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8/16/2019 Chapter 4.Determinants of National Advantage, Competitivenes
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Determinants of National Advantage,
Competitiveness.Reference: Michael Porter –
Competitive Advantage of Nations.A nation may achieve international success in an
industry ecause of four road attriutes that
shape the environment in !hich the local firms
compete or impede the creation of competitive
advantage.
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"hese are: #i. $actor Conditions – factors of production
such as s%illed laour or infrastructure
re&uired to compete in a particular industry.ii. Demand Conditions – the nature of home
demand for the industry's product or service.
iii. Related and (upporting )ndustries – the presence or asence in a nation of supplier
and related industries that are internationally
competitiveness.
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iv. $irm strategy, structure and rivalry –
the conditions in the nation governingho! companies are created, organised
and managed and the nature of domestic
rivalry."hese form the Diamond of Prof. Michael Porter
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$irm (trategy,(tructure and
Rivalry
Demand
Conditions
$actor
Conditions
Related and
(upporting
)ndustries
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Nations tend to succeed in industry or industrysegments !here the *diamond' is the most
favourale.
"he diamond is a mentally re#inforcing system. $ore+ample favourale demand conditions !ill not
lead to competitive advantage unless the stateof rivalry is sufficient to cause firms to respondto them.
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Competitive advantage ased on only one or t!o
determinants is possile in Natural Resource
)ndustries or industries re&uiring little
sophisticated technology or s%ills. (uch
advantage usually proves to e unsustainale
ecause it shifts rapidly and gloal
competitors can easily circumvent it.
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Advantages throughout the diamond arenecessary for achieving and sustainingcompetitive success in the %no!ledgeintensive industries that form the
ac%one of advanced economies.Advantage in every determinant is not a
prere&uisite for competitive advantage inan industry.
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"he interplay of advantage in many
determinants yields self#reinforcing enefits that are e+tremely hard for
foreign rivals to nullify or duplicate
"!o additional variales can influence thenational system vi-. chance and
government.
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Chance events are outside the control of
firms: pure inventions, rea%through in
asic technologies, !ars, e+ternal political developments, maor shifts in
foreign mar%et demand.
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/overnments at all levels can improve or detract
from national advantage. Antitrust policy can
affect domestic rivalry0 regulation can alter
home demand conditions0 investments in
education can change factor conditions0
government purchases can stimulate related
and supporting industries.
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/overnment policies implemented !ithout
consideration of ho! they influence the entire
system of determinants are li%ely to underminenational advantage as enhance it.
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$actor Conditions – all nations have factors of production. "hese are the inputs necessary tocompete in any industry – laour, araleland, natural resources, capital,infrastructure. 1o!ever, the factors mostimportant to competitive advantage in most
industries are not inherited ut are created!ithin a nation through processes that differ!idely across nations and among industries.
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1ence the rate at !hich these factors are created
and upgraded and made more speciali-ed to particular industries are important in the
development and maintenance of
competitive advantage.
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$actor 2ndo!ment1uman Resources – &uality, s%ills and cost
pf personnel ta%ing into account standard
!or%ing hours and !or% ethic.Physical Resources – aundance, &uality,accessiility and cost of a nation's land,
!ater, mineral or timer deposits, hydro#electric po!er sources. Climatic conditions,location and geographic si-e.
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3ocation relative to other nations that aresuppliers or mar%ets affects transportationcosts and the ease of cultural and usiness
interchange.4no!ledge Resources – the nation's stoc% of
scientific, technical and mar%et %no!ledge
earing on goods and services. 4no!ledgeresides in 5niversities, /overnment and private research institutions, statisticalagencies, etc.
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Capital Resources – the amount and cost of capitalavailale to finance industry. "he total stoc% of
capital resources in a country and the forms in
!hich it is deployed are affected y the nationalrate of savings and the structure of the national
capital mar%ets. "he gloali-ation of capital
mar%ets and the large capital flo! among nations
is slo!ly ma%ing national conditions more similar.1o!ever, sustantial differences remain.
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)nfrastructure – transportation andcommunication systems, mail and parcel
deliveries, payments in funds transfer, health
care, etc. "his also includes such things ashousing stoc% and cultural institutions !hich
affect the &uality of life and the
attractiveness of a nation as a place to liveand !or%.
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Competitive advantage from factors depend onho! efficiently and effectively they areemployed. 1o!ever, the value of particular
factors can't e dramatically altered y thechoice of technology.
1uman resources, %no!ledge and capital factors
are highly moile. (%illed people moveamong nations. 1ence, factor availaility ina nation is not an advantage if the factorleaves.
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1ierarchies among factors.6asic Advanced factors.
6asic factors include natural resources,
climate, location, uns%illed and semi#s%illedlaour and det capital.
Advanced factors include modern digital
communications, highly educated personnel7graduate engineers, computer scientists,university research institutes in sophisticateddisciplines8.
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6asic factors are passively inherited ortheir creation re&uires modest or
unsophisticated private or social
investment. (uch factors are either
unimportant to national competitive
advantage or the advantage they provideis unsustainale.
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1ence the returns to these factors are lo!"hus asic factors remain important ine+tractive or agricultural ased
industries 7timer, sugar8 and in these!hole technological s%ills are modestand are !idely availale. 2.g. in
construction of civil proects 7schools,apartments8 !ith lo! engineeringcontent.
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Advanced factors # these are the most
significant !ith respect to developingcompetitive advantage. "hey are neededto achieve the higher order advantages
li%e differentiated products and proprietary production technology 7e.g.copyrights, patents, etc.8. "hey are more
scarce since their development demandslarge and sustained investments in othhuman and physical capital.
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"hese factors are integral to the design and
development of a firm's products and processes as !ell as its capacity to innovate.2.g. Denmar%'s success in en-ymes reflects
a sophisticated scientific %no!ledge infermentation0 its success in furniture reflectsa pool of university trained furnituredesigns. 9apan's pool of engineers 7innumer much higher per capita than almostany other nation8 has een more important tothe success in the numerous 9apanese
industries than any other factor.
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/enerali-ed factors # these include the high!ay
system, a supply of det capital or !ellmotivated employers !ith a good generaleducation.
(peciali-ed $actors – these include narro!lys%illed personnel, infrastructure !ith specific properties, %no!ledge ases in particular
fields. 2+amples include, say, a scientificinstitute !ith e+pertise in optics0 a portspeciali-ing in handling ul% chemicals, a pool of venture capital see%ing to fund
soft!are companies.
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More advanced factors tend also to e more
speciali-ed though not in all cases, e.g. highlys%illed computer programmers, !hile anadvanced factor can e deployed in a range of
industries.(peciali-ed factors provide a more decisive and
sustainale ase for competitive advantage."hey are scarce.
/enerali-ed factors support a asic advantage andare usually availale in many nations and tendto e more easily nullified, circumvented or
sourced through corporate net!or%s.
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(peciali-ed factors are more focused and often
ris%ier, re&uire private and social investment."hey depend also on the e+istence of a aseof generali-ed factors. "hey are necessary in
the more comple+, strategic or proprietarycompany activities. "his ma%es themintegral to innovation (peciali-ed factorsare necessary at the international firm'shome#ase and less effective at a foreignsite. Relate this to the employers at ourmulti-national production outposts and what
is recognized at their northern headquarters.
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1ence, to sustain competitive advantage a
nation's firms must delierately set out tonullify or supplant today's asic factor
advantages even though they still persist.
Note ho!ever, that there is an importantdynamic attached to factor advantage. "he
standard of !hat constitutes an advanced
factor rises continually as the state of%no!ledge, the state of science and the state
of practice improve.
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2.g. the %no!ledge of an engineer, electrical, !ho
graduated in ;nly through continuous training andupgrading of s%ills could the ;
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"he rising !orld standard for factors means that
in order to maintain advantage for factors,not ust a one#time investment is necessary
ut continual re#investment to upgrade their
&uality. Advanced and speciali-ed factorsdemand the greatest, most sustainedinvestment in the most difficult#to#ma%eforms.
1ence, nations succeed in industries in !hichthey are particularly good at creating andupgrading the necessary factors.
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/overnments usually concentrate on providing
investments for factor creation that aregenerali-ed and asic. "he private sector hasan important role in factor creation to attain
factor advantage in most industries.$or e+ample, investments in asic research
!hile important in seeding possiilities for
commercial innovation !ill not lead tocompetitive advantage unless transmitted to,or further developed y, private sectorindustry.
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Surely, the disconnect between
our research institutions and
industry, and the lack of the use of
indigenous development anduse of advanced factors by
our private sector speaks volumes
about our lack of industrialcompetitiveness.
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(elective $actor Disadvantages – competitive
advantage can gro! out of the disadvantagein some factors. $or e+ample, lac% of lo!cost laour can determine innovation to
circumvent it.1ence, innovating around asic factor
advantages leads firms to upgrade y
developing more sophisticated competitiveadvantage 7li%e proprietary technology, oreconomies of scale due to more automatedfacilities8 that can e sustained longer and
!hich may also support higher prices.
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Apply this idea to our collapsed sugar
industry
"hus innovation to offset selective
!ea%nesses is more li%ely thaninnovation to e+ploit strengths.
Again apply this idea to our natural
resource industry.
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1o!ever, to innovate firms must have access to
appropriate human resource to supportinnovation in the industry, for e+amplesupportive home demand conditions. ithoutcommitment firms !ill cede competitiveadvantage. Also domestic rivalry !ill pressurefirms to see% more lasting advantage over theirlocal rivals. 1ence, other parts of the diamond
can influence a nation's firms to innovatearound a selective factor disadvantage ratherthan ta%e the easy !ay out of sourcing factorsfrom aroad.
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$or e+ample, American consumer electronics firms
faced !ith high relative laour costs moved tolocate laour intensive activities in Asiancountries leaving the product and production
process virtually the same. 9apanese rivalsfacing intense domestic rivalry and a maturehome mar%et set aout to eliminate laourthrough automation !hich involved the
reduction in the numer of components !hichfurther lo!ered cost and improved &uality.9apanese firms !ere soon uilding assemly
plants in the 5(, the place that the 5( firms had
sought to avoid.
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Demand Conditions – the second asic
determinant of national competitiveadvantage in an industry is home demand
conditions for the industry product or
service. "hese road attriutes are important – the composition, the si-e and pattern of
gro!th and the mechanisms y !hich the
nation's domestic preferences aretransmitted to the foreign mar%et.
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1ome Demand Composition – Nations gain
competitive advantage in industries orindustry segments !here the home demand
gives local firms a clearer or earlier picture
of uyer needs than foreign rivals can have.$urther, if home uyers pressure local firms
to innovate faster and achieve more
sophisticated competitive advantages thesecould force competitive advantage.
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"hough the mar%et is going gloal the firm is
clearly more attracted to the home mar%et. !ote then the disadvantage that a firm could
have that is totally e"port oriented #urther
the smallness of the local home market as in$%$, is clearly a disadvantage when
considering home demand. &ow then does
such a firm overcome this strike againstcompetitiveness'
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1ence, pro+imity to the right type of uyers is
important in developing national competitiveness.A nation's firms are li%ely to gain competitive
advantage in gloal segments that represent a large
or highly visile store of home demand utaccount for a less significant store in other nations.
(n $%$ we have a relatively large energy sector with
world class demands that are indeed &ome
)emand.
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Should our response to this not make for global
competitive advantage' *et to date it hasnot
Nations in !hich a segment is largest in asolute
terms may gain advantages in reapingeconomies of scale. 1o!ever, the asolutesi-e of segments !ithin a nation plays a
complicated role in competitive nationaladvantage since firms compete gloally andcan achieve large scale even if their homemar%et is small.
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$his is of e"treme relevance to us in the
+aribbean.
(ince a small nation can compete in a segment
!hich represents an important store of local
demand ut a small store of demand
else!here even if the asolute si-e of the
segment is greater in other nations.
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(ophisticated and Demanding 6uyers – A nation's
firms gain competitive advantage if domestic uyers are, or are among, the !orld's mostsophisticated and demanding uyers for the product or service. Pro+imity, oth physical and
cultural to these uyers, helps a nation's firms perceive ne! needs.
$he fact that $%$ has world class
processing firms on its soil and these areindeed demanding if they are to remaincompetitive can allow local firms to supply products and services to them and gain
competitive advantage.
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(ophisticated and demanding uyers could
pressure local firms to meet high standards.1o!ever, if the local firms do not respondthen, as in "B", the plants supply import
!hat they re&uire.1o!ever, if the demands of these sophisticated
uyers are especially stringent or
challenging ecause of local circumstances!hich are most prevalent in the industryaroad, the local firms have a productionopportunity to ecome competitive.
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Again in $%$ our geology is e"tremely difficult
compared with many other ports of the world.Should this not spur local companies into sophisticated e"ploitation procedures for the
energy sector'"he role of sophisticated uyers can also e
played y distriution channels. $or e+ample!hat is emerging is large po!erful chains ofstores especially in the 5( that assophisticated retailers can force manufacturersto introduce ne! models and reduce prices
and thus costs.
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1ence, via these sophisticated retailers a firm in
a small country can appear to e+tend itshome mar%et. aybe we can benefit by plugging into rice Smarts Retailer +hain
Also, if the nation's uyers for a product orservice are multinationals companies anadvantage is created for the nation's firms ecause the domestic 6uyers are also foreign
uyers.
1o!ever, the local firms !ill have to overcomethe uilt#in preference of the multinational to
uy from firms at its home#ase.
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Related and (upporting )ndustries
"he third road determinant of national
advantage in an industry is the presence in
the nation of supplier industries or related
industries that are competitive.
"he presence of international competitive
supplier industries in a nation create
advantages in do!nstream industries.
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# the first is via efficient, early, rapid and
sometimes preferential access to the mostcost effective inputs.
!ote our downstream steel industry
clearly did not benefit from its
pro"imity to (SA$. /hy' aybe
our downstream products were too
near those of (SA$.
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# more significant is the advantage the home#
ased suppliers provide in on#going co#ordination, i.e. lin%ages et!een the value
chains of firms and their suppliers are
important to competitive advantage. )t isclearly an advantage to have serious
management of suppliers neary.
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# most important enefit of home#ased
suppliers is the process of innovation andupgrading. Competitive advantage emerges
from close !or%ing relationships et!een
!orld#class suppliers and industry. $irmsgain &uic% access to information, ne! ideas
and insights and to supplier innovations. "he
e+changing of R B D and oint prolemsolving lead to faster and more efficient
solutions.
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Related )ndustries
"he presence of competitive industries that arerelated often leads to ne! competitiveindustries. Related industries are those in
!hich firms can co#ordinate or shareactivities in the value chain !hen competingor those !hich involve products that arecomplementary. An e+ample of it is thecomplementarity of the (ilicon alley firmshence their massive success over the standalone characteristic of the Route ? firms in
the 2astern 5(A.
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Also firms that produce computers and those
that produce application soft!are can thrivein this supporting environment.
$irm (trategy and Rivalry
"he fourth road determinant of national
competitive advantage is the conte+t in!hich firms are created, organi-ed and
managed as !ell as domestic rivalry.
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(trategy and (tructure of Domestic $irms.
No nation e+hiits uniformity across all firms ut the national conte+t creates sometendencies that are noticeale. $or e+ample,
in )taly many successful internationalcompetitors are relatively small or mediumsi-ed firms that are privately o!ned 7not onstoc% e+change8. )n /ermany, the topmanagement of many companies consists of persons !ith technical ac%grounds andcompanies are hierarchical in organi-ation
and management.
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No one managerial system is universally
appropriate, ut nations !ill tend to suceedin industries !here the management
practices and modes of organi-ation
favoured y the national companies are !ellsuited to the industries' sources of
competitive advantage.
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)talian firms are !orld leaders in a range of
fragmented industries 7lighting, furniture,foot!ear, farics, pac%aging machines8 in
!hich the economies of scale are either
modest or can e overcome through co#operation among loosely affiliated
companies. "hese companies are usually
dominated y a singly individual and canadapt e+tremely &uic%ly to mar%et changes.
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)n /ermany, the engineering and technical
ac%ground of many serving e+ecutives produce a strong inclination to methodical product and process improvement. "hese
characteristics lead to greatest success inindustries !ith high engineering content7optics, chemicals, comple+ machinery8, acareful development process, after#salesservice and hence re&uire a highlydisciplined management structure.
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/erman success is nearer in consumer goods
and services !here image mar%eting andrapid ne! feature and model turnover are
important to competition.
*ou may like to e"amine how firms are
organized in $%$ and seek to determine
what influences this.
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/oals
Company goals - these are most strongly
determined y o!nership structure, the
motivation of o!ners and holders of det,
the nature of the corporate governance and
the incentive processes that shape the
motivation of senior managers.
"he goals of the pulicly held corporations
reflect the characteristics of the nation's
pulic corporations.
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2.g. )n /ermany and (!it-erland, most shares
are held y institutions for e+tended periodsand are rarely traded. 3ong#term capital
gains are e+empt from ta+ation reinforcing a
prospective to hold shares for a sustained period.
Management of firms pay attention to the 6oard
ut day#to#day stoc% price movements are
most vie!ed as particularly important.
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"he 5( is the other e+treme. Most shares are
held y institution investors ut institutionsare measured on &uarterly and share priceappreciation. 1ence, institutions trade
fre&uently in order to reali-e capitalappreciation and account for the mosttrading in larger company stoc%s. 3ong#termcapital gains of investors are ta+ed at thesame rate as ordinary income shortening thetime hori-on of the investment.
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Many institutions, ecause they are managing
pension assets ta%e no account of ta+es ininvestment closures. hen compared !ithlo! transaction costs in the efficient 5(
mar%et more trading is encouraged.1ence, management responds to stoc% price
movements in the NE( ecause of the ta%e#over threat and the prevalence of stoc%options. )n practice, the only effective !ay toremove under#performing management oraffect corporate direction is through ta%e#
over.
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/iven the lac% of effective shareholdergovernance via the 6oard means that there is
little to counteract management ehaviour.
As a result, the rate of return standards forevaluating investments are higher in the 5(
than many other advanced returns. 54 is
nearer that of the 5(0 (!eden and 9apan arecloser to /ermany and (!it-erland.
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"he attitudes of det holders also influencecompany goals. An important differenceamong nations is the e+tent to !hich det
holders also hold e&uity in the companies.)n 9apan, /ermany and (!it-erland regulations
allo! an%s to hold corporate e&uity. 1ence,
lenders hold significant e&uity sta%es and play an important role in corporategovernance.
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6y holding oth 7det and e&uity8 an%s aremotivated to e concerned !ith long#termcompany health rather than short#term cash
flo! and interest coverage.$here is no need to question what thelocal 0anks are interested in
Nations !ill succeed !here the goals of theo!ners and managers match the needs of theindustry.
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/erman and (!iss circumstances favourindustries re&uiring modest initial ris%capital ut there is a need for heavy and
sustained investment and re#investment. 5(conditions favour entry into ne! industriesre&uiring ris% capital and competingindustries !here strong incentives for annual
profitaility are consistent !ith competitiveadvantage ecause of the nature of theirinvestment needs.
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1ence, the 5( does !ell in relatively ne!industries 7computers, soft!are and ne!services8 or ones in !hich e&uity funding of
many ne! companies feeds active domesticrivalry.
)n mature or less glamorous industries, capitalmar%et pressures and governance pressures!ill e prone to lead to harvesting ofcompetitive positive and inade&uate level ofinvestment to sustain improvement and
innovation.
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)n summary, the $inancialCulture of the nation and thegoals of the company and its
managers all affect the %ind ofindustries in !hich the nationcould e competitive.
aybe one can analyse the goals of firms andthe financial culture to get some feel of whatindustries or class of industries may best suit$%$.
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/oals of )ndividuals.
"he motivations of individuals !ho manage and
!or% in firms can enhance or detract from
success in particular industries.
"he Central concern is !hether oth are
motivated to develop their s%ills as !ell as
e+tend the effort necessary for creating and
sustaining competitive advantage.
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Clearly one important aspect is the re!ard systemfor employees. )t is important as to !hate+tent the !or%er is motivated y financial
gain and the nation's ta+ structure.)n (!eden the marginal ta+ rates are high and
people !or% not primarily to enhance theirincome ut to contriute to the company andenhance their sta%es. "his slo!s decision#ma%ing and limits ris%#ta%ing slo!ing successto certain %inds of industries.
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6onus compensation ased on individual performance and rapid promotion of
outstanding employees of say the 5(,
reinforce competitive advantage in some
%inds of industries ut not others
especially those re&uiring longaccumulation of s%ills and comple+ co#
ordination.
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)t is a ig motivation in the 5( to see% a fortune
on a ne! start#up via its sale. (!eden israrely successful in industries !here this
ehaviour is important.
Attitude to!ard ris%#ta%ing influences the ailityto achieve success in certain industries. )nsome nations li%e /ermany, (ingapore,
(!it-erland, a failure from ta%ing a usinessris% is vie!ed as a personal catastrophe, as in"B". )n other nations, a failure or t!o or!hatever is acceptale.
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Also immigration is !ell aligned to ris%#ta%ing.
1ence, countries that allo! immigrationhave seem an unusual proportion of ne!firms set up y ne! comers.
Domestic Rivalry.)t is often suggested that domestic rivalry among
firms is !asteful ecause it leads to
duplication of effort and from derivingeconomies of scale. 1ence, some call forchoosing national champions.
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)n gloal competition successful firms
compete vigorously at home and
pressure each other to improve and
innovate. Domestic rivalry is moreimportant as opposed to rivalry !ith
foreign companies !hen continuous
improvement and innovation are seen asthe essential aspects for competitive
advantage in an industry.
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ith a group of domestic rivals follo!ing
various competitive strategies, there is a
chec% against government intervention
that can stifle innovation or luntcompetition. hen there are fe! rivals
there is pressure for susidies,
guaranteed home demand or favoritismof a local firm. "hese do not foster
competitiveness.
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Competing domestic rivals %eep each other
honest in otaining government support./overnment contracts do not ecome aguaranteed mar%et for any one company ifthe competitors are prepared to fight for
piece of the pie.
)ntense domestic rivalry depends on ne! usiness formation to create ne!
competitors. Ne! usiness formation isimportant to upgrading of competitiveadvantage since it adds to the process of
innovation.
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Ne! entrants and *outsiders' !illing to ta%e
ris%s and ne! approaches to competing."here are t!o asic means for usiness
formation. >ne is the estalishment of
entirely ne! companies, 7either as spin#offsor the result of ne! ideas gained from
academic training or research8. "he other is
for a ne! usiness to e formed y internaldiversification into ne! industries y
e+isting firms.
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"he spin#off unloc%s a ne! product and process
innovation and can lead to serving ne!segments of the mar%et. $actor conditions in
the form of a pool of s%illed and specially
trained personnel are a pre#re&uisite forstarting ne! usinesses. Ris% capital is
re&uired especially in usinesses !hich
cannot e funded y personal resources. National culture and priorities can influence
the industries to !hich outstanding people
are attracted.
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"he 5( had many ne! start#up usinesses !hile 9apanhas a fe!. 9apanese researchers typically oin the
research staff of larger companies. $he best of us in$%$ go looking for a 1ob with the largercompanies, in particular to the #)( firms.
"he method via diversification is almost al!aysto!ards related areas of usiness. 4no!ledge andassets are transferred from the e+isting to the ne! usiness entering the prospects of competitive
advantage. "he fact that an e+isting firm !ishes todiversify into a related field is a potent source ofcompetitive advantage. )nternal entry and itsrelated cousin corporate venturing is common in
9apan, 4orea and /ermany.
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)nvention 2ntrepreneurship and Chance.
)nvention and 2ntrepreneurship drives nationaladvantage. National factor creation, demandconditions, supplier industries, etc., providethe environment that encourages innovation
and entrepreneurship. 6ut again, aninnovation may e completely disconnectedfrom the environment, as !as penicillin !hich
!as discovered in Canada, ut !ascommercially e+ploited in Denmar% and the5( that had the re&uired demand conditions,
i li d f t l d th d t