Forces To Achieve Higher Order Advantage Economics Essay
To analyze the strength of a cluster, how it creates its competitive advantage and how it can sustain it, the useful tool is the diamond model developed by M.E. Porter. Before starting describe the model some premises have to be clarify:
Competition and competitive advantage differ from one industry to another and between industry segments.
In global competition firms develop their value chain in different countries. Home base nations are those in which core activities are performed; for this reason it is important to explain why a nation is more or less desirable as home base for competing.
Competitive advantage is achieved through continuous improvement, innovation and upgrading.
Firms gain competitive advantage perceiving new need and moving early to exploit them.
The reasons why an industry achieve success can be clearly explain with this model, the diamond, based on four mutually reinforcing determinants which create, shape and develop the context for competition:
Related and supporting industries
Firms strategy, structure and rivalry
Figure 4. The diamond model
Factors conditions are factors of productions. They are nothing more than inputs such as labor, natural resources, capital and infrastructure. According to standard theories, trade was made upon these factors; industries will gain position exporting products which make an extensive use of these features. United States for example has been a big exporter of agricultural products, low labor cost is the basis for the development of industries in eastern Asia, Taiwan or China for example.#p#分页标题#e#
but to gain and sustain competitive advantage as we have previously describe we must understand that inputs are more than the mere availability of natural resources. First, they can be grouped in a number of categories:
Human resources: quantity, skills and costs of personnel taking consideration work ethic. This factor involves all level of workforce and all type of specialization.
Physical resources: quantity, availability, costs, accessibility and abundance of natural resources, such as water, minerals and land. Other factors that can be included in this category are: climate, which has been determinant for the development of the Californian wine industry; location, which has always influenced industries for transportation costs or cultural proximity; geographic size and time zone has been the cause of the growth of the facsimile industry in Japan allowing better communication between this country and others such as the USA.
Knowledge resources: universities, institutes, research facilities, agencies, trade associations and all other business resources such as databases and literature.
Capital resources: amount and cost of capital available to finance business. Capital resources included secured and unsecured debt, bonds, equity and venture capital. This condition is influenced by the stock of savings and the capital market structure of a nation but global competition is changing also this aspect, allowing firms to access global capitals.
Infrastructure: quality, type and cost of available infrastructure. This category includes: transportation, communication, health care, financial and educational systems. This category has to be intended in a broad sense, involving all the infrastructures that are able to raise the standard of living of people; for this reason are also included for example cultural institutions.
Firms gain advantage not only if they possess factors but if they have the uniquely inputs that are important for their industries. Estonia gains advantage thanks to its geographical location between Russia and Europe, but also because of its naval infrastructures; Switzerland develops its advantage on its internal cultural diversity and on the availability of a highly skilled workforce. The role of the stock of “natural gift” factors could not be only related to their presence but is defined by how efficiently and effectively this pool of inputs is exploited.
There are different types of factors between which is necessary to discriminate. The first distinction is between basic and advanced factors. Basic factors include resources, climate, location, labor and capital; generally these inputs are inherited or their creation requires few and unsophisticated investments. These inputs do not provide a competitive advantage or the one they provide is unsustainable because it will decrease as these inputs become less necessary or less available. Basic factors can explain some trade based on low factors costs or in extractive and agricultural industries. This is the case of Korean construction industry which base its advantage on the availability of low cost and organized labor.#p#分页标题#e#
Advanced factors include modern technologies, communications and highly specialized education. This type of factors are those created by nations and are the most significant for competitive advantage. Advanced inputs are necessary to reach higher-order competitive advantage, they are scarcer because develop them require lots of investments both in capital and in labor. They are truly advanced inputs because they are difficult to imitate and to find on a global market. United States’ availability of skilled personnel in computer hardware and software create advantages not only in electronics industry but also in others like medical electronics and financial services.
The second discrimination is made between generalized and specialized factors. Generalized factors are those that can be used in a wide range of industries. They are generally available in many nations and sustain a more rudimental type of advantage that can be easily nullified or imitated in global competition because activities based on these inputs can be performed in every nation.
Specialized factors are those relevant only for a limited range of industries. More advanced factors tend to be specialized because this type of inputs require focus and risky investments. These factors are sources of a more sustainable competitive advantage because they are scarcer and difficult to imitate in global competition. This type of input is at the basis of German advantage in optics. They have a high availability of skilled personnel, trained in special university programs and also workers being experts thanks to apprenticeship programs.
Industries have to develop a sustainable advantage based on both general e specialized factors because it is the quality and availability of both that determine the competitiveness of a firm in global markets.
These factors could be inherited or created, which means that nations have stocks of different inputs that are endowed but the most important for competitive advantage are inputs that are developed. The role of endowed inputs is more complicated; it is not simply a matter of exploitation. The way they can contribute to the achievement of competitive advantage is more related to how efficiently and effectively and where they are deployed. These decisions are crucial for a nation economy because every nation has some attractive factors pool but is the way they are used that makes the difference in competition.
Created factors are generally an hard basis for higher-order competitive advantage. Factor creation involves public and private investments in education and infrastructure; the rise of world standards for factors requires not only una tantum investments but continuous upgrading and reinvestment to keep factors rise in quality. Private role is necessary because firms are in the position to best know which factors are necessary to compete; government investments usually concentrate on more basic and generalized factors. A good example of private involvement in factor creation is Denmark, where there are two hospitals specialized in diabetes treatment that made also research on the same field. These two centers are owned by two major companies as Novo Industri and Nordisk Industri.#p#分页标题#e#
No nation can develop all type of factors, the decision of which are the best to create is to made according to the strength of the diamond as a system.
An important way to create factors are selective disadvantages, that mean transform disadvantages in competitive advantages because in a dynamic environment, such a global one, disadvantages create pressure to innovate and to search solutions around them. Since innovation is a function of effort and attention, invention around weaknesses is more likely than innovation to exploit strengths because it pushes through new solutions. The positive role of selective disadvantage is based on the fact that they are selective, meaning that they involve only some factors and firms concentrate only on what can motivate. A great example of exploiting disadvantages is Italian steel industry. Companies in this field faced high capital requirement, high energy costs and low local availability of raw material. Privately owned firms are located around Brescia, in the north of the country and the state owned companies are in the south of Italy. Northern companies were affected by high transportation costs, due to the distance with ports and to the inefficient transportation system of the country. This disadvantage results in a new solution called mini-mills in which Brescia-area producers were pioneering. This technology uses less capital, less energy and scrap metal. The introduction of this new solution change their value chain in a positive way that make them gain global position.
Home demand influences the rate and character of innovation and improvement. There are three attributes significant for demand: composition, size and pattern of growth and the way it interchanges its preferences to foreign markets. To determine competitive advantage quality of home demand is more important than quantity of demand.
The composition of home demand is the mix and character of home buyer needs. Since firms perceive, interpret and respond to changes in these needs, how demand gives them clear and early picture of its needs can make firms able to achieve competitive advantage or not. Firms are more able to understand and respond to home market needs because of the greater knowledge of them; perceiving foreign buyers needs is extremely difficult because of the distance between the headquarters and the foreign market. To achieve competitive advantage there are three characteristics of home demand to consider: segment structure, sophistication and anticipatory needs.
The first is the distribution of demand for particular varieties. Industry’s firms are likely to gain competitive advantage from segment that are large and highly visible of home demand but account for less in global competition because these segments make possible to achieve economies of scale or learning. Generally the presence of this type of segments shapes the priorities of firms making large segments receiving more attention put aside smaller ones, which can be perceived as profitable from foreign firms. Particularly important are those segments that required a sophisticated advantage because firms are pushed to upgrade and achieve these segments make the advantage more sustainable. Commercial airlines industry is a good example for these considerations. Airbus identified a new segment for medium capacity plane for short hauls that was ignored by Boeing and other manufacturers. This segment represents a significant part of market in Europe because of the presence of numbers of cities with short flying distances that were underserved.#p#分页标题#e#
The second represents the nature of home buyers. Sophisticated and demanding buyers allow firms to perceive advanced needs and the proximity with this kind of buyers pressure firms to reach a high standard for quality, features and services. Japanese audio equipment buyers are knowledgeable in purchasing products because they are seen as a status. This fact continuously push firms in achieving higher levels of products sophistication.
Finally, firms gain advantage if their home demand needs anticipate those of foreign nations. This characteristic is related to sophistication because generally, sophisticated buyers are early adopters. Benefits are not only related to new products because these buyers stimulate firms in continuous upgrading. Scandinavian concern for environment push customers in paying attention to all new solution that will help them in saving the environment, this attitude push industries in continuously upgrading their products.
The demand size can lead to competitive advantage when there are industries in which are present economies of scale and learning. Firms are encouraged to invest in technology development, productivity improvements and in large scale facilities.
Other patterns that can influence the advantage of an industry are: the number of independent buyers, the rate of growth of home demand and early saturation. The first creates a better environment for innovation, motivates progress and expands the pool of market information. It also decreases the risk perceived and augments entry and investments. The second is a function of how rapid is the growth of demand in its size. A rapid domestic growth push nation’s firms to have less fear in adopt new technologies and building new and bigger facilities. A slower rate of growth makes firms scared of introducing new technologies and changes that make what was made before redundant. A good example could be Italian appliance industry after the World War II. The rapid growth of this demand led producers built large-scale and automated plants. The rapid growth of this industry allows Italian firms to supply also international buyers gaining also the advantage of being the first to enter underserved segments. Finally, early saturation is important for innovation and upgrading. It put pressure on firms to push down prices, introduce new technologies and improve product quality. It provides incentives for buyers to change old products in favor of the newest; saturation improves rivalry creating price wars from which emerges only few bigger but stronger competitors. Home demand saturation is beneficial when firms can perceive a growing foreign market: if other nations’ firms have a lack of productivity to meet booming demand, firms can reach these foreign customers without competing with domestic rivalry. Following the World War II, American engineering and construction industry had its industrial base almost intact and had also specialized workforce gained on wartime. Companies were pushed in the space creating by the absence of foreign firms to reconstruct. Saturation is linked with early penetration that helps local firms become established and both are beneficial to competitive advantage only if they push local firms to products that are desired also abroad.#p#分页标题#e#
The internationalization of home demand is another way by which it can contribute to competitive advantage. When a nation’s buyers are mobile or multinational they create advantage because local are also foreign needs. This type of buyers generally can be considered as a base for loyal foreign customers, but their most important benefit lies in decreasing the perceived risk of going in foreign markets. This type of consumers highlight the opportunity of reaching foreign needs and establishing a foreign presence. This effect is evident in travel related industries such as hotels, car rental, credit services and fast food where US companies gained lots of benefits. A similar kind of influence happens when domestic needs influence foreign needs; this happens in many ways:
foreigners come to a nation for training
political alliances such as aid and special relationships.
All these type of exchanges expose industries to another nation’s culture, taste and preferences that can influences foreign consumers’ purchases but local firms have to pay attention to do not forget the importance of innovation and improvement.
Related and supporting industries
The presence of suppliers provides advantages in downstream industries. First, it gives rapid, efficient, early and preferential access to production inputs. Italian leadership in jewelry industry id due to the fact that Italian firms produce two thirds of the world jewelry equipment and that they are also leaders in recycling these materials. Since mere access is not a great advantage, the second benefit is related to the linkages that firms can create with their suppliers to improve coordination. Probably the most important advantage is in the innovation process. Close relationships with suppliers help firms in perceive new opportunities; linkages help the interchange of information and permit them to influence each other. This process accelerate the development of new technologies, new methods and ideas creating new solutions that help the industry in growing faster. Obviously the maximum benefit of exploit linkages is gained when suppliers and firms are proximal, when cultural similarities facilitate the flow of information and when also suppliers are global competitors because global competition will push them in trying to be always the best. Italy provide a good example also in this case: in leather footwear industry footwear manufacturer regularly interact with leather manufacturers on techniques and new trends. Footwear manufacturers learn about techniques and leather manufacturers learnt about new trends.
Related industries are those in which firms can coordinate or share activities in the value chain when competing, or those which involve products that are complementary  . Activities that can be shared are those of research and development, manufacturing, distribution and marketing. A nation’s related industries can help the exchange of information and technical capabilities because of the cultural proximity. These industries are important also because they can push the creation of other industries that can serve both, the success in one industry can pull through demand for complementary products. Swiss candy producer, Ricola, accelerate its international expansion employing distribution channels of chocolate producers, Tobler Jacobs.#p#分页标题#e#
Firms strategy, structure and rivalry
The fourth determinant of the diamond is related to a nation’s business environment; an industry will gain competitive advantage where management practices and modes of organization favor national environment. Many aspect of a nation influence managerial approaches: attitude towards authority, human resource management, social norms, educational system, history, government attitudes, political system, culture and many others. Italy’s history of small size and family owned companies mirror a high grade of individualism. In the country, families have a strong power and generally members try to work in the same firm. As a result, this practice make firms to be created for the family instead of being created for market needs.
An important aspect of the environment are goals and commitment; to gain and sustain advantage a nation’s firms have to keep these two factors aligned with the advantage. Company goals are determined by company owners, debt holders and corporate governance; these factors impact on advantages because industries have different investment requirements and risky profiles, different return and different horizons. United States are a good example, in their companies more shares are in the hands of institutional investors, who performances are measured by quarterly results. This aspect adds to the lack of long term information stress quarterly earnings growth. In addition long term capital gains are taxed as other earnings; all these consideration have the effect to short time horizons. Shareholders cannot really influence the management because the board of directors has a little weight in corporate governance. This aspect adds to the fact that managers’ compensations are strongly connected to performances through bonuses, affect company’s profits limiting them to short time. These facts with the presence of a well-functioning quasi-public risk capital market make the rate of returns of US companies higher than others.
Individuals’ goals affect firms performance as the central concern is made individuals develop their skills as well as do what is necessary to sustain the advantage. Employees are involved in company goals with the reward systems, that has to consider the social value of work, the tax system and the attitude toward wealth. Workers can be involved also creating a relationship between them and managers; this relationship is useful to sustain high-order advantage based on the performance of a group of united people. Success can be improved also if the industry is considered as a national prestige. This status push talents to work in industry considering working there as a prestige, workers will see the firm more than a business demonstrating more commitments and effort. In Israel the most prestigious works were defense and agriculture, in Britain were the church, military and civil services.#p#分页标题#e#
Domestic rivalry is a tool to innovate and improve, because firms compete aggressively to create new more quality products at a lower price. It is not only a matter of price, rivalry is an advantage because:
puts pressure to improve
improves commitment when become emotional or personal
puts pressure to sell abroad
forces to achieve higher-order advantage.
Rivalry is also useful to avoid some disadvantages, such as government intervention and protection. When domestic competition is not sufficient, it can be substituted with global strategies only if the industry is a totally open market in a small nation. As an industry matures the number of rivals fall but it is important to remind that it is not the number but the effectiveness what makes rivalry an advantage. Rivals can also cooperate and this cannot affect competition if it is limited and organized.
New entrants are also important to stimulate improvement. They serve new segment and try new ways to respond to buyer’s needs. New business are developed through two mechanisms, entirely new company and internal diversification. The first is based on spin-offs founded by employees, buyers or suppliers; they create more rivalry, serve ignored segments, develop new products and processes. Examples of this phenomenon are descendants of the American General Automation such as Digital Equipment and Data General in the minicomputer industry and the Italian ACMA in the packaging industry which creates lots of its competitors. Internal diversification is based on established firms and the transfer of knowledge and assets. Japan is a great instance for this mechanism; the desire to occupy employees make available by technological improvements and the difficulty in making acquisitions has been a fertile land for internal diversification of established firms.
A double array system
These determinants reinforce each other and this mutual influence multiplies the overall effect of the diamond.
Generalized factors such as education and transportation are developed in every nation because they are a natural outcome of governmental policies. However, every nation has its personal availability of resources but are policies that make these outcomes change for differences in standards, rate of investments and in how government is involved in factor creation. Generalized factor are not a source of advantage, they are necessary to create advanced and specialized factors but to develop these type of factors private contribution is necessary.
Domestic rivalry strongly influences factor creation because local and vigorous competition push firms in developing new products, new processes, new technologies and skills. The effects on competition are amplified when firms are all located in a particular region, because this fact enhances and reinforces relationships not only between firms and rivals but also between the industry and actors outside it; when industries are seen as prestigious because they attract investments and attention and as a consequence factors are developed more rapidly. There are number of university programs in the New York area related to the financial industry; the same happens in Germany for the auto industry; it happens also in Denmark for the biological research. All these cases explain vigorous competition pushes firms in make more investments that will help the industry growth in a sort of never ending cycle. Competition has also the effect of mitigating the power of actors in the industry, decreasing the perceived risk of invest in it. Buyers influence factor creation, a strong sophisticated demand pushes firms in continuous upgrading to meet local needs. Countries as Norway or Sweden in which trade depends on sea transportation have developed several programs to generate specialized skills to meet local demand. It also attracts attention on the industry galvanizing investments in this industry. Generally, the presence of suppliers and related industries shape the way inputs are created because these actors can work on them together especially on those that are easily transferrable.#p#分页标题#e#
Rivalry is the determinant that more affects demand conditions. Strong competition rises marketing investments to drive commitment to the market; firms are aggressive on prices to gain market share and tend to introduce products earlier. Local demand is continuously stimulated, upgraded and expanded making market saturation more rapid; this will push firms to internationalize. The soft drinks industry is more developed in the US than in any other country due to the presence of the major global players. The intense rivalry between Coca-Cola, Seven Up and Pepsi, not only is influenced by the market but creates demand because new products are always first introduced in the US. Local competition can have effects also on foreign demand; rivalry builds industry’s image reducing the perceived risk of sourcing from these firms. Foreign attention is gained also if there is the presence of supported industries, because the transferability of reputation and the pull through effect of complementary products also enhance international demand. Factor creating mechanisms attract foreigners to learn from local firms creating in them the need of these products. This fact also rises the internationalization of local firms.
Related industries are developed where factors are highly required. Skills, knowledge and technologies are spill overs of local competition that produce benefits. The size and growth of demand augment the efficiency of suppliers thanks to the possible economies of scale and the specialization of related industries which try to reach new needs. Domestic rivalry strongly influence this determinant because a group of firms is easier to notice than an isolated company; competition will push suppliers to specialize in creating products build on industry’s needs. Aggressive firms also push suppliers in growth and develop putting pressure on change and collaboration. A group of rivals rise the standard and competition between suppliers also because successful firms also enter suppliers industry. This is the most influencing condition not only because it encourages the creation of related and supporting industries but also because rivalry can enhance standards levels, competition in other industries and innovation.
Demand conditions affect rivalry when buyers seek multiple sources and stimulate new entry. When particularly sophisticated and skilled buyers enter the industry themselves the bring new skills and acute understanding of the industry’s needs. The Japanese robotics industry could be a great case in which leaders as Kawasaki are also robots users. New entries are encouraged also in supported and related industries but when rivalry is attractive, suppliers often try to enter in user market, bringing knowledge and processes that can reshape competition and upgrade competitive advantage. Rivalry and related industries influence each other because local rivalry put the attention also on related industries which bring to local competition a flow of new entrants that make innovation flourish. Competition is also affected by factor creation because the need of new inputs encourage the growth of new businesses.#p#分页标题#e#
This determinant is probably the most important in encouraging innovation and upgrade and its benefits often boost those of other conditions. Spill overs benefits can be summarized as:
create and attract new factors
upgrade and expand local demand
encourage related industries
Another important benefit is represented by external economies, which arise because of spillovers of technology and specialization. This phenomenon is important because generally this benefit is transmitted to related industries but it is not easily imitable by foreign competitors even if they have national subsidiaries.
As we have seen analyzing the diamond, its determinants must be seen as a system in which every arrow brings benefits to another and vice versa; even if one of these is not developed the in some ways the others have an unusual advantage which compensate the lacking arrow. It is not easy to explain where the advantage starts or which factors is the real essence of competitive advantage, because it is a complex system in which cause effect relation are not clear. Besides, the diamond is continuously in motion, the business environment becomes favorable as the diamond change itself to adapt to continuous changes of nations and industries. This continuous evolution of the diamond is what determine how a nation will sustain its advantage because the maintenance of a benefit depends on how linkages between the determinants are managed.
Diamond and developing countries
As developing economies have no real clusters, they also present a diamond that is not equally grew. The high presence of natural inputs stimulate factor conditions but the low living conditions that usually affect these countries impede the improvement of the demand side of the diamond.
They generally have low wages and high quantity of inputs but they do not have capital, technology or infrastructure. To growth they have to improve the quality and efficiency of their inputs specializing around some clusters. Looking at the context in which firms grow they usually are countries with high political and economic instability, where capital is costly, the economic horizons look too much at the short-time and the business environment is made of monopolists, protected firms and competition is based on price. To gain advantage they have to change their situation developing stability and eliminating impediments to competition (abolish controls and monopolism for example). In these economies companies are generally isolated, which means that there are no related and supporting industries or where they are present, they are uncompetitive with few linkages with the main cluster. Developing conditions to make related industries grow are essential to improve their situation. The weakest part is demand which is unsophisticated, undifferentiated with no standards. Countries must create the social conditions to make people buy advanced goods.#p#分页标题#e#