5. competitive adv. of nations

8/3/2019 5. Competitive Adv. of Nations

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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



Firm Strategy,Structure &

Rivalry

FactorConditions

DemandConditions

Related & Supporting

Industries

Chance

Govt.

National Diamond



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





Generalized factors Highway system, Infrastructure, supply of debt capital,

availability of educated employees

Basic factors

Natural resources, climate, labor force behavior





Specialized factors

Skilled labor, knowledge base in particular fields,

Advanced factors

Digital data communication, highly educated population,

Research institutions




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




Rivalry

FactorConditions

DemandConditions


Industries

Chance

Govt.

National Diamond



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




Rivalry

FactorConditions

DemandConditions


Industries

Chance

Govt.

National Diamond



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




Rivalry

FactorConditions

DemandConditions


Industries

Chance

Govt.

National Diamond



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.




Rivalry

FactorConditions

DemandConditions


Industries

Chance

Govt.

National Diamond



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 amongstdeterminants

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




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




Holland : Spl. Research Institutions in flower growing,

packaging, handling operations, …

California : Wine Research Institute

India : Leather Research Institute, Gem & Jewelry, IT




Rivalry

FactorConditions

DemandConditions


Industries

A cluster of

domestic rivalsstimulates factor

creationPerceived

national

challenges

stimulate factor

creationHome demand

influencespriorities for

factor creating

investments

R&S industries

create or

stimulate the

creation of

transferable

factors

Influences onfactor 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




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




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




Rivalry

FactorConditions

DemandConditions


Industries

Intense rivalry makes

home demand larger

& more sophisticated

A gp. of rivals

builds a national

image &

recognition as an

important

competitor

Sophisticated factor-

creating mechanisms

attract foreign students &

participants by foreign

firms which pulls throughthe nation’s products

Int’l. successful industries

producing complementary

products pull throughforeign demand

Influences onHome demand

conditions

The image of world

class R&S industries

spills over to benefit




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.




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




Rivalry

FactorConditions

DemandConditions


Industries

Spl. Factors pools

are transferable to

R&S industries

A gp. of rivals

encourages the

formation of

more specialized

suppliers

Large growing home

demand stimulates the

growth and deepening of

supplier industries

Influences onR&S Industries




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..




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




Examples:

In Japan, Camera manufacturers entry in small copiers

Italian machine tool producers entered into factory automation

Korean TV makers entered into Videotape recorders.




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




Rivalry

FactorConditions

DemandConditions


Industries

Factor abundance or

spl. factor creating

mechanisms spawn

new entrants

New entrants

emerge from

R&S industries

World class users enter supplying industries

Influences onDomestic rivalry

Early product

penetration feeds

entry




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.




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?



Industry

CompetitorsRivalry amongst

existing firms

Supplier Power Buyer Power

Entry Barrier

Threat ofSubstitutes



Barriers & Profitability

Low High

LowLow, Stable

returnsLow, Risky

returns

HighHigh, Stable

returnsHigh, Risky

returns E n t r y

B a r r i e r

s

Exit Barriers



Dimension Rating Relevance to

Biz

Rationale

Economy of Scale

Differentiation

Entry deterring price

Expected retaliation (resources to

fight back, excess cash and

unused borrowing capacity)

Capital requirements

Switching costs

Access to distribution channel

Cost disadvantage independent of

scale

Government Policy

Barriers to Entry



Supplier Power

Dimension Rating Relevance Rationale

Supplier Industry Concentration

Presence of Substitute Inputs

Importance of User Industry

(sales volume share)

Impact of Inputs on costs andquality

Suppliers products areDifferentiated (leading tohigher switching costs)

Labour

Threat of forward integration bysuppliers




Biz

Rationale

Buyer Industry Concentration

Purchases form a Significant

fraction of the buyer’scost

Products are Differentiated

Switching costs

Industry profitability

Threat of backward integration

Quality of input to end product

Buyer knowledge on market

Buyer Power




Biz

Rationale

Trade-off of substitute

Buyer inclination to substitute

Price performance

Overall

Threat of substitutes



Dimension Rating Relevance

to Biz

Rationale

Numerous or equally balanced

competitors

Slow industry growth

High fixed or storage cost

Lack of differentiation or

switching costs

Capacity augmented in largeincrements

Diverse competitors

High strategic stakes

High exit barriers

Degree of Rivalry



A Firm’s Strategy

Uniquenessperceived by

customers

Low cost position

Industry

wide

Differentiation Cost Leadership

Segment FOCUS S t r a t e

g i c T a r g

e t

Strategic Advantage



CONCEPTUAL FRAMEWORK FOR ATTAINING CORPORATE GOALS

COMPETITIVENESS GROWTH

CAPABILITY

CORPORATE

GOALS



Profitability•EBIDT•PAT

Working Capital•GCA/GS•NCA/GS

Joy•EI Index

PEM•P/E equal to mkt.Avg. P/E

Low investmenthigh ROIprojects

Profitablegrowth thruacquisitions,

etc

BUILDING BLOCKS OF GOAL ACHIEVEMENT

Trusted,Empowered,Aligned,Motivated

Employees

Efficient & Effective SystemsCapable & Productive people

Positive imageamongst

Investors & society

Q,C,DImprovements

FinancialRestructuring

AssetProductivity

CapacityUtilisation

Profitable MktDevelopment

PriceImprovement

ProductMarket

Optimisation

COMPETITIVENESS GROWTH

CAPABILITY PROJECTS

GOALS



Thank you

5. competitive adv. of nations

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