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High Quality vs Low-Cost Bargain: The Current Dichotomy! (IV). Unsolved issues of the National Competitive Advantage (Part B)

Have a beautiful Friday. The last Friday of January 2021.

Today I will explain to you in the most uncomplicated manner, what is the “National Competitive Advantage of the Nations”. Next Monday we will proceed and finalize the sub-theme about the issues of this theoretical framework that has been utilized during the last 30 years. Sorry for not rushing directly into the contradictions or problems of this theory. I always begin first with a historic background. Then we jump into an understanding of the framework per se. Finally, as the cherry on top, we proceed with the critique analysis to find the positive elements, the issues, or the contradictions or troubles. For those strategy consultants or experts in business, this post could sound repetitive, but many times, when you read from simplicity, it is good to rewind to the basics. Also, remember that I always write for those who have erudition in other areas, for example, scientists, MDs, archaeologists, artists or historians, or other practitioners/business owners, students, or stay at home moms who do not have any idea about this, but each of them hold a deep understanding of their own areas of expertise.

Let´s start where we left the last paragraph unfinished in our last episode.

The National Competitive Advantage of Nations: This theory started as research from Michael Porter. At that time, a young and clever MBA and Ph.D. in business economics and strategy. Michael Porter started by asking himself questions such as why do some countries are more successful than others in the international competition.   Porter published the findings of his research in the book “The Competitive Advantage of Nations”. And his contribution was a home run. Why? Because at that time, in the context of a post-WWII era, and under the level of technology development of that decade, he discovered that his observations were explaining the differences and discrepancies of success between the analyzed 10 countries level of competitiveness of their own industries.

He built a thesis about a diamond framework of mutually-reinforcing four main key determinants of a nation (plus two additional influencing factors: government and chance). These factors determine the national success advantage when a country´s companies were doing business domestically and internationally. These conditions were constituting an interrelated and integrated diamond in which productivity was privileged. If you see the diamond carefully, what Porter did was basically to reframe and bundle these different attributes under a framework as such:

  1. Factor Endowments: Based on Heckscher-Ohlin theory, Porter simply proposed a couple of groups factors in between these key elements of production. (a) Basic Factors: which are given by the geography and demography of each country. Here we can include the natural resources tied to each nation (a type of soil, water, type of land, animals, cultivation, forests, etc). Additionally, other basic factors are its specific habitat arrangement, climate, location, and as I mentioned previously all the demographic conditions. The second hierarchy among these factors is the (2) Advanced Factors:  such as degree of sophistication in communications, infrastructure (public and private), degree of skilled labor, research and development facilities, and technological know-how. At this time, Porter wished to understand the correlation between the level of education and the type of specialization of the human capital in a particular country that triggered successful manufacturing industries.  Porter found several interrelations between the level of advanced factors integrated into the success of the specific type of industries chosen by the country. And he discovered that the higher investment in advanced factors, the higher possibilities in creating more sustainable value raising the nation´s wealth.
  2. Demand Conditions: Porter also found that each country has a domestic demand with a certain degree of requirements for its wants and needs. Basically, he stated that the more demanding or requiring high-standards a society has for its local production, the more challenging is for the companies to domestically made products that fulfill those exigent customers.  This level of exigency from the customers to the companies creates pressure over the domestic companies. In exchange, the firms deliver more innovation and high quality of products and services. This competition helps the firms to be tip-top ready when competing internationally. For example, at the time of Porter´s theory introduction, the concept of high quality was pivotal for his theory. Basically, he argued to don´t be angry when you find exigence or strict requirements from your clients in your local market. By fulfilling the most challenging local client expectations, this rigorous demand helps companies to reach and achieve high quality, helps to drill the company´s value chain with efficiency, in a way that when your company enters to compete to foreign markets, the high demanding local conditions have strengthened the local company competitive advantage.
  3. Relating and Supporting Industries: This attribute relates to the industry to which the corporation belongs. Each company requires crucial suppliers of raw inputs. It requires specific machinery. Vital processes which many times are outsourced. Imperative essential technologies for success. In one phrase, a company is not alone, it always requires decisive supporting sub-industries or related industries, grouped under the tag of “clusters”.  Porter’s “cluster” term was extremely innovative then. He stressed the philosophy of initiating and building cluster groups of companies in alliances of cooperation in between all of them. For example, in the case of a corporation dedicated to the agro-industrial production of tomatoes in Colombia. The cluster for this industry includes not only the production seed company but the machinery firm from Switzerland utilized for quality control, the organic fertilizers corporation, the leased land on which the nursery tomato garden company relies upon, and the packaging company that delivers all the boxes for exporting them. Besides, it requires strategic alliances with all the logistics entities (air, and land) required to transport the tomatoes internationally.
  4. Firm Strategy, Structure, and Rivalry: Here we land into the fourth broad attribute of national competitive advantage within a nation. Porter recognized that in a particular nation, each firm has an organizational structure, a managerial culture and style, a set of specific corporate and business and operational (functional) strategies, and a specific management ideology. Each company is in a different world, in which the leaders or the executive top management team procure privileged frameworks for their value chain (manufacturing, marketing, delivery and customer service processes). It is not the same to hold a board of directors where the CEO is more worried about appearing constantly on social media and he is measuring how each of the tweets affects the narcissistic image of his position; compared with another company in which the CEO is always caring for his employees at the bottom line, emphasizing how to improve the product, visiting every day the manufacturing processes, caring for the people quality of life inside and outside the production plant. Porter also observed that there is a relation between the vigorous domestic rivalry and the creation/persistence of competitive advantage in an industry.  According to Porter, when there is domestic “sane and wholesomely” rivalry in between the company members of an industry, this creates pressures to each to innovate, to improve quality, to raise the degree of standards as measured against others of a similar kind,  to invest in improvement, and upgrade and refresh the advanced factors. For Porter, all this domestic rivalry helps to create world-class unique competitors that can compete based on high-quality.
  5. Government: This variable that belongs to the environment in which the firm competes, can influence the national diamond for good or for worst. A Government, that extends policies to help the entrepreneurs or companies to improve their national competitiveness, is helping to install transparent rules of the game and ethical protection policies that can regulate the intensity of the domestic rivalry within an industry. Governments also can help to invest in education, to enhance or increase the labor skilled capabilities to serve many industries, or to ignite more sophisticated entrepreneurship. Governments also can detract from the business environment, if they don´t provide a democratic ecosystem for entrepreneurs who wish to leave the “valley of death behind”. Governments can shape domestic demand through local product standards and regulations that can keep the high standards afloat for the sake of the customers´ needs and wants. Governments are not just to collect taxes, but to maintain, keep and protect through the law and antitrust laws all the market participants. Besides, governments can act as challengers and catalysts for the industry’s success. Also, there are countries in which governments invest some minority participation ( no more than 15% equity) in private corporations, not just to improve the competitive advantage of the entity, but also to provide measures of protection when companies are starting to compete abroad.
  6. Chance:  In this particular context, each country has its own causalities, lucky or fortuitous events that may impact up to a certain degree, not just the industries of a country, but also can provide opportunities for one nation to move ahead of the competition´s game. Chance also may reshape industry structure and provide events such as major innovations to succeed. In the tourism sector, there are several historic legacy infrastructures from our ancestors, that by luck can help us to create clusters to innovate, design, and promote the hospitality industry attracting more visitors year over year.
“Baby chin-chin”. An aquarelle painted for this blog. Handmade with love by Eleonora Escalante on paper Fabriano 5-240GSM. Size: 7 inches x 5 inches.

Well, this is it for today. I truly hope you have understood the components of Porter´s diamond for National Competitive Advantage between nations. Next Tuesday we will proceed with the analysis of the most relevant issues at each of these attributes, after 30 years of its implementation. Please notice, this model has been particularly utilized in so many countries, and it has started to affect our current global systems, regardless of China´s free trade objectives in the world. Have a beautiful weekend, see you again soon. Thank you for reading to me.

To be continued…

Sources of reference utilized for this chapter:

Disclaimer: Illustrations in Watercolor are painted by Eleonora Escalante. Other types of illustrations or videos (which are not mine) are used for educational purposes ONLY.  Nevertheless, the majority of the pictures, images, or videos shown on this blog are not mine.  I do not own any of the lovely photos or images posted unless otherwise stated.

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