3H Strategy & International Business
Session 30: The Competitive Advantage of Nations - the Model
The following notes are largely a summary of Porter’s model taken from his book - The
Competitive Advantage of Nations. As such they can be read as a background to the class
The principal economic goal of the nation is to produce a high and rising standard of living for its
A nation’s standard of living is determined by its productivity - the value of the output produced by a unit of labour or capital based on:
; the quality & features of the product which affects prices
; the efficiency of production
Traditional theories on national competitiveness seek to answer the wrong question.
The critical question -
Why do some nations succeed and others fail in international competition? but:
Why are firms based in a particular nation able to create and sustain competitive advantage against
the world’s best competitors in a particular industry or segment?
Central to this creation and sustaining of advantage is, argues Porter, innovation.
Innovation - Creating Advantage
“Firms create competitive advantage by perceiving or discovering new and better ways to compete
in an industry and bringing them to market, which is ultimately an act of innovation”:
; improvements in technology
; better methods / ways of doing things
; product or process changes
Sources of Innovation:
; New technologies e.g. Japanese firms & medical imaging
; New or shifting buyer needs e.g. American fast food & consumer demands for convenience &
; Emergence of new industry segment e.g. small Japanese lift trucks for general purposes ; Shifting input costs or availability e.g. transport costs and global production
; Changes in government regulation e.g. early U.S. financial deregulation & American firms’
Innovation - Sustaining Advantage
; Companies need to perceive opportunities for innovation and exploit them quickly. ; Early moves often allow for innovations to be translated into other advantages and advantage
to be sustained over time e.g. economies of scale, learning effects, establishing a brand name. ; A hierarchy of advantages - some more sustainable than others e.g. process technology v.
; More sources better than one for continued success e.g. Japanese copiers - flexible
manufacturing, dealer networks & reliability
; Continued improvement & upgrading - move up the hierarchy e.g. Korean shipbuilders
expanded scale & increased technology whilst still possessing low labour costs
The Bases of the Model
Why do the firms in a particular nation achieve international success in a particular industry?
Porter argues that firms gain competitive advantage when:
; their home base allows and supports the most rapid accumulation of specialised assets and
; their home base affords better ongoing information and insight into product and process needs; ; the goals of owners, managers, and employees support intense commitment and sustained
; their home environment is the most dynamic and challenging, stimulating firms to upgrade &
widen their advantages overtime.
These are the conditions which provide the pressures on firms to invest and innovate.
The Competitive Diamond
Figure 3.5 The determinants of national advantage (Porter抯 diamond)
Firm strategy,Firm strategy,
structure andstructure and
Related andRelated and
Porter’s model outlines four broad attributes of a nation that shape the environment in which
local firms compete that promote or impede the creation of competitive advantage: ; factor conditions
; demand conditions
; related & or supporting industries
; firm strategy, structure and rivalry
Two additional factors can also affect the model:
All the factors act individually and as a mutually reinforcing system.
1. Factor conditions
The nation’s position in factors of production, such as skilled labour or infrastructure, necessary to compete in a given industry will affect the resources available to create competitive advantage.
Goes beyond traditional factors of production. Factors most important to competitive advantage
are created within not inherited by the nation through processes that differ widely across nations and industries. Stock less important than rate at which created, upgraded and made more specialised. Selective disadvantages can, through influencing strategy and innovation, lead to sustained success.
Grouped into broad categories:
; Human Resources quantities, skills and costs of personnel.
; Physical resources abundance, quality, accessibility and cost of land, water, mineral or timber
deposits, hydro electric sources, fishing grounds, climate, location (relative to markets and
suppliers, time zone) and geographic size.
Knowledge resources scientific, technical and market knowledge, residing in universities, ;
research institutions, statistical agencies, business & scientific literature, market research
reports, trade associations etc.
; Capital resources amount and cost of capital available to finance industry, depending on
savings rates and capital market structures. Globalisation making conditions more similar but
differences likely to persist.
; Infrastructure type, quality and cost available that affects competition, includes transport
systems, communications, mail & parcel delivery, payments/funds transfer systems, health care
etc. Also housing, cultural institutions affecting quality and attractiveness of life.
The mix will vary widely and different factors important for different industries. Advantage depends on how efficiently and effectively that they are deployed and where, not just access. Human factors can be mobile between nations.
These categories also form a hierarchy of factors:
; Basic factors (natural resources, climate, location, unskilled/semi skilled labour, debt capital)
tend to be inherited, or require modest investment, often the advantage supplied is
unsustainable by diminished necessity, wider availability or easy access by global firms
; Advanced factors (modern communications infrastructure, highly educated personnel, research
institutes) now most significant for higher order competitive advantage such as differentiated
products & propriety process technology. Require larger sustained investments and more
difficult to produce globally.
; Generalised factors (highways, debt capital, university-educated employees) can be deployed
in wide range of industries.
; Specialised factors (specific skilled personnel specific knowledge bases or infrastructure),
usually includes most advanced factors, but not always e.g. computer programmers can go into
wide range of industries. More useful for sustained bases of competitive advantage because
less available globally or to outsiders.
Advanced & specialised factors tend to create the most significant and sustainable competitive advantages.
The standard for factors is constantly rising; factor creation requires continual investments in
factor-creating mechanisms like education institutions and research institutes. In addition
private as well as public investment needed.
2. Demand conditions.
shaping The nature of home demand for the industry’s product or service. Influence is dynamic -
the rate and character of improvement by a nation’s firms. Quality more important than quantity.