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Competitive Advantage of Nations

Competitive Advantage of Nations. Pesewa Presentations. COMPETITIVE ADVANTAGE OF NATIONS- Porter’s Diamond Model . Firm strategy, structure and rivalry. Government Policy. Chance. Factor conditions. Demand conditions. Related and supporting industries. DIAMOND FRAMEWORK-Key points.

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Competitive Advantage of Nations

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  1. Competitive Advantage of Nations Pesewa Presentations

  2. COMPETITIVE ADVANTAGE OF NATIONS- Porter’s Diamond Model Firm strategy, structure and rivalry Government Policy Chance Factor conditions Demand conditions Related and supporting industries

  3. 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

  4. 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 resource-dependent 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

  5. 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

  6. INTERNATIONAL LOCATION DECISIONS- The case of NIKE USA ( internationally competitive in all components of the diamond, especially on demand conditions) R&D AND PRODUCT DESIGN South Korea , Taiwan (international competitive advantage on factor conditions and related / supporting industries) MANUFACTURE OF SHOE COMPONENTS SHOE ASSEMBLY Taiwan, China, Thailand, Malaysia , Philippines ( international competitive advantage on factor conditions) MARKETING AND DISTRIBUTION Primarily North America and Western Europe ( international competitive advantage on strategy, structure and rivalry and on demand conditions NIKE’S INTERNATIONAL VALUE CHAIN

  7. 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)

  8. TWO ADDITIONALVARIABLES 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/ de-regulation, legislation, investment policies and implementation procedures)

  9. 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.

  10. 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

  11. 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

  12. 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-Classification

  13. BASIC FACTORS Natural resources, climate, location, unskilled labour, debt capital Passively inherited. Requires little private and social investment Unsustainable and unimportant sources of comp.adv.. Essential in resource-led industries ADVANCED FACTORS Digital communications, infrastructure, highly educated human resources, university research institutes Actively created.Requires sophisticated investment Sustainable.Important sources of comp.adv.Difficult to acquire or imitate Important in high value adding industries software, genetics, pharmaceuticals) INPUT FACTORS-Further Classification

  14. FACTOR CREATION MECHANISMS Basic and Generalized Factors Educational investments in Universities and research inst. Sophisticated social, tech. & econ. investment Providing necessary infrastr. And org. for knowledge transfer Inclusion of private sector in investments Other determinants in the diamond Advanced and Specialized Factors

  15. 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)

  16. DEMAND CONDITIONS-Cont.. • Buyers can be demanding due to challenging circumstances (air conditioning in Japan, anti-corrosive 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

  17. 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

  18. 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

  19. 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

  20. 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.

  21. 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.

  22. 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

  23. INFLUENCES ON DEMAND CONDITIONS DOMESTIC RIVALRY 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 FACTOR CONDITIONS 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

  24. 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 Skills, knowledge, technology and other specialized and advanced factors created in an industry to spill over to benefit related and supporting industries DEMAND CONDITIONS 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)

  25. INFLUENCES ON DOMESTIC RIVALRY DOMESTIC RIVALRY (Upgrade) DEMAND CONDITIONS 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 FACTOR 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 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

  26. INFLUENCES OF OTHER DETERMINANTS ON FACTOR CREATION FACTOR CREATION

  27. INFLUENCES OF OTHER DETERMINANTS ON DEMAND COMPOSITION AND SIZE DEMAND COMPOSITION AND SIZE

  28. INFLUENCES OF OTHER DETERMINANTS ON THE DEVELOPMENT OF RELATED AND SUPPORTING INDUSTRIES RELATED AND SUPPLIER INDUSTRIES

  29. INFLUENCES OF OTHER DETERMINANTS ON DOMESTIC RIVALRY DOMESTIC RIVALRY

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