‘”Michael Porter reaches his conclusions the old fashioned way: he earns them through solid research. The lessons of the book are sharp and deep.”
– Robert M. Solow, Nobel Laureate in Economics, MIT
National prosperity is created, not inherited. It does not grow out of a country’s natural endowments, its labor pool, its interest rates, or its currency’s value, as classical economics explains. This means it can be influenced by enlightened policymakers.
This is the core thesis of Harvard Business School professor Michael Porter in his book The Competitive Advantage of Nations. It is one of the most influential business and management books of all time.
The book was published in 1990. I was a graduate student at the Stockholm School of Economics at the time and I bought the book in the schools bookstore out of curiosity even though it was not a part of my course literature. It is a tome of 896 pages filled with data and reasoning.
A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade. Companies gain advantage against the world’s best competitors because of pressure and challenge. They benefit from having strong domestic rivals, aggressive home-based suppliers, and demanding local customers.
In a world of increasingly global competition, nations, regions and cities have become more, not less, important. As the basis of competition has shifted more and more to the creation and assimilation of knowledge, the role of places and the integrated innovation systems in nations and regions has grown.
Competitive advantage is created and sustained through a highly localized process. Differences in national values, culture, economic structures, institutions, and histories all contribute to competitive success. There are striking differences in the patterns of competitiveness in every country; no nation can or will be competitive in every or even most industries. Ultimately, nations succeed in particular industries because their home environment is the most forward-looking, innovative, dynamic, and challenging.
Most discussions of the competitive success of nations used to look at aggregate, economy-wide measures like the balance of trade and comparative advantages as defined by David Ricardo who explained it in his 1817 book On the Principles of Political Economy and Taxation.
For the traditional economists, comparative advantage refers to the ability of a company to produce a particular good or service at a lower marginal and opportunity cost over another. Even if one nation (or region) is more efficient in the production of all goods (absolute advantage in all goods) than another, both nations will still gain by trading with each other, as long as they have different relative efficiencies.
In his ground breaking work, Porter chose a different starting point. He looks at competitive advantages, beginning with individual industries and competitors and building up to the economy as a whole. Nations do not compete in the marketplace, business firms do, and the performance of individual companies in particular industries depend upon competitive advantages that can be either won or lost.
The home nation (or region) influences the ability of its companies to succeed in particular industries, with the success or failure of thousands of competing struggles determining the state of a nation’s economy and its ability to progress, grow and prosper. This new angle must have come naturally to Porter, building on his previous two books Competitive Strategy and Competitive Advantage, which dealt with competition among companies.
Porter identifies the fundamental determinants of national competitive advantage in an industry, shows how they work together as a system, and examines clustering, in which groups of successful firms and industries emerge in one country to gain leading positions in the world market.
Further, he identifies the fundamental determinants of national competitive advantage in an industry and how they work together to give international advantage.
According to Porter, it is no accident that Japan leads in exporting electronics and computer-controlled machinery, Italy in fabrics and home furnishings, and the United States in computer software, medical equipment and movies. Data is studied from ten countries; United States, Germany, Italy, Sweden, United Kingdom, Japan, Korea, Denmark, Singapore and Switzerland, concluding:
The primary role of a nation (or region) is to provide a ‘home base’ to a company
The home base is the nation (or region) in which the essential competitive advantages are created and sustained
Usually the home base will be the location of most productive jobs, core technologies and the most advanced skills
This means that companies must work with continuous innovation to gain competitive advantage and survive domestic competition in the home market, and by doing so they become competitive and successful on the world market.
Porter then describes four keys to a nation’s competitive advantage in relation to other countries (popularly referred to as “Porter´s Diamond”):
Where the keys are defined as:
1. Factor Conditions: Describes the situation in a nation regarding production factors, like skilled labor, infrastructure, etc., which are relevant for competition in particular industries.
2. Home Demand Conditions: Describes the state of home demand for products and services produced in a country.
3. Related and Supporting Industries: The existence or non-existence of internationally competitive supplying industries and supporting industries.
4. Firm Strategy, Structure, and Rivalry: The conditions in a country that determine how companies are established, organized and managed, as well as the characteristics of domestic competition industries.
5. Government and Chance: Government can influence development when interfering market development; unexpected events are described with the factor Chance.
The findings are rich in implications for firms and governments and sets the agenda for discussions of global competition. The book was an extraordinary achievement and had a profound effect upon management, policy-makers and academics worldwide.
In each of the 10 countries that Porter and his international research team investigated, clusters of firms gained a global competitive edge by capitalizing on innovation, raising productivity, and drawing on unique elements of their country’s history and character. Porter sees government’s proper role as pusher and challenger, rather than as giver of subsidies to protect industries. Stressing renewed effort and competition as keys to gaining global advantage, he questions regulations that would limit competition and recommends enforcement of antitrust laws to end monopolistic mergers.
The messages in the book are complex and takes some time to absorb and understand and this brief blog post can only present a summary. For the inquisitive reader who wants to know more, there is a link below to a recent one hour lecture by Michael Porter on regional competitiveness.
Professor Porter summarized the key findings in his book in an article in Harvard Business Review, which can be downloaded by clicking on the link above.