The Competitive Advantage Of Nations

“Competitive advantage that rests on factor costs is vulnerable to even lower factor costs somewhere else.”

Porter provides a reason why relying on factor costs, such as cheap labor, is a bad strategy for a nation. This is because low factor costs are easily replicable elsewhere. They are also vulnerable to being undercut. A better, and more sustainable, strategy is for a nation to create high-quality of products.

“The reason so few firms sustain their position is that change is extraordinarily painful and difficult for any successful organization.”

In this passage, Porter explains why firms are so slow to continue the upgrading and innovating process once they have become successful. Doing so involves restructuring and disturbing the established, comfortable ways of doing things. Unfortunately, this means that such firms are likely to be overtaken by firms with less of an investment in the old order.

“Pride and ego also focus attention on success in meeting needs in the home market.”

Porter explains why the quality of home demand is important for firms. While it is possible to gain information from demand for one’s products in other countries, firms tend to pay more attention to the home market. This is in part due to pride on the part of owners and managers and the desire to dominate domestic rivals.

“[…] nations tend to be competitive in activities that are admired or depended upon.”

The prestige associated with an industry in a nation will affect whether it is successful there. For example, in Italy, it is fashion, while in the US, it is finance and the entertainment industry. Prestige-associated industry attracts the most talented and motivated people.

“[…] in some places an industry is ‘in the air.’”

This quote is attributed to Alfred Marshall. It refers to the idea that in certain places an industry is so deeply intertwined with a place that its presence is apparent everywhere. Examples include the association of Los Angeles with the movie industry and of Silicon Valley with computing.

“Foreign firms must compete not with a single firm, or even a group of firms, but with an entire subculture.”

Porter explains the strength of what he calls “clusters.” They are so strong because all the different firms and resources in an area mutually reinforce one another, from strong competition to excellent supplier firms, to advanced demand and workers. It is extremely hard for a competing nation to replicate this from scratch.

“These demand characteristics, though, make services more amenable to systematization, standardization, and branding […].”

Porter refers to the British and American success in service industries. Home demand for services in these nations reflects more casual types of society, which allows for more impersonal, and thus standardizable, services. In contrast, in a nation like Japan, the demand for service specificity and personal attention makes it very hard for companies to standardize and scale.

“American needs often anticipated, if not defined, foreign demand.”

Part of the reason for the US’s success in the decades immediately following World War II was that due to increased affluence, US demand was highly anticipatory of future trends. However, this also helped shape the demand and aspirations of other nations via advertising and mass marketing.

“Swiss companies are politically acceptable in nations where firms from others are not.”

One of the explanations for Swiss success. Being neutral in the second world war meant that Switzerland was more easily able to do business with firms and customers from both sides in the war. Sweden, also neutral, enjoyed a similar advantage, especially in the immediate post-war period.

“Unlike Britain or France, Germany had no colonies to provide guaranteed export markets.”

Porter cites this as an apparent disadvantage both before and after both world wars. However, the absence of such guaranteed markets forced German firms to compete on international markets and to upgrade their industry to do so. In contrast, easy access to markets for British and French firms led to complacency and a loss of competitive edge.

“Japanese knowledge creation has taken place in companies much more than in other institutions.”

Porter cites knowledge creation as both a strength and a weakness for Japan. On the one hand, research being conducted within companies means that it is highly tailored to the needs of that firm and industry. However, it also means that broader, fundamental, or foundational, research in science and technology still trails nations like the US where extensive research is conducted through universities as well.

“Demand skewed toward compactness, lightness, and multifunctionality […].”

Porter cites this approach as part of the reason for Japanese success in certain industries. Due to constraints on space in Japan, products often had to be compact and multifunctional. This demand proved to anticipate a broader global trend in this direction and thus benefited Japanese firms.

“Highly specialized knowledge and skills are passed within families and from generation to generation.”

Porter describes how training and knowledge about working in industries operates in Italy. This evolved in part because of the strong sense of family, and respect for the old, that exists in Italy. It was also a response to the weakness or absence of formal government training and education programs.

“One trend is the shift from standardised, mass-produced products toward more customised, higher-styled, higher quality goods.”

In many areas, especially fashion, consumer trends at the higher end have moved toward more specialized and stylized products. This has benefited the Italian fashion industry, which operates through small and highly specialized firms. It has hindered US producers, who are still very wedded to the model of cheap mass production and marketing.

“Korean companies are characterized by extremely strong chief executives, who wield enormous power within their organizations.”

Korean success in the 1970s and 1980s is partly based on a strict hierarchical, disciplined, and even authoritarian, work culture. This allowed for decisive decision making, particularly in investing in new technology. However, this may prove a disadvantage when Korea upgrades to more advanced industries, such as computing, where employee autonomy is important.

“Success in international competition was elevated to a patriotic duty…”

Porter cites another reason for Korea’s success in the 1970s and 1980s. The government was effective at encouraging a consensus around the need for Korean firms to compete on the world stage. This motivated Korean workers and managers to strive toward that goal.

“Education for the elite has stressed humanities and pure science in favor of more practical pursuits, and many talented people in Britain have avoided practical disciplines such as engineering.”

This passage describes British university education. Theoretical pursuits are prioritized over practical ones. This can be seen as both a symptom and cause of Britain becoming a wealth-driven society that views industry as unglamorous or unimportant.

“[…] many entrepreneurs who achieved success sought to adopt upper-class norms and distance themselves from industry.”

Due to the UK’s rigid social structure and a distaste for or scepticism toward “new money” earned in industry, few home-grown entrepreneurs exist in Britain. As such, most innovators in the UK tend to be foreigners who have moved there. Unfortunately, they often seek to ingratiate themselves into the upper class once they succeed and thus do not disturb the class structure holding Britain back.

“A company’s leader must create a context in which widening and upgrading advantage is viewed as normal and expected.”

Porter discusses the proper role of business leaders. They need to inculcate a culture in which change and innovation are the norm, not the exception. This runs against the grain of many managers and workers who seek stability, continuity, and an easy life.

“[…] planning curriculum, placing graduates, and providing financial support for equipment and facilities, faculty positions, scholarships, and recognition programs for outstanding teachers and students.”

Porter outlines some of the ways business can develop a productive relationship with universities. This is a two-way process whereby they can reap the rewards of more tailored research and graduate skills by supporting and investing in these institutions. However, this approach does raise questions about the potential compromises to academic freedom that may ensue.

“To keep progressing and learning on the job, Italians must have better skills in mathematics, computing, and other basic fields.”

Porter cites the lack of improvements in the formal education system as one of the challenges for Italian industry. While informal and family-based education and training has been sufficient in some industries, like clothing and ceramics, it will not be in other industries and may hinder progress.

“There is a sense in Sweden that with enough collaboration all will benefit.”

Porter describes the double-edged sword of Swedish society and competitiveness. While a cooperative ethos is laudable and brings certain advantages to industry, as people can work together harmoniously, this emphasis stunts individual initiative and innovation, limiting firms’ ability to advance.

“Too many companies seem to be intent on defending what they have rather than creating new advantages.”

Porter describes the state of Swiss industry. This could also be seen as true, though, of certain industries in many advanced nations. A desire to preserve existing wealth—or to best exploit it through speculation—rather than to create new wealth, is symptomatic of a nation sliding towards being a wealth-driven society.