Michael Porter: The Competitive Advantage of Nations
Management developing strategy in a global environment needs to understand the competitive advantages
they have over firms from other countries. Porter (The Competitive Advantage of Nations) seeks to ‘isolate the national attributes that foster competitive advantage in an industry’. Porter identifies determinants of national competitive advantage which are outlined in the following diagram. Porter refers to this as the Diamond.
Role of factor conditions
Human resources skills, (price, motivation, industrial relations), Physical resources (land, minerals, climate, location relative to other nations), Knowledge (scientific and technical know-how, educational institutions), Capital (i.e. amounts available for investment, how it is deployed?), Infrastructure (transport, communications, housing)
Basic factors include: natural resources, climate, semi-skilled and unskilled labour. Basic factors are inherited, or at best their creation involves little investment.
Advanced factors include modern digital communications, highly educated personnel, research laboratories and so forth. They are necessary to achieve high order competitive advantages such as differentiated products and proprietary
Role of demand conditions
The home market determines how firms perceive, interpret and respond to buyer needs. This information puts pressure on firms to innovate and provides a launch pad for global ambitions.
There are few cultural impediments to communication in the home market.
The segmentation of the home market shapes a firm’s priorities: companies will generally be successful globally in segments which are similar to the home market.
Sophisticated and demanding buyers set standards.
Anticipatory buyer needs: if consumer needs are expressed in the home market earlier than in the world market, the firm benefits from experience.
The rate of growth: slow growing home markets do not encourage the adoption of state of the art technology.
Early saturation of the home market will encourage a firm to export.
Role of related and supporting industries
Competitive success in one industry is often linked to success in related industries. Domestic suppliers are preferable to foreign suppliers, as ‘proximity of managerial and technical personnel, along with cultural similarity, tends to facilitate free and open information flow’ at an early stage.
This facilitates the generation of clusters. These are concentrations of many companies in the same industry in one area, together with industries to support them. For example, London in the UK is a global financial services centre, with a concentration of banks, legal services, accounting services and a depth of specialist expertise. Silicon Valley is a further example.
Role of strategy, structure and rivalry
Structure: National cultural factors create certain tendencies to orientate business people to certain industries. German firms have a strong presence in industries with a high technical content.
Strategy: Industries in different countries have different time horizons, funding needs and so forth.
(a) National capital markets set different goals for performance. In some countries, banks are the main source of capital, not equity shareholders.
(b) When an industry faces difficult times, it can either innovate within the industry, to sustain competitive position or shift of resources from one industry to another (e.g. diversification).
Domestic rivalry: (a) With little domestic rivalry, firms are happy to rely on the home market.
(b) Tough domestic rivals teach a firm about competitive success.
(c) Each rival can try a different strategic approach.
Two other variables, chance events and the role of government, also play their part in determining the competitive environment.
The factors in the ‘Diamond’ are interrelated. Competitive advantage in an industry rarely rests on a single determinant.
Related industries affect demand conditions for an industry. For example ‘piggy-back’ exporting is when an exporting company also exports some of the products of related industries.
Domestic rivalry can encourage the creation of more specialized supplier industries.
Related business and industries are geographically clustered. A cluster is a linking of industries through relationships which are either vertical (buyer-supplier) or horizontal (common customers, technology, skills). Clusters are supposedly a key factor in the competitive advantage of nations.
Within a country, the industry may be clustered in a particular area.
The Indian software industry is based in Bangalore.
The UK investment banking industry is largely based in London.