India

Factor Endowments 12 , 13

LO7.2

The sources of national advantage; that is, why an industry in a given country is more (or less) successful than the same industry in another country.

Classical economics suggests that factors of production such as land, labor, and capital are the building blocks that create usable consumer goods and services. 14 However, companies in advanced nations seeking competitive advantage over firms in other nations create many of the factors of production. For example, a country or industry dependent on scientific innovation must have a skilled human resource pool to draw upon. This resource pool is not inherited; it is created through investment in industry-specific knowledge and talent. The supporting infrastructure of a country—that is, its transportation and communication systems as well as its banking system—are also critical.

Factors of production must be developed that are industry and firm specific. In addition, the pool of resources is less important than the speed and efficiency with which these resources are deployed. Thus, firm-specific knowledge and skills created within a country that are rare, valuable, difficult to imitate, and rapidly and efficiently deployed are the factors of production that ultimately lead to a nation’s competitive advantage.

For example, the island nation of Japan has little land mass, making the warehouse space needed to store inventory prohibitively expensive. But by pioneering just-in-time inventory management, Japanese companies managed to create a resource from which they gained advantage over companies in other nations that spent large sums to warehouse inventory.

Demand Conditions

Demand conditions refer to the demands that consumers place on an industry for goods and services. Consumers who demand highly specific, sophisticated products and services force firms to create innovative, advanced products and services to meet the demand. This consumer pressure presents challenges to a country’s industries. But in response to these challenges, improvements to existing goods and services often result, creating conditions necessary for competitive advantage over firms in other countries.

Countries with demanding consumers drive firms in that country to meet high standards, upgrade existing products and services, and create innovative products and services. The conditions of consumer demand influence how firms view a market. This, in turn, helps a nation’s industries to better anticipate future global demand conditions and proactively respond to product and service requirements.

Denmark, for instance, is known for its environmental awareness. Demand from consumers for environmentally safe products has spurred Danish manufacturers to become leaders in water pollution control equipment—products it successfully exported.

Related and Supporting Industries

related and supporting industries (national advantage)

the presence, absence, and quality in the nation of supplier industries and other related industries that supply services, support, or technology to firms in the industry value chain.

Related and supporting industries enable firms to manage inputs more effectively. For example, countries with a strong supplier base benefit by adding efficiency to downstream activities. A competitive supplier base helps a firm obtain inputs using cost-effective, timely methods, thus reducing manufacturing costs. Also, close working relationships with suppliers provide the potential to develop competitive advantages through joint research and development and the ongoing exchange of knowledge.

Related industries offer similar opportunities through joint efforts among firms. In addition, related industries create the probability that new companies will enter the market, increasing competition and forcing existing firms to become more competitive through efforts such as cost control, product innovation, and novel approaches to distribution. Combined, these give the home country’s industries a source of competitive advantage.

In the Italian footwear industry the supporting industries enhance national competitive advantage. In Italy, shoe manufacturers are geographically located near their suppliers. The manufacturers have ongoing interactions with leather suppliers and learn about new textures, colors, and manufacturing techniques while a shoe is still in the prototype stage. The manufacturers are able to project future demand and gear their factories for new products long before companies in other nations become aware of the new styles.

Firm Strategy, Structure, and Rivalry

firm strategy, structure, and rivalry (national advantage)

the conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry.

Rivalry is particularly intense in nations with conditions of strong consumer demand, strong supplier bases, and high new entrant potential from related industries. This competitive rivalry in turn increases the efficiency with which firms develop, market, and distribute products and services within the home country. Domestic rivalry thus provides a strong impetus for firms to innovate and find new sources of competitive advantage.

This intense rivalry forces firms to look outside their national boundaries for new markets, setting up the conditions necessary for global competitiveness. Among all the points on Porter’s diamond of national advantage, domestic rivalry is perhaps the strongest indicator of global competitive success. Firms that have experienced intense domestic competition are more likely to have designed strategies and structures that allow them to successfully compete in world markets.

In the U.S., for example, intense rivalry has spurred companies such as Dell Computer to find innovative ways to produce and distribute its products. This is largely a result of competition from IBM and Hewlett-Packard.

Strategy Spotlight 7.2 discusses India’s software industry. It provides an integrative example of how Porter’s “diamond” can help to explain the relative degree of success of an industry in a given country. Exhibit 7.1 illustrates India’s “software diamond.”

Exhibit 7.1: India’s Diamond in Software

Note: Dashed lines represent weaker interactions.

Source: From Kampur D. and Ramamurti R., “India’s Emerging Competition Advantage in Services,” Academy of Management Executive: The Thinking Manager’s Source. Copyright © 2001 by Academy of Management. Reproduced with permission of Academy of Management via Copyright Clearance Center.

Concluding Comment on Factors Affecting a Nation’s Competitiveness

Porter drew his conclusions based on case histories of firms in more than 100 industries. Despite the differences in strategies employed by successful global competitors, a common theme emerged: Firms that succeeded in global markets had first succeeded in intensely competitive home markets. We can conclude that competitive advantage for global firms typically grows out of relentless, continuing improvement, and innovation. 15

International Expansion: A Company’s Motivations and Risks

Motivations for International Expansion

LO7.3

The motivations (or benefits) and the risks associated with international expansion, including the emerging trend for greater offshoring and outsourcing activity.

Increase Market Size

There are many motivations for a company to pursue international expansion. The most obvious one is to increase the size of potential markets for a firm’s products and services. 16 By early 2009, the world’s population exceeded 6.9 billion, with the U.S. representing less than 5 percent. Exhibit 7.2 lists the population of the U.S. compared to other major markets abroad.

Exhibit 7.2: Populations of Selected Nations and the World

Source: www.geohive.com/global/pop_data2.php.

Many multinational firms are intensifying their efforts to market their products and services to countries such as India and China as the ranks of their middle class have increased over the past decade. These include Procter & Gamble’s success in achieving a 50 percent share in China’s shampoo market as well as PepsiCo’s impressive inroads in the Indian soft-drink market. 17 Let’s take a brief look at China’s emerging middle class: 18

multinational firms

firms that manage operations in more than one country.

· • China’s middle class has finally attained a critical mass—between 35 million and 200 million people, depending on what definition is used. The larger number is preferred by Fan Gong, director of China’s National Economic Research Institute, who fixes the lower boundary of “middle” as a family income of $10,000.