In his seminal work, ‘The Competitive Advantage of Nations’ (1990), Harvard Business School professor Michael E. Porter provides illuminating insights into how nations can improve competitive advantage in an age of globalization. The conventional wisdom makes us believe that national boundaries and national governments are increasingly becoming redundant in an age of global free market. This, however, does not explain as to why some nations have a competitive advantage over others. Going against the conventional viewpoint, Porter brings his own innovative approach to the problem.
Porter’s Diamond of National Advantage
In order to explain as to why some nations gain competitive advantage over others, Porter carried out a four-year study of 10 countries and published his findings in the form of a book in the year 1990. In this book, Porter explains that companies gain advantage mainly because of innovation. Innovation can lead to competitive advantage by which one nation can outshine another. However, this is only possible when there is a presence of certain factors. According to Porter, there are four determinants of national competitive advantage. They are:
- Factor Conditions
- Demand Conditions
- Firm Strategy, Structure and Rivalry
- Related and Supporting Industries
Together they make up a diamond like structure which Porter calls the Diamond of National Advantage. If companies can improve on each of the determinant, they can gain competitive advantage. However, in order for the diamond to work as a system, the individual companies, the company leaders and the national governments have to work in tandem.
Let us discuss these factors in details now.
- Factor Conditions: According to classical economic theory, factors of production such as labor, land, capital, infrastructure and natural resources are crucial for any industry to flourish. Porter thinks otherwise. He says, selective disadvantage in any of the above factors can give an incentive to innovate and upgrade. For instance, Japan, a small country with no natural resources, succeeded because it could turn the selective disadvantages into advantages by innovating and improving.
- Demand Conditions: In a globalized world where domestic demand may seem redundant, Porter suggests domestic demand can further add to the competitive advantage of a company. A substantial domestic market can provide the primary driver for a company to innovate and upgrade before moving to foreign markets. Further a nation can export its values and tastes in order to create a market in the foreign shores. For instance, the United States was able to create a market for its fast-food chains and credit card companies by creating a demand for American tastes.
- Firm Strategy, Structure and Rivalry: Domestic competition in any industry plays a big role in driving innovation. Intense domestic rivalry among Japanese car manufacturers helped the country’s automobile industry to innovate in the foreign markets
- Related and Supporting Industries: Presence of allied industries can further bolster the demand of the mother industry in international competitive markets. For instance, Italian Jewelry brands do well in foreign markets because Italian companies provide two-thirds of the world’s jewelry making and precious metal recycling machinery.
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