13. national competitive advantage: porter’s diamond.
- in 1990, Michael porter published a book, the competitive advantage of nations, the results determining why some countries succeed and other fail in international competition. He explains why a nation achieves international success in a particular industry.
- porter theorizes that 4 attributes of a nation shape the environment in which local firms compete and these attributes promote or impede the creation of competitive advantage.
// 1. Factor endowments – nation’s position in factors of production such as skill levels of different segments of the workforce and the quality of the technological infrastructure necessary to compete in a given industry.
// 2. Demand conditions – the nature of home demand for the industry’s product or service.
// 3. Relating and supporting industries – the presence or absence of supplier industries and related industries that are internationally competitive.
// 4. Firm strategy, structure, and rivalry – the conditions governing how companies are created, organized and managed and the nature of domestic competition.
- porter suggests that these 4 attributes as constituting the diamond. Firms are most likely to succeed in industries or industry segments where the diamond is most favorable.
- the diamond is a mutually reinforcing system. The effect of one attribute is dependent on the state of others. For example, favorable demand conditions will not result in competitive advantage unless the state of rivalry is strong enough to cause firms to respond to them.
- a nation is likely to achieve international success in a certain industry is a function of the combined impact of (1) factor endowments; (2) domestic demand conditions, (3) related and supporting industries, and (4) domestic rivalry.
- the porter’s diamond predicts the pattern of international trade that countries should be exporting products from those industries where all four components of the diamond are favorable, while importing in those areas where the components are not favorable.
// (1) factor conditions:
\ factor endowments lie at the center of the h- o theory.
\ although he did not propose anything new, he does distinguish the characteristics of factors of production between basic factors and advanced factors.
\ basic factors – natural resources, climate, location, and demographics.
\ advanced factors – sophisticated and highly skilled labor, communication infrastructure, research facilities, and technological know- how.
\ he argues that advanced factors are the most significant for competitive advantage.
\ unlike the naturally endowed basic factors, advanced factors are the results of investment in education and innovation. Investment in basic and higher education, by improving the general skills and knowledge level of the population and by stimulating advanced research at higher education institutions, can enhance a nation’s advanced factors.
\ whereas, the basic factors can be the initial spark for why a country begins producing a certain product, advanced factors account for the sustained competitive advantage a country enjoys in that industry.
// (2) demand conditions:
\ the characteristics of home demand are particularly important in shaping the attributes of domestically made products and in creating pressures for innovation and quality since firms are most sensitive to the needs of their customers.
\ more sophisticated and knowledgeable domestic buyers drive companies to modify existing products to include new design features, improve product quality, or even develop entirely new products.
\ thus, a nation can gain competitive advantage if their domestic consumers are sophisticated, knowledgeable, and demanding. Such consumers pressure local firms to meet high standards of product quality and to produce innovative products.
// (3) related and supporting industries:
\ the benefits of investments in advanced factors of production by related and supporting industries can spill over into an industry, thereby helping it achieve a strong competitive position internationally.
\ for example, technological advances in the u.s. semiconductor industry provided the basis for u.s. success in personal computers.
\ one consequence of this process is that successful industries within a country tend to be grouped into clusters of related industries.
\ such clusters are important because valuable knowledge can flow between the firms within a geographic cluster, benefiting all within the cluster – agglomeration.
// (4) firm stategy, structure, and rivalry:
\ diferent nations are characterized by different management ideologies which either help them or do not help them to build national competitive advantage. The strategies of firms and the actions of their managers have lasting effects on future competitiveness. Maangers have lasting effects on future competitiveness. Maangers are essential who are committed to producing quality products valued by buyers while maximizing the firm’s market share and/or financial returns.
\ strong domestic rivalry induces firms to look for ways to improve efficiency, which makes them better international competitors. Domestic rivalry creates pressures to innovate, to improve quality, to reduce cost, and to invest in upgrading advanced factors. The more intense the struggle is to survive between a nation’s domestic companies, the greater will be their competitiveness. This heightened competitiveness helps them to compete against imports and against companies that might develop a production presence in the home market.
\ apart from the 4 factors identified as part of the diamond, porter identifies the roles of 2 external factors influencing the diamond: (1) chance and (2) government in fostering the national competitiveness of industries.
\ chance events, such as major innovations, can reshape the industry structure and provide the opportunity for one nation’s firms to succeed over another’s.
\ governemtne, by its choice of policies, can lessen or improve its national advantage. For example, regulation can alter home demand conditions, antitrust policies can influence the intensity of rivalry within an industry, and government investments in education can change factor endowments.