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Porters Diamond
(Harvard Business School, 1990)
The Competitive Advantage of Nations. Looked at 100 industries in 10 nations. Thought existing theories didnt go far enough. Question: Why does a nation achieve international success in a particular industry?

McGraw-Hill/Irwin

2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

Determinants of National Competitive Advantage


Factor endowments:nations 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 industrys 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.
McGraw-Hill/Irwin 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Porters Diamond
Determinants of National Competitive Advantage
Firm Strategy, Structure and Rivalry
Factor Endowments Demand Conditions

Figure 4.6

Related and Supporting Industries


2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

McGraw-Hill/Irwin

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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.

McGraw-Hill/Irwin

2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

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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

McGraw-Hill/Irwin

2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

McGraw-Hill/Irwin

2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Advanced Factor Endowments


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

McGraw-Hill/Irwin

2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

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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.

McGraw-Hill/Irwin

2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

McGraw-Hill/Irwin

2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

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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.

McGraw-Hill/Irwin

2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Firm Strategy, Structure and Rivalry


Management ideology can either help or hurt you. Presence of domestic rivalry improves a companys competitiveness.

McGraw-Hill/Irwin

2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

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 multinationals 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

Dunnings Eclectic Paradigm: The OLI Paradigm


ownership (O) advantage: MNEs capacity to engage competitively in the foreign valueadded activities vis--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

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