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Porter‟s Diamond
(Harvard Business School, 1990)
• The Competitive Advantage of Nations. • Looked at 100 industries in 10 nations. – Thought existing theories didn‟t go far enough. • Question: “Why does a nation achieve international success in a particular industry?”

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Determinants of National Competitive Advantage
• Factor endowments:nation‟s position in factors of production such as skilled labor or infrastructure necessary to compete in a given industry. • Demand conditions:the nature of home demand for the industry‟s product or service. • Related and supporting industries:the presence or absence in a nation of supplier industries or related industries that are nationally competitive. • Firm strategy, structure and rivalry:the conditions in the nation governing how companies are created, organized, and managed and the nature of domestic rivalry.
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Porter‟s Diamond
Determinants of National Competitive Advantage
Firm Strategy, Structure and Rivalry
Factor Endowments Demand Conditions

Figure 4.6

Related and Supporting Industries
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The Diamond
• Success occurs where these attributes exist.
– More/greater the attribute, the higher chance of success.

• The diamond is mutually reinforcing.

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Determinants of National Competitive Advantage
Chance
Company Strategy, Structure, and Rivalry

Two external factors that influence the four determinants.

Factor Conditions Related and Supporting Industries

Demand Conditions

Government

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Factor Endowments
• Taken from Heckscher-Olin • Basic factors: – natural resources – climate – location – demographics • Advanced factors: – communications – skilled labor – research – technology

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Advanced Factor Endowments
• More likely to lead to competitive advantage. • Are the result of investment by people, companies, government.

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Relationship of Basic to Advanced Factors
• Basic can provide an initial advantage. • Must be supported by advanced factors to maintain success. • No basics, then must invest in advanced factors.

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Demand Conditions
• Demand creates the capabilities. • Look for sophisticated and demanding consumers.
– impacts quality and innovation.

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Related and Supporting Industries
• Creates clusters of supporting industries that are internationally competitive. • Must also meet requirements of other parts of the Diamond.

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Firm Strategy, Structure and Rivalry
• Management „ideology‟ can either help or hurt you. • Presence of domestic rivalry improves a company‟s competitiveness.

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Hofstede
• Study (IBM) is a general way to look at differences between cultures.
• 4 dimensions:
– – – – Power distance. Individualism versus collectivism. Uncertainty avoidance. Masculinity versus femininity.

• But:
– Assumption of one-to-one relationship between culture and nation-state. – Research may be culturally bound. – Respondents worked within a single company. – Work is beginning to look dated (1967-1973).

Work Related Values for Selected Countries
Power Distance
49 69 68 77 54 81 38 40 Argentina Brazil France India Japan Mexico Netherlands U.S.A. 86 76 86 40 92 82 53 46 46 38 71 48 46 30 80 91

Uncertainty Individualism Masculinity Avoidance
56 49 43 56 95 69 14 62

Table 3.1

Leveraging Subsidiary Skills
New Challenges 1. Humility to recognize valuable skills can come from anywhere. 2. Establish incentives to encourage local employees to acquire new skills. 3. Need a process to identify new skill development. 4. Need to facilitate transfer of new skills within the firm.

Skills can be created anywhere in a multinational’s global operations network.

Pressures for Cost Reduction and Local Responsiveness
High
Company C Generally reflects the position of most companies Company B

Cost pressures Low

Low
Figure 12.4

High Pressures for local responsiveness

• Cost Reduction
– Mass producing a standardized product at an optimal location.
• Intense:
– in commodity industries. – Where competitors are in low cost locations. – Where there is persistent excess capacity. – Where there are low switching costs. – Because of greater international competition.

• Local responsiveness
– Arise from:
• Differences in consumer taste and preferences. • Differences in infrastructure and traditional practices. • Differences in distribution channels. • Host government demands.

Local Responsiveness
Taste and preference Infrastructure And Delegate production practice and marketing to
national subsidiaries

Distribution channels
Delegate marketing to national subsidiaries.

Host government

Delegate manufacturing and production to foreign subsidiaries.

Manufacture locally.

Four Basic Strategies
High
Global Strategy
Transnational Strategy

Cost pressures Low
International Strategy Multi domestic Strategy

Low

High Pressures for local responsiveness
Figure 12.5

Strategic Choices
Global Increase profitability through cost reductions from experience curve effects and location economies. Transnational Exploit experienced based cost and location economies, transfer core competencies within the firm, and pay attention to local responsiveness needs.

International Create value by transferring skills to local markets where skills are not present.

Multidomestic Oriented toward achieving maximum local responsiveness.

Cost Pressures and Pressures for Local Responsiveness Facing Caterpillar
High
Caterpillar Tractor Cost pressures Low
Figure 12.6

Low

High Pressures for local responsiveness

The Advantages and Disadvantages of the Four Strategies

Strategy Global International

Advantages Exploit experience curve effects Exploit location economies Transfer distinctive competencies to Foreign Markets

Disadvantages Lack of local responsiveness Lack of local responsiveness Inability to realize location economies Failure to exploit experience curve effects
Table 12.1a

The Advantages and Disadvantages of the Four Strategies
Strategy Advantages Disadvantages Inability to realize location economies Failure to exploit experience curve effects Failure to transfer distinctive competencies to foreign markets Difficult to implement due to organizational problems Table 12.1

Multi-domestic Customize product offerings and marketing in accordance with local responsiveness

Transnational

Exploit experience curve effects Exploit location economies Customize product offerings and marketing in accordance with local responsiveness Reap benefits of global learning

Industry Globalization Drivers-Detailed
• Common customer needs and tastes • Global customers and channels • Transferable marketing • Lead countries MARKET DRIVERS

• Global scale economies • Steep experience curve • Favorable transportation costs • Differences in country costs (incl. Fx) • High product development costs • Fast-changing technology

COST DRIVERS

INDUSTRY GLOBALIZATION POTENTIAL

• Favorable trade policies • Compatible technical standards • Common marketing regulations GOVERNMENT • Government owned DRIVERS competitors • Government owned customers • Host government Concerns • High exports and imports • Interdependence of countries • Competitors from different countries • Globalized competitors • Transferable Competitive Advantage • Apply equally in service businesses

COMPETITIVE DRIVERS

Dunning‟s Eclectic Paradigm: The OLI Paradigm
– ownership (O) advantage: MNEs‟ capacity to engage competitively in the foreign valueadded activities vis-à-vis competitors. – locational (L) advantage: MNEs‟ wish to locate those foreign value-added activities and/or those relating to the creation of ownership advantage in a host country. – internalisation (I) advantage: MNEs‟ desire and opportunity to internalise the market for the ownership advantage.
From Dr. Annie Wei