The Competitive Advantage of Nations - Essay Example

? The competitive advantage of nations Introduction Globalization has brought revolutionary changes in this world. Business is one segment in which globalization exerted significant changes. Most of the prominent organizations are operating internationally or cross culturally at present because of globalization. Countries are competing each other attracting as much as foreign direct investment. The competitive power of nations is depending on many factors. Michael Porter has formulated a Diamond model to explain the competitive power of nations in international market. In his opinion, firm strategy, structure and rivalry, factor conditions, demand conditions, related and supporting industries are the factors governments should control in order to manage the competitive power of nations. The following illustration provides a brief idea about the factors which affect the competitive power of nations. (Vision on Innovation: 2. Models on the dynamics of innovation, 2009). Michael Porter while teaching in Harvard University in the 70’s and 80’s has made lot of researches with the help of his associates formulated a frame work to assess the competitive advantages of nations which is illustrated above. Porter has introduced parameters such as clusters of companies, suppliers, related industries and institutions in particular locations as the factors which affect the competitive power of a nation in international market. This framework is known as Porter’s ‘diamond’ of National Competitive Advantage. This paper analyses the competitive power of nations with the help of Michel Porter’s diamond model The competitive advantage of nations According to Porter (1990), “A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade. Companies gain advantage against the world’s best competitors because of pressure and challenge. They benefit from having strong domestic rivals, aggressive home-based suppliers, and demanding local customers” (Porter, 1990). It is difficult for firms to survive in the market without innovation. The market is changing rapidly because of the advancements in science and technology and the arrival of new products. Competition or rivalry in the market always forces nations and firms to innovate new products. Until the beginning of 2000, Nokia was the leader in the mobile phone industry. However, Apple Inc introduced the touchscreen mobile phones at the beginning of 2000 and the leadership of Nokia in the mobile phone industry is slowly diminishing now. Apple controlled the mobile phone industry until recently. However, Samsung captured the leadership of this industry from APPLE at present with the help of innovative smartphones such as Galaxy S2, S3 etc. In short, rivalry and ability to innovate new products determine the success and failures of companies in the market at present. No organization or country can take the leadership for granted. For example the technological dominance of America is currently challenged strongly by Asian countries such as China, Korea and India. America maintained leadership in the technology market until recent times; however, their supremacy seems to be challenged by many other countries at present. The following table provides the strengths and weakness of America as a country at present in the global market. Strategic Issues For the United States Strengths Weaknesses Innovation Science, technology, R&D Entrepreneurship Free and open competition Capital markets (current uncertainty) Economic decentralization Human resources challenges Need to restructure public education Access to higher education Training Americans vs. low skilled immigration Falling U.S. leadership in international economic development U.S. influence, authority, and focus has diminished Weak transitional “Security Blanket” Retraining system Pension security Health insurance access and mobility Unnecessary cost of doing business. Burdensome regulations Litigation costs High-cost / high complexity tax system Energy inefficiency High healthcare costs 1 (Porter, n.d., p.27) From the above table, it is evident that technological developments alone may not help a country in increasing its competitive power. It should be noted that America and European countries have superior abilities in technology compared to other countries. At the same time these countries or regions are currently struggling because of manpower shortage. Foreigners are working in most of the employment sectors in these regions. Because of manpower shortage, labor cost in these regions is extremely high compared to that in India or China. India and China are countries which are blessed with abundant manpower. Because of the supremacy in manpower, labor cost in these countries is extremely lower than that in America or Europe. As a result of that most of the prominent companies are currently trying to establish their manufacturing units in Asian countries in order to exploit cheap labor. It is difficult for the products manufactured in America or Europe to compete with that manufactured in Asian countries, at least in terms of price. In short, competitive power of a country depends not only on technological excellence but also many other factors. In a world of increasingly global competition, nations have become more, not less, important. As the basis of competition has shifted more and more to the creation and assimilation of knowledge, the role of the nation has grown. Competitive advantage is created and sustained through a highly localized process. Differences in national values, culture, economic structures, institutions, and histories all contribute to competitive success. There are striking differences in the patterns of competitiveness in every country; no nation can or will be competitive in every or even most industries. Ultimately, nations succeed in particular industries because their home environment is the most forward-looking, dynamic, and challenging (Porter, 1990). Middle East is a region blessed with immense oil resources. Because of the supremacy in oil production, Middle Eastern countries have monopolized the oil market in the world. Organization of Petroleum Exporting Countries or OPEC is determining the prices of oil in international market. No other country or region has any control over the oil prices in the world. OPEC is believed to be the best example for oligopoly. Same way, outsourcing is one of the major revenue sources of India at present. Plenty of business process outsourcing (BPO) units, are functioning in all major cities of India at present. Jobs worth billions of dollars are currently outsourced to India like cheap labor oriented countries from wealthy countries or regions such as America and Europe. In other words, abundant educated people are the wealth of India like countries at present. It should be noted that economic gurus earlier cited over population as the reason for poor development in India. However economists have changed their views and theories at present. They are of the view that over population is currently serving as a blessing for India. In other words, India’s cheap manpower is helping the country to earn revenues from foreign countries. Hashish from overseas still seems to be preferred in most European countries, a situation similar to that in the Netherlands during the eighties. Apart from consumer preferences, import substitution will probably never take on the avalanche-like characteristics that occurred in the Netherlands, if only because of the absence of a tolerated network for cannabis in the other European countries. Moreover, traditional producing countries have responded to the challenge of Euro cannabis by offering cannabis products of higher quality. Even in the Netherlands, domestic producers are once more facing tougher competition from hashish from traditional production countries. At the same time, however, the Dutch cannabis sector seems to be benefiting from a 'competitive advantage', which means that the Dutch product seems to be able to increase its market share at the European level. Nowadays, production figures in this country exceed domestic demand already several times (Jansen, 2002). From the above descriptions, it is evident that competitive advantage of a country depends on its geographical peculiarities and environment also. The geographies of some countries are suitable for some kind of agriculture. For example, rubber tree is growing well in Thailand, Indonesia, Malaysia and India like hot climatic countries. Therefore these countries have monopoly in rubber market. Rubber prices in international market are fixed by these countries. Market size is another factor which affects the competitive power of a country. It should be noted that American market is one of the biggest markets in the world and hence most of the companies are long for opportunities in this market. China is the number one exploiter of American market at present. Chinese companies believe in bulk production. However Chinese market is not big enough to sell all the products produced in China. Therefore Chinese companies are looking for opportunities in overseas countries all the time. “Influenced by the need to maintain share prices and to create opportunities for employees, most large companies adopt a strategy of waiting until new markets are "large enough to be interesting," leaving the door wide open to quick-acting start-ups” (Vision on Innovation: 2. Models on the dynamics of innovation. 2009) Conclusions Competitive power of nations is determined not only by technological excellence, but also by factors such as ability to innovate, geography, manpower cost, market size, natural resources etc. In other words, a nation can improve its competitive power with the help of skilled labour, technology and knowledge base, government support and culture. Strategy, structure, rivalry of firms, supporting industries, demand in the market and factor conditions are some of the factors which control the competitive power of nations. References Jansen, A.C.M. (2002), The economics of cannabis-cultivation in Europe. Paper presented at the 2nd European Conference on Drug Trafficking and Law Enforcement. Paris, 26&27 September, 2002. Porter M.E. 1990. The Competitive Advantage of Nations. Harvard Business Review. March 1990. [Online] Available at: http://hbr.org/1990/03/the-competitive-advantage-of-nations/ar/1[Accessed 05 January 2013] Porter, M.E. n.d., The Competitive Advantage of Nations, States and Regions. [Online] Available at: http://www.isc.hbs.edu/pdf/20090415_AMP.pdf[Accessed 05 January 2013] Vision on Innovation: 2. Models on the dynamics of innovation. 2009. [Online] Available at: http://www.caneval.com/vision/innovation/innovation2.html[Accessed 05 January 2013] Read More