of organization. The factory focuses on research designs and prototyping and does testing of raw materials. Production work is outsourced to the specialized suppliers and subcontractors. Furniture-machine manufacturers are also located close by the clusters. These related companies work directly with the suppliers to custom-make equipment that can produce furniture that would be impossible to make with standardized manufacturing equipment. Source: Cullen and Parboteeh (2010), International Business Strategy and the Multinational Company. Routledge: New York