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Demand Conditions
The nature of home demand conditions for the firm's products and services is important because
it determines the rate and nature of improvement and innovation by the firms in the nation.
Demand conditions are the factors that either train firms for world-class competition or that fail
to adequately prepare them to compete in the global marketplace.
Four characteristics of home demand are important to creation of competitive advantage:
1) Composition of Home Demand. This demand element determines how firms perceive,
interpret, and respond to buyer needs.
Competitive advantage can be achieved when the home demand sets the quality standard
and defines buyer needs. This information is not available to foreign rivals.
This advantage is enhanced when home buyers pressure firms to innovate quickly and
frequently; the advantage is in staying ahead of the market.
2) Size and Pattern of Growth of Home Demand. These are important only if the
composition of the home demand is sophisticated and anticipates foreign demand.
Large home markets offer economies of scale and learning while dealing with familiar,
comfortable markets.
If home demand reflects or anticipates foreign demand, large-scale facilities and
programs will be an advantage in global competition.
3) Rapid home market growth. This is an incentive to invest in and adopt new technologies
faster, and to build large, efficient facilities.
Early home demand gives local firms the advantage of getting established in an industry
sooner than foreign rivals.
Early market saturation puts pressure on a company to expand into international markets
and innovate.
4) Means by Which a Nation's Products and Services Are Pushed or Pulled into Foreign
Countries. The issue is whether a nation's people and businesses go abroad and then demand
the nation's products and services in those second countries.
A related issue is that of a nation's people going abroad for training, pleasure, business, or
research. After returning home, they are likely to demand the products and services with which
they became familiar while abroad.
Related and Supporting Industries
A nation has an advantage when it is home to globally competitive companies in business sectors
that comprise related and supporting industries.
Globally-competitive supplier industries provide inputs to downstream industries.
They are globally competitive in terms of price and quality and gain competitive advantage.
Downstream industries have easier access to inputs and technology, and to the managerial and
organizational structures that made them competitive.
Access is a function of proximity in terms of physical distance and cultural similarity.
It is the contact and coordination with the suppliers that optimize linkages; these opportunities
may not be available to foreign firms.
Similar advantages are present when there are globally competitive, related industries in a nation.
Opportunities are available for coordinating and sharing value chain activities.
Firm Strategy, Structure, and Rivalry
The nature of firm strategy, structure, and rivalry is the final determinant of a nation’s
diamond.
Domestic rivalry in a single national market is a powerful influence on competitive advantage.
The PC industry in the U.S. shows how a strong domestic rivalry keeps an industry dynamic and
creates pressure to innovate and improve.
It is not the number of domestic rivals that is important; rather, it is the intensity of the
competition and the quality of the competitors that make the difference.
Differences in management styles, organizational skills, and strategic perspectives create
advantages and disadvantages, as do differences in domestic rivalry. (Exhibit 16-8)
For example, German company structure is hierarchical while Italian firms run like small family
businesses.
There are two final external variables to consider in the evaluation of national competitive
advantage—chance and government.
Chance
Chance events play a role in shaping the competitive environment.
Chance events are occurrences that are beyond the control of firms, industries, and usually
governments.
Included are wars and their aftermaths, major technological breakthroughs, dramatic shifts in a
factor or input cost, like an oil crises, swings in exchange rates, etc.
Chance events are important because they create major discontinuities in technologies that allow
nations and firms that were not competitive to leapfrog over old competitors and become
competitive, even leaders, in the changed industry.
For example, the development of microelectronics allowed Japanese firms to overtake U.S. and
German firms.
From a systemic perspective, chance events alter conditions in the diamond.
The nation with the most favorable "diamond," will convert these events into a competitive
advantage.
Government
Although it is often argued that government is a major determinant of national competitive
advantage, government is not a determinant, but rather an influence on determinants.
By reinforcing determinants in industries where a nation has competitive advantage, government
improves the competitive position of the nation’s firm.
Governments devise legal systems that influence competitive advantage by means of tariffs and
nontariffs barriers and laws requiring local content and labor.
CURRENT ISSUES IN COMPETITIVE ADVANTAGE
(Learning Objective #4)
Porter's work on national competitive advantage has stimulated a great deal of further research.
The Geneva-based World Economic Forum issues an annual report ranking countries in terms of
their competitiveness.
Morgan Stanley used the Porter framework to identify 238 companies with a sustainable
competitive advantage worldwide.
"National advantage" was then assessed by analyzing how many of these companies were
headquartered in a particular country.
The United States ranked first, with 125 companies identified as world leaders. (Table 16-1)
Hypercompetitive Industries
(Learning Objective #4)
Richard D'Aveni suggests that the Porter strategy frameworks fail to adequately address the
dynamics of competition in the 1990s and the new millennium.
He noted that, the business environment at the time was characterized by short product life
cycles, short product design cycles, new technologies, and globalization. All of these facts and
forces interacted to undermine market stability.
The result was an escalation and acceleration of competitive forces.
In light of these changes, D'Aveni believes the goal of strategy has shifted from sustaining to
disrupting advantages.
D'Aveni uses the term hypercompetition to describe a dynamic competitive world in which no
action or advantage can be sustained for long.
According to D’Aveni’s model, competition unfolds in a series of dynamic strategic interaction
in four arenas: cost/quality, timing and know-how, entry barriers, and deep pockets.
According to D’Aveni, the only source of a truly sustainable competitive advantage is a
company’s ability to manage its dynamic strategic interactions with competitors by means of
frequent movements and countermovements that maintain a relative position of strength in each
of the four arenas (Table 16-2).
Cost Quality
Competition in the first arena, cost/quality, occurs via seven dynamic strategic interactions: price
wars, quality and price positioning, “the middle path”, “cover all niches”, outflanking and
niching, the move toward an ultimate value marketplace, and escaping from the ultimate value
marketplace by restarting the cycle (See Table 16-2)
The global watch industry is cited as an example of hypercompetitive behavior in the cost/quality
arena.
Timing and Know-how
The second arena for hypercompetition is based on organizational advantages derived from
timing and know-how.
A firm that has the skills to be a "first mover" and arrive first in a market has achieved a timing
advantage.
A know-how advantage is the technological knowledge—or other knowledge of a new method of
doing business—that allows a firm to create an entirely new product or market.
D’Aveni identifies six dynamic strategic interactions that drive competition in this arena:
capturing first-mover advantages, imitation and improvement by followers, creating
impediments to imitation, overcoming the impediments, transformation or leapfrogging, and
downstream vertical integration.
ENTRY BARRIERS
Industries in which barriers to entry have been built up comprise the third arena in which
hypercompetitive behavior is exhibited.
These barriers include economies of scale, product differentiation, capital investments, switching
costs, access to distribution channels, cost advantages other than scale, and government policies.
The first dynamic strategic interaction comes as a company builds a geographic “stronghold” by
creating and reinforcing barriers. After securing a market—especially the home-country market
—competitors begin to seek markets outside the stronghold.
Thus, the second dynamic strategic interaction takes place when companies target the product
market strongholds of competitors in other countries.
The third dynamic strategic interaction comes when incumbents make short-term counter-
responses to the guerrilla attacks. Strong incumbents may try to turn back the invader with price
wars, factory investment, or product introductions, or they may adopt a wait-and-see attitude
before responding.
The fourth dynamic strategic interaction occurs when the incumbent realizes it must respond
fully to the invader by making strategic responses to create new hurdles. U.S. automakers, for
example, waged a PR campaign urging U.S. citizens to “Buy American.”
The fifth dynamic strategic interaction takes place when competitors react to these new hurdles.
In an effort to circumvent import quotas as well as co-opt the “Buy American” campaign, the
Japanese automakers built plants in the United States.
The sixth dynamic strategic interaction consists of long-run counter-responses to the attack via
defensive moves or offensive moves. GM’s 1990 introduction of Saturn is a good illustration of a
well-formulated and executed defensive move. As the first decade of the twenty-first century
continues, GM is launching another defensive move; in an effort to defend its Cadillac nameplate
from Lexus, Acura, and Infiniti, GM is developing a global strategy for Cadillac. Competition in
the third arena continues to escalate.
The seventh dynamic strategic interaction, competition between the incumbent and entrant is
exported to the entrant’s home turf.
The eighth and final dynamic strategic interaction in this arena consists of an unstable standoff
between the competitors. Over time, the stronghold erodes as entry barriers are overcome,
leading competitors to the fourth arena.
As the preceding discussion shows, the irony and paradox of the hypercompetition framework is
that, in order to achieve a sustainable advantage, companies must seek a series of unsustainable
advantages!
D’Aveni is in agreement with the late Peter Drucker, who long counseled that the role of
marketing is innovation and the creation of new markets.
Innovation begins with abandonment of the old and obsolete.
Likewise, D’Aveni urges managers to reconsider and reevaluate the use of what he believes are
old strategic tools and maxims. He warns of the dangers of commitment to a given strategy or
course of action. The flexible, unpredictable player may have an advantage over the inflexible,
committed opponent. D’Aveni notes that, in hypercompetition, pursuit of generic strategies
results in short-term advantage, at best. The winning companies are the ones that successfully
move up the ladder of escalating competition, not the ones that lock into a fixed position.
D’Aveni is also critical of the five forces model. The best entry barrier, he argues, is maintaining
the initiative, not mounting a defensive attempt to exclude new entrants.
The Flagship Firm: The Business Network with Five Partners
According to Professors Alan Rugman and Joseph D’Cruz, Porters model is too simplistic given
the complexity of today’s global environment. Rugman and D’Cruz have developed an
alternative framework based on business networks that they call the flagship model.
A major difference between the flagship model and Porter’s is that Porter’s is based on the notion
of corporate individualism and individual business transactions.
The flagship firm is at the center of a collection of five partners; together they form a business
system that consists of two types of relationships. The flagship firm provides the leadership,
vision, and resources to “lead the network in a successful global strategy”.
Key suppliers are those that perform some value-creating activities, such as manufacturing of
critical components, better than the flagship. This is a network relationship, with a sharing of
strategies, resources, and responsibility fro the success of the network. Other supplies are kept at
“arm’s length”. Likewise, the flagship has network relationships with key customers and more
traditional, arms-length commercial relationships with key consumers.
Blue Ocean Strategy
One of the most important recent strategy frameworks was proposed by Professors Renee
Mauborgne and Kim Chan. Mauborgne and Chin define two categories of competitive spaces:
red oceans and blue oceans. Red oceans are existing markets or industries with well-defined
boundaries where the “rules” are understood by all players. By contrast, blue oceans are markets
or industries that do not currently exist.
Additional Research on Comparative Advantage
Other researchers have challenged Porter’s thesis that a firm’s home-base country is the main
source of core competencies and innovation.
For example, Indiana University Professor Alan Rugman argues that the success of companies
based in small economies such as Canada and New Zealand stems from the “diamonds” found in
a particular set or combination of home and related countries. For example, a company based in
an EU nation may rely on the national “diamond” of one of the 27 other EU members.
Similarly, one impact of NAFTA on Canadian firms is to make the U.S. “diamond” relevant to
competency creation. Rugman argues that, in such cases, the distinction between the home nation
and the host nation becomes blurred.
He proposes that Canadian managers must look to a “double diamond” and assess the attributes
of both Canada and the United States when formulating corporate strategy.
It has been argued that, for smaller countries, the nation is not the relevant unit of analysis in
formulating strategy. Rather, corporate strategists must look beyond the nation to the region or to
sets of closely linked countries.
Porter explains, “‘Choice’ arises from doing things differently from the rival. And strategy is
about trade-offs, where you decide to do this and not that. Strategy is the deliberate choice not to
respond to some customers, or choosing which customer needs you are going to respond to.”
Porter is not convinced of the validity of competitive advantage models based on core
competency or hypercompetitive industries. He feels that a nation has an advantage when it is
home to globally competitive companies in business sectors that are related and supporting
industries.
TEACHING TOOLS AND EXERCISES
Additional Cases:
"HyundaiCard's Marketing Strategy" by Chan Soo Park and Ronald D. Camp. Richard Ivey
School of Business, Dec 2009. HBS # 909A28-PDF-Eng, 20 p.
Verne Global: Building a Green Data Center in Iceland”. Thomas Steenburgh; Nnamdi Okike.
HBS 509063.
Videos: Wall Street Journal: "New Japanese Cars Coming to U.S.: Tomy Toys" 2/28/2011
1:09:30 PM. Japan's Tomica line of die-cast cars and track and train systems is making a play
again for the largest toy-buying market, the United States. The cars were once popular in
America in the 1980s, until the yen started climbing. Lisa Twaronite reports.
http://online.wsj.com/video/new-japanese-cars-coming-to-us-tomy-toys/A46529F3-4098-4BA4-
A972-5D1CE7131B05.html
Out-of-Class Reading: Öz, Özlem. "Assessing Porter's Framework for National Advantage: The
Case of Turkey." Journal of Business Research 55, no. 6 (June 2002), pp. 509-515.
Activity: Students should be preparing or presenting their Cultural-Economic Analysis and
Marketing Plan for their country and product as outlined in Chapter 1.
Small Group Class Activity: Students will study a new-car purchasing guide (available at the
library, for sale at newsstands or on the Internet). The assignment is to pick a category of new
cars (such as luxury or economy) and examine different aspects of the cars (including features,
style and image, and price). (a) Identify companies that you think are competing, based on the
market point of view. (b) What sort of competitive strategies do you see being used? (c) What
different strategic groups can you identify in your chosen segment of the automobile industry?
(d) Which groups seem to compete with one another?
Guest Speaker: Invite a manager from a local motorcycle dealership to speak to the class. How
does this brand (Suzuki or Honda) compete effectively with Harley Davidson to minimize
Harley’s competitive advantage?
SUGGESTED READINGS
Books
Arnold, David. The Mirage of Global Markets: How Globalizing Companies Can Succeed as
Markets Localize. Englewoods Cliffs, NJ: Prentice-Hall, 2003.
Abegglen, James C., and George Stalk Jr. Kaisha: The Japanese Corporation. New York: Basic
Books, 1985.
D'Aveni, Richard. Hypercompetition: Managing the Dynamics of Strategic Maneuvering. New
York: Free Press, 1994.
Hamel, Gary and C. K. Prahalad. Competing for the Future. Boston: Harvard Business School
Press, 1994.
Inkpen, Andrew and Kannan Ramaswamy. Global Strategy: Creating and Sustaining Advantage
Across Borders. Oxford: Oxford University Press, 2005.
Porter, Michael E. Competitive Advantage: Creating and Sustaining Superior Performance. New
York: Free Press, 1985.
_____. Competition in Global Industries. Boston: Harvard Business School Press, 1986.
_____. The Competitive Advantage of Nations. New York: Free Press, 1990.
Rugman, Alan M. and Joseph R. D'Cruz. Multinationals as Flagship Firms. Oxford: Oxford
University Press, 2000.
Slywotzky, Adrian J. Value Migration: How to Think Several Moves Ahead of the
Competition. Boston: Harvard Business School Press, 1996.
Stiglitz, Joseph E. Globalization and Its Discontents. New York: W.W. Norton & Company,
2002.
Yip, George S. Total Global Strategy: Managing for Worldwide Competitive Advantage.
Englewood Cliffs, NJ: Prentice Hall, 1995.
Articles
Bingham, Christopher B, Eisenhardt, Kathleen M. , Furr, Nathan, R. "Which Strategy When?"
MIT Sloan Management Review October 2011. HBR # SMR401-PDF-ENG, 7 p.
Chadee, Doren, and Rajiv Kumar. "Sustaining the International Competitive Advantage of Asian
Firms: A Conceptual Framework and Research Propositions." Asia-Pacific Journal of
Management 18, no. 4 (December 2001) pp. 461-480.
Cravens, David W., H. Kirk Downey and Paul Lauritano. "Global Competition in the
Commercial Aircraft Industry: Positioning for Advantage by the Triad Nations,"
Columbia Journal of World Business 26, no. 4 (Winter 1992), pp. 46-58.
Davies, Howard, and Paul Ellis. "Porter's Competitive Advantage of Nations: Time for the Final
Judgment?" Journal of Management Studies 37 no. 8 (December 2000) pp. 1189-1213.
Dichter, Ernst. “The World Customer.” Harvard Business Review 40 (July-August 1962), pp.
113-122.
Ghemawat, Pankaj. “Regional Strategies for Global Leadership.” Harvard Business Review 83
(December 2005), pp. 94-107.
Hamel, Gary, and C.K. Prahalad. "Strategic Intent." Harvard Business Review 67, no. 3 (May-
June 1989), pp. 63-76.
_____. "The Core Competence of the Corporation." Harvard Business Review 68, no. 3 (May-
June 1990), pp. 79-93.
_____. "Strategy as Stretch and Leverage." Harvard Business Review 71, no. 2 (March-April
1993), pp. 75-85.
Henzler, Herbert A. "The New Era of Eurocapitalism." Harvard Business Review 70, no. 4 (July-
August 1992), pp. 57-68.
Ki, Kyung Hoon, Jeon, Byung Joo, Jung, Hong Seob., Lu, Wei. & Jones, Joseph. "Effective
Employment Brand Equity Through Sustainable Competitive Advantage, Marketing
Strategy and Corporate Image". Journal of Business Research (Volume 64, Issue 11, p.
1207-1211) 2011
Koza, Mitchell P., Tallman, Stephen & Ataay, Aylin. "The Strategic Assembly of Global Firms: A
Microstructural Analysis of Local Learning and Global Adaptation". Global Strategy
Journal (Volume 1, Issue 1-2, p.27-46) 2011
Ledgard, Jonathan. “Skoda Leaps to Market.” Strategy and Business 10 (Fall 2005), pp. 1-12.
Leonidou, Leonidas C., Palihawadana, Dayananda & Theodosiou, Marios. "National Export-
Promotion Programs as Drivers of Organizational Resources and Capabilities: Effects on
Strategy, Competitive Advantage, and Performance". Journal of International Marketing
(Volume 19, Number 2, p. 1-29) 2011
Link: http://online.wsj.com/video/new-japanese-cars-coming-to-us-tomy-toys/A46529F3-4098-
4BA4-A972-5D1CE7131B05.html
Mascarenhas, Briance. "Order of Entry and Performance in International Markets." Strategic
Management Journal 13, no. 7 (October 1992), pp. 499-510.
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Industries." Strategic Management Journal 13, no. 6 (September 1992), pp. 399-417.
Öz, Özlem. "Assessing Porter's Framework for National Advantage: The Case of Turkey."
Journal of Business Research 55, no. 6 (June 2002), pp. 509-515.
Rugman, Alan M., and Alain Verbeke. "Foreign Subsidiaries and Multinational Strategic
Management: An Extension and Correction of Porter's Single Diamond Framework."
Management International Review 33, no. 2, Special Issue 1993/2, pp. 71-84.
_____. "Subsidiary-Specific Advantages in Multinational Enterprises." Strategic Management
Journal 22, no. 3 (March 2001), pp. 237-250.
Spannos, Yiannis E., and Spyros Lioukas. "An Examination into the Causal Logic of Rent
Generation: Contrasting Porter's Competitive Strategy Framework and the Resource-based
Perspective." Strategic Management Journal 22, no. 10 (October 2001), pp. 907-934.
Shirazi, Seyedah Fatemah Mostafavi & Som, Ahmad Puad Mat. "Destination Management and
Relationship Marketing: Two Major Factors to Achieve Competitive Advantage". Journal
of Relationship Marketing (Volume 10, Issue 2, p.76-87) 2011
Wiilliams, Jeffrey R. "How Sustainable is Your Competitive Advantage?" California
Management Review 34, no. 3 (Spring 1992), pp. 29-51.
Zook, Chris and James Allen. "The Great Repeatable Business Model" Harvard Business
Review, November 2011. R1111G-PDF-ENG. 9 pg.
