Porters National DiamondCompetitive Advantage Of NationsLecture 5 & 6

BackgroundDisillusioned by the economic theories of trade, Michael Porter (1990 from Harvard Business School) advanced a new theory to explain national competitive advantage.The main question he attempts to answer was:Why a nation achieve international success in a particular industry?Example:Why does Japan do so sell in the automobile industryWhy does Switzerland excel in the production and export of precision instruments and pharmaceuticals?Why do Germany and the United States do so well in the chemical industry?

Porter and his team conducted a comprehensive study on 100 industries in10 leading nations to learn what leads to competitive advantage to nations.United StatesGermany ItalySwedenUnited KingdomJapanKoreaDenmarkSingaporeSwitzerlandBackground (Cont.)

Porters Diamond ModelMichael Porter postulated that determinants of competitive advantage of a nation were based on four major attributes.Factor Endowments:- A nations position in factors of production (Labor, Land, and Capital).Demand Conditions:- The nature of home demand for the industrys product or services.Related And Supporting Industries:- The presence of absence of supplier industries and related industries that are internationally competitive.Firm Strategy, Structure and Rivalry:- The conditions governing how companies are created, organized, and managed the nature of domestic rivalry.

And two additional variables that can influence the national diamond in important ways.Chance:- An event, such as major innovations, which can reshape industry structure and provide the opportunity for one nations firms to replace anothers.Government:- By its choice of policies, can detract from or improve national advantage.Porter argues that success occurs where these attributes exist.Greater the attribute, the higher chance of success.According to him diamond is a mutually reinforcing system, the effect of one attribute is contingent on the state of others.Example, favorable demand conditions will not result in competitive advantage unless the state of rivalry is sufficient to cause firms to respond to them.Porters Diamond Model (Cont.)

Porters Diamond Model (Cont.)Determinants of National Competitive AdvantageGovernmentChanceCombined ImpactCombined Impact

Factor EndowmentsTraditions trade theories define factor conditions as land, labor, and capital.Where as porter divided factors in to two categories:Basic factors (unskilled labor, natural resources, climate, location, and demographics) are inherited and require little or no investment to be utilized in the production process.Advanced factors (communication infrastructure, sophisticated and skilled labor, research facilities, and technological know-how) are created and upgraded through reinvestment and innovation to specialized factors.Basic factors can provide only an initial advantage. They must be supported by advanced factors to maintain success.Porters Diamond Model (Cont.)

Factor Endowments (Cont.)For Example:-Switzerland was the First country to experience labor shortages. They abandoned labor-intensive watches and concentrated on innovative/high-end watches.Japan, a country that lacks arable land and mineral deposits and yet through investment has build a substantial endowment of advanced factors.Sweden has a short building season and high construction costs. These two things combined created a need for pre-fabricated houses.Porters Diamond Model (Cont.)

Demand ConditionsHome country Demand plays an important role in producing competitiveness.According to him, it is not only the size of the home demand that matters, but also the sophistication of home country buyers.It is the composition of home demand that shapes how firms perceive, interpret and respond to buyers needs.This forces home country firms to continually innovate and upgrade their competitive positions to meet the high standards in terms of product quality, features and service demands.More specifically, Porter regards the essential conditions of demand as: a home demand that anticipates and leads international demand, industry segments with a significant share of home demand, and sophisticated and demanding buyers. Porters Diamond Model (Cont.)

Demand Conditions (Cont.)For Example:-Italian ceramic Industry after the world war II. There was a postwar housing BOOM. Consumers wanted cool floors because of Hot climatic conditions.Japans knowledgeable buyers of cameras made that industry to innovate and grow tremendously.The French wine industry. The French are sophisticated wine consumers. These consumers force and help French wineries to produce high quality wines.Local demand for cellular phones in Scandinavia made Nokia and Ericson in invest in other developing nations.Porters Diamond Model (Cont.)

Related And Supporting IndustriesThe third broad attribute of national advantage in an industry is the presence of suppliers or related industries that are internationally competitive.Benefits of investment in advanced factors by suppliers and related industries can spill over.For Example:-Technological leadership in the U.S. semiconductor industry provided the basis for U.S. success in personal computers and several other technically advanced electronic products.Switzerland success in pharmaceutical industry is closely related to its international success in technological dye industry.Swedish strength in fabricated steel industry is the reason for development in the Swedens specialty steel industry.Porters Diamond Model (Cont.)

Related And Supporting Industries (Cont.)Successful industries tend to be grouped in clusters in countries which then prompts knowledge flows between firms through employees.One such cluster that porter identified was in the German textile and apparel sector, which included high quality cotton, wool, synthetic fibers, sewing machine needles, and a wide range of textile machinery.Porters Diamond Model (Cont.)

Firm Strategy, Structure, And RivalryThe conditions in the nation governing how companies are created, organized, and managed, and the nature of domestic rivalry.Nations are characterized by different management ideologies which influence the ability of firms to build national competitive advantage.There is a strong association between vigorous domestic rivalry and the creation and persistence of competitive advantage in an industry.For Example:-Japan has high priced land and so its factory space is at a premium. This lead to just-in-time inventory techniques (Japanese firms cant have a lot of stock taking up space, so to cope with the potential of not have goods around when they need it). They innovated traditional inventory techniques.Porters Diamond Model (Cont.)

Government & ChanceRegulation can alter home demand conditionsGovernment investment in education can change factor endowment.For Example:-1991 US Govt Tariff on Japanese imports of LCD screensAPPLE and IBM Protested stronglyJapan The low cost LCD manufacturerIncrease the LCD screens as well as Laptops in the global market Reduce the Market Share.Porters Diamond Model (Cont.)

Evaluating Porters Theory

Question: Is Porter right?

Answer

If Porter is correct, his model should predict the pattern of international trade in the real world.Countries should export products from industries where the diamond is favorable.Countries should import products from areas where the diamond is not favorable.So, far there has been little empirical testing of the theory.Porters Diamond Model (Cont.)

CriticismGovernment can influence on any four components of the diamond.

Porter developed this paper based on case studies and these tend to only apply to developed economies.Porters Diamond Model (Cont.)

Case StudyInformation And Telecommunication Koreas Competitive AdvantagesAnalysis of Koreas Competitive Advantage with Michael E. Porter's Diamond Framework.

Korea - New developed countries - Information and Telecommunication.

Case Study (Cont.)Factors Condition Korean Government continuous effortImprovement in IT infrastructure.Facilitating the usage of information technology.Favorable environment for development of IT industry.Over 90% of nation area is wired with broadband internet network.IT workforce in Korea accounted for 447,000 (2.1% of total workforce).Overall level of education in Korea is relatively high.Korean government support educational institutions related to IT skills.Supply of quality of IT workforce is expected to increased.

Factors Condition (Cont.)Dae Deok Valley - an important IT cluster - Attracts foreign investment.

Several joint research and development projects with well-known foreign companies and universities.

Through export of CDMA technology - solid network among the south Asian nations is established.Case Study (Cont.)

Demand ConditionsHigh computing and Internet penetration rate since 1998.Large user base of Internet - sophisticated internet usage.IT effectively used - individual level, Business & government sectors.The competitive market situation - Forcing market players - higher quality service at cheaper rate to users.Korean governments effort to develop IT industry - Privatization and Market Deregulation in Telecommunication market.Encouraged fair market competition in Telecommunication market. Resulting in lower price, better quality, better service and created favorable business environments for business.E-commerce exceeded 45 billion USD and projected a growth rate of 9% per year.Case Study (Cont.)

Related And Supporting IndustryKorea has secured leading position in semiconductor market especially for DRAM (Dynamic Random Access Memory) - DDR RAM and SD RAM.Cheap and Quality Hardware production units available.IT Enabled Services like BPOs and KPOs Yantram Solutions.Korea ranks itself in top manufacture in LCD and Mobile phone, example LG group, Samsung group, Doosan Group, DiaBell.Korea - the leading position in IT related production.The proactive effort - R&D and market expansion, as well as government support are expected.Korean government plans to extend its financial support for R&D especially in 10 core technologies.Initiated several huge project with private sectors

Case Study (Cont.)

Firm Strategy, Structure, And RivalryKorea - favorable business environmentsQuick registration process,Lower entry barriers in IT industry,Lower cost using telecommunication infrastructure,Diverse capital resourcesGovernment supportsThese activities result in huge number of small, medium-sized venture company in IT industry.And Hence it leads to severe domestic rivalry because of market competition.Encourages the continuous development of Innovative technology and improvement of business models in business sectors.

Case Study (Cont.)

Recap

Case Study 2Competitive Advantage Of Telecommunication Sector Of IndiaGovernmentFactor conditionFirm structure ,strategy and rivalryRelated and supported industryDemand condition

GovernmentGovernment full support through reform process.Policies are in place to safeguard the interest of service provider as well those of consumer.Example:-Government is promoting telecom manufacturing by providing Tax sop and establishing telecom SEZ.Liberal Foreign Investment Regime: FDI limit increased from 49% to 74% ,rural telecom equipment also open to large investments.Auction of 3G Spectrum by inviting bids.To safeguard consumer DOT established TRAI,TDSAT.Unified access licensing regime was established.Case Study 2 (Cont.)

Government (Cont.)Number portability was proposed and still pending.Unified access licensing regime was established.Number portability was proposed and still pending.Universal service obligation (USO).Total FDI US$3892.19 mn(1991-2007), 3rd largest sector to attract FDI.100% FDI is permitted through automatic route in telecom equipment manufacturing.Foreign telecom companies can bid for 3G without partnering local service provider.Case Study 2 (Cont.)

Factor ConditionPresence of skilled and talented labor pool.Rapidly developing robust telecom infrastructure.Increasing disposable income of consumer.Increasing demand due to changing lifestyle and growing attraction for mobile with new features.Low labor cost .Country emerged as major R&D hub.Example:-It is estimated working age population is expected to rise by 83% by 2026.Nokia which has set up its manufacturing operation in India considering long term sustainable demand for mobile telephony.Case Study 2 (Cont.)

Demand ConditionIndia has a large middle class of 300 mn.Growing affordability and life free schemes have created the market at the bottom of the pyramid.Country increasing population and Low teledensity of 19%.Export opportunities and ensure India as a manufacturing hub for Asia Pacific.Huge rural population yet to be tapped (close to 100 mn come from rural area).Example:-India's upper middle class spends 6% of their earning on telecom services.ARPU for GSM user is 6.6$ per month.Case Study 2 (Cont.)

Firm structure, Strategy And RivalrySeries of reform opened up the economy as a result of intensive competition in the country pop up which has made it possible for service providers to offer service at low fare [number of operator in circle have increased to 5-6].Saturation in urban market so capitalizing on value added service will enable service provider to increase ARPU.Many new handset have been launched.Merger & acquisition strategy is being followed by the service provider in expanding their reach.Business alliance to improve cost and quality company outsource non core activities. Ex-Airtel alliance with Ericson.

Case Study 2 (Cont.)

Rural Penetration:- BSNL is developing infrastructure in rural area to increase its customer base.Low Cost Strategy:- To increase customer base and retain them many service provider adhere to this service.Rapid Innovation:- Company launches new handset in the market by developing set with new features.Attractive Designing:- This strategy is used by Motorola and established a distinct identity in the market.Case Study 2 (Cont.)

Competitive Pricing Strategy:- Motorola come up with this strategy and aims at connecting the unconnected to penetrate the market with competitive pricing.Example:-Providing services at low fair have been possible due to infrastructure sharing.Currently private participation is permitted in all segment of the telecom industry including international long distance, domestic long distance, internet etc.Vodafone - Hutchison telecom international.Case Study 2 (Cont.)

Related And Supported IndustryCompetent handset manufactures have produced the low price handset for the Indian market and India has low manufacturing cost.Handset manufactures are setting up manufacturing bases in India for better operation management.Many telecom and equipment and software companies are based in India like nokia ,Samsung and telecom equipment market stood at us $17100 million.Network infrastructure companies like Alcatel - Lucent, Cisco, Eriksson.Telecom solution provider, tech Mahindra, IBM etc.Case Study 2 (Cont.)

ConclusionsThe diamond of national advantage makes sense as a means of understanding global economic success.Domestic success does prepare companies to compete globally.Major European and an increasing number of Asian countries are capable of competing on a global basis.The global marketplace is only going to get tougher based on more, tougher competitors.The diamond can help to anticipate and understand new competitors.

Multimedia Lecture Support Package to Accompany Basic MarketingLecture Script 6-*So, if his arguments are correct, his model ought to predict the patterns of trade we see in the real world. Unfortunately, at this time, his theory hasnt been well tested. While it seems to make sense, without empirical testing, we really dont know. Remember that the Heckscher Ohlin theory made sense, until Leontief decided to test it, that is!However, to get an idea of how the theory can explain success in an industry, think about Nokia. You might own a Nokia cell phone, but you might not know that Nokia is a Finnish company, and that its a leading player in the global cell phone industry. Youre probably wondering how a company from a small, European country came to be so successful. Well, in the case of Nokia, all the points on Porters diamond were favorable. You can learn more about Nokia in the Management Focus in your text.