Competitive Advantage

• national comparative advantage is world leadership in specific industries
• firm level competitive advantage is superior performance relative to other competitors in the same industry or industry average
• national competitiveness = national comparative advantages and firm level competitive advantages
• three perspectives that explain development of national competitive advantage:

  1. competitive advantage of nations
  2. determinants of national competitiveness (diamond model)
  3. national industrial policy
• competitive advantage of nations perspective: In 1990 Professor Michael Porter wrote in The Competitive Advantage of Nations that it depends on collective competitive advantages of nation's firms. Over time, this relationship is reciprocal.
• at both firm and national levels, competitive advantages grow out of innovation
• Australia's innovative Vix has significant investment in R&D at 23% of firms revenue
• innovation results primarily from R&D
• most top European, Japanese, and United States firms spend half or more of their total R&D in countries other than where they're headquartered in order to:

  1. gain talent
  2. cut labor costs
  3. gain insights
• innovation promotes productivity, measured as output per unit of labor or capital
• Ireland and South Korea have been very successful in growing their productivity over time
• determinants of national competitiveness (diamond model) background: Michael Porter in The Competitive Advantage of Nations described several factors that give rise to competitive advantage at both company and national levels. The Porter Diamond Model is composed of four major elements.
• Porter Diamond Model four elements:

  1. demand conditions
  2. firm strategy, structure, and rivalry
  3. factor conditions
  4. related and supporting industries
• demand conditions (diamond model): refers to nature of home market demand for specific products and services, which pressures firms to innovate faster and produce better products
• firm strategy, structure, and rivalry (diamond model): nature of domestic rivalry and conditions in a nation that determines how firms are created organized and managed
• intense rivalry in consumer electronics industries in Japan has pushed firms like Sony to a leading position in the industry
• companies that face highly competitive environment at home tend to outperform global competitors that lack such competition
• the auto industry in Germany has fierce domestic competition amply preparing Volkswagen (owner of Audi and Porsche), BMW, and Daimler for global competition
• factor conditions (diamond model): describe nation's resources such as labor, natural resources, capital, tech, entrepreneurship, workforce skills, and know how
• Germany has an abundance of workers with strong engineering skills helping propel the country
• related and supporting industries (diamond model): presence of clusters of suppliers, competitors, and a skilled workforce
• industrial cluster: concentration of businesses, suppliers, and supporting firms in same industry located at a particular geographic location
• one example of an industrial cluster is the fashion industry in northern Italy
• one example of an industrial cluster is the pharmaceutical industry in Switzerland
• one example of an industrial cluster is the footwear industry in Vietnam
• one example of an industrial cluster is the medical technology industry in Singapore
• one example of an industrial cluster is Wireless Valley in Stockholm, Sweden
• one example of an industrial cluster is the consumer electronics industry in Japan
• the most important sources of national advantage are the knowledge and skills individuals, firms, industries, and countries possess
• knowledge and skills are the most important factors in deciding where companies will locate
• Silicon Valley, California and Bangalore, India have emerged as leading edge business clusters because of availability of specialized talent
• some argue knowledge is most important source of sustainable long run competitive advantage
• a national industrial policy is a proactive economic development plan that a government launches to build/strengthen particular industry, often implemented in collaboration with the private sector
• historically, governments favored traditional industries including automobiles, shipbuilding, and heavy machinery - all with long value chains that produce enormous added value
• five features of national industrial policies:

  1. tax incentives: encourage citizens/firms to save and invest money which can be used for investment
  2. monetary and fiscal policies: low interest loans that provide stable supply of capital
  3. educational systems: ensure steady stream of competent workers
  4. infrastructure: in areas such as IT, comm systems, and transportation
  5. legal and regulatory systems: ensures stability of national economies
• Dubai developed a national industrial policy to become an international commercial center in ICT sector
• governments can influence demand conditions and related and supporting industries through regulations
• governments can influence factor conditions by supporting educational initiatives and capital markets
• governments can influence firm strategy, structure, and rivalry with tax policies and regulations
• for much of early 20th century, government policies limited New Zealand's ability to flourish and trade with the rest of the world