Unit 5: Discussion 2 Week 5 MBA695

Strategy in Practice

National Competitive Advantage

Have you ever wondered how firms from the same country dominate their industries worldwide? For example, US companies Apple, Google, and Microsoft control the worldwide industry for computer operating systems; German organizations dominate in machine tools; and Italian firms lead in the sale of leather goods. Michael Porter developed a tool, the Porter’s Diamond of National Competitive Advantage, that explains how this happens.

Four factors help push organizations toward greater innovation, with those companies that innovate the most having an advantage in international competition:

Factor conditions. An abundance of critical resources including skilled labor, a technologically advanced knowledge base, easy access to capital, and solid infrastructure provide firms with the tools they need to innovate. Germany is known for an educated, manufacturing-oriented workforce, giving it an advantage in the machine tool industry.

Demand conditions. The more a country’s customers demand innovation, the more likely domestic firms are going to be at the forefront of innovation. Japanese consumers tend to be ahead of the curve in demanding the latest consumer electronics products, giving Japanese consumer electronics firms direction in developing new products.

Related and supporting industries. If a country has multiple parts of the value chain located near each other, it is easier to coordinate innovation, speeding up the pace. Italy is known not just for leatherworking but leatherworking machinery, fashion, and shoes. The four industries being co-located allows for closer coordination and faster innovation.

Firm strategy, structure, and rivalry. Different types of firm structure are suited to particular types of industries. Laws governing how firms are started and how they interact with labor have a large impact on the international strategies that firms pursue. Rivalry also plays a large role. While rivalry, according to the five forces model discussed in Chapter 2 and illustrated in Figure 9.5, tends to decrease profit, it also spurs innovation. Firms that survive high levels of rivalry are usually more prepared to take on international competition.

factor conditions Land, natural resources, and labor that allow for production of goods and services.

demand conditions The conditions in a market that determine the degree of demand for a product or service.

related and supporting industries Industries that produce products or services that are inputs or complements to the industry you are studying.

FIGURE 9.5 Porter’s Diamond of National Competitive Advantage

Source: Adapted from M. E. Porter, The Competitive Advantage of Nations (New York: Free Press, 1990).

Reference

Dyer, Jeffrey, H. et al. Strategic Management: Concepts and Cases. Available from: MBS Direct, (3rd Edition). Wiley Global Education US, 2019.