Competitive Advantage of Nations Author: Michael Porter Presenter: Wesley Shu Prepared for EMBA, Feng-Chia University

Eroded Early Mover Advantages Customer relationship Scale economies Loyalty of distribution channels All can be overtaken by competitors if not improved.

Customer relationship

Scale economies

Loyalty of distribution channels

All can be overtaken by competitors if not improved.

Global Competitiveness Report Composition of GCI GCI Ranking

Composition of GCI

GCI Ranking

Su stainability The only way to sustain a competitive advantage is to upgrade it.

The only way to sustain a competitive advantage is to upgrade it.

Why companies capable of innovation in some nations? Why do they pursue improvements,? Why are they able to overcome the substantial barriers?

Why companies capable of innovation in some nations?

Why do they pursue improvements,?

Why are they able to overcome the substantial barriers?

The Diamond of National Advantage Firm Strategy, Structure, and Rivalry Demand Conditions Related and Supporting Industries Factor Conditions

F a ctor Condition Availability of resources and skills necessary for competitive advantage in an industry e.g., Skilled Labor or Infrastructure

Availability of resources and skills necessary for competitive advantage in an industry

e.g., Skilled Labor or Infrastructure

Demand Condition Home market – the information that shapes the opportunities that companies perceive and the directions in which they deploy their resources and skills.

Home market – the information that shapes the opportunities that companies perceive and the directions in which they deploy their resources and skills.

Related & Supporting Industries The international competitiveness of supplier industries & other related industries

The international competitiveness of supplier industries & other related industries

Firm Strategy, Structure, & Rivalry The conditions governing how companies are created, organized, and managed, and the nature of domestic rivalry

The conditions governing how companies are created, organized, and managed, and the nature of domestic rivalry

Factor Conditions A nation does not inherit but instead creates the most important factors of production to form the backbone of any advanced economy.

A nation does not inherit but instead creates the most important factors of production to form the backbone of any advanced economy.

Factor Conditions The rate and efficiency with which a nation creates, upgrades, and deploys the factors is more important than the volume.

The rate and efficiency with which a nation creates, upgrades, and deploys the factors is more important than the volume.

Factor Conditions A factor must be highly specialized to an industry’s particular needs to support competitive advantage.

A factor must be highly specialized to an industry’s particular needs to support competitive advantage.

Factor Conditions Highly specialized factors come from world-class institutes that create and then upgrade them.

Highly specialized factors come from world-class institutes that create and then upgrade them.

Factor Conditions Selective disadvantages can prod a company to innovate and upgrade – e.g., high land costs, labor shortage, or the lack of local raw materials lead companies to innovating and upgrading to compete.

Selective disadvantages can prod a company to innovate and upgrade –

e.g., high land costs, labor shortage, or the lack of local raw materials lead companies to innovating and upgrading to compete.

Factor Conditions - Disadvantage The following conditions have to be met for disadvantage-advantage transformation to work:

The following conditions have to be met for disadvantage-advantage transformation to work:

Factor Conditions - Disadvantage Signal companies and companies innovate in advance of rivals Favorable conditions in other aspects of the diamond Company commitment

Signal companies and companies innovate in advance of rivals

Favorable conditions in other aspects of the diamond

Company commitment

Demand Conditions Home demand gives companies clear and early picture of emerging buyer needs Demanding buyers

Home demand gives companies clear and early picture of emerging buyer needs

Demanding buyers

Demand Conditions The character of home demand is more significant than the size.

The character of home demand is more significant than the size.

Characters of Demand Conditions Market segment is larger or more visible than in foreign countries. Buyers are more sophisticated. Buyers’ needs anticipate or even shape those of other nations

Market segment is larger or more visible than in foreign countries.

Buyers are more sophisticated.

Buyers’ needs anticipate or even shape those of other nations

Characters of Demand Conditions Exporting values and tastes as well as products

Exporting values and tastes as well as products

Related & Supporting Industries Those who are internationally competitive can provide competitive production methods and trigger innovation and upgrading.

Those who are internationally competitive can provide competitive production methods and trigger innovation and upgrading.

Firm Strategy, Structure, & Rivalry Corporate Structure & Nature of Domestic Rivalry National Circumstances & Context Firm Strategy

Firm Strategy, Structure, & Rivalry – Germany Strictly hierarchical organization & management practices with technical background top managers National Circumstances & Context Technical Oriented Industries

Firm Strategy, Structure, & Rivalry – Italy Family owned, medium size companies with sophisticated taste National Circumstances & Context Consumer goods & services

Firm Strategy, Structure, & Rivalry Domestic rivalry to stimulate competition, creating pressure on companies to innovate and improve

Domestic rivalry to stimulate competition, creating pressure on companies to innovate and improve

The Diamond as a System The effect of one point often depends on the state of others. E.g., sophisticated buyers & human resources Each point can reinforce others. E.g., domestic rivalry promotes improvement in all the other determinants.

The effect of one point often depends on the state of others. E.g., sophisticated buyers & human resources

Each point can reinforce others. E.g., domestic rivalry promotes improvement in all the other determinants.

The Diamond as a System Nations are rarely home to just one competitive industry – clusters of industries.

Nations are rarely home to just one competitive industry – clusters of industries.

The Role of Government Catalyst and Challenger

Catalyst and Challenger

The Role of Government But in politics, a decade is an eternity. Consequently, most governments favor policies that offer easily perceived short-term benefits, such as subsidies, protection, and arranged mergers – the very policies that retard innovation.

But in politics, a decade is an eternity. Consequently, most governments favor policies that offer easily perceived short-term benefits, such as subsidies, protection, and arranged mergers – the very policies that retard innovation.

The Role of Government Focus on specialized factor creation. A void intervening in factor and currency markets. E nforce strict product, safety, and environmental standards

Focus on specialized factor creation.

A void intervening in factor and currency markets.

E nforce strict product, safety, and environmental standards

The Role of Government S harply limit direct cooperation among industry rivals. P romote goals that lead to sustained investment D eregulate competition E nforce strong domestic antitrust policies

S harply limit direct cooperation among industry rivals.

P romote goals that lead to sustained investment

D eregulate competition

E nforce strong domestic antitrust policies

Focus on Specialized Factor Creation G eneral factors rarely produce competitive advantage, e.g., secondary education system, broad national concern such as health care. S pecialized apprenticeship programs, university research efforts linked with industries, private company investment ultimately create the factors that will yield advantage.

G eneral factors rarely produce competitive advantage, e.g., secondary education system, broad national concern such as health care.

S pecialized apprenticeship programs, university research efforts linked with industries, private company investment ultimately create the factors that will yield advantage.

Avoid intervening in factor & currency markets E .g., lower factor cost E .g., currency devaluation

E .g., lower factor cost

E .g., currency devaluation

Avoid intervening in factor & currency markets E .g., lower factor cost E .g., currency devaluation

E .g., lower factor cost

E .g., currency devaluation

Sharply limit direct cooperation among industry rivals C ompanies rarely contribute their best scientists and engineers to cooperative projects. Divert company attention and resources from proprietary research Value of cooperative research: S ignal the importance of emerging technical areas

C ompanies rarely contribute their best scientists and engineers to cooperative projects.

Divert company attention and resources from proprietary research

Value of cooperative research: S ignal the importance of emerging technical areas

Company Agenda Create pressures for innovation Seek out the most capable competitors as motivators Establish early-warning systems – translate into early-mover advantages Improve the national diamond

Create pressures for innovation

Seek out the most capable competitors as motivators

Establish early-warning systems – translate into early-mover advantages

Improve the national diamond

Company Agenda W elcome domestic rivalry G lobalize to tap selective advantages in other nations Use alliances only selectively Locate the home base to support competitive advantage

W elcome domestic rivalry

G lobalize to tap selective advantages in other nations

Use alliances only selectively

Locate the home base to support competitive advantage

Improve the National Diamond F orm clusters – work with its home-nation buyers, suppliers, and channels T ake explicit steps to create specialized factors

F orm clusters – work with its home-nation buyers, suppliers, and channels

T ake explicit steps to create specialized factors