Porter's National Competitive Advantage

Porter's National Competitive Advantage Theory

• Absolute advantage is when a country can produce more of a good at a lesser marginal cost with better quality
• Comparative advantage is when a country can produce a particular good at a lower marginal cost and opportunity cost
• Competitive advantage is any benefit a country or company has over others because of lower material costs, labor costs, or easy access to raw materials, giving them the ability to offer greater value to customers
• A country with both absolute and comparative advantage has a competitive advantage
• Absolute Advantage + Comparative Advantage = Competitive Advantage
• Michael Porter developed a model in 1990 to explain national competitive advantage in "The Competitive Advantage of Nations. "
• Porter stated that a nation's industry competitiveness depends on its capacity to innovate and upgrade
• Four stages of development include:
  • Development based on production factors
  • Development based on investments (capital)
  • Development based on innovation (creativity)
  • Development based on prosperity (economic growth and development)
• A country rich in basic production factors like land, labor, and capital is better positioned to compete globally and achieve economic development
• A country rich in capital investments can compete better globally
• A prosperous nation has the means to engage competitively in the global market
• Porter's theory explains why some nations are more competitive in certain industries
• Four determinants of why some nations are more competitive include:
• Local market resources and capabilities
• Local market demand conditions
• Local suppliers and complementary industries
• Local firm characteristics
• Local market resources and capabilities are also known as factor conditions
• Porter recognized the value of the factor proportions theory/Hecksher and Ohlin's H-O theory, which considers a nation's resources a key exports/imports factor
• Basic factors are a new list of advanced factors like:
• Human resources
• Material resources
• Investments in education
• Technology
• Infrastructure
• Factors are not innate and can develop and change.
• A creative domestic market is critical to ensuring ongoing innovation, leading to a sustainable competitive advantage
• Innovative, trendsetting, and sophisticated domestic markets will pursue the development of new products and technologies
• Large global firms benefit from strong and efficient supporting and related industries, requiring firms to have an efficient and strong support network
• The growth and development of a buyer industry enhances growth opportunities for the corresponding supplier industry
• Interrelated industries can lead to advantages in related industries when one industry succeeds internationally
• Local firm characteristics include firm strategy, industry structure, and industry rivalry
• Strategies help in setting new goals
• Structure helps in managing operations
• Rivalry helps in generating innovation
• The development of an efficient transportation system is crucial for economic growth
• A healthy level of rivalry between domestic firms spurs innovation, competitiveness, and growth in domestic and global markets
• Government and chance play a role in the national competitiveness of industries
• Governments can increase firms and industries competitiveness with policies
• Countries/companies become more competitive when they take opportunities

Country Similarity Theory

• Traditional trade theories emphasize differences in resources and demand as necessary for trade
• The country similarity theory is built upon similar or identical features of nations trading internationally
• Developed countries trade more with developed countries
• Offering similar goods in the market leads to countries prospering
• Swedish economist Steffan Linder developed the country similarity theory in 1961
• Linder proposed that consumers in countries at similar development stages have similar preferences
• Trade is likely between countries with comparable qualities like level of development, savings rates, and natural resources
• Inter-industry trade is the exchange of goods produced in different industries among countries
• The exchange could be when one industry in country A exchanges goods for a dissimilar industry in country B
• Intra-industry trade is the exchange of goods produced in the same industry
• The Geert-Hofstede model is a tool used to compare countries with six dimensions:
• Power distance
• Individualism
• Masculinity
• Uncertainty avoidance
• Long-term orientation
• Indulgence

Product Life Cycle Theory

• Life cycle is all the stages a living thing passes since birth
• Product life cycle is the time a product is in the market till its removal from the shelves
• Raymond Vernon developed product life cycle theory in 1966 to help companies plan the progress of new products
• The theory assumes that new product production will occur completely in the home country of its innovation
• Four stages:
• introduction
• Create awareness, not profits
• Gain widespread product awareness and brand recognition
• Big money is spent on distribution and promotion
• Educate customers about the brand and the product
• Two price-setting strategies:
• Price skimming
• Price penetration
• Growth
• Market knows the product, companies are attracted, profits come in, and market shares stabilize
• Sales usually grow exponentially
• Economies of scale are now in order
• Product rises in popularity
• Businesses may find rival competition
• Maturity
• Sales continue increasing in a decreasing pattern, curve may decrease
• Intense competition since there are many competitor brands
• Businesses and competitors differentiate, price wars and sales promotion become common
• Product differentiation and brand awareness is a must
• Maintaining profitability and preventing sales market decline is the biggest challenge
• Decline
• Sales drop, even with marketing/promotion
• Price wars continue, products are withdrawn, and cost control are important

Global Strategic Rivalry Theory

• It was forwarded in 1980 by economists Paul Krugman and Kelvin Lancaster
• The theory focused on multinational corporations (MNCs) and their path to competitive advantage
• Barriers to entry refers to obstacles a new firm may face when entering an industry/market and are the means to gain competitive advantage such as:
• Research and development (R&D) activities engaged in by companies for the invention of new products/services to remain competitive
• Ownership of intellectual property rights like creations of the mind
• Intellectual property includes things such as a patent, copyright, trademark, brand name, etc
• Patent is an exclusive right granted for a new, inventive, and useful product, which may be used for licensing
• Copyright is the exclusive legal right to reproduce, publish, sell, or distribute something
• Trademark/brand name is a word/group of words/sign/symbol/logo that distinguishes a business' goods/services
• Brand names and trademarks are used for franchising
• Economies of scale means proportionate saving in costs (cost advantage) gained by an increased volume of production
• Cost advantage is from spreading the overhead cost among a greater number of units produced
• Two economic forces of scale:
• Internal economies of scale refers to scale economies by a firm
• External economies of scale refers to scale economies enjoyed by an entire industry
• Unique business processes or methods producing competitive advantage over those without experience
• Having extensive experience in the industry
• Control of resources or favorable access to raw materials

Explore Porter's National Competitive Advantage theory. This model, developed by Michael Porter in 1990, explains how a nation's industry competitiveness relies on the capacity to innovate. It also describes development stages based on production factors and investment.