Pe s e w a Pr e s e n t a t i o n s
Competitive Advantage of Nations
COMPETITIVE ADVANTAGE OF NATIONS- Porter’s Diamond Model
Firm strategy,
structure and rivalry
Chance
Factor conditions
Government
Policy
Demand conditions
Related and
supporting industries
DIAMOND FRAMEWORK-Key points
• The competitive advantage of a nation depends on the international
competitiveness of its firms and the industry within it.However the national
environment exerts a powerful influence on the competitiveness of the firm and its
industry:it provides a home base within which firm and the industry develops
critical resources and capabilities and key success factors
• Four interrelated factors in a nation are responsible for the competitiveness: Factor
conditions, demand conditions, strategy structure and rivalry, related and
supporting industries
• For a country to sustain a competitive advantage in a sector/ industry over time
requires a dynamic advantage:its firms must broaden and extend the basis of their
advantage through imitation and innovation
• The impact of the national environment on firm’s competitive advantage is less
about national resources and more about the dynamic conditions that influence
innovation and imitation
DIAMOND MODEL- key Points
• The diamond is a mutually reinforcing system. The
effect of one determinant is contingent on the state
of others.Advantages in one determinant can also
create or upgrade advantages in others.
• Competitive advantage based on one or two
determinants is possible in natural resourcedependent industries or undifferentiated industries.
Such advantage usually is unsustainable ( except
location/ climate advantages)
• Advantages throughout the diamond are necessary
for achieving and sustaining competitive advantage
USES OF DIAMOND FRAMEWORK
• To identify the sources of competitive advantage
at national/ regional/ industry level
• To formulate global and foreign entry strategies
• To locate the geographic locations of operations
• To develop effective government polices at local/
regional/ national level to reinforce competitive
advantage at three levels
INTERNATIONAL LOCATION DECISIONS- The case of NIKE
USA
R&D AND PRODUCT
DESIGN
( internationally competitive
in all components of the
diamond, especially on
demand conditions)
South Korea , Taiwan
MANUFACTURE OF
SHOE COMPONENTS
SHOE ASSEMBLY
(international competitive
advantage on factor conditions
and related / supporting
industries)
Taiwan, China, Thailand,
Malaysia , Philippines
( international competitive
advantage on factor
conditions)
MARKETING AND
DISTRIBUTION
NIKE’S INTERNATIONAL VALUE CHAIN
Primarily North America and
Western Europe
( international competitive
advantage on strategy, structure
and rivalry and on demand
conditions
DETERMINANTS OF A NATION’S INTERNATIONAL COMPETITIVE
ADVANTAGE
• 1. Factor Conditions: ( skilled labour, infrastructure,
factors of productions, location)
• 2. Demand Conditions: (The nature of home
demand for the industry’s product/ services)
• 3.Related and Supporting Industries:( The presence
of international competitiveness in supplier/ related
industries
• 4. Firm Strategy, Structure and Rivalry: ( The
conditions how companies are created, organized,
managed, and the nature of domestic rivalry in the
nation)
TWO ADDITIONAL VARIABLES IN DETERMINING A NATION’S
INTERNATIONAL COMPETITIVE ADVANTAGE IN AN INDUSTRY
• 5. Chance: (factors usually outside the control of
nations such as wars, act of terrorism, natural
disasters, oil shocks, significant shifts in world
financial markets, external political development
etc.)
• 6. Government Policy: ( Central/ regional / local
governments can improve or detract from national
advantage through policies on regulation/ deregulation, legislation, investment policies and
implementation procedures)
FACTOR CONDITIONS- Key characteristics
• Possession of low cost or uniquely high quality factors that are
significant for an industry are sources of competitive advantage in a
particular industry. If these input factors are also industry/ nation
specific, difficult to transfer, substitute or imitate, then they
become the sources of sustainable competitive advantage
• Competitive advantage from input factors also depends on how
efficiently and effectively they are deployed as well as how nation’s
firms mobilize these factors
• Mere availability of input factors is not sufficient to explain
competitive success: Virtually all nations have some attractive input
factor pools that have never been deployed in appropriate industry
or have been deployed poorly. Other determinants in the diamond
are also essential to translate input factors conditions international
success. Therefore it is not mere access factors but the ability to
deploy them productively that takes on the central importance to
competitive advantage.
FACTOR CONDITIONS-Determinants
INPUT FACTORS
• Human Resources : Such as ; quality, skills and cost of personnel
, work ethics
• Physical Resources : The abundance, quality and cost of nation’s
land water, mineral and other deposits, power sources, physical
traits, location, geographic size, time zone, proximity and
position of the country
• Knowledge Resources : Stock of scientific, technical and market
knowledge bearing on goods and services.Number , quality and
accessibility of nation’s universities, public/ private research
institutions, research output, trade associations
Input factors- Classification- some key points
• The most significant and SCA results when a nation
possesses specialized and advanced factors for competing
in a particular industry
• The availability and quality of advanced factors determines
the sophistication of comp.adv. (Difficulty in replicating)
• In contrast, comp.adv. Based on basic/ generalized factors
is unsophisticated and not sustainable
• Advanced and specialized factors should be continuously
upgraded in order to sustain comp.adv. due to dynamic
nature of innovation and technology.Today’s advanced/
specialized factors are tomorrow’s basic/ generalized
factors
INPUT FACTORS-Classification
GENERALIZED
• Input factors available for
all industries.
(Transportation systems
natural resources,
employees with college
education etc)
• Available in many
nations.Can be easily
nullified easier to replicate
or acquire
SPECIALIZED
• Input factors that are
industry specific
( narrowly skilled personnel,
infrastructure with
specific properties,
employees specific to a
function engineering,
chemistry etc)
• Provide decisive and
sustainable bases for
comp.adv.due to scarcity
• Requires more focused,
riskier private and social
investment
•
•
•
•
INPUT FACTORS-Further Classification
ADVANCED FACTORS
BASIC FACTORS
•
Digital
communications,
Natural resources, climate,
infrastructure, highly
location, unskilled labour,
educated human
debt capital
resources, university
Passively inherited.
research institutes
• Actively created.Requires
Requires little private and
sophisticated investment
social investment
• Sustainable.Important
Unsustainable and
sources of
comp.adv.Difficult to
unimportant sources of
acquire or imitate
comp.adv..
• Important in high value
adding industries
Essential in resource-led
software, genetics,
industries
pharmaceuticals)
FACTOR CREATION MECHANISMS
Basic and Generalized
Factors
Sophisticated
social, tech. &
econ. investment
Inclusion of private
sector in investments
Other determinants
in the diamond
Educational
investments in
Universities and
research inst.
Providing necessary
infrastr. And org. for
knowledge transfer
Advanced and Specialized
Factors
DEMAND CONDITIONS-Determinants
1.Home Demand Composition:
• Segment structure of the demand( fragmented/
consolidated- regional/ national/global)
• The size of the demand( global national demand size is
associated with national advantage)
• Profitability achieved in a segment
• Segment range
• Sophisticated and Demanding Buyers: More sophisticated
and demanding the buyers are, more is the international
advantage.This is because such buyers pressure local firms
to meet standard in product/ service attributes ( Japanese
cameras,Belgian chocolate, Italian shoes etc)
DEMAND CONDITIONS-Cont..
• Buyers can be demanding due to challenging
circumstances (air conditioning in Japan, anticorrosive Volvo in Sweden, high taxes leading to
small car design in Europe etc)
• Buyers can be demanding due to historical passion
towards a product-gardening equipment in UK, high
performance cars in Italy etc)
• Anticipatory buyer needs
DEMAND CONDITIONS-Cont..
2.Other Demand Characteristics
• Rate of growth of home demand
• Early home demand(helps local firms to move sooner than
foreign rivals to become internationally competitive defensive and space industries in USA)
• Early Saturation: encourages upgrading, innovation in
product services and forces internationalization-Heineken
and beer industry in Holland, Car industry in Japan
3. Internationalization of Domestic Demand
• Mobile or Multinational buyers
• Foreign buyers in a nation
RELATED AND SUPPORTING INDUSTRIES
Internationally competitive related and supporting
industries lead to national advantage due to
• Access to most cost-efficient inputs
• Access to the availability of machinery
• Process of innovation and upgrading
• Proximity of human resources and culture similarity
• Sharing activities leading to scale advantages
• Availability of complementary products/ services
FIRM STRATEGY, STRUCTURE AND RIVALRY
• Strategy, Structure of Domestic firms
• Company Goals: short-term/ long term, ownership
structure, the role of shareholders
• Individual Goals: attitude to risk taking, wealth etc
• Domestic Rivalry leading to Comp.Adv.. Due to
–
–
–
–
Creating pressure on firms to innovate
Pressure firms to sell abroad to grow
Upgrade the competitive advantage from other determinants
New business formation( products/ markets) in order to escape
from rivalry pressures
DYNAMICS OF NATIONAL ADVANTAGE -Key points
• The determinants of national advantage constitute a complex
system, yet the system is an evolutionary one, in which one
determinant influences others.
• All the determinants singly or jointly contribute or detracts from
national advantage
• Diamond as a system is dynamic, that the beneficial/
detrimental effect of one determinant often depends on the
state of others
• The sources of SCA in a nation grows out of “self reinforcing
interaction” among all ( or most) determinants, which is difficult
for foreign competitors or nations to replicate
• The sources of SCA of a nation is due to “causal ambiguity” in
that the interplay, self reinforcement and relationship among
determinants are so complex to obscure cause and effect.
DYNAMICS OF NATIONAL ADVANTAGE- Key Points
• The diamond system is also constantly in motion.The national
industry continually evolves to reflect changing circumstances or
fall into decline.
• In simple or resource intensive industries and in standard lower
technology industries, the FACTOR CONDITIONS can be decisive
for national advantage.However, SCA in more sophisticated
industries rarely result from one single determinant
• While nation’s firms may initially draw their competitive
advantage from one determinant, sustaining it will be usually
difficult when advantage expands to include others
• While disadvantage in one or two determinants do not prevent a
nation gaining competitive advantage, the most robust
competitive advantage tends to be associated with self
reinforcing and mutual dependence in many determinants.
INFLUENCES ON FACTOR CONDITIONS
DOMESTIC RIVALRY
Competition stimulates rapid development
of specialized and advanced input factors
FACTOR
CONDITIONS
(Up grade)
DEMAND
CONDITIONS
Level of sophisticated
demand tend to channel
private and public
investment
by the government
RELATED AND SUPPORTING
INDUSTRIES
Stimulate their own mechanism for creating
& upgrading specialized factors
through research and training etc
INFLUENCES ON DEMAND CONDITIONS
DOMESTIC RIVALRY
FACTOR
CONDITIONS
Fierce competition means more investment
in customer marketing, early product development, demand
stimulation and internationalization.
Fierce competition also upgrades demand conditions
through advertising and promotion and enhance foreign demand
by building national image in the industry
Advanced and specialized
factors attract more overseas
firms and resources
which often provide
better domestic and foreign
demand conditions
DEMAND
CONDITIONS
( upgrade)
RELATED AND SUPPORTING
INDUSTRIES
Can enhance the internationalization
of demand for an industry
product through transferability of reputation
I.e made in Japan
INFLUENCES ON RELATED AND SUPPORTING INDUSTRIES
DOMESTIC RIVALRY
Domestic rivalry creates competition among related and
supplier industries to supply best upstream product/ services
efficiently and effectively.Suppliers must innovate and improve
or be replaced
FACTOR
CONDITIONS
DEMAND
CONDITIONS
Skills, knowledge, technology
and other specialized
and advanced
factors created
in an industry
to spill over to benefit related
and supporting
industries
When the size and growth
of home demand is significant
and more specialized suppliers
emerge to address unmet needs,
replace imports or perform
activities
more efficiently and effectively
RELATED AND SUPPORTING
INDUSTRIES
( upgrade)
INFLUENCES ON DOMESTIC RIVALRY
DOMESTIC RIVALRY
(Upgrade)
FACTOR
CONDITIONS
DEMAND
CONDITIONS
Skills, knowledge, technology
and other specialized
and advanced
factors created
are the sources for new start ups
More robots factors are
created due
to domestic rivalry
Demanding buyers seek
multiple sources
and encourage entry .
Highly sophisticated buyers
may also enter the industry via
“backward” integration.
Such buyers
also have pool of resources
and expertise
that upgrade domestic rivalry
RELATED AND SUPPORTING
INDUSTRIES
Suppliers that are internationally successful often
enter user industries by bringing skills and
other resources through “forward” integration.
This can reshape industries providing the formation of
comp. Adv.. Spin-offs from supplier industries can bring creativity and innovation
INFLUENCES OF OTHER DETERMINANTS ON FACTOR CREATION
DOMESTIC RIVALRY
RELATED AND
SUPPORTING
INDUSTRIES
DEMAND
CONDITIONS
A number of local competitors in vigorous
competition stimulates the rapid development of
skilled human resources , related technologies,
market specific knowledge and specialized
infrastructure
Firms invest in factor creation under pressure not to
fall behind.
Competition among rivals spills over into efforts to
develop relationships with educational and research
institutions and information providers leading to
factor creation
The presence of several domestic rivals can elevate
the political support and consensus for investments in
creating specialized factor by the government.
Related and supporting industries stimulate their own
mechanism (training and education) to create and
upgrade specialized factors.
The existence of clusters of several industries further
stimulates government bodies, educational
institutions, firms and individuals to invest relevant
factor creation
Large home demand for a product or unusually
stringent or sophisticated demand tends to channel
social and private investment into related factor
creation.
Advanced and specialized factors grow up to help
meet pressing local needs
High or stringent local demand raises the likelihood consensus
in government for making factor-creating investments. It also
focuses the attention of individuals and firms on the need for
making private investments
FACTOR
CREATION
INFLUENCES OF OTHER DETERMINANTS ON DEMAND COMPOSITION AND SIZE
DOMESTIC RIVALRY
RELATED AND
SUPPORTING
INDUSTRIES
FACTOR
CONDITIONS
Group of local rivals invests in marketing, driven by
an intensive commitment stimulates primary demand
at home market (Pepsi and Coca Cola I US soft
drinks industry)
Competitive rivalry builds home market awareness
.Aggressive marketing strategies stimulates and
expands home market demand
Early saturation of home demand leads to aggressive
efforts to internationalize home demand.
Vigorous domestic rivalry can enhance foreign
demand by helping to build a national image in the
industry. Foreign buyers take notice and include in
their review of potential sources.
The presence of successful related and supporting
industries enhance international demand for an
industry's products through the transferability of
reputation. ("Made in Japan" in electronics industry
transferred to watches and car industry etc)
A Nation with sophisticated factor crating
mechanisms connected to a particular industry will
attract foreign students and firms, who will learn and
observe. These students and firms often provide
foreign demand for a nation's goods and services
DEMAND COMPOSITION
AND SIZE
INFLUENCES OF OTHER DETERMINANTS ON THE DEVELOPMENT OF RELATED AND
SUPPORTING INDUSTRIES
DOMESTIC RIVALRY
DEMAND
CONDITIONS
FACTOR
CONDITIONS
Group of internationally successful domestic firms,
selling worldwide, channels global demand to the
domestic supplier industry.
Existing related and supporting industry firms create
products/ services tailored to the internationally
competitive industry. Broad line suppliers establish
special divisions to serve an industry
A group of internationally successful home-based
rivals challenges and push the supplier industry to
develop. Under the pressure that grows out of
aggressive competitors among their customers,
suppliers must innovate and be improved or replaced
A group of strong domestic rivals can raise the
standard in supplier and related industries via entry
When size and growth of home demand is
significant, more and specialized suppliers emerge to
address unmet needs, replace imports, or perform
activities efficiently and effectively. The efficiency
of domestic suppliers rises with increasing industry
scale.
Factor conditions and creating mechanisms can
influence the development of related and supporting
industries. Skills, knowledge and technology created
in an industry spill over to related and supporting
industries via buyer / supplier relationship
RELATED AND SUPPLIER
INDUSTRIES
INFLUENCES OF OTHER DETERMINANTS ON DOMESTIC RIVALRY
DEMAND
CONDITIONS
RELATED AND
SUPPORTING
INDUSTRIES
FACTOR
CONDITIONS
Sophisticated users who enter the industry can bring
an acute understanding of buyer needs as well as
pool of expertise and thus enhance the prospects for
competitive advantage. Spin-offs founded by exemployees of sophisticated users lead to many of the
same effect
Entry by established firms from supplier and related
industries produces a domestic industry structure that
can be especially conducive to investment and
innovation.
Entrants from related and supporting induces bring
with them skills and resources from their core
businesses that can reshape competition in an
industry, providing the foundation for competitive
advantage
Specialized and advanced factors and factor crating
mechanisms are the source of spin-offs that enter the
industry bringing new ideas and ways of competing
DOMESTIC RIVALRY