Competitive Advantage of Nations Session 5
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Competitive Advantage of Nations
Session 5
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Dynamics of competitive advantage… Sustained competitive advantage in an industry or
country grows out of the self reinforcing interplay of advantages in several areas, creating an environment
for overseas competitors to replicate
The national system is as, or more, important than the
individual parts
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Dynamics of competitive advantage…
Why does a nation achieve international success in a
particular industry?
There are 4 broad attributes of a nation that shape the
environment in which local firms compete that promote
or impede the creation of competitive advantage
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National Diamond…
Nations are most likely to succeed in industries or industry
segments where the national diamond is the most favorable.
The diamond is a mutually reinforcing system.
The effect of one determinant is contingent on the state of others
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Firm Strategy,Structure &
Rivalry
FactorConditions
DemandConditions
Related & Supporting
Industries
Chance
Govt.
National Diamond
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Factor Conditions…
Competitive advantage from factors depend on how
efficiently and effectively they are employed.
Factors can be classified as,
Generalized factors
Basic factors
Specialized factors
Advanced factors
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Factor Conditions…
Factors can be classified as,
Generalized factors Highway system, Infrastructure, supply of debt capital,
availability of educated employees
Basic factors
Natural resources, climate, labor force behavior
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Factor Conditions…
Factors can be classified as,
Specialized factors
Skilled labor, knowledge base in particular fields,
Advanced factors
Digital data communication, highly educated population,
Research institutions
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Factor Conditions…
Development of advanced & spl. factors need concerted
effort and large scale investments in both human and
physical capital. Nations normally lead these efforts.
Selective disadvantage in more basic factors can prod a
country to innovate and grow.
Example : Poor natural resource in Japan -> competitive
innovation
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Firm Strategy,Structure &
Rivalry
FactorConditions
DemandConditions
Related & Supporting
Industries
Chance
Govt.
National Diamond
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Demand Conditions…
Three attributes of home demand
Composition of home demand
Size and pattern of growth
Mechanism by which the demands are transmitted to foreign
markets
Companies normally need to be a domestic leader before
embarking on to global positioning
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Demand Conditions…
Large home market size can lead to competitive advantage
due to, Economies of scale
Faster learning opportunities due to demand pressures
Technology developments
Productivity improvements
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Firm Strategy,Structure &
Rivalry
FactorConditions
DemandConditions
Related & Supporting
Industries
Chance
Govt.
National Diamond
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Related & Supporting Industries…
Presence of efficient and world class R&S industries is
critical for building competitiveness
It facilitates supply of cost effective inputs to the main
industry
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Firm Strategy,Structure &
Rivalry
FactorConditions
DemandConditions
Related & Supporting
Industries
Chance
Govt.
National Diamond
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Firm Strategy, Structure &
Rivalry…
National circumstances and context create strong
tendencies in how companies are created and shaped
Amongst all determinants of the ‘Diamond’, rivalry is the
most important because of its powerful stimulating effect on
all others.
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Firm Strategy,Structure &
Rivalry
FactorConditions
DemandConditions
Related & Supporting
Industries
Chance
Govt.
National Diamond
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Two Variables - Govt. & Chance
Govt. influences each of the four determinants through its,
Industrial policies
Fiscal & monetary policies
Regulatory systems
Promotional schemes
Incentives and relief
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Two Variables - Govt. & Chance
Chance events can affect competitive position because of
developments such as,
Technological breakthroughs
New inventions
Political decisions on foreign govts.
Wars, Calamities, Significant shift in global order, …
Discontinuities in inputs - oil shock, surge in world demand, …
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Interplay amongstdeterminants
Influence on Factor conditions
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Patterns of Factor Creation…
Sustained investment in generalized factors is essential to
building national economic progress.
What is important for competitive advantage is unusually
effective mechanisms for creation or upgradation of
advanced & specialized factors
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Patterns of Factor Creation…
Denmark : 11 world class agricultural universities, Carlsberg
Institute in fermentation & biological research, several
research centers in furniture design, .. All in a nation with 5
Mn. Population
German factor creation in Chemistry is unparelleled - Kaiser
Wilhelm University
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Patterns of Factor Creation…
Holland : Spl. Research Institutions in flower growing,
packaging, handling operations, …
California : Wine Research Institute
India : Leather Research Institute, Gem & Jewelry, IT
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Firm Strategy,Structure &
Rivalry
FactorConditions
DemandConditions
Related & Supporting
Industries
A cluster of
domestic rivalsstimulates factor
creationPerceived
national
challenges
stimulate factor
creationHome demand
influencespriorities for
factor creating
investments
R&S industries
create or
stimulate the
creation of
transferable
factors
Influences onfactor creation
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Patterns of Factor Creation…
Factor creation is most strongly influenced by domestic
rivalry
Vigorous competition stimulates rapid development in
Skilled manpower
Related technologies
Market specific research
Specialized infrastructure
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Interplay amongstdeterminants
Influence on Demand
Composition & Size
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Influence on Demand Creation…
Home demand conditions for an industry reflect many
national attributes such as,
Population
Social norms
Climate
Mix of other industries
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Influence on Demand Creation…
Per capita consumption of soft drinks in the US is the highest
in the world, driven by aggressive domestic rivalry between
Coke and Pepsi
Intense domestic rivalry not only stimulates demand, but
creates base for product / market innovations
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Firm Strategy,Structure &
Rivalry
FactorConditions
DemandConditions
Related & Supporting
Industries
Intense rivalry makes
home demand larger
& more sophisticated
A gp. of rivals
builds a national
image &
recognition as an
important
competitor
Sophisticated factor-
creating mechanisms
attract foreign students &
participants by foreign
firms which pulls throughthe nation’s products
Int’l. successful industries
producing complementary
products pull throughforeign demand
Influences onHome demand
conditions
The image of world
class R&S industries
spills over to benefit
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Influence on Demand Creation…
Intense domestic rivalry can also create demand overseas.
A group of domestic rivals build a national image; foreign
companies take note of this and include them as potential
sources.
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Interplay amongstdeterminants
Influence on R&S Industry
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Development of R&S Industry…
The breadth and specialization of supporting industry is
enhanced by the size and growth in home demand
Where home demand is significant, specialized suppliers
emerge to address the unmet needs, replace imports, …
More potent influencer is the aggressive domestic rivalry
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Firm Strategy,Structure &
Rivalry
FactorConditions
DemandConditions
Related & Supporting
Industries
Spl. Factors pools
are transferable to
R&S industries
A gp. of rivals
encourages the
formation of
more specialized
suppliers
Large growing home
demand stimulates the
growth and deepening of
supplier industries
Influences onR&S Industries
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Development of R&S Industry…
Examples:
Semi conductor firms in Japan triggered world class
semiconductor equipment suppliers
Diary & fishing industries of Denmark stimulated world class
food processing, fishing boats, radio telephone communication,
paints for boats, etc..
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Development of R&S Industry…
Examples:
In Germany, world class chemical companies gave impetus to
suppliers of pumps, liquid measurement & control equipment, …
In the US, electronics industry gave birth to world class test &
measurement equipment manufacturers
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Development of R&S Industry…
Examples:
In Japan, Camera manufacturers entry in small copiers
Italian machine tool producers entered into factory automation
Korean TV makers entered into Videotape recorders.
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Interplay amongstdeterminants
Influence on Firm Strategy,
Structure & Rivalry
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Influences on Domestic Rivalry…
Demand conditions enhance domestic rivalry, when home
buyers have multiple options
Highly sophisticated players may also enter the home
industry with advancements- Example : Matsushita,
Kawasaki into Robot making
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Firm Strategy,Structure &
Rivalry
FactorConditions
DemandConditions
Related & Supporting
Industries
Factor abundance or
spl. factor creating
mechanisms spawn
new entrants
New entrants
emerge from
R&S industries
World class users enter supplying industries
Influences onDomestic rivalry
Early product
penetration feeds
entry
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Influences on Domestic Rivalry…
Suppliers particularly those that are internationally successful, often
enter user industries.
Sandvik, Sweden moved from specialty steel to rock drills
SKF from specialty steel to ball bearings
US bio technology industry has been built by top university
departments.
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Influences on Domestic Rivalry…
Domestic rivalry spills over to benefit the nation such as,
Stimulating new rivals through spin offs
Creating & attracting factors
Upgrading and expanding home demand
Encouraging and upgrading R&S industries
Channeling govt. policy in more effective directions.
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How to apply to a firm?
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Industry
CompetitorsRivalry amongst
existing firms
Supplier Power Buyer Power
Entry Barrier
Threat ofSubstitutes
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Barriers & Profitability
Low High
LowLow, Stable
returnsLow, Risky
returns
HighHigh, Stable
returnsHigh, Risky
returns E n t r y
B a r r i e r
s
Exit Barriers
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Dimension Rating Relevance to
Biz
Rationale
Economy of Scale
Differentiation
Entry deterring price
Expected retaliation (resources to
fight back, excess cash and
unused borrowing capacity)
Capital requirements
Switching costs
Access to distribution channel
Cost disadvantage independent of
scale
Government Policy
Barriers to Entry
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Supplier Power
Dimension Rating Relevance Rationale
Supplier Industry Concentration
Presence of Substitute Inputs
Importance of User Industry
(sales volume share)
Impact of Inputs on costs andquality
Suppliers products areDifferentiated (leading tohigher switching costs)
Labour
Threat of forward integration bysuppliers
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Dimension Rating Relevance to
Biz
Rationale
Buyer Industry Concentration
Purchases form a Significant
fraction of the buyer’scost
Products are Differentiated
Switching costs
Industry profitability
Threat of backward integration
Quality of input to end product
Buyer knowledge on market
Buyer Power
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Dimension Rating Relevance to
Biz
Rationale
Trade-off of substitute
Buyer inclination to substitute
Price performance
Overall
Threat of substitutes
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Dimension Rating Relevance
to Biz
Rationale
Numerous or equally balanced
competitors
Slow industry growth
High fixed or storage cost
Lack of differentiation or
switching costs
Capacity augmented in largeincrements
Diverse competitors
High strategic stakes
High exit barriers
Degree of Rivalry
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A Firm’s Strategy
Uniquenessperceived by
customers
Low cost position
Industry
wide
Differentiation Cost Leadership
Segment FOCUS S t r a t e
g i c T a r g
e t
Strategic Advantage
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CONCEPTUAL FRAMEWORK FOR ATTAINING CORPORATE GOALS
COMPETITIVENESS GROWTH
CAPABILITY
CORPORATE
GOALS
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Profitability•EBIDT•PAT
Working Capital•GCA/GS•NCA/GS
Joy•EI Index
PEM•P/E equal to mkt.Avg. P/E
Low investmenthigh ROIprojects
Profitablegrowth thruacquisitions,
etc
BUILDING BLOCKS OF GOAL ACHIEVEMENT
Trusted,Empowered,Aligned,Motivated
Employees
Efficient & Effective SystemsCapable & Productive people
Positive imageamongst
Investors & society
Q,C,DImprovements
FinancialRestructuring
AssetProductivity
CapacityUtilisation
Profitable MktDevelopment
PriceImprovement
ProductMarket
Optimisation
COMPETITIVENESS GROWTH
CAPABILITY PROJECTS
GOALS
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Thank you