Making Sense of Strategy II: Week Two

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Making Sense of Strategy II

Week Two
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Copyright Material Arab Open University Egypt Branch-B301B
LOGO
Presentation Agenda
Course materials to be discussed in tutorials
Readings for Block 3: Reading 12: The Competitive advantage of nations Reading 13: National Policies and domestic politics Block 3: Unit 4 (sections 4.3 & 4.4)
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LOGO
Reading 12
The Competitive Advantage of Nations
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Porter argued that a nation can create new advanced factor endowments (talents) such as skilled labour, a strong technology and knowledge base, government support and culture. A nations competitiveness depends on the capacity of its industry to innovate and upgrade. Companies gain advantage against the worlds best competitors because of pressure and challenge. They benefit from having strong domestic rivals, aggressive home-base suppliers, and demanding local customers. 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. Porter used a diamond shaped diagram as the basis of a framework to illustrate the determinants of national advantage. This diamond represents the national plying field that countries establish for their industries. Copyright Material Arab Open W24 University Egypt Branch-B301B 01/03/201
Information plays a large role in the process of innovation and improvement information that either is not available to competitors or that they do not seek, it comes simple investment in R&D or market research, or from effort and from openness and from looking in the right place. The only way to sustain a competitive advantage is to upgrade it to move to more sophisticated types. (i.e. Japan cars). Two additional prerequisites for sustaining competitive advantage:
1. A company must adopt a global approach to strategy. It must sell its product worldwide, under its own brand name, through international marketing channels that it controls. This approach require the company to locate production or R&D facilities in other nations to take advantage of lower wage rates, to gain or improve market access, or to take advantage of foreign technology. 2. Creating more sustainable advantages often means that a company must make its existing advantage obsolete even while it is still an advantage.
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The Diamond - Four Determinants of National Competitive Advantage

1. Factor conditions (i.e. the nation's position in factors of production, such as skilled labour and infrastructure), 2. Demand conditions (i.e. the nature of home-market demand for the industry's product or service, sophisticated customers in home market), 3. Related and supporting industries, the presence or absence in the nation of supplier industries and other related industries that are internationally competitive. 4. Firm strategy, structure and rivalry (i.e. conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry).
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1. Factor Conditions
By factor condition: it is meant the nations position in terms of factors of production such skilled labour or infrastructure necessary to compete in a given industry. Most of the factors of production that are required in todays sophisticated and knowledge-intensive industries are created factors (such as skilled human resources or a scientific base). thus a nation does not inherit (get) but instead creates the most important factors of production. This is in contrast to the old doctrine (guideline) of factors of production labour, land, natural resources, capital, infrastructure. Even educated workface is not enough what matters most is specialized workface e.g. in chemical industries, optics.etc. Governments may have an important role in creating or supporting the creation of factors of production by funding training and support specialized scientific institutions.
2. Demand Conditions
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. Nations gain competitive advantage in industries where the home demand gives their companies a cleared or earlier picture of emerging buyer needs, and where demanding buyers pressure companies to innovate faster and achieve more sophisticated competitive advantages than their foreign rivals. Demanding and sophisticated consumers in the home market can pressure companies to meet high standards and innovate faster than their foreign rivals. Government policy can aid this process by instituting and strict product safety and environmental standards
3. Related and Supporting Industries

Innovation may require consideration interaction between, a firm, and its users or supplies and between firms themselves. Geographies and cultural closeness can be crucial factors in this process: agents located near each other can take advantage of shorter lines of communication and an on-going exchange of ideas and information which may also be helped by the development of dose and high-trust working relationship. The illustration of the Italian footwear cluster (fig.2Page 166) offers a graphic example of how a group of dose-by, supporting industries creates competitive advantage in a range of interconnected industries that are all internationally competitive W2-01/03/2014
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4. Firm Strategy, Structure and Rivalry

National circumstances and context create strong tendencies in how companies are created, organized, and managed, as well as what the nature of domestic rivalry will be. Government policy can influence a firms behaviour through its taxation policies towards long-term investment and through the nature of its competition policies. Competitiveness in a specific industry results from convergence of the management practices and organizational modes favoured in the country and the sources of competitive advantage in the industry. A . Strategy ( such as Capital Markets ) B . Structure C . Rivalry
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A. Strategy ( such as Capital Markets )

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 KSA) will tend to be more competitive in industries where investment is long term (like the Oil industry). Company goals reflect the characteristics of national capital markets and the compensation practices for managers
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Porter argues that the best management styles vary among industries. Some countries may be oriented toward a particular style of management. Those countries will tend to be more competitive in industries for which that style of management is suited. Individual motivation to work and expand skills is also important to competitive advantage. For example, Germany tends to have hierarchical management structures composed of managers with strong technical backgrounds and Italy has smaller, familyCopyright Material Arab Open W2-01/03/2014 run firms. 14 University Egypt Branch-B301B
B. Structure
C . Rivalry
Porter argues the presence of strong local rivals is a final, and powerful, stimulus to the creation and persistence of competitive advantage. Competition is particularly strong in Japan, where many companies compete strongly in most industries. Domestic rivalry, like any rivalry, creates pressure on companies to innovate and improve. Local rivals push each other to lower costs, improve quality and service, and create new products and processes, also will keep each other honest in obtaining government support Copyright Material Arab Open W2-01/03/2014 15
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1. The effect of one point depends on the others. For example, factor disadvantages will not lead firms to innovate unless there is sufficient rivalry. The diamond also is a self-reinforcing system. For example, a high level of rivalry often leads to the formation of unique specialized factors. At the broadest level, weaknesses in any one determinant will constrain an industrys potential for advancement and upgrading. But the points of the diamond are also self-reinforcing: they form a system. Two elements, domestic rivalry and geographic concentration, have especially great power to transform the diamond into a system domestic rivalry because it promotes improvement in all the other determinants, and geographic concentration because it elevates and magnifies the interaction of the four separate W2-01/03/2014 Copyright Material Arab Open influences. 17
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The Diamond as a System
The Diamond as a System

2. Another effect of the diamonds systemic nature is that nations are rarely home to just one competitive industry, rather, the diamond creates an environment that promotes clusters of competitive industries. Competitive industries are usually linked together through vertical (buyer-seller) or horizontal (common customers, technology, channels) relationships. One competitive industry helps to create another in mutually reinforcing process. Porter provides a somewhat detailed example to illustrate the system. The example is the ceramic tile industry in Italy. Porter emphasizes the role of chance in the model. Chance events can either benefit or harm a firms competitive position. These can be anything like major technological innovation or inventions, acts of war and damage, or dramatic shifts in exchange rates. One might wonder how agglomeration (accumulation) becomes self18 reinforcing Copyright Material Arab Open University Egypt Branch-B301B W2-
The role of government

The government plays an important role in Porters diamond model. Like everybody else, Porter argues that there are some things that governments do that they should not, and other things that they do not do but should. He says, "Governments proper role is as a catalyst and challenger; it is to encourage - or even push - companies to raise their objectives and move to higher levels of competitive performance "
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The role of government to support the diamonds

1. Focus on specialized factor creation Government should provide national infrastructure like education or research institutions connected with industry and encourage private investments to create factors. 2. Avoid intervention in factor and currency market Intervene to create lower factor cost or favourable exchange rate that help firm to compete internationally 3. Enforce strict product, safety and environmental standards Enforce strict product, safety, and environmental standards which pressure companies to upgrade technology, improve quality and provide features that respond to consumer demands. 4. Limit direct cooperation among industry rivals Allowing more cooperative R&D to achieve economy of scale to reduce duplication of resources and cost
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The role of government to support the diamonds

5. Promote goals that lead to sustained investment Government shape the goal of firms to encourage innovative creation to encouraging investment in human skill and assets 6. Deregulate competition As maintaining state monopoly, restricting entry leading to static market structure and less dynamics. 7. Impose strong domestic antirust policies Real national competitiveness requires policies to disallow merger and alliance because they reduce the incentive to innovate. 8. Reject managed trade Managed trade guaranteed markets for inefficient companies, so trade agreement would reduce motivation to innovate. Therefore, Policies should follow open market access to every foreign nation and remove its barriers.
The role of company policy to support diamonds:
1. Create pressure for innovation: A company should expose themselves to challenges to have incentive to innovate and sell to customer with difficult needs or provide material from advanced suppliers. 2. Seek out the most capable competitors as motivators Company should be dynamic and meet new challenges by studying and respecting competitors and compete with them 3. Establish early-warning systems Company had to investigate new buyers, competitors and maintain relation with research centres 4. Improve the national diamond For international success firm had to improve their national position through forming clusters and deal with local buyers, suppliers to help them upgrade.
The role of company policy to support diamonds:

5. Welcome domestic rivalry To compete globally companies had to have domestic rivals to create incentive to innovation 6. Globalize a tap selective advantage in other nations Innovation to support local diamond is better than outsourcing, that is developing local suppliers is better than depending on one foreign supplier. While foreign activities are selective and only used to support the competitive advantage, e.g. establish R&D overseas. 7. Use alliance only selectively Most alliance with foreign companies is short term, to benefit from foreign capabilities. It requires cooperation between two operations and reconciling goals 8. Locate the home base to support competitive advantage If the national state not supporting companies then they had to move else where to achieve economy of scale W224
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Government policy can support each factor in this diamond; in factor conditions, supporting specialized scientific institutions. In demand condition, government policy can aid this process by instituting and enforcing strict product, safety and environmental standards. In related and supporting industries, government policy may support the formation of regional and national clusters by encouraging the creation of appropriate regional infrastructure. In firm's strategy, structure and rivalry, government policy can influence a firm's behaviour in this respect in various ways, such as through its taxation policies towards long-term investment and through the nature of its competition policies. Government policy needs to take account of how the four elements of the diamond interact with each other, and try to ensure that they reinforce and complement each other, to increase the capacity of a nation to innovate and Copyright Material Arab Open W2-01/03/2014 25 upgrade. University Egypt Branch-B301B
Government policy
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The role of leadership

Leaders believe in change, they energize their organizations to innovate continuously, and energize the importance of their home country as integral to their competitive success and work to upgrade it. Leaders recognize the need for pressure and challenge, because they are willing to encourage appropriate and painful government policies and regulations.
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National policies and domestic politics

Reading 13
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Introduction
Formally, the interaction between domestic policy and international business runs in two directions. States erect policies that affect firms' ability to trade and invest across borders; and the actions of trading and investing firms affect the political climate of the states in which they do business. The relationship, of course, is interactive and changes over time: states influence firms, and firms influence states, and both operate simultaneously in a number of domestic and international arenas. This article concentrates on just one piece of this complex arrangement. Arguing that international business is essentially, incontrovertibly (unquestionably) political, it describes the range of state policies that can shape and constrain the behaviour of firms. Specifically, it examines five different kinds of domestic policy: trade policy, foreign direct investment, capital controls, regulation, and Copyright Material Arab Open University competition policy. W2-01/03/2014 30 Egypt Branch-B301B
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1. Trade policy
Of all the rules impinge (impose) upon the conduct of international business , the rules of trade are perhaps the most obvious. Because trade so clearly crosses national borders and can effect a national economy so deeply, governments have nearly always tried to govern the trade economy and shape the performance. The government try to create rules that directly and indirectly affect the ability of firm to compete across borders .
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At some level of abstraction , nearly any economic policy undertaken by the state can be seen as exerting an influence on trade. Any policy that effect relative costs ,or demand , or labour market can shift the international trading broad macro level is series of policies that target directly the conduct of trade . These policies used for different ends such as To enhance the competitive performance of national based firm. Competitive advantage is wholly tangential (vague) .
However, firms contemplating (anticipating) either a trading relationship or a foreign investment need to investigate the commercial impact of these trading rules. Three kinds of rules demand particular attention A. Export control B. Protectionism C. Strategic trade policy
A. Export controls
States have tried to limit , from time to time , the goods that producers can ship across their borders. These controls serve an economic object , insulating the domestic economy from the inflationary impact of excess foreign demand . Controls serve a distinctly political purpose , they are designed to prevent a rival state from gaining access to key resources and technology, or to punish a state for some perceived wrongdoing , in both of these instances , export controls are employed as "force short of war, a way for the state to enhance its geopolitical aims without having to risk military confrontation .
A. Export controls
Export controls fall into one of two related categories: a. A government will compose a list of strategic goods (computers , encryption codes) and matching list of countries to which the export of these goods is prohibited. b. Impose specific sanction or embargoes (bans) to protest the action of rival state, during the period of apartheid .
The aim of sanction or export control is to force the target country to change Its behavior.
However these policies directly effect commercial conditions (the target state , the sending state , and the peripheral countries ). Strategic import are liable to disappear from the market , leaving importers and import-dependent firms at a loss, while massively unceasing demand for locally available substitutes Exporters from the sending states , meanwhile will face an immediate decline in sales and the potential loss of long term relationship. So firms needs to keep a careful watch on political events that could lead to sanctions or other export controls So firms also needs to be aware of the political forces and particular rules that drive sanction policies
A. Export controls
Protectionism policies are a common feature of the international economy . All states employ protectionism in one guise or another . All firms have felt its various effect. The challenge for mangers is to understand as precisely as possible where protectionism lies , and how best to avoid or exploit its rules . Sometimes protectionism is flagrant , in its oldest and most obvious forms , like tariffs ,quotas and other mechanical barriers to trade , because it want to protect its domestic producer from the strains of international competition. Or it wants to nurture and support domestic production , the state impose quantitative or price based restriction
B. Protectionism
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Foreign firms hoping to sell into the protected market either to fit in under the requisite quota or see the tariff include in the cost of their product , both response damage the competitiveness of foreign firms relative to their domestically based competitions, a similar relationship holds for less direct forms of trade protection, under international pressure to reduce tariffs and eliminate quotas , many state resort to more discreet means. They offer research or export credit to their own firms or impose regulatory conditions that disadvantage foreign firms against their domestic rivals. Such as nontariff barriers are legion , and the subject of intense international acrimony.
B. Protectionism
C. Strategic trade policy

It resets on a series of well-formulated proposition about the national advantage of protecting certain large and critical industries . In these industries (semiconductor, aircraft) the presence of externalities and scale economies means that firms must be global to compete, and that only a handful of competitors will survive in the global marketplace . In these industries , therefore , trade approaches a zero-sum game, either countries foster the growth of their own firms or they risk losing the industry entirely. if firms want to compete , they needs to garner government support. In most cases this support entails not only domestic assistance but also a willingness to fight and negotiate at the international level.
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2. Rules of foreign direct investment
These are rules that influence the condition under which firms can invest directly in the territory of foreign state. Historically , the rules and context of foreign investment have been driven by conflict, fearful of the economic and industrial power of foreign investor , many state in the nineteenth and early twentieth centuries kept exceedingly tight reins over the companies that invested in there territory. Investment were negotiated on case by case basis and the state retained a unique ability to wrest further concessions from foreign investors once their capital hade been sunk into the country and their technologies rendered obsolete by the passage of time.
Recently , the hungry for the capital and technology of foreign firms , many state anxiously competing to attract investors, offering them financial incentive and the promise of preferential treatment, that does not means that foreign investment has lost its political under current , or domestic rules no longer affect the environment for investing firms , foreign investment remains inherently political , and rules can have a dramatic impact on the investing firms. Rules shape the investment climate in a number of ways a. First there were still customarily restrict (they can not enter some sectors) b. Even where investment in permitted , it may nevertheless be conditional on the participation of local joint venture partner , the import of certain technologies or a promise to manufacture for export
States can influence foreign investment through a. Limits on the employment of aliens and specific performance requirement b. Use the rules or FI to attract and advantage particular firms. So the firms must think strategically about how to avoid the limits imposed by domestic law as well as how to reap the benefits that the law particular circumstances are capable of providing . However the politics of FI can create a far more hostile environment and discouraging set of rules, under these circumstances , the investors only options were either to leave the market or fight their battles directly with those who made the rules .
In the past , most of the countries imposed some level of control over the export of capital , fearful of dis-equilibrating swings in short term capital movement , so they regulate how much capital investors could take aboard with them , and under circumstances . Essentially countries use capital control to buffering the domestic economy from free flowing forces of the international capital market ,developing countries find themselves caught between two opposing tensions. On one hand the globalization of capital flows reduce the efficacy of any unilateral rules on capital risk isolating any country that attempts to stem or control the flow . On the other hand , the sheer forces of the global market increase the financial vulnerability of developing states .
3. Capital control
3. Capital control
To blunt the impact of such external shocks , developing countries often maintain a series of control on capital and foreign exchange flow (IMF) for purchase of goods and services . While many of these controls are targeted most short term, or portfolio , flows, they have a strong peripheral impact on flows associated with trade and foreign investment , they also tend to fall most heavily on foreign firms , since government that grant licenses of foreign exchange typically distinguish between foreign and domestic applicant . So multinational firms need to include them as part of strategic landscape , and respond to them accordingly. For countries that are economically volatile , also they need to consider the possibility of dramatic policy shift.
4. Regulations
They are direct instead to the domestic economy , and to the mass of policy objectives that economic activity both facilitates and demand . Because these policies vary so widely across national borders , however , they are inherently important to the conduct on international business. Government regulate in order to promote a public good or address a public bad, known more formally as positive and negative externalities . They regulate to improve economic efficiency by correcting naturally existing market imperfection, or by controlling egregious excesses that the market has produce They also regulate in order to guide market forces towards certain noneconomic , socially desirable (clean air, medical treatment price caps wage control)
4. Regulations
The rules and political of regulation affect foreign firms A. They establish which specific industries are subject to regulation , and thus which firms will need to participate in direct and on-going relationship with the state(pharmaceuticals , food processing , health care .) B. Even when firms move from one regulated market to another , the forms regulation can still be different .
5. Antitrust and competition policy
These are rules that provide the basic guidelines for market activity, rules that are deeply embedded in the political culture of a country and thus tend to vary widely across national borders. Antitrust policy seeks to maintain the efficacies of competition by keeping capitalist firms from growing too large or working too closely with their would-be rivals, it also intend to prevent firms from exerting undue control over the market in which they operate , it target several kind of presumed anti-competitive behaviour : predatory prices , excessive market concentration and collusion. Like regulation , antitrust is a form of state directed almost entirely at the domestic market, state employ antitrust to gain what they believe to be a more efficient use of national recourses , higher level of domestic growth , greater stability in prices , output, or employment , or more equitable distribution of income
5. Antitrust and competition policy
Sometimes government also just use antitrust as a means to limit the reach of firms they perceive as being too large or powerful. Antitrust affect the domestic environment of business , so it affect any foreign firm operating within the domestic market. Sometime , antitrust and competition policy can provide dramatic opportunity for competitive advantage
Domestic politics
The policies that effect international business are generated through some kind of rational process and by particular, often even predictable , If the firm want to understand the policies that are liable to effect their businesses , they need to consider as well the process by which these policies are established , they need , in other words to understand the domestic politic of the countries in which they trade or invest. So where do policies come from? And how are they created ?it depend in some countries rules emerge through rational and predictable process of rent seek. various interest group express their preferences to a political system which arbitrate their interest and rewards those with the most vote, the greatest clout, or staunchest coalition
Domestic politics
In other instances , rules spring much more directly from the will and power of the central leadership. In most countries , power is split among various groups and agencies and rules emerge from a continuous bargaining among them. The outcome of these struggle depend on the institutional structure of the various agencies and the relative weight of power distributed among them.
Domestic politics
This gape between politics and policy is subtle but important , all national policy, it seems safe to conclude, is the product of domestic politics , of the struggle for power and interest that define a national system and create its rules. Firms must consider the full range of political action that resides there: the political forces that give rise to actual policy, as well as the quieter dimmer , but no less powerful forces that shape unwritten rules of business.
The role of international forces

It comes from the international arena and from the growing array of external groups who claims some voice in a countrys ostensibly internal affairs. Some of these voices have existed for countries. The new actors have appeared on the world stage, armed with distinctly international agenda and explicitly determined to shape the ways in which national rules are created and enforced such as GATT and WTO. These institutions contain their own complex sets of rules and their own mechanisms for enforcement . As countries comply with internationality negotiated rules , they shift at the same time their domestic environment for trade and investment .
A change in the rules of trade at the international level may thus necessitate a change in corporate strategy in a particular domestic market. A similar dynamic holds at the regional level , where rules promulgated by institutions such as EU, NAFTA. It is the dramatic growth of nongovernmental organization , transnational groups that form around a particular shared interest :in human rights or environmentalism.
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Not that none of these accusations allege illegal conduct on the part of the corporate participants. And all of them focus on rules that apply primarily at the domestic level. Yet transnational groups are able, increasingly , to exert pressure on how these rules are created and enforced . Through a variety of tactics , they compel government to revisit their own policies and cede, perhaps, a portion of their own power.
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Summary of Block 3: Unit 4

Summary In this unit, we have principally focused upon the increasing environmental complexity that organisations face from challenges posed by continuous change and the increasingly globalised nature of the world economy. We have encouraged you to consider how this additional complexity may make the job of the manager more difficult, and the extent to which the reliability of the various frameworks we introduced you to in Units 1-3 may need to be questioned in order to reflect their application in an ever more fluid and uncertain world. We have also asked you to consider the impact of major institutional forces (not least of which are national and supranational governments) upon an organisation and its attempts to analyse the strategic environment. Copyright Material Arab Open University
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This unit brings to a close our review of the tools of strategic analysis in the strategy toolkit. As you prepare to move to the next stage of the strategy process strategic choice please reflect upon what the main themes we have covered here have been. Put simply, these themes are that most organisations face incredible uncertainty in attempting to make sense of their external and internal environments, and while the frameworks in the toolkit might offer some help in this regard, they will not provide an appropriate

answer without the application of skilled assessment and evaluation. In other words, these tools provide data for you, and the rational approach suggests that having this data may help you to make the right decision. But this will happen only if you can understand what the data says about the context your organisation operates within, and if you can use this insight to choose the right strategic option. However, this is not easy, as we shall see as we begin to consider the choice phase of the strategy process and the theory and reality of strategic decision making in an organisation.
Figure 4.3: Porter's single-diamond framework (Block 3: Unit 4.3 - P 169)
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Homework
Homework Block 3: activities 4.12, 4.13, 4.14, 4.15, 4.16, 4.17, 4.18, 4.19, 4.20, 4.21
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B301B

Making Sense of Strategy II

Copyright Material Arab Open University Egypt Branch-B301B

Course materials to be discussed in tutorials

Copyright Material Arab Open University Egypt Branch-B301B

The Diamond - Four Determinants of National Competitive Advantage

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3. Related and Supporting Industries

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4. Firm Strategy, Structure and Rivalry

A. Strategy ( such as Capital Markets )

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The Diamond as a System

The Diamond as a System

The role of government

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The role of government to support the diamonds

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The role of government to support the diamonds

The role of company policy to support diamonds:

The role of company policy to support diamonds:

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The role of leadership

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National policies and domestic politics

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C. Strategic trade policy

2. Rules of foreign direct investment

2. Rules of foreign direct investment

2. Rules of foreign direct investment

5. Antitrust and competition policy

5. Antitrust and competition policy

The role of international forces

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Summary of Block 3: Unit 4

Summary of Block 3: Unit 4

Summary of Block 3: Unit 4

Figure 4.3: Porter's single-diamond framework (Block 3: Unit 4.3 - P 169)

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Copyright Material Arab Open University Egypt Branch-B301B

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