Internat onal Bus ness

The
Nat Compet
ons t ve Advantage of
by M chael E. Porter
From the Magaz ne (March–Apr l 1990)

Nat onal prosper ty s created, not nher ted. It does not grow out of a
country’s natural endowments, ts labor pool, ts nterest rates, or ts
currency’s value, as class cal econom cs ns sts.
A nat on’s compet t veness depends on the capac ty of ts ndustry to
nnovate and upgrade. Compan es ga n advantage aga nst the world’s
best compet tors because of pressure and challenge. They benef t
from hav ng strong domest c r vals, aggress ve home-based suppl ers,
and demand ng local customers.
In a world of ncreas ngly global compet t on, nat ons have become
more, not less, mportant. As the bas s of compet t on has sh fted
more and more to the creat on and ass m lat on of knowledge, the
role of the nat on has grown. Compet t ve advantage s created and
susta ned through a h ghly local zed process. D fferences n nat onal
values, culture, econom c structures, nst tut ons, and h stor es all
contr bute to compet t ve success. There are str k ng d fferences n
the patterns of compet t veness n every country; no nat on can or
w ll be compet t ve n every or even most ndustr es. Ult mately,
nat ons succeed n part cular ndustr es because the r home
env ronment s the most forward-look ng, dynam c, and challeng ng.

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These conclus ons, the product of a four-year study of the patterns of
compet t ve success n ten lead ng trad ng nat ons, contrad ct the
convent onal w sdom that gu des the th nk ng of many compan es
and nat onal governments—and that s pervas ve today n the Un ted
States. (For more about the study, see the nsert “Patterns of Nat onal
Compet t ve Success.”) Accord ng to preva l ng th nk ng, labor costs,
nterest rates, exchange rates, and econom es of scale are the most
potent determ nants of compet t veness. In compan es, the words of
the day are merger, all ance, strateg c partnersh ps, collaborat on, and
supranat onal global zat on. Managers are press ng for more
government support for part cular ndustr es. Among governments,
there s a grow ng tendency to exper ment w th var ous pol c es
ntended to promote nat onal compet t veness—from efforts to
manage exchange rates to new measures to manage trade to pol c es
to relax ant trust—wh ch usually end up only under m n ng t. (See
the nsert “What Is Nat onal Compet t veness?”)

Patterns of Nat onal Compet t ve Success

by: M chael E. Porter
To nvest gate why nat ons ga n compet t ve advantage n
part cular ndustr es and the mpl cat ons for company ...

What Is Nat onal Compet t veness? by: M chael E.

Porter
Nat onal compet t veness has become one of the central
preoccupat ons of government and ndustry n every
nat on. Yet ...

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These approaches, now much n favor n both compan es and
governments, are flawed. They fundamentally m sperce ve the true
sources of compet t ve advantage. Pursu ng them, w th all the r short-
term appeal, w ll v rtually guarantee that the Un ted States—or any
other advanced nat on—never ach eves real and susta nable
compet t ve advantage.
We need a new perspect ve and new tools—an approach to
compet t veness that grows d rectly out of an analys s of
nternat onally successful ndustr es, w thout regard for trad t onal
deology or current ntellectual fash on. We need to know, very
s mply, what works and why. Then we need to apply t.
How Compan es Succeed n Internat onal Markets
Around the world, compan es that have ach eved nternat onal
leadersh p employ strateg es that d ffer from each other n every
respect. But wh le every successful company w ll employ ts own
part cular strategy, the underly ng mode of operat on—the character
and trajectory of all successful compan es— s fundamentally the
same.
Compan es ach eve compet t ve advantage through acts of nnovat on.
They approach nnovat on n ts broadest sense, nclud ng both new
technolog es and new ways of do ng th ngs. They perce ve a new bas s
for compet ng or f nd better means for compet ng n old ways.
Innovat on can be man fested n a new product des gn, a new
product on process, a new market ng approach, or a new way of
conduct ng tra n ng. Much nnovat on s mundane and ncremental,
depend ng more on a cumulat on of small ns ghts and advances than
on a s ngle, major technolog cal breakthrough. It often nvolves deas
that are not even “new”— deas that have been around, but never
v gorously pursued. It always nvolves nvestments n sk ll and
knowledge, as well as n phys cal assets and brand reputat ons.
Some nnovat ons create compet t ve advantage by perce v ng an
ent rely new market opportun ty or by serv ng a market segment that
others have gnored. When compet tors are slow to respond, such
nnovat on y elds compet t ve advantage. For nstance, n ndustr es
such as autos and home electron cs, Japanese compan es ga ned the r
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 n t al advantage by emphas z ng smaller, more compact, lower
capac ty models that fore gn compet tors d sda ned as less prof table,
less mportant, and less attract ve.
In nternat onal markets, nnovat ons that y eld compet t ve
advantage ant c pate both domest c and fore gn needs. For example,
as nternat onal concern for product safety has grown, Swed sh
compan es l ke Volvo, Atlas Copco, and AGA have succeeded by
ant c pat ng the market opportun ty n th s area. On the other hand,
nnovat ons that respond to concerns or c rcumstances that are
pecul ar to the home market can actually retard nternat onal
compet t ve success. The lure of the huge U.S. defense market, for
nstance, has d verted the attent on of U.S. mater als and mach ne-
tool compan es from attract ve, global commerc al markets.
Informat on plays a large role n the process of nnovat on and
mprovement— nformat on that e ther s not ava lable to compet tors
or that they do not seek. Somet mes t comes from s mple nvestment
n research and development or market research; more often, t
comes from effort and from openness and from look ng n the r ght
place unencumbered by bl nd ng assumpt ons or convent onal
w sdom.
Th s s why nnovators are often outs ders from a d fferent ndustry or
a d fferent country. Innovat on may come from a new company,
whose founder has a nontrad t onal background or was s mply not
apprec ated n an older, establ shed company. Or the capac ty for
nnovat on may come nto an ex st ng company through sen or
managers who are new to the part cular ndustry and thus more able
to perce ve opportun t es and more l kely to pursue them. Or
nnovat on may occur as a company d vers f es, br ng ng new
resources, sk lls, or perspect ves to another ndustry. Or nnovat ons
may come from another nat on w th d fferent c rcumstances or
d fferent ways of compet ng.
W th few except ons, nnovat on s the result of unusual effort. The
company that successfully mplements a new or better way of
compet ng pursues ts approach w th dogged determ nat on, often n

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the face of harsh cr t c sm and tough obstacles. In fact, to succeed,
nnovat on usually requ res pressure, necess ty, and even advers ty:
the fear of loss often proves more powerful than the hope of ga n.
Once a company ach eves compet t ve advantage through an
nnovat on, t can susta n t only through relentless mprovement.
Almost any advantage can be m tated. Korean compan es have
already matched the ab l ty of the r Japanese r vals to mass-produce
standard color telev s ons and VCRs; Braz l an compan es have
assembled technology and des gns comparable to Ital an compet tors
n casual leather footwear.
Compet tors w ll eventually and nev tably overtake any company that
stops mprov ng and nnovat ng. Somet mes early-mover advantages
such as customer relat onsh ps, scale econom es n ex st ng
technolog es, or the loyalty of d str but on channels are enough to
perm t a stagnant company to reta n ts entrenched pos t on for years
or even decades. But sooner or later, more dynam c r vals w ll f nd a
way to nnovate around these advantages or create a better or cheaper
way of do ng th ngs. Ital an appl ance producers, wh ch competed
successfully on the bas s of cost n sell ng m ds ze and compact
appl ances through large reta l cha ns, rested too long on th s n t al
advantage. By develop ng more d fferent ated products and creat ng
strong brand franch ses, German compet tors have begun to ga n
ground.
Ult mately, the only way to susta n a compet t ve advantage s to
upgrade t— to move to more soph st cated types. Th s s prec sely
what Japanese auto-makers have done. They n t ally penetrated
fore gn markets w th small, nexpens ve compact cars of adequate
qual ty and competed on the bas s of lower labor costs. Even wh le
the r labor-cost advantage pers sted, however, the Japanese
compan es were upgrad ng. They nvested aggress vely to bu ld large
modern plants to reap econom es of scale. Then they became
nnovators n process technology, p oneer ng just- n-t me product on
and a host of other qual ty and product v ty pract ces. These process
mprovements led to better product qual ty, better repa r records, and
better customer-sat sfact on rat ngs than fore gn compet tors had.

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Most recently, Japanese automakers have advanced to the vanguard of
product technology and are ntroduc ng new, prem um brand names
to compete w th the world’s most prest g ous passenger cars.
The example of the Japanese automakers also llustrates two
add t onal prerequ s tes for susta n ng compet t ve advantage. F rst, a
company must adopt a global approach to strategy. It must sell ts
product worldw de, under ts own brand name, through nternat onal
market ng channels that t controls. A truly global approach may even
requ re the company to locate product on or R&D fac l t es n other
nat ons to take advantage of lower wage rates, to ga n or mprove
market access, or to take advantage of fore gn technology. Second,
creat ng more susta nable advantages often means that a company
must make ts ex st ng advantage obsolete—even wh le t s st ll an
advantage. Japanese auto compan es recogn zed th s; e ther they
would make the r advantage obsolete, or a compet tor would do t for
them.
As th s example suggests, nnovat on and change are nextr cably t ed
together. But change s an unnatural act, part cularly n successful
compan es; powerful forces are at work to avo d and defeat t. Past
approaches become nst tut onal zed n standard operat ng
procedures and management controls. Tra n ng emphas zes the one
correct way to do anyth ng; the construct on of spec al zed, ded cated
fac l t es sol d f es past pract ce nto expens ve br ck and mortar; the
ex st ng strategy takes on an aura of nv nc b l ty and becomes rooted
n the company culture.
Successful compan es tend to develop a b as for pred ctab l ty and
stab l ty; they work on defend ng what they have. Change s tempered
by the fear that there s much to lose. The organ zat on at all levels
f lters out nformat on that would suggest new approaches,
mod f cat ons, or departures from the norm. The nternal
env ronment operates l ke an mmune system to solate or expel
“host le” nd v duals who challenge current d rect ons or establ shed
th nk ng. Innovat on ceases; the company becomes stagnant; t s only
a matter of t me before aggress ve compet tors overtake t.
The D amond of Nat onal Advantage
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Why are certa n compan es based n certa n nat ons capable of
cons stent nnovat on? Why do they ruthlessly pursue mprovements,
seek ng an ever more soph st cated source of compet t ve advantage?
Why are they able to overcome the substant al barr ers to change and
nnovat on that so often accompany success?
The answer l es n four broad attr butes of a nat on, attr butes that
nd v dually and as a system const tute the d amond of nat onal
advantage, the play ng f eld that each nat on establ shes and operates
for ts ndustr es. These attr butes are.
1. Factor Cond t ons. The nat on’s pos t on n factors of product on,
such as sk lled labor or nfrastructure, necessary to compete n a
g ven ndustry.
2. Demand Cond t ons. The nature of home-market demand for the
ndustry’s product or serv ce.
3. Related and Support ng Industr es. The presence or absence n the
nat on of suppl er ndustr es and other related ndustr es that are
nternat onally compet t ve.
4. F rm Strategy, Structure, and R valry. The cond t ons n the nat on
govern ng how compan es are created, organ zed, and managed, as
well as the nature of domest c r valry.
These determ nants create the nat onal env ronment n wh ch
compan es are born and learn how to compete. (See the d agram
“Determ nants of Nat onal Compet t ve Advantage.”) Each po nt on
the d amond—and the d amond as a system—affects essent al
ngred ents for ach ev ng nternat onal compet t ve success: the
ava lab l ty of resources and sk lls necessary for compet t ve
advantage n an ndustry; the nformat on that shapes the
opportun t es that compan es perce ve and the d rect ons n wh ch
they deploy the r resources and sk lls; the goals of the owners,
managers, and nd v duals n compan es; and most mportant, the
pressures on compan es to nvest and nnovate. (See the nsert “How
the D amond Works: The Ital an Ceram c T le Industry.”)

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Determ nants of Nat onal Compet t ve Advantage

How the D amond Works: The Ital an Ceram c T le

Industry by: M chael J. Enr ght by: Paolo Tent
In 1987, Ital an compan es were world leaders n the
product on and export of ceram c t les, a $10 b ll on
ndustry. Ital an ...

When a nat onal env ronment perm ts and supports the most rap d
accumulat on of spec al zed assets and sk lls—somet mes s mply
because of greater effort and comm tment—compan es ga n a
compet t ve advantage. When a nat onal env ronment affords better
ongo ng nformat on and ns ght nto product and process needs,
compan es ga n a compet t ve advantage. F nally, when the nat onal
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env ronment pressures compan es to nnovate and nvest, compan es
both ga n a compet t ve advantage and upgrade those advantages over
t me.
Factor Cond t ons. Accord ng to standard econom c theory, factors of
product on—labor, land, natural resources, cap tal, nfrastructure—
w ll determ ne the flow of trade. A nat on w ll export those goods that
make most use of the factors w th wh ch t s relat vely well endowed.
Th s doctr ne, whose or g ns date back to Adam Sm th and Dav d
R cardo and that s embedded n class cal econom cs, s at best
ncomplete and at worst ncorrect.
In the soph st cated ndustr es that form the backbone of any
advanced economy, a nat on does not nher t but nstead creates the
most mportant factors of product on—such as sk lled human
resources or a sc ent f c base. Moreover, the stock of factors that a
nat on enjoys at a part cular t me s less mportant than the rate and
eff c ency w th wh ch t creates, upgrades, and deploys them n
part cular ndustr es.
The most mportant factors of product on are those that nvolve
susta ned and heavy nvestment and are spec al zed. Bas c factors,
such as a pool of labor or a local raw-mater al source, do not
const tute an advantage n knowledge- ntens ve ndustr es.
Compan es can access them eas ly through a global strategy or
c rcumvent them through technology. Contrary to convent onal
w sdom, s mply hav ng a general work force that s h gh school or
even college educated represents no compet t ve advantage n modern
nternat onal compet t on. To support compet t ve advantage, a factor
must be h ghly spec al zed to an ndustry’s part cular needs—a
sc ent f c nst tute spec al zed n opt cs, a pool of venture cap tal to
fund software compan es. These factors are more scarce, more
d ff cult for fore gn compet tors to m tate—and they requ re
susta ned nvestment to create.
Nat ons succeed n ndustr es where they are part cularly good at
factor creat on. Compet t ve advantage results from the presence of
world-class nst tut ons that f rst create spec al zed factors and then
cont nually work to upgrade them. Denmark has two hosp tals that
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concentrate n study ng and treat ng d abetes—and a world-lead ng
export pos t on n nsul n. Holland has prem er research nst tutes n
the cult vat on, packag ng, and sh pp ng of flowers, where t s the
world’s export leader.
What s not so obv ous, however, s that select ve d sadvantages n the
more bas c factors can prod a company to nnovate and upgrade—a
d sadvantage n a stat c model of compet t on can become an
advantage n a dynam c one. When there s an ample supply of cheap
raw mater als or abundant labor, compan es can s mply rest on these
advantages and often deploy them neff c ently. But when compan es
face a select ve d sadvantage, l ke h gh land costs, labor shortages, or
the lack of local raw mater als, they must nnovate and upgrade to
compete.
Impl c t n the oft-repeated Japanese statement, “We are an sland
nat on w th no natural resources,” s the understand ng that these
def c enc es have only served to spur Japan’s compet t ve nnovat on.
Just- n-t me product on, for example, econom zed on proh b t vely
expens ve space. Ital an steel producers n the Bresc a area faced a
s m lar set of d sadvantages: h gh cap tal costs, h gh energy costs, and
no local raw mater als. Located n Northern Lombardy, these
pr vately owned compan es faced stagger ng log st cs costs due to
the r d stance from southern ports and the neff c enc es of the state-
owned Ital an transportat on system. The result: they p oneered
technolog cally advanced m n m lls that requ re only modest cap tal
nvestment, use less energy, employ scrap metal as the feedstock, are
eff c ent at small scale, and perm t producers to locate close to
sources of scrap and end-use customers. In other words, they
converted factor d sadvantages nto compet t ve advantage.
D sadvantages can become advantages only under certa n cond t ons.
F rst, they must send compan es proper s gnals about c rcumstances
that w ll spread to other nat ons, thereby equ pp ng them to nnovate
n advance of fore gn r vals. Sw tzerland, the nat on that exper enced
the f rst labor shortages after World War II, s a case n po nt. Sw ss
compan es responded to the d sadvantage by upgrad ng labor
product v ty and seek ng h gher value, more susta nable market

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segments. Compan es n most other parts of the world, where there
were st ll ample workers, focused the r attent on on other ssues,
wh ch resulted n slower upgrad ng.
The second cond t on for transform ng d sadvantages nto advantages
s favorable c rcumstances elsewhere n the d amond—a cons derat on
that appl es to almost all determ nants. To nnovate, compan es must
have access to people w th appropr ate sk lls and have home-demand
cond t ons that send the r ght s gnals. They must also have act ve
domest c r vals who create pressure to nnovate. Another
precond t on s company goals that lead to susta ned comm tment to
the ndustry. W thout such a comm tment and the presence of act ve
r valry, a company may take an easy way around a d sadvantage
rather than us ng t as a spur to nnovat on.
For example, U.S. consumer-electron cs compan es, faced w th h gh
relat ve labor costs, chose to leave the product and product on
process largely unchanged and move labor- ntens ve act v t es to
Ta wan and other As an countr es. Instead of upgrad ng the r sources
of advantage, they settled for labor-cost par ty. On the other hand,
Japanese r vals, confronted w th ntense domest c compet t on and a
mature home market, chose to el m nate labor through automat on.
Th s led to lower assembly costs, to products w th fewer components
and to mproved qual ty and rel ab l ty. Soon Japanese compan es
were bu ld ng assembly plants n the Un ted States—the place U.S.
compan es had fled.
Demand Cond t ons. It m ght seem that the global zat on of
compet t on would d m n sh the mportance of home demand. In
pract ce, however, th s s s mply not the case. In fact, the compos t on
and character of the home market usually has a d sproport onate
effect on how compan es perce ve, nterpret, and respond to buyer
needs. Nat ons ga n compet t ve advantage n ndustr es where the
home demand g ves the r compan es a clearer or earl er p cture of
emerg ng buyer needs, and where demand ng buyers pressure
compan es to nnovate faster and ach eve more soph st cated
compet t ve advantages than the r fore gn r vals. The s ze of home
demand proves far less s gn f cant than the character of home
demand.
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Home-demand cond t ons help bu ld compet t ve advantage when a
part cular ndustry segment s larger or more v s ble n the domest c
market than n fore gn markets. The larger market segments n a
nat on rece ve the most attent on from the nat on’s compan es;
compan es accord smaller or less des rable segments a lower pr or ty.
A good example s hydraul c excavators, wh ch represent the most
w dely used type of construct on equ pment n the Japanese domest c
market—but wh ch compr se a far smaller proport on of the market n
other advanced nat ons. Th s segment s one of the few where there
are v gorous Japanese nternat onal compet tors and where
Caterp llar does not hold a substant al share of the world market.
More mportant than the m x of segments per se s the nature of
domest c buyers. A nat on’s compan es ga n compet t ve advantage f
domest c buyers are the world’s most soph st cated and demand ng
buyers for the product or serv ce. Soph st cated, demand ng buyers
prov de a w ndow nto advanced customer needs; they pressure
compan es to meet h gh standards; they prod them to mprove, to
nnovate, and to upgrade nto more advanced segments. As w th
factor cond t ons, demand cond t ons prov de advantages by forc ng
compan es to respond to tough challenges.
Espec ally str ngent needs ar se because of local values and
c rcumstances. For example, Japanese consumers, who l ve n small,
t ghtly packed homes, must contend w th hot, hum d summers and
h gh-cost electr cal energy—a daunt ng comb nat on of
c rcumstances. In response, Japanese compan es have p oneered
compact, qu et a r-cond t on ng un ts powered by energy-sav ng
rotary compressors. In ndustry after ndustry, the t ghtly constra ned
requ rements of the Japanese market have forced compan es to
nnovate, y eld ng products that are ke -haku-tan-sho—l ght, th n,
short, small—and that are nternat onally accepted.
Local buyers can help a nat on’s compan es ga n advantage f the r
needs ant c pate or even shape those of other nat ons— f the r needs
prov de ongo ng “early-warn ng nd cators” of global market trends.
Somet mes ant c patory needs emerge because a nat on’s pol t cal
values foreshadow needs that w ll grow elsewhere. Sweden’s long-
stand ng concern for hand capped people has spawned an
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ncreas ngly compet t ve ndustry focused on spec al needs.
Denmark’s env ronmental sm has led to success for compan es n
water-pollut on control equ pment and w ndm lls.
More generally, a nat on’s compan es can ant c pate global trends f
the nat on’s values are spread ng—that s, f the country s export ng
ts values and tastes as well as ts products. The nternat onal success
of U.S. compan es n fast food and cred t cards, for example, reflects
not only the Amer can des re for conven ence but also the spread of
these tastes to the rest of the world. Nat ons export the r values and
tastes through med a, through tra n ng fore gners, through pol t cal
nfluence, and through the fore gn act v t es of the r c t zens and
compan es.
Related and Support ng Industr es. The th rd broad determ nant of
nat onal advantage s the presence n the nat on of related and
support ng ndustr es that are nternat onally compet t ve.
Internat onally compet t ve home-based suppl ers create advantages
n downstream ndustr es n several ways. F rst, they del ver the most
cost-effect ve nputs n an eff c ent, early, rap d, and somet mes
preferent al way. Ital an gold and s lver jewelry compan es lead the
world n that ndustry n part because other Ital an compan es supply
two-th rds of the world’s jewelry-mak ng and prec ous-metal
recycl ng mach nery.
Far more s gn f cant than mere access to components and mach nery,
however, s the advantage that home-based related and support ng
ndustr es prov de n nnovat on and upgrad ng—an advantage based
on close work ng relat onsh ps. Suppl ers and end-users located near
each other can take advantage of short l nes of commun cat on, qu ck
and constant flow of nformat on, and an ongo ng exchange of deas
and nnovat ons. Compan es have the opportun ty to nfluence the r
suppl ers’ techn cal efforts and can serve as test s tes for R&D work,
accelerat ng the pace of nnovat on.
The llustrat on of “The Ital an Footwear Cluster” offers a graph c
example of how a group of close-by, support ng ndustr es creates
compet t ve advantage n a range of nterconnected ndustr es that are
all nternat onally compet t ve. Shoe producers, for nstance, nteract
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regularly w th leather manufacturers on new styles and
manufactur ng techn ques and learn about new textures and colors of
leather when they are st ll on the draw ng boards. Leather
manufacturers ga n early ns ghts nto fash on trends, help ng them to
plan new products. The nteract on s mutually advantageous and
self-re nforc ng, but t does not happen automat cally: t s helped by
prox m ty, but occurs only because compan es and suppl ers work at
t.

The nat on’s compan es benef t most when the suppl ers are,
themselves, global compet tors. It s ult mately self-defeat ng for a
company or country to create “capt ve” suppl ers who are totally
dependent on the domest c ndustry and prevented from serv ng
fore gn compet tors. By the same token, a nat on need not be
compet t ve n all suppl er ndustr es for ts compan es to ga n
compet t ve advantage. Compan es can read ly source from abroad
mater als, components, or technolog es w thout a major effect on

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 nnovat on or performance of the ndustry’s products. The same s
true of other general zed technolog es—l ke electron cs or software—
where the ndustry represents a narrow appl cat on area.
Home-based compet t veness n related ndustr es prov des s m lar
benef ts: nformat on flow and techn cal nterchange speed the rate of
nnovat on and upgrad ng. A home-based related ndustry also
ncreases the l kel hood that compan es w ll embrace new sk lls, and t
also prov des a source of entrants who w ll br ng a novel approach to
compet ng. The Sw ss success n pharmaceut cals emerged out of
prev ous nternat onal success n the dye ndustry, for example;
Japanese dom nance n electron c mus cal keyboards grows out of
success n acoust c nstruments comb ned w th a strong pos t on n
consumer electron cs.
F rm Strategy, Structure, and R valry. Nat onal c rcumstances and
context create strong tendenc es n how compan es are created,
organ zed, and managed, as well as what the nature of domest c
r valry w ll be. In Italy, for example, successful nternat onal
compet tors are often small or med um-s zed compan es that are
pr vately owned and operated l ke extended fam l es; n Germany, n
contrast, compan es tend to be str ctly h erarch cal n organ zat on
and management pract ces, and top managers usually have techn cal
backgrounds.
No one manager al system s un versally appropr ate—
notw thstand ng the current fasc nat on w th Japanese management.
Compet t veness n a spec f c ndustry results from convergence of
the management pract ces and organ zat onal modes favored n the
country and the sources of compet t ve advantage n the ndustry. In
ndustr es where Ital an compan es are world leaders—such as
l ght ng, furn ture, footwear, woolen fabr cs, and packag ng mach nes
—a company strategy that emphas zes focus, custom zed products,
n che market ng, rap d change, and breathtak ng flex b l ty f ts both
the dynam cs of the ndustry and the character of the Ital an
management system. The German management system, n contrast,
works well n techn cal or eng neer ng-or ented ndustr es—opt cs,
chem cals, compl cated mach nery—where complex products demand
prec s on manufactur ng, a careful development process, after-sale
/
serv ce, and thus a h ghly d sc pl ned management structure. German
success s much rarer n consumer goods and serv ces where mage
market ng and rap d new-feature and model turnover are mportant
to compet t on.
Countr es also d ffer markedly n the goals that compan es and
nd v duals seek to ach eve. Company goals reflect the character st cs
of nat onal cap tal markets and the compensat on pract ces for
managers. For example, n Germany and Sw tzerland, where banks
compr se a substant al part of the nat on’s shareholders, most shares
are held for long-term apprec at on and are rarely traded. Compan es
do well n mature ndustr es, where ongo ng nvestment n R&D and
new fac l t es s essent al but returns may be only moderate. The
Un ted States s at the oppos te extreme, w th a large pool of r sk
cap tal but w despread trad ng of publ c compan es and a strong
emphas s by nvestors on quarterly and annual share-pr ce
apprec at on. Management compensat on s heav ly based on annual
bonuses t ed to nd v dual results. Amer ca does well n relat vely new
ndustr es, l ke software and b otechnology, or ones where equ ty
fund ng of new compan es feeds act ve domest c r valry, l ke spec alty
electron cs and serv ces. Strong pressures lead ng to
under nvestment, however, plague more mature ndustr es.
Ind v dual mot vat on to work and expand sk lls s also mportant to
compet t ve advantage. Outstand ng talent s a scarce resource n any
nat on. A nat on’s success largely depends on the types of educat on
ts talented people choose, where they choose to work, and the r
comm tment and effort. The goals a nat on’s nst tut ons and values
set for nd v duals and compan es, and the prest ge t attaches to
certa n ndustr es, gu de the flow of cap tal and human resources—
wh ch, n turn, d rectly affects the compet t ve performance of certa n
ndustr es. Nat ons tend to be compet t ve n act v t es that people
adm re or depend on—the act v t es from wh ch the nat on’s heroes
emerge. In Sw tzerland, t s bank ng and pharmaceut cals. In Israel,
the h ghest call ngs have been agr culture and defense-related f elds.
Somet mes t s hard to d st ngu sh between cause and effect.
Atta n ng nternat onal success can make an ndustry prest g ous,
re nforc ng ts advantage.
/
The presence of strong local r vals s a f nal, and powerful, st mulus to
the creat on and pers stence of compet t ve advantage. Th s s true of
small countr es, l ke Sw tzerland, where the r valry among ts
pharmaceut cal compan es, Hoffmann-La Roche, C ba-Ge gy, and
Sandoz, contr butes to a lead ng worldw de pos t on. It s true n the
Un ted States n the computer and software ndustr es. Nowhere s
the role of f erce r valry more apparent than n Japan, where there are
112 compan es compet ng n mach ne tools, 34 n sem conductors, 25
n aud o equ pment, 15 n cameras— n fact, there are usually double
f gures n the ndustr es n wh ch Japan boasts global dom nance. (See
the table “Est mated Number of Japanese R vals n Selected
Industr es.”) Among all the po nts on the d amond, domest c r valry s
arguably the most mportant because of the powerfully st mulat ng
effect t has on all the others.

/
Est mated Number of Japanese R vals n Selected Industr es Sources:
F eld nterv ews; N ppon Kogyo Sh nbun, N ppon Kogyo Nenkan,
1987; Yano Research, Market Share J tan, 1987; researchers’
est mates.

Convent onal w sdom argues that domest c compet t on s wasteful: t

leads to dupl cat on of effort and prevents compan es from ach ev ng
econom es of scale. The “r ght solut on” s to embrace one or two
nat onal champ ons, compan es w th the scale and strength to tackle
fore gn compet tors, and to guarantee them the necessary resources,
w th the government’s bless ng. In fact, however, most nat onal
champ ons are uncompet t ve, although heav ly subs d zed and
protected by the r government. In many of the prom nent ndustr es
n wh ch there s only one nat onal r val, such as aerospace and
telecommun cat ons, government has played a large role n d stort ng
compet t on.
Stat c eff c ency s much less mportant than dynam c mprovement,
wh ch domest c r valry un quely spurs. Domest c r valry, l ke any
r valry, creates pressure on compan es to nnovate and mprove. Local
r vals push each other to lower costs, mprove qual ty and serv ce,
and create new products and processes. But unl ke r valr es w th
fore gn compet tors, wh ch tend to be analyt cal and d stant, local
r valr es often go beyond pure econom c or bus ness compet t on and
become ntensely personal. Domest c r vals engage n act ve feuds;
they compete not only for market share but also for people, for
techn cal excellence, and perhaps most mportant, for “bragg ng
r ghts.” One domest c r val’s success proves to others that
advancement s poss ble and often attracts new r vals to the ndustry.
Compan es often attr bute the success of fore gn r vals to “unfa r”
advantages. W th domest c r vals, there are no excuses.
Geograph c concentrat on magn f es the power of domest c r valry.
Th s pattern s str k ngly common around the world: Ital an jewelry
compan es are located around two towns, Arezzo and Valenza Po;
cutlery compan es n Sol ngen, West Germany and Sek , Japan;
pharmaceut cal compan es n Basel, Sw tzerland; motorcycles and
mus cal nstruments n Hamamatsu, Japan. The more local zed the
r valry, the more ntense. And the more ntense, the better. /
Another benef t of domest c r valry s the pressure t creates for
constant upgrad ng of the sources of compet t ve advantage. The
presence of domest c compet tors automat cally cancels the types of
advantage that come from s mply be ng n a part cular nat on—factor
costs, access to or preference n the home market, or costs to fore gn
compet tors who mport nto the market. Compan es are forced to
move beyond them, and as a result, ga n more susta nable advantages.
Moreover, compet ng domest c r vals w ll keep each other honest n
obta n ng government support. Compan es are less l kely to get
hooked on the narcot c of government contracts or creep ng ndustry
protect on sm. Instead, the ndustry w ll seek—and benef t from—
more construct ve forms of government support, such as ass stance n
open ng fore gn markets, as well as nvestments n focused
educat onal nst tut ons or other spec al zed factors.
Iron cally, t s also v gorous domest c compet t on that ult mately
pressures domest c compan es to look at global markets and toughens
them to succeed n them. Part cularly when there are econom es of
scale, local compet tors force each other to look outward to fore gn
markets to capture greater eff c ency and h gher prof tab l ty. And
hav ng been tested by f erce domest c compet t on, the stronger
compan es are well equ pped to w n abroad. If D g tal Equ pment can
hold ts own aga nst IBM, Data General, Pr me, and Hewlett-Packard,
go ng up aga nst S emens or Mach nes Bull does not seem so
daunt ng a prospect.
The D amond as a System
Each of these four attr butes def nes a po nt on the d amond of
nat onal advantage; the effect of one po nt often depends on the state
of others. Soph st cated buyers w ll not translate nto advanced
products, for example, unless the qual ty of human resources perm ts
compan es to meet buyer needs. Select ve d sadvantages n factors of
product on w ll not mot vate nnovat on unless r valry s v gorous and
company goals support susta ned nvestment. At the broadest level,
weaknesses n any one determ nant w ll constra n an ndustry’s
potent al for advancement and upgrad ng.

/
But the po nts of the d amond are also self-re nforc ng: they
const tute a system. Two elements, domest c r valry and geograph c
concentrat on, have espec ally great power to transform the d amond
nto a system—domest c r valry because t promotes mprovement n
all the other determ nants and geograph c concentrat on because t
elevates and magn f es the nteract on of the four separate nfluences.
The role of domest c r valry llustrates how the d amond operates as a
self-re nforc ng system. V gorous domest c r valry st mulates the
development of un que pools of spec al zed factors, part cularly f the
r vals are all located n one c ty or reg on: the Un vers ty of Cal forn a
at Dav s has become the world’s lead ng center of w ne-mak ng
research, work ng closely w th the Cal forn a w ne ndustry. Act ve
local r vals also upgrade domest c demand n an ndustry. In furn ture
and shoes, for example, Ital an consumers have learned to expect
more and better products because of the rap d pace of new product
development that s dr ven by ntense domest c r valry among
hundreds of Ital an compan es. Domest c r valry also promotes the
format on of related and support ng ndustr es. Japan’s world-lead ng
group of sem conductor producers, for nstance, has spawned world-
lead ng Japanese sem conductor-equ pment manufacturers.
The effects can work n all d rect ons: somet mes world-class
suppl ers become new entrants n the ndustry they have been
supply ng. Or h ghly soph st cated buyers may themselves enter a
suppl er ndustry, part cularly when they have relevant sk lls and v ew
the new ndustry as strateg c. In the case of the Japanese robot cs
ndustry, for example, Matsush ta and Kawasak or g nally des gned
robots for nternal use before beg nn ng to sell robots to others. Today
they are strong compet tors n the robot cs ndustry. In Sweden,
Sandv k moved from spec alty steel nto rock dr lls, and SKF moved
from spec alty steel nto ball bear ngs.
Another effect of the d amond’s system c nature s that nat ons are
rarely home to just one compet t ve ndustry; rather, the d amond
creates an env ronment that promotes clusters of compet t ve
ndustr es. Compet t ve ndustr es are not scattered helter-skelter
throughout the economy but are usually l nked together through
vert cal (buyer-seller) or hor zontal (common customers, technology,
/
channels) relat onsh ps. Nor are clusters usually scattered phys cally;
they tend to be concentrated geograph cally. One compet t ve
ndustry helps to create another n a mutually re nforc ng process.
Japan’s strength n consumer electron cs, for example, drove ts
success n sem conductors toward the memory ch ps and ntegrated
c rcu ts these products use. Japanese strength n laptop computers,
wh ch contrasts to l m ted success n other segments, reflects the base
of strength n other compact, portable products and lead ng expert se
n l qu d-crystal d splay ga ned n the calculator and watch ndustr es.
Once a cluster forms, the whole group of ndustr es becomes
mutually support ng. Benef ts flow forward, backward, and
hor zontally. Aggress ve r valry n one ndustry spreads to others n
the cluster, through sp n-offs, through the exerc se of barga n ng
power, and through d vers f cat on by establ shed compan es. Entry
from other ndustr es w th n the cluster spurs upgrad ng by
st mulat ng d vers ty n R&D approaches and fac l tat ng the
ntroduct on of new strateg es and sk lls. Through the condu ts of
suppl ers or customers who have contact w th mult ple compet tors,
nformat on flows freely and nnovat ons d ffuse rap dly.
Interconnect ons w th n the cluster, often unant c pated, lead to
percept ons of new ways of compet ng and new opportun t es. The
cluster becomes a veh cle for ma nta n ng d vers ty and overcom ng
the nward focus, nert a, nflex b l ty, and accommodat on among
r vals that slows or blocks compet t ve upgrad ng and new entry.
The Role of Government
In the cont nu ng debate over the compet t veness of nat ons, no top c
engenders more argument or creates less understand ng than the role
of the government. Many see government as an essent al helper or
supporter of ndustry, employ ng a host of pol c es to contr bute
d rectly to the compet t ve performance of strateg c or target
ndustr es. Others accept the “free market” v ew that the operat on of
the economy should be left to the work ngs of the nv s ble hand.
Both v ews are ncorrect. E ther, followed to ts log cal outcome,
would lead to the permanent eros on of a country’s compet t ve
capab l t es. On one hand, advocates of government help for ndustry
frequently propose pol c es that would actually hurt compan es n the /
long run and only create the demand for more help ng. On the other
hand, advocates of a d m n shed government presence gnore the
leg t mate role that government plays n shap ng the context and
nst tut onal structure surround ng compan es and n creat ng an
env ronment that st mulates compan es to ga n compet t ve
advantage.
Government’s proper role s as a catalyst and challenger; t s to
encourage—or even push—compan es to ra se the r asp rat ons and
move to h gher levels of compet t ve performance, even though th s
process may be nherently unpleasant and d ff cult. Government
cannot create compet t ve ndustr es; only compan es can do that.
Government plays a role that s nherently part al, that succeeds only
when work ng n tandem w th favorable underly ng cond t ons n the
d amond. St ll, government’s role of transm tt ng and ampl fy ng the
forces of the d amond s a powerful one. Government pol c es that
succeed are those that create an env ronment n wh ch compan es can
ga n compet t ve advantage rather than those that nvolve
government d rectly n the process, except n nat ons early n the
development process. It s an nd rect, rather than a d rect, role.
Japan’s government, at ts best, understands th s role better than
anyone— nclud ng the po nt that nat ons pass through stages of
compet t ve development and that government’s appropr ate role
sh fts as the economy progresses. By st mulat ng early demand for
advanced products, confront ng ndustr es w th the need to p oneer
front er technology through symbol c cooperat ve projects,
establ sh ng pr zes that reward qual ty, and pursu ng other pol c es
that magn fy the forces of the d amond, the Japanese government
accelerates the pace of nnovat on. But l ke government off c als
anywhere, at the r worst Japanese bureaucrats can make the same
m stakes: attempt ng to manage ndustry structure, protect ng the
market too long, and y eld ng to pol t cal pressure to nsulate
neff c ent reta lers, farmers, d str butors, and ndustr al compan es
from compet t on.
It s not hard to understand why so many governments make the
same m stakes so often n pursu t of nat onal compet t veness:
compet t ve t me for compan es and pol t cal t me for governments
/
are fundamentally at odds. It often takes more than a decade for an
ndustry to create compet t ve advantage; the process enta ls the long
upgrad ng of human sk lls, nvest ng n products and processes,
bu ld ng clusters, and penetrat ng fore gn markets. In the case of the
Japanese auto ndustry, for nstance, compan es made the r f rst
falter ng steps toward export ng n the 1950s—yet d d not ach eve
strong nternat onal pos t ons unt l the 1970s.
But n pol t cs, a decade s an etern ty. Consequently, most
governments favor pol c es that offer eas ly perce ved short-term
benef ts, such as subs d es, protect on, and arranged mergers—the
very pol c es that retard nnovat on. Most of the pol c es that would
make a real d fference e ther are too slow and requ re too much
pat ence for pol t c ans or, even worse, carry w th them the st ng of
short-term pa n. Deregulat ng a protected ndustry, for example, w ll
lead to bankruptc es sooner and to stronger, more compet t ve
compan es only later.
Pol c es that convey stat c, short-term cost advantages but that
unconsc ously underm ne nnovat on and dynam sm represent the
most common and most profound error n government ndustr al
pol cy. In a des re to help, t s all too easy for governments to adopt
pol c es such as jo nt projects to avo d “wasteful” R&D that
underm ne dynam sm and compet t on. Yet even a 10% cost sav ng
through econom es of scale s eas ly null f ed through rap d product
and process mprovement and the pursu t of volume n global markets
—someth ng that such pol c es underm ne.
There are some s mple, bas c pr nc ples that governments should
embrace to play the proper support ve role for nat onal
compet t veness: encourage change, promote domest c r valry,
st mulate nnovat on. Some of the spec f c pol cy approaches to gu de
nat ons seek ng to ga n compet t ve advantage nclude the follow ng.
Focus on spec al zed factor creat on. Government has cr t cal
respons b l t es for fundamentals l ke the pr mary and secondary
educat on systems, bas c nat onal nfrastructure, and research n
areas of broad nat onal concern such as health care. Yet these k nds of
general zed efforts at factor creat on rarely produce compet t ve
/
advantage. Rather, the factors that translate nto compet t ve
advantage are advanced, spec al zed, and t ed to spec f c ndustr es or
ndustry groups. Mechan sms such as spec al zed apprent cesh p
programs, research efforts n un vers t es connected w th an ndustry,
trade assoc at on act v t es, and, most mportant, the pr vate
nvestments of compan es ult mately create the factors that w ll y eld
compet t ve advantage.
Avo d nterven ng n factor and currency markets. By nterven ng n
factor and currency markets, governments hope to create lower factor
costs or a favorable exchange rate that w ll help compan es compete
more effect vely n nternat onal markets. Ev dence from around the
world nd cates that these pol c es—such as the Reagan
adm n strat on’s dollar devaluat on—are often counterproduct ve.
They work aga nst the upgrad ng of ndustry and the search for more
susta nable compet t ve advantage.
The contrast ng case of Japan s part cularly nstruct ve, although
both Germany and Sw tzerland have had s m lar exper ences. Over
the past 20 years, the Japanese have been rocked by the sudden N xon
currency devaluat on shock, two o l shocks, and, most recently, the
yen shock—all of wh ch forced Japanese compan es to upgrade the r
compet t ve advantages. The po nt s not that government should
pursue pol c es that ntent onally dr ve up factor costs or the
exchange rate. Rather, when market forces create r s ng factor costs
or a h gher exchange rate, government should res st the temptat on to
push them back down.
Enforce str ct product, safety, and env ronmental standards. Str ct
government regulat ons can promote compet t ve advantage by
st mulat ng and upgrad ng domest c demand. Str ngent standards for
product performance, product safety, and env ronmental mpact
pressure compan es to mprove qual ty, upgrade technology, and
prov de features that respond to consumer and soc al demands.
Eas ng standards, however tempt ng, s counterproduct ve.
When tough regulat ons ant c pate standards that w ll spread
nternat onally, they g ve a nat on’s compan es a head start n
develop ng products and serv ces that w ll be valuable elsewhere.
/
Sweden’s str ct standards for env ronmental protect on have
promoted compet t ve advantage n many ndustr es. Atlas Copco, for
example, produces qu et compressors that can be used n dense urban
areas w th m n mal d srupt on to res dents. Str ct standards, however,
must be comb ned w th a rap d and streaml ned regulatory process
that does not absorb resources and cause delays.
Sharply l m t d rect cooperat on among ndustry r vals. The most
pervas ve global pol cy fad n the compet t veness arena today s the
call for more cooperat ve research and ndustry consort a. Operat ng
on the bel ef that ndependent research by r vals s wasteful and
dupl cat ve, that collaborat ve efforts ach eve econom es of scale, and
that nd v dual compan es are l kely to under nvest n R&D because
they cannot reap all the benef ts, governments have embraced the
dea of more d rect cooperat on. In the Un ted States, ant trust laws
have been mod f ed to allow more cooperat ve R&D; n Europe,
megaprojects such as ESPRIT, an nformat on-technology project,
br ng together compan es from several countr es. Lurk ng beh nd
much of th s th nk ng s the fasc nat on of Western governments w th
—and fundamental m sunderstand ng of—the countless cooperat ve
research projects sponsored by the M n stry of Internat onal Trade
and Industry (MITI), projects that appear to have contr buted to
Japan’s compet t ve r se.
But a closer look at Japanese cooperat ve projects suggests a d fferent
story. Japanese compan es part c pate n MITI projects to ma nta n
good relat ons w th MITI, to preserve the r corporate mages, and to
hedge the r sk that compet tors w ll ga n from the project—largely
defens ve reasons. Compan es rarely contr bute the r best sc ent sts
and eng neers to cooperat ve projects and usually spend much more
on the r own pr vate research n the same f eld. Typ cally, the
government makes only a modest f nanc al contr but on to the
project.
The real value of Japanese cooperat ve research s to s gnal the
mportance of emerg ng techn cal areas and to st mulate propr etary
company research. Cooperat ve projects prompt compan es to explore
new f elds and boost nternal R&D spend ng because compan es know
that the r domest c r vals are nvest gat ng them.
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Under certa n l m ted cond t ons, cooperat ve research can prove
benef c al. Projects should be n areas of bas c product and process
research, not n subjects closely connected to a company’s propr etary
sources of advantage. They should const tute only a modest port on of
a company’s overall research program n any g ven f eld. Cooperat ve
research should be only nd rect, channeled through ndependent
organ zat ons to wh ch most ndustry part c pants have access.
Organ zat onal structures, l ke un vers ty labs and centers of
excellence, reduce management problems and m n m ze the r sk to
r valry. F nally, the most useful cooperat ve projects often nvolve
f elds that touch a number of ndustr es and that requ re substant al
R&D nvestments.
Promote goals that lead to susta ned nvestment. Government has a
v tal role n shap ng the goals of nvestors, managers, and employees
through pol c es n var ous areas. The manner n wh ch cap tal
markets are regulated, for example, shapes the ncent ves of nvestors
and, n turn, the behav or of compan es. Government should a m to
encourage susta ned nvestment n human sk lls, n nnovat on, and n
phys cal assets. Perhaps the s ngle most powerful tool for ra s ng the
rate of susta ned nvestment n ndustry s a tax ncent ve for long-
term (f ve years or more) cap tal ga ns restr cted to new nvestment n
corporate equ ty. Long-term cap tal ga ns ncent ves should also be
appl ed to pens on funds and other currently untaxed nvestors, who
now have few reasons not to engage n rap d trad ng.
Deregulate compet t on. Regulat on of compet t on through such
pol c es as ma nta n ng a state monopoly, controll ng entry nto an
ndustry, or f x ng pr ces has two strong negat ve consequences: t
st fles r valry and nnovat on as compan es become preoccup ed w th
deal ng w th regulators and protect ng what they already have; and t
makes the ndustry a less dynam c and less des rable buyer or
suppl er. Deregulat on and pr vat zat on on the r own, however, w ll
not succeed w thout v gorous domest c r valry—and that requ res, as
a corollary, a strong and cons stent ant trust pol cy.
Enforce strong domest c ant trust pol c es. A strong ant trust pol cy—
espec ally for hor zontal mergers, all ances, and collus ve behav or— s
fundamental to nnovat on. Wh le t s fash onable today to call for
/
mergers and all ances n the name of global zat on and the creat on of
nat onal champ ons, these often underm ne the creat on of
compet t ve advantage. Real nat onal compet t veness requ res
governments to d sallow mergers, acqu s t ons, and all ances that
nvolve ndustry leaders. Furthermore, the same standards for
mergers and all ances should apply to both domest c and fore gn
compan es. F nally, government pol cy should favor nternal entry,
both domest c and nternat onal, over acqu s t on. Compan es should,
however, be allowed to acqu re small compan es n related ndustr es
when the move promotes the transfer of sk lls that could ult mately
create compet t ve advantage.
Reject managed trade. Managed trade represents a grow ng and
dangerous tendency for deal ng w th the fallout of nat onal
compet t veness. Orderly market ng agreements, voluntary restra nt
agreements, or other dev ces that set quant tat ve targets to d v de up
markets are dangerous, neffect ve, and often enormously costly to
consumers. Rather than promot ng nnovat on n a nat on’s
ndustr es, managed trade guarantees a market for neff c ent
compan es.
Government trade pol cy should pursue open market access n every
fore gn nat on. To be effect ve, trade pol cy should not be a pass ve
nstrument; t cannot respond only to compla nts or work only for
those ndustr es that can muster enough pol t cal clout; t should not
requ re a long h story of njury or serve only d stressed ndustr es.
Trade pol cy should seek to open markets wherever a nat on has
compet t ve advantage and should act vely address emerg ng
ndustr es and nc p ent problems.
Where government f nds a trade barr er n another nat on, t should
concentrate ts remed es on d smantl ng barr ers, not on regulat ng
mports or exports. In the case of Japan, for example, pressure to
accelerate the already rap d growth of manufactured mports s a
more effect ve approach than a sh ft to managed trade. Compensatory
tar ffs that pun sh compan es for unfa r trade pract ces are better than
market quotas. Other ncreas ngly mportant tools to open markets
are restr ct ons that prevent compan es n offend ng nat ons from
nvest ng n acqu s t ons or product on fac l t es n the host country—
/
thereby block ng the unfa r country’s compan es from us ng the r
advantage to establ sh a new beachhead that s mmune from
sanct ons.
Any of these remed es, however, can backf re. It s v rtually
mposs ble to craft remed es to unfa r trade pract ces that avo d both
reduc ng ncent ves for domest c compan es to nnovate and export
and harm ng domest c buyers. The a m of remed es should be
adjustments that allow the remedy to d sappear.
The Company Agenda
Ult mately, only compan es themselves can ach eve and susta n
compet t ve advantage. To do so, they must act on the fundamentals
descr bed above. In part cular, they must recogn ze the central role of
nnovat on—and the uncomfortable truth that nnovat on grows out
of pressure and challenge. It takes leadersh p to create a dynam c,
challeng ng env ronment. And t takes leadersh p to recogn ze the all-
too-easy escape routes that appear to offer a path to compet t ve
advantage, but are actually short-cuts to fa lure. For example, t s
tempt ng to rely on cooperat ve research and development projects to
lower the cost and r sk of research. But they can d vert company
attent on and resources from propr etary research efforts and w ll all
but el m nate the prospects for real nnovat on.
Compet t ve advantage ar ses from leadersh p that harnesses and
ampl f es the forces n the d amond to promote nnovat on and
upgrad ng. Here are just a few of the k nds of company pol c es that
w ll support that effort:
Create pressures for nnovat on. A company should seek out pressure
and challenge, not avo d them. Part of strategy s to take advantage of
the home nat on to create the mpetus for nnovat on. To do that,
compan es can sell to the most soph st cated and demand ng buyers
and channels; seek out those buyers w th the most d ff cult needs;
establ sh norms that exceed the toughest regulatory hurdles or
product standards; source from the most advanced suppl ers; treat
employees as permanent n order to st mulate upgrad ng of sk lls and
product v ty.
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Seek out the most capable compet tors as mot vators. To mot vate
organ zat onal change, capable compet tors and respected r vals can
be a common enemy. The best managers always run a l ttle scared;
they respect and study compet tors. To stay dynam c, compan es
must make meet ng challenge a part of the organ zat on’s norms. For
example, lobby ng aga nst str ct product standards s gnals the
organ zat on that company leadersh p has d m n shed asp rat ons.
Compan es that value stab l ty, obed ent customers, dependent
suppl ers, and sleepy compet tors are nv t ng nert a and, ult mately,
fa lure.
Establ sh early-warn ng systems. Early-warn ng s gnals translate nto
early-mover advantages. Compan es can take act ons that help them
see the s gnals of change and act on them, thereby gett ng a jump on
the compet t on. For example, they can f nd and serve those buyers
w th the most ant c patory needs; nvest gate all emerg ng new buyers
or channels; f nd places whose regulat ons foreshadow emerg ng
regulat ons elsewhere; br ng some outs ders nto the management
team; ma nta n ongo ng relat onsh ps w th research centers and
sources of talented people.
Improve the nat onal d amond. Compan es have a v tal stake n mak ng
the r home env ronment a better platform for nternat onal success.
Part of a company’s respons b l ty s to play an act ve role n form ng
clusters and to work w th ts home-nat on buyers, suppl ers, and
channels to help them upgrade and extend the r own compet t ve
advantages. To upgrade home demand, for example, Japanese mus cal
nstrument manufacturers, led by Yamaha, Kawa , and Suzuk , have
establ shed mus c schools. S m larly, compan es can st mulate and
support local suppl ers of mportant spec al zed nputs— nclud ng
encourag ng them to compete globally. The health and strength of the
nat onal cluster w ll only enhance the company’s own rate of
nnovat on and upgrad ng.
In nearly every successful compet t ve ndustry, lead ng compan es
also take expl c t steps to create spec al zed factors l ke human
resources, sc ent f c knowledge, or nfrastructure. In ndustr es l ke
wool cloth, ceram c t les, and l ght ng equ pment, Ital an ndustry
assoc at ons nvest n market nformat on, process technology, and
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common nfrastructure. Compan es can also speed nnovat on by
putt ng the r headquarters and other key operat ons where there are
concentrat ons of soph st cated buyers, mportant suppl ers, or
spec al zed factor-creat ng mechan sms, such as un vers t es or
laborator es.
Welcome domest c r valry. To compete globally, a company needs
capable domest c r vals and v gorous domest c r valry. Espec ally n
the Un ted States and Europe today, managers are wont to compla n
about excess ve compet t on and to argue for mergers and
acqu s t ons that w ll produce hoped-for econom es of scale and
cr t cal mass. The compla nt s only natural—but the argument s
pla n wrong. V gorous domest c r valry creates susta nable
compet t ve advantage. Moreover, t s better to grow nternat onally
than to dom nate the domest c market. If a company wants an
acqu s t on, a fore gn one that can speed global zat on and
supplement home-based advantages or offset home-based
d sadvantages s usually far better than merg ng w th lead ng
domest c compet tors.
Global ze to tap select ve advantages n other nat ons. In search of
“global” strateg es, many compan es today abandon the r home
d amond. To be sure, adopt ng a global perspect ve s mportant to
creat ng compet t ve advantage. But rely ng on fore gn act v t es that
supplant domest c capab l t es s always a second-best solut on.
Innovat ng to offset local factor d sadvantages s better than
outsourc ng; develop ng domest c suppl ers and buyers s better than
rely ng solely on fore gn ones. Unless the cr t cal underp nn ngs of
compet t veness are present at home, compan es w ll not susta n
compet t ve advantage n the long run. The a m should be to upgrade
home-base capab l t es so that fore gn act v t es are select ve and
supplemental only to over-all compet t ve advantage.
The correct approach to global zat on s to tap select vely nto sources
of advantage n other nat ons’ d amonds. For example, dent fy ng
soph st cated buyers n other countr es helps compan es understand
d fferent needs and creates pressures that w ll st mulate a faster rate
of nnovat on. No matter how favorable the home d amond,
moreover, mportant research s go ng on n other nat ons. To take
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advantage of fore gn research, compan es must stat on h gh-qual ty
people n overseas bases and mount a cred ble level of sc ent f c effort.
To get anyth ng back from fore gn research ventures, compan es must
also allow access to the r own deas—recogn z ng that compet t ve
advantage comes from cont nuous mprovement, not from protect ng
today’s secrets.
Use all ances only select vely. All ances w th fore gn compan es have
become another manager al fad and cure-all: they represent a
tempt ng solut on to the problem of a company want ng the
advantages of fore gn enterpr ses or hedg ng aga nst r sk, w thout
g v ng up ndependence. In real ty, however, wh le all ances can
ach eve select ve benef ts, they always exact s gn f cant costs: they
nvolve coord nat ng two separate operat ons, reconc l ng goals w th
an ndependent ent ty, creat ng a compet tor, and g v ng up prof ts.
These costs ult mately make most all ances short-term trans t onal
dev ces, rather than stable, long-term relat onsh ps.
Most mportant, all ances as a broad-based strategy w ll only ensure a
company’s med ocr ty, not ts nternat onal leadersh p. No company
can rely on another outs de, ndependent company for sk lls and
assets that are central to ts compet t ve advantage. All ances are best
used as a select ve tool, employed on a temporary bas s or nvolv ng
noncore act v t es.
Locate the home base to support compet t ve advantage. Among the
most mportant dec s ons for mult nat onal compan es s the nat on n
wh ch to locate the home base for each d st nct bus ness. A company
can have d fferent home bases for d st nct bus nesses or segments.
Ult mately, compet t ve advantage s created at home: t s where
strategy s set, the core product and process technology s created,
and a cr t cal mass of product on takes place. The c rcumstances n
the home nat on must support nnovat on; otherw se the company
has no cho ce but to move ts home base to a country that st mulates
nnovat on and that prov des the best env ronment for global
compet t veness. There are no half-measures: the management team
must move as well.
The Role of Leadersh p
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Too many compan es and top managers m sperce ve the nature of
compet t on and the task before them by focus ng on mprov ng
f nanc al performance, sol c t ng government ass stance, seek ng
stab l ty, and reduc ng r sk through all ances and mergers.
Today’s compet t ve real t es demand leadersh p. Leaders bel eve n
change; they energ ze the r organ zat ons to nnovate cont nuously;
they recogn ze the mportance of the r home country as ntegral to
the r compet t ve success and work to upgrade t. Most mportant,
leaders recogn ze the need for pressure and challenge. Because they
are w ll ng to encourage appropr ate—and pa nful—government
pol c es and regulat ons, they often earn the t tle “statesmen,”
although few see themselves that way. They are prepared to sacr f ce
the easy l fe for d ff culty and, ult mately, susta ned compet t ve
advantage. That must be the goal, for both nat ons and compan es:
not just surv v ng, but ach ev ng nternat onal compet t veness.
And not just once, but cont nuously.
ABusversness
on Rev
of thew.s art cle appeared n the March–Apr l 1990 ssue of Harvard

M chael E. Porter s a Un vers ty Professor at

Harvard, based at Harvard Bus ness School n
Boston. He s a co-author of The Pol t cs Industry:
How Pol t cal Innovat on Can Break Part san
Gr dlock and Save Our Democracy (Harvard
Bus ness Rev ew Press, 2020).