Competitive Advantage of Nations

Session 5

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

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

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

Chance

Firm Strategy, Structure & Rivalry

National Diamond

Factor Conditions

Demand Conditions

Related & Supporting Industries

Govt.

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

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

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

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

Chance

Firm Strategy, Structure & Rivalry

National Diamond

Factor Conditions

Demand Conditions

Related & Supporting Industries

Govt.

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

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

Chance

Firm Strategy, Structure & Rivalry

National Diamond

Factor Conditions

Demand Conditions

Related & Supporting Industries

Govt.

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

Chance

Firm Strategy, Structure & Rivalry

National Diamond

Factor Conditions

Demand Conditions

Related & Supporting Industries

Govt.

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.

Chance

Firm Strategy, Structure & Rivalry

National Diamond

Factor Conditions

Demand Conditions

Related & Supporting Industries

Govt.

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

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,

Interplay amongst determinants

Influence on Factor conditions

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

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

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

A cluster of domestic rivals stimulates factor creation

Firm Strategy, Structure & Rivalry

Perceived national challenges stimulate factor creation

Influences on factor creation

Factor Conditions

Home demand influences priorities for factor creating investments

Demand Conditions

R&S industries create or stimulate the creation of transferable factors

Related & Supporting Industries

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

Interplay amongst determinants

Influence on Demand Composition & Size

Influence on Demand Creation

Home demand conditions for an industry reflect many national attributes such as,

Population
Social norms

Climate
Mix of other industries

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

Influences on Home demand conditions

Firm Strategy, Structure & Rivalry

A gp. of rivals builds a national image & recognition as an important competitor Sophisticated factorcreating mechanisms attract foreign students & participants by foreign firms which pulls through the nations products

Intense rivalry makes home demand larger & more sophisticated

Factor Conditions

Demand Conditions
The image of world class R&S industries spills over to benefit Intl. successful industries producing complementary products pull through foreign demand

Related & Supporting Industries

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.

Interplay amongst determinants

Influence on R&S Industry

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

Influences on R&S Industries

Firm Strategy, Structure & Rivalry

A gp. of rivals encourages the formation of more specialized suppliers

Factor Conditions

Demand Conditions

Spl. Factors pools are transferable to R&S industries

Related & Supporting Industries

Large growing home demand stimulates the growth and deepening of supplier industries

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..

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

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.

Interplay amongst determinants

Influence on Firm Strategy, Structure & Rivalry

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

Factor abundance or spl. factor creating mechanisms spawn new entrants

Firm Strategy, Structure & Rivalry

Early product penetration feeds entry

Influences on Domestic rivalry

World class users enter supplying industries

Factor Conditions
New entrants emerge from R&S industries

Demand Conditions

Related & Supporting Industries

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.

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.

How to apply to a firm?

Entry Barrier

Supplier Power

Industry Competitors Rivalry amongst existing firms

Buyer Power

Threat of Substitutes

Barriers & Profitability

Exit Barriers
Entry Barriers
Low High Low, Risky returns High, Risky returns

Low
High

Low, Stable returns High, Stable returns

Barriers to Entry
Dimension Economy of Scale Differentiation Entry deterring price Expected retaliation (resources to fight back, excess cash and unused borrowing capacity) Capital requirements Switching costs Rating Relevance to Biz Rationale

Access to distribution channel

Cost disadvantage independent of scale Government Policy

Supplier Power
Dimension
Supplier Industry Concentration Presence of Substitute Inputs Importance of User Industry (sales volume share) Impact of Inputs on costs and quality Suppliers products are Differentiated (leading to higher switching costs) Labour

Rating

Relevance

Rationale

Threat of forward integration by suppliers

Buyer Power
Dimension Buyer Industry Concentration Purchases form a Significant fraction of the buyers cost
Products are Differentiated

Rating

Relevance to Biz

Rationale

Switching costs Industry profitability Threat of backward integration Quality of input to end product

Buyer knowledge on market

Threat of substitutes
Dimension
Trade-off of substitute Buyer inclination to substitute

Rating

Relevance to Biz

Rationale

Price performance
Overall

Degree of Rivalry
Dimension Numerous or equally balanced competitors Slow industry growth High fixed or storage cost Lack of differentiation or switching costs Capacity augmented in large increments Diverse competitors High strategic stakes High exit barriers Rating Relevance to Biz Rationale

A Firms Strategy
Strategic Advantage Strategic Target
Uniqueness perceived by customers Industry wide Differentiation Low cost position

Cost Leadership

Segment

FOCUS

CONCEPTUAL FRAMEWORK FOR ATTAINING CORPORATE GOALS

CORPORATE GOALS

COMPETITIVENESS

GROWTH

CAPABILITY

BUILDING BLOCKS OF GOAL ACHIEVEMENT

GOALS
Profitability EBIDT PAT Working Capital GCA/GS NCA/GS Joy EI Index PEM P/E equal to mkt. Avg. P/E

COMPETITIVENESS
Financial Restructuring Asset Productivity Profitable Mkt Development

GROWTH
Product Market Optimisation Low investment high ROI projects
Profitable growth thru acquisitions, etc

Q,C,D Improvements

Capacity Utilisation

Price Improvement

CAPABILITY PROJECTS

Trusted,Empowered, Aligned,Motivated Employees

Efficient & Effective Systems

Capable & Productive people

Positive image amongst Investors & society

Thank you