Porter's Five Forces and National Competitiveness

The Competitive Advantage of Nations

• National prosperity does not arise from inherited factors like natural resources or currency value, but rather is created.
• A nation's competitiveness relies on its industry's ability to innovate and upgrade, gaining advantage against global competitors through pressure and challenge.
• These benefits accrue from strong domestic rivals, aggressive home-based suppliers, and demanding local customers.

Global Competition and National Importance

• In an increasingly globalized world, nations are becoming more important because of the shift toward creation and assimilation of knowledge.
• Competitive advantage is locally sustained, shaped by national values, culture, economic structures, institutions, and historical context.
• National patterns of competitiveness differ, and no nation can be competitive in every industry; success is tied to particular industries where the home environment is forward-looking and dynamic.

Challenging Conventional Wisdom

• Current views emphasize labor costs, interest rates, exchange rates, and economies of scale as primary drivers of competitiveness, but these are flawed approaches.
• Popular strategies like mergers, alliances, and government support for specific industries, including policies managing exchange rates or relaxing antitrust measures, often undermine competitiveness.

Patterns of National Competitive Success: Research Overview

• A four-year study examined competitive success patterns in 10 leading trading nations: Denmark, Germany, Italy, Japan, Korea, Singapore, Sweden, Switzerland, the United Kingdom, and the United States.
• The research, involving over 30 native-based researchers using a consistent methodology, challenged conventional wisdom.
• The United States, Japan, and Germany were identified as leading industrial powers.
• In 1985, the 10 studied nations accounted for 50% of total world exports.
• The study sought foundational factors for national competitive advantage by analyzing nations with diverse characteristics, moving beyond single-nation comparisons.

Research Methodology and Focus

• Industries displaying international success were identified using statistical data, published sources, and field interviews, focusing on those with a competitive edge over top global competitors.
• Substantial and sustained exports, plus significant outbound foreign investment from home-country skills defined international success, examined at timepoints in 1971, 1978 and 1985.
• Home base designated for locally owned or autonomously managed companies.
• Studying over 100 industries/groups, the research explored the origins, growth, and international competitive advantage, and sustaining it, in each nation, focusing on industry development and economic impact.

Industry Selection Criteria

• Industries selected per nation represented key competitive groups, accounting for significant exports, exceeding 20% in Japan, Germany, Switzerland, and over 40% in South Korea.
• Analyzed major international successes like German autos and chemicals, Japanese semiconductors and VCRs, Swiss banking and pharmaceuticals, Italian footwear and textiles, and U.S. aircraft and film.
• Research excluded industries heavily reliant on natural resources but included technologically intensive natural-resource related fields like newsprint and agricultural chemicals.

Defining and Achieving National Competitiveness

• National competitiveness lacks a clear definition, unlike the competitiveness of a company.
• Some link it to macroeconomic factors like exchange/interest rates and government deficits, dismissing the fact that Japan, Italy, and South Korea thrived despite deficits, as well as Germany and Switerland despite appreciating currencies.
• Others point to cheap labor, yet Germany, Switzerland, and Sweden prospered despite labor shortages and high wages.
• A notion about bountiful natural resources is dismissed due to the success of countries with limited natural resources like Germany, Japan, Switzerland, Italy, and South Korea
• Others assert government policies drive competitiveness, but government intervention in Italy has been ineffective.

Productivity as the Key

• The meaningful concept of competitiveness at the national level is productivity.
• A nation's primary goal is to improve its citizens' living standard through labor/capital productivity.
• Productivity relies on product quality/features and production efficiency, determining national per capita income.
• Both international trade and foreign investment enhance a nation's productivity by allowing specialization in productive industries but can also threaten industries unable to compete internationally.
• It's inappropriate to define national competitiveness as just achieving a trade surplus or balanced trade through low wages and a weak currency if the nation still imports key goods it cannot competitively produce.
• It is also not just "jobs" but the specific type of higher skilled job growth that decides economic prosperity, which requires focus on commercially viable skills and technology.

National Competitive Advantage and Focused Industries

• A nation's diverse industries vary strikingly in competitive success, concentrating international advantage to particular industry segments.
• German car exports skew towards high-performance models, whereas Korean exports focus on compacts and subcompacts.
• True international competitive advantage exists within only a few nations, shaping the search for the decisive national characteristics yielding specific competitive advantage.
• Classical theory emphasizes production factors such as land, labor and resources. However, classical theory has been overshadowed by globalization and advancements in technology.

New Theories on International Competition

• A new theory must recognize that companies compete in international markets using foreign investment alongside trade.
• The theory must explain why a nation provides a home base for internationally competitive companies by highlighting how essential competitive advantages are created/sustained.
• The home base has the influence on domestic industries while the nationality of shareholders is secondary.
• This theory must move beyond comparative advantage and reflect differentiated products, segmented markets, technology changes, and economies of scale.
• The theory must address why companies based in particular nations innovate and improve faster than foreign rivals.

International Market Success: Innovation and Improvement

• Companies gain competitive advantage through innovation, encompassing new technologies and improved methods.
• Innovation manifests in product design, production processes, marketing strategies, and training methods, often relying on small insights and investments, knowledge and skill.
• Innovations perceive new market opportunities or under-served segments, gaining advantage when competitors are slow to react.
• Japanese firms initially gained an edge by focusing on smaller, compact models that foreign competitors considered unimportant.

Domestic Conditions and Innovation

• Innovations anticipating domestic and foreign needs yield competitive international advantage.
• Swedish firms such as Volvo, Atlas Copco, and AGA succeeded by addressing international product safety concerns.
• Home-market-specific innovations can hinder international competitiveness.
• For instance, companies can lose focus on global market if they over pursue the United States defence market.
• Information is vital for innovation/improvement, sourced through R&D, market research, openness, and unbiased perspectives.

Overcoming Innovation Challenges

• Innovators often come from different industries/countries or are new to particular roles, fostering the development of a new company, new senior manager or through diversifications.
• Innovation results from unusual/dogged effort to succeed amid harsh criticism and obstacles, driven by pressure, necessity, fear of loss, and unwavering determination.
• Sustaining competitive advantage requires continuous improvement because advantages get copied. As an example Korean firms have matched Japanese rivals in TV/VCR production, and similarly designs is seen in Brazilian footwear compared to Italian casual leather shoes

Sustaining Competitive Edge: Upgrading and Global Strategy

• Advantage is best sustained by upgrading, or moving to sophisticated types of competitive strategies.
• That is precisely what Japanese automakers have done, investing in modern plants, process technology like just-in-time production, and other productivity practices to provide better products and customer satisfaction.
• Japanese automakers are now introducing new and premium brand names to compete with the most prestigious passenger cars.
• Companies should adopt a global strategy, selling worldwide under their brand through controlled international marketing channels.
• Advantage is sustained through preemptive strategies, making existing advantages obsolete, or competitors will. Japanese auto companies understood this well.

Change and the Innovative Company

• Change and innovation are intertwined, but change is unnatural, particularly at successful companies facing powerful forces resisting change.
• Companies can become predictable, aiming for stability and defending against the fear of loss. That's why past approaches become standardized and training stifles exploration to the one right way.
• Internal environments become like immune systems, expelling individuals challenging the norm. Innovation ceases and stagnation takes hold before competitors overtake the company.

Diamond Framework of National Advantage

• National advantage stems from four attributes that collectively form a 'diamond':
  • Factor conditions: A nation's input resources, such as skilled labor, necessary for competition.
  • Demand conditions: The nature of home-market demand for the industry's offering.
  • Related and supporting industries: The presence/absence of internationally competitive supplier industries and other related areas.
  • Firm strategy, structure, and rivalry: Conditions governing company formation, organization, and management, along with domestic rivalry.
• The diamond represents the national environment where companies are born and learn how to compete, enhancing international competitive success by availing the necessary resources and skills, shaping opportunities and how resources/skills are used.
• Competitive advantage arises when a national environment supports rapid asset accumulation, facilitates better ongoing information, and exerts pressure to innovate/invest.

Examining the Italian Ceramic-Tile Industry: A Case Study

• Italian companies are identified as world leaders in ceramic tile and exported $10B industry in the mid-late 1980s.
• 30% of world production and almost 60% of world exports for Italian companies concentrated in Sassuolo in Emilia-Romagna region.
• The industrial dynamism, sophisticated and demanding local buyers, plus strong and unique distribution channels created constant pressure for innovation.
• World-class, Italian related industries strengthened that standing.
• Geographic concentration of the cluster supercharged the success.

The Origins of the Italian Ceramic Tile Industry: A Case Study

• Production in Sassuolo grew from earthenware & crockery with histories to the 13th century. Italian tile producers initially depended on foreign resources and production tech.
• Italian tile production had a need to import Kaolin Clay used to make tiles. Additionally the Tile-making equipment was also predominantly sourced from Germany, America, and France.
• Subsequently, process technicians from tile companies left to launch equipment companies, thus the local machinery industry arose by 1970. Italian companies were exporting the very equipment that was needed for their white clay-based tiles.
• A mutually supportive relationship emerged and was reinforced, which in turn supported better prices and equipment. A pool of technicians also developed.

Home Demand and the Italian Tile Industry: A Case Study

• Italy had a high per capita tile consumption by the mid 1960s. They were the first to adopt new designs and features, thus constantly innovating and creating mutually reinforcing processes.
• Specialized stores began opening in the 1980s. By 1985, there were 7,600 showrooms handling roughly 80% of domestic sales.
• 1976, The tile company Piemme tiles were introduced by famous designers drew in designer service companies, in which Italy was already a world leader. A design industry would have over $10B in exports at the time.
• Intense rivalry through the sheer number increased constant innovation for companies. This was augmented through the close proximity of all of the producers living in the same area.

Upgrading Through Hardship: A Case Study in Italy

• In the early 1970s, Italian tile companies faced intense domestic rivalry, pressure from retail customers and the 1973 energy crisis, pushing them to reduce costs.
• The result was a technological breakthrough, the rapid single-firing process which reduced the need to use 225 people, and instead needed 90 people. Cycle time went from 16 to 20 hours, down to 50 to 55 minutes.
• Export from Italian manufacturers would exceed domestic sales by the early 1980s, and exports represented 80% of total sales by 1988 thanks to joint manufacturer efforts to create material handling equipment transforming the manufacturing process
• Italian compensation for the skill categories was lower than in the United States and Germany, as an example. A constant pressure for operations which Italian firms have sought after.

Intercommunication in the Italian Ceramics Industry

• Italian domestic demand for ceramics in industry had become far more saturated by 1970, so to step up their effort supporting Italian tiles would assist their foreign markets
• Publications, and home design would assist advertising, designers with the ability to highlight awareness of Italian tile for awareness, with a need to also capitalize on export
• Trade promotions were implemented in 1980 with other association offices such as 1980, 1984, and 1987 trade shows to promote for investment

Framework for Factors of Production and Competitiveness

• The Standard economic theory notes that factors of productions (Land, Labor, Natural Resources, Capital, and Infrastructure) indicate the flow of trade. Nations export based on the factors which provide in abundance.
• Nations can only inherit or create factors of production. The stock at a certain time is less important than that of how they handle the resources they create in particular industries
• The most relevant production factors and ones to specialize. Basic factors do not make an advantage, but must be technologically intensive and require sustained investments to create.

Competitive Advantage Through Disadvantage

• Selective disadvantages catalyze innovation, turning static disadvantages into dynamic competitive advantages and Japan can be seen as an example.
• The understanding is that deficiencies spur competitive innovation by just-in-time expensive spaced product that was already more minimized expensive space
• Disadvantages convert only under certain conditions. Appropriate signals about expanding must be sent to companies so that they learn to develop their operations out.
• Nations can only innovate in anticipation of foreign rivals. Furthermore, they have the proper signal if they have home demand and active international relations.

The Impact of Labor Costs and Home-Demand Conditions

• US consumer-electronics companies chose to alter production techniques with labor costs and sources
• Japanese firms use home costs by eliminating labor. This lead improved assembly qualities
• Home and demands might minimize globalization but the composition effect for domestic buyers has changed by the way the companies react to demand
• Stringent needs are from local value such as culture, resources. Japanese consumers want small houses. Therefore Japanese electronics has pioneered compact and smaller technologies
• Needs can anticipate shapes from local buyers. Sweeden long has concerns Denmark's also have success for pollution technologies

Related and Supporting Industries

• National advances are present in related and supporting industries that are internationally competitive. Home based suppliers create a most effective input which Italy did when other silver manufacturing industries in part lead world trade
• A close interaction between the suppliers and the other sectors can take constant flow information about ideas and innovation with their own.
• A relationship for leather can be mutually advantageous. Companies can readily source from abroad.
• Nations' companies benefit when most suppliers also compete like them internationally.

Firm Strategy, Structure, and Rivalry

• National circumstances create solid competencies. National contexts tend to create the management as well.
• No universal management exists
• Global standards and industries, such as industries leading in machine lighting, for example, come from this influence
• Country Goals Also Differ Markedly In the Goals That Companies reflect such as characteristics of the capital available to firms. Outstanding talent will be a talent will take on the economy.

Importance and Types of Rivalry

• Competition allows for the creation and persistence of domestic advantages as this happens for many countries' companies
• Countries are stimulated by a final competition to make it advantageous. The presence of very large companies is apparent in Japan with 112 competitors.
• With domestic rivals there are no excuses, such as "unfair practices". Localized rivalry magnifies power. The more intense, the better.

Upgrading Competitive Advantage and the Diamond

• Sources or the advantages from a specific nation is the pressure this presents from the competition or advantages that come up due to simply being there as an advantage.
• Domestic rivals force them beyond and to sustainable edges. Domestic competition pushes them through.
• Digital equipment can still hold itself to IBM and hewlett packard.Sophisticated buyers are not translated like technology because.

The Diamond as a System: Interconnectedness & Government Role

• The effect of one point on the diamond of national advantage depends on the state of others and any one determinant will restrict the total potential
• Governments must aid or give any policies and those are the ones that can build companies of competitive advantage instead.
• The government’s most important role is transmitting and amplifying the diamond. Japan, for example understand that the need to pioneer Frontier with what is a process
• There is a continuous cycle to create advantage and process that requires skill. Governments has a potential for economic power if what I tell are sustained so it is well.

Guidelines for Government Policy to Enhance National Competitiveness

• Focus on specialized factor creation by supporting specialized apprenticeship programs, industry connected university research, and creating strong trade associations etc.
• Avoid intervening factor and currency markets is so that companies compete and survive and to encourage to the world.
• Enforce strict product: Safe policy for competitive advantages by demanding domestic policy. Easing standards is counterproductive.
• Cooperate to limit cooperative research and to allow more R and D investments. Cooperative research should be used.

Shaping Investment and Trade

• Promote goals that lead to sustain investments because tax.
• Deregulate to keep a balanced trade for an industrial market that is competitive and strong.
• Reject manual labor; Managed trade shows the importance of creating a national competitive industry.
• Government trade markets pursued open markets throughout every nation with the ability to effectively create and address the emerging industries and their problems

Explore Porter's framework for national competitiveness. Understand how innovation, education, and strategic location foster industry advantage. This covers key factors driving global success.