National Competitive Advantage of Nations - Coursework Example

National Competitive Advantage of Nations Introduction According to M.E. Porter, the prosperity of a nation is not inherited but created. As per the Classical economics theories, the prosperity of a country does not grow out of its’ national inheritance or bequests or the nation’s labour resources, its currency value or for that matter its interest rates. But a nation’s competitiveness and the conclusive prosperity depend on the capability of its industry to upgrade, innovate and create. A nation attains competitive advantage through competitive firms and firms and industries become competitive through innovation. It is the pressure and the challenge of competing against the best in the world that brings out the best in a nation in terms of competition and the creation of a sustainable competitive advantage. An abundance of inherited factors can only undermine the competitive advantage of a nation. (Porter E.M., 1990) Porter claims that approaches which are presently in vogue in both governments and companies are imperfect. The reason put forward by Porter for them being flawed is that these approach “fundamentally misperceive the true sources of competitive advantage” (Michael E. Porter, 1990). Pursuing them, nations will be able to achieve a short-term success but never will be able to achieve a true and sustainable competitive advantage. Porter says that a new set of perspective and tools are required, a kind of an approach to national competitiveness that has been derived through the direct analysis of successful international companies and not a result of traditional economic ideologies and current intellectual trends. The simple question that needs to asked and solved is “what works, why, it works and how it work?” After finding solutions to these “what, why and how” it’s just a matter of applying them. (Porter E.M., 1990) Hence this paper delves with the ideas and theories of M.E. Porter’s on national competitive advantage. His concept of clusters, the diamond model and as well as the role of the MNEs and FDIs in the culmination of a nation’s competitive advantage. The Concept of Cluster The geographic concentration of interconnected industries, service providers, specialised suppliers and the other associated institutions in a particular sphere or a field that are present in a nation or a within a region are known as clusters. Clusters arise and grow because they increase the productivity with which the companies can compete. These clusters are linked by the interdependence in providing a related category of products and services (Porter E. M, 1990). Due to the close proximity of the clusters both in terms of their activities and geography, the constituents of clusters enjoy a number of economic benefits culminating from positive location and precise externalities. The benefits from the externalities includes access to human resources and suppliers, the knowledge got from the spillovers, the pressure for better performance and the knowledge gained from the interactions with specialised suppliers and customers. (Ketels Christian, 2003) Michael E. Porter, in his Nov-Dec 1998, Harvard Business Review article, “Clusters and the New Economics of Competition” explained how a cluster enhances higher levels of innovation and productivity and as well as lays down the foundation for economic policies and competitive strategies. Moreover, the article also highlights the misconception of location playing no vital role in today’s era of technological advancement and globalization. Porter states that, in theory location may not be any longer a source of competitive advantage, however, in actual practice location still remains central to competition. According to Porter, the economic map of today is characterised by clusters that enjoy a hyper competitive success in the particular field they are involved in. The best and the most famous examples of clusters can be found in Hollywood (media cluster) and Silicon Valley (IT cluster). These clusters influence the overall competition in three ways: They increase the productivity of the companies that are based in the area. Secondly, by giving a push to the direction and the pace of innovation. Lastly, the clusters stimulate the formation of new business and enterprises within the region. The cultural, geographic and the institutional proximity, which are the main characteristics of a cluster provides the companies within a particular region with closer relationship, special information, better and first hand information, powerful motivations and other like advantages that are improbable to tap in from a distance. (Porter E.M., 1998) Today considering the increasing global interest in clusters, which is evident from the fact that as of 2003, the cluster profile database at the Institute of Strategy and Competitiveness contains more than 800 entries on the subject from 52 countries, the trueness of Porters statement, “the more complex, knowledge-based, and dynamic the world economy becomes, the more this is true. Competitive advantage lies increasingly in local elements--knowledge, relationships, and motivation--that distant rivals cannot replicate” is ringing globally. In recent years, various organisations including the European Commission, the OECD, the U.S. National Governors Association and the U.S. AID have taken initiatives and devoted chief conferences for the better understanding of the concept of clusters. (Ketels Christian, 2003) Apart from this significant concept of clusters on national competitive advantage, provided by Porter, there is the Diamond model, which underlines the four determinants of National Competitive Advantage. The Diamond Model Porter’s Diamond Model for the Competitive Advantage of Nations offers a representation that will help to understand the competitive position of a nation in world-wide competition, better. Porter has repeatedly stressed that a, “sustained industrial growth has hardly ever been built upon a nations inherited endowments” (Porter E.M., 1990). The concept of ‘clusters’ originally articulated by Porter addresses the tensions between localistaion and globalization, empahsises how these clusters push innovation and hence competition. The Diamond model or the “Porter’s diamond”, which is more of a direct outcome of interconnection of the quartet of advanced factors and activities in and between the companies and industries in the clusters, looks at the vibrant interaction of demand and supply factors within the cluster, the strategy and structure of its constituent industries and the cluster’s link with the supporting industries- suggesting that the competitiveness does not simply arise from an individual firm but from the relationships between these individual firms (Porter E.M., 1998). The four determinants or the advanced factors that comprise “Porter’s Diamond” of national competitive advantage are: Demand Conditions- that is the sophistication of the customer’s demand in the market. Factor Conditions- this implies to the country’s capability in factors of production. Firm Strategy, Structure and Rivalry- the conditions according to which the different companies are organised and structured the nature of domestic rivalry between the competitors and Related and Supporting Industries. The most significant part of the diamond is role of the government that makes the apex of the diamond as shown in fig.1. The role of the government in Porter’s diamond is to act as a catalyst to facilitate the competition between the companies and enhance higher levels of competitive performance. Figure 1: Porter’s Diamond Model The best illustration for the Porter’s Diamond of national competitive advantage is the Japan’s Fax Machine Industry. The Japanese facsimile companies, like the Fuji Corporation succeeded in this industry due to the following factors: Japan’s Demand Conditions: The Japanese written language created the demand conditions in the market. Factor Conditions: Per capita Japan has a comparatively a high number of electrical engineers. Domestic rivalry among the leading companies like the Canon, Rilcoh and Fuji Xerox in Japanese fax machine industry provide the necessary thrust for new innovations and which resulted in the rapid cost reductions. Availability of a good number of supporting and related industries with good technological skills and Lastly the industry got government support in the form of NTT developments (Porter E.M., 1990). Porter’s Diamond notes down the competitive advantage that can be gained from the benefits of the industrial clusters at regional level. Though the competition and innovation within industrial clusters is enhanced by the geographical and institutional proximity, but Porter maintains that the competitive advantage solely rests on the integrating activities that takes place within the firm, rather than the reliance on allies and other cooperative strategies. According to Porter the capabilities that are harnessed internally are tougher for others to imitate. Alliances poses threats of losing control over the internal knowledge and the challenges that are posed in organisational and strategic coordination with an ally with contrary goals. Porter further suggested that the alliances can be left to second string competitors that are catching up or they can be used as provisional appliances when an industry faces uncertainties resulting from major shifts (Demers et a., 1997) The Role of Product Differentiation In business and marketing product differentiation implies to the process of identifying the differences between a product from that of its competitor and hence making the necessary to make the product more attractive by contrasting its unique qualities with other products in the market. Product differentiation being one of the vital sources of competitive advantage plays an important role both in Porter’s Diamond and Clusters. According to the Cluster Mapping Data of 2003 the U.S. economy consisted of more than 40 traded clusters, which included clusters ranging from heavy construction services to aerospace engines and apparels to footwear to jewelry products (Ketels Christian, 2003). With so many clusters, it is but natural for the existence of product differentiation among different companies to gain competitive advantage. The role of product differentiation being to gain competitive advantage, the methods of adopted by companies to differentiate their products from their competitors naturally leads to innovation and developments of products and innovations. Porter, in his article “What is Strategy” (1996) argues that differentiation based on a unique amalgamation of activities, i.e. a cluster offers a more sustainable foundation for competitive advantage in comparison to low-cost advantaged based on making improvements on operational efficiency and effectiveness (Porter E.M., 1996). Hence these “activity systems” that are closely related to the resource based view and the “value chain framework” (1985), reflects the use of a firm’s internal resources to innovate and create a differentiated product or services, which are difficult to imitate and per se the competitive position remains intact (Ghemawat et al., 1999). This article also claims that the Japanese companies lack competitive strategy and that their competitive advantage is based on improving operational effectiveness, an advantage that has been eroded by imitation. This claim of Porter was a basis of many a debates and reflections among Japan’s policy makers and managers. This later led to the establishment of the Porter Prize that annually felicitates the Japanese companies that have achieved higher profitability through the implementation of unique competitive strategies based on innovation on processes and products (Jorgensen J.J., 2008). Clustering and National Competitive Advantage In the diamond model Porter has explained competitiveness within the parameters of macro-economics, where the industries functioned and competed primarily through the benefits of spatial proximity. However, while examining the conditions allowing a cluster development, Porter focused largely on the elements of industries at the national level such as the urban industrial concentrations in Italy and the British auctioneers in London. While formulating his diamond model, Porter queried on whether a nation is an appropriate level of analysis and also acknowledged the affect of proximity on clustering and with respect to the improvement of and intensification of competition and information flows. References: Demers C.; Hafsi T.; Jorgensen J.J.; Molz R. 1997, Industry Dynamics of Cooperative Strategy: Dominant and Peripheral Games. In: P.W. BEAMISH; J.P. KILLING (eds.), Cooperative strategies: North American perspectives. San Francisco, New Lexington Press, p. 111-132, retrieved on 21st March, 2009. Ghemawat P.; Collis D.; Pisano G.; Rivkin J., 1999, Strategy and the Business Landscape, Reading, Addison-Wesley, 176 p, retrieved on 21st March, 2009. Jorgensen J.J., 2008, Commentario: Michael Porter’s Contribution to Strategic Management, McGill University, Montreal, retrieved on 21st March, 2009, from: http://www.unisinos.br/publicacoes_cientificas/images/stories/pdfs_base/v5n3/236a238_rs01jorgensen.pdf Ketels Christian, 2003, The Development of the Cluster Concept- Present Experiences and Further Developments, NRW Conference, retrieved on 21st March, 2009, from:  http://www.planotecnologico.pt/document/development_cluster_concept.pdf. Porter E.M., 1998, Clusters and the New Economics of Competition, Harvard Business Publishing, Harvard Business School, retrieved on 21st March, 2009, from: http://hbr.harvardbusiness.org/1990/03/the-competitive-advantage-of-nations/ar/1 Porter E.M., 1990, The Competitive Advantage of Nations, New York: The Free Press, retrieved on 21st March, 2009. Porter E.M., 1996. What is strategy?, Harvard Business Review, 74(6):61-78, retrieved on 21st March, 2009. Wallace A, 2006, Greece Frames Future in Technological Cluster, EE Times Europe, retrieved on 21st March, 2009, from: http://eetimes.eu/semi/193501147 Read More