Theory of National Competitive Advantage

The theory attempts to analyze the reasons for a nation’s success in a particular industry

Porter studied 100 industries in 10 nationsPostulated determinants of competitive advantage of a

nation were based on four major attributes Factor endowments Demand conditions Related and supporting industries Firm strategy, structure and rivalry

Porter’s Diamond

Success occurs where these attributes exist

More/greater the attribute, the higher chance of success

The diamond is mutually reinforcing

Factor Endowments

Factor endowments: A nation’s position in factors of production such as skilled labor or infrastructure necessary to compete in a given industryBasic factor endowmentsAdvanced factor endowments

Basic Factor Endowments

Basic factors: Factors present in a countryNatural resourcesClimateGeographic locationDemographics

While basic factors can provide an initial advantage they must be supported by advanced factors to maintain success(Advanced Factors enable a speedier transformation of Basic Factors??)

Advanced Factor EndowmentsAdvanced factors: The result of

investment by people, companies, and government are more likely to lead to competitive advantage If a country has no basic factors, it must invest in

advanced factors

Advanced Factor Endowments

CommunicationsSkilled laborResearchTechnologyEducation

Demand Conditions

Demand:creates capabilities creates sophisticated and

demanding consumers

Demand impacts quality and innovation

Related and Supporting Industries

Creates clusters of supporting industries that are internationally competitive

Must also meet requirements of other parts of the Diamond

Firm Strategy, Structure and RivalryLong term corporate vision is a

determinant of successManagement ‘ideology’ and structure of

the firm can either help or hurt youPresence of domestic rivalry improves a

company’s competitiveness

Porter’s Theory-Predictions

Porter’s theory should predict the pattern of international trade that we observe in the real world

Countries should be exporting products

from those industries where all four components of the diamond are favorable, while importing in those areas where the components are not favorable

Implications for Business

Location implications:Disperse production activities to countries where they

can be performed most efficientlyFirst-mover implications:

Invest substantial financial resources in building a first-mover, or early-mover advantage

Policy implications: Promoting free trade is in the best interests of the

home country, not always in the best interests of the firm, even though many firms promote open markets

Implications for Strategy of Individual Firms ???

Group presentations based on handout!