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Question Determinants of national competitive advantage create the national environment in which companies are born and learn how to compete. Your business tour around industrial city in your country 🙁 Bahrain, Lebanon, Oman, Jordan, Kuwait, Egypt, Saudi Arabia, and Sudan) revealed the following: Many shops, show rooms, restaurants and hotels among other business and industrial premises bear the following sign boards: ‘SHOP CLOSED’‘SHOP ON SALE’ ‘FACTORY CLOSED’ ‘CLEARANCE SALE’… etc.Factories closed and put on receivership…etc.Many companies closed and relocated to other countries… etc. Required: 1. As a strategy and policy expert, you are required to apply Porter’s model of ‘the diamond of national advantage’ using the four determinants to critically analyze the impact of above scenario on the competitive advantage in Sultanate of Oman. (1000 words) 2. Suggest and critically discuss 4 main strategies together with policies that the government can adopt to enable firms/ business organizations survive in the above environment. (500 words) *** Words Count = 1500 Words. *** In-Text Citations and References using Harvard style. *** MUST include E-library and course materials. *** I’ve uploaded attachments related to this assignment.
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B301B: MAKING SENSE OF STRATEGY
Block 3: Readings
Reading 12 (p156-178):
The competitive advantage of nations.
By: Michael E. Porter
Porter, M. E. (1990) ‘The Competitive Advantage of Nations’, Harvard
Business Review, March–April.
Introduction
A nation’s competitiveness depends on the capacity of its
industries to innovate. Companies will get lots of benefit
from having strong domestic rivals, good domestic
suppliers, and demanding local customers.
With global markets and global competition, nations have
become more important. Due to globalization and increased
competition
companies
focusing
on
generating
integrating knowledge to focus on innovation.
and
2
Introduction
Countries values, culture, economic structures, institutions, and
histories all contribute to competitive success. Each country succeeds
in specific industries. Productivity of a nation is the most important
concept in the competitive advantage of nations. The main goal of a
nation is to produce high standard of living for the people, and to be a
favorable home for companies that compete internationally.
A nation’s companies must improve quality and productivity, improve
technology and production efficiency, and add desirable features and
new product innovations. Remember no nation can be competitive in
everything.
3
How companies succeed in international markets
New technological innovations help companies to achieve competitive
advantage. Most innovations involve investments in skills and knowledge, as
well as in physical assets. Innovation can be new product design, new
production process, new marketing or training approach. Once a company
achieves competitive advantage through an innovation, it can sustain the
competitive advantage through continuous improvement.
To sustain competitive advantage:

The company must adopt a global approach to strategy. It must sell its
product worldwide, under its own brand name, through international
marketing channels that it controls.

The company must make its own advantage very strong with continuous
improvement in order to sustain it competitive advantage.
4
The diamond of national advantage
There are four attributes of a nation that constitute the
diamond of national competitive advantage (Figure 1 page
162):
1. Factor
conditions: including factors of production such as labor or
infrastructure.
2. Demand
conditions: the home-market demand for the product.
3. Related
and supporting industries: the presence or absence in the
nation of supplier or related industries that are internationally
competitive.
4. Firm
strategy, structure, rivalry: the conditions in the nation
governing how companies are created, organized, and managed, as
well as the nature of domestic rivalry.
5
The diamond of national advantage
6
The diamond of national advantage
These determinants create the national environment in which
companies are born and learn how to compete.
Achieving international competitive success depends on:
◼ The
availability of resources and skills.
◼ The information that shapes the opportunities
◼ The directions in which they deploy their skills
◼ The goals of the owners and managers.
◼ The pressures to invest and innovate.
Companies gain a competitive advantage through the
accumulation of specialized assets and skills, and through
ongoing information and insight into products and process
needs.
7
1 – Factor conditions
Factor Conditions are the factors of production that includes things like
skilled labour, education, capital, climate, and infrastructure. Companies
gain a competitive advantage through the accumulation of specialized
assets and skills, developing solid infrastructure to facilitate business,
promoting innovation etc.
8
1 – Factor conditions
◼ According to Adam Smith and David Ricardo, the factors of production
(labor, land, capital, natural resources & Infrastructure) determined the
flow of trade. This is incomplete.
◼ In
the sophisticated industries, a nation creates the important factors of
production (skilled human resources and the science base) and does not
inherit them.
◼ What
is important is the rate and efficiency with which a nation creates,
upgrades, and deploys factors of production.
◼ Important
factors of production (for knowledge-intensive industries)
are those involving heavy investment, and are specialized. (ex.: a
specialized institute in optics).
9
1 – Factor conditions
To turn disadvantages into advantages, Companies
◼ Should
innovate before foreign rivals.
◼ Must have access to people with appropriate skills.
◼ Must have home demand conditions.
◼ Must have active domestic rivals who create pressure to innovate.
◼ Finally company goals that lead to sustained commitment to the
industry.
◼Japanese
consumer-electronics companies eliminated the
need for labour through automation, which resulted in lower
assembly costs and improved quality.
◼While
US companies decided to relocate their activities to
Taiwan, Indonesia… (Soon Japanese companies were
building assembly plants in the US).
10
2 – Demand conditions
Nations gain competitive advantage in industries:
◼ Where
home demand gives the firm an early picture of
emerging buyer needs.
◼ Where
demanding buyers pressure companies to innovate
faster than foreign rivals.
◼ When
a segment is larger in the domestic market than in
foreign markets. (this segment will gain more attention, ex. Hydraulic
excavators, Japan)
◼ Where
domestic buyers are the world’s most sophisticated and
demanding buyers for the product or service. (Demand conditions
force companies to respond to tough challenges).
11
2 – Demand conditions

Japanese consumers live in very small homes. In
response, Japanese companies have pioneered
compact, quiet air-conditioners.

Japanese companies are pioneers in products that
are light-thin-short-small (kei-haku-tan-sho) and
internationally accepted.

In many countries, local buyers can act as early
indicators of global market trends.

A nation’s companies can anticipate global trends if
the country is exporting its values and tastes as well
as its products (like the franchises from USA: fast
food, credit cards..)
12
3 – Related and supporting industries
Internationally competitive home-based related and
supporting industries create advantages in several ways:
◼ Deliver
the most cost effective inputs in an efficient, early and
rapid way. (ex.: Italian jewellery companies lead the world because
Italians supply two-thirds of the world’s jewellery-making machines).
◼ Provide
close working relationships, quick flow of
information, exchange of ideas and innovations. (ex.: Italian
Footwear Cluster, shoe producers interact with leather manufacturers,
proximity is important)
◼ The
nation’s companies benefit most when the suppliers and
related industries are global competitors. It is self defeating
for a company or country to have suppliers who are totally
dependent on the domestic industry.
13
4 – Firm strategy, structure, and rivalry
A nation’s success depends on the types of education chosen by its
talented people, the place where they choose to work? and their
commitment and effort.
Attaining international success makes an industry prestigious,
reinforcing its advantage.
The presence of strong local rivals stimulates competitive
advantage. Among all the points on the diamond of national
advantage, domestic rivalry is the most important because of the
stimulating effect it has on all the other. In Switzerland, the strong
rivalry between Swiss pharmaceutical companies (Sandoz,
Hoffmann-La Roche, Ciba-Geigy) made all of them global leaders.
14
4 – Firm strategy, structure, and rivalry
◼ Conventional
wisdom argues that domestic competition is wasteful.
It leads to duplication and
◼ Prevents firms from achieving economies of scale.
◼ The government should embrace 1 or 2 national champions only.

◼ But
real cases have shown that national champions are the least competitive
globally. (ex.: Aerospace)
◼ Domestic
rivalry creates pressure on local companies to innovate and
constantly improve.

The result will be lower costs, improved quality, and product & process
innovations.
◼ The
closer the domestic rivals are to each other in their geographic location,
the better. (example: pharmaceutical companies in the Swiss city of Basel).
◼ The
presence of domestic competitors cancels advantages arising from being
in a particular nation. Thus, firms are obliged to move beyond them.
15
The diamond as a system
The diamond national advantage system works like a
common system. And a system achieves its goal by means
of interrelated components. Same like that diamond system
have four interrelated components to gain national and
competitive advantage. Every single factor of diamond
system has its impacts on all other three components.
16
The role of government
Government rules and regulations also play a vital role in
Porter’s Diamond of National Advantage. For example
government encourages a firm to raise its product standard
by imposing strict product standards. Government of a
country can also stimulate early demand for technological
advanced products.
17
Recommended Government Policy Approaches
1.
Focus on specialized factor creation: Government should
work on improving the skills of its citizens by giving them
specialized training on specific field. They should promote
research and connect the university research with industry.
2. Avoid intervention in factor and currency markets: When
market forces create higher factor costs or higher exchange rate,
government should not push them back down.
3. Enforce strict standards: Government should enforce product
standards, as well as safety and environmental standards. This
will result in improved quality and more advanced technology.
18
Recommended Government Policy Approaches
4. Limit direct cooperation among industry rivals:
Companies don’t contribute their best scientists and
engineers to cooperative projects or shared R&D.
Companies focus on their own private research. Cooperative
research should be indirect it could be through some
university labs.
5. Promote goals leading to sustained investment:
Governments should encourage investment in human skills
and innovation. The single most powerful tool is a taxincentive for long-term capital gains.
6. Deregulate competition: Allowing entry into an industry
encourages competition and innovation.
19
Recommended Government Policy Approaches
7. Enforce strong domestic antitrust policies: Real national
competitiveness requires governments to disallow mergers, acquisitions,
and alliances that involve industry leaders.
Government policy should favor internal entry, both domestic and
international, over acquisition.
However, firms should be allowed to acquire small firms in related
industries when the move promotes the transfer of skills that could
ultimately create competitive advantage.
8. Reject managed trade: Government should have a trade policy
promoting open markets. Trade barriers should be dismantled.
20
The Company Agenda
Competitive advantage comes by promoting innovation in the
organization. Here are just a few of the kinds of company policies that
will support that effort:
Create challenges and pressures for innovation:
• Seek out sophisticated and demanding buyers.
• Upgrade employees’ skills and productivity.
• Establish toughest regulations
• Source from the most advanced suppliers.
Seek out tough competitors as motivators:
Companies that value stability, obedient customers, dependent
suppliers, and sleepy competitors may not become successful in the
long run.
21
The Company Agenda
Improve the national diamond:
• By improving people skills and supporting local suppliers.
• Upgrade home demand. (Japan, musical schools).
• Invest in market information, process technology, and common
infrastructure.
• Locate your HQ where there are concentrations of sophisticated
buyers, important suppliers, or universities and laboratories.
Welcome domestic rivalry: Welcome domestic rivalry, because
strong domestic competitors help in challenging your company to
become stronger and to grow internationally.
22
The Company Agenda
Globalize to tap the advantages of other nations: Identify
sophisticated foreign buyers. Helps firms identify different needs
and create pressure to innovate. Station high quality people in
overseas bases to take advantage of foreign research.
Use alliances only selectively: Alliances are best employed on a
temporary basis, and involving non-core activities.
Locate the home-base in a way to support competitive
advantage:
A company can have different home bases for distinct businesses or
segments. The environment should support innovation and global
competitiveness, otherwise the firm will have to move.
23
The role of leadership
Too many managers misperceive the nature of competition by
focusing on improving financial performance, seeking stability, and
reducing risk through alliances and mergers.
Leaders should believe in change and continuous innovations. They
should recognize the importance of their home country Leaders should
recognize the need for pressure and challenge.
Companies should not only aim for survival, but for achieving
international competitiveness.
24
B301B: MAKING SENSE OF STRATEGY
Block 3: Readings
Reading 13 (p.179-202):
National policies and domestic politics.
By: Debora L. Spar
Spar, D. L. (2001) ‘Chapter 8: National Policies and Domestic Policies’ in
Rugman, A. M. and Brewer, T. L. (eds) Oxford Handbook of International
Business, Oxford, Oxford University Press.
Introduction
The present essay describes the types of state
policies that can shape and constrain the behavior
of firms.
It examines five different kinds of domestic
policy:
• Trade policy,
• Foreign direct investment,
• Capital controls,
• Regulation, and
• Competition policy
Trade Policy:
The trade policies are different from country to country and
they are formulated by its government officials. The aim of
trade policy is to boost the nation’s international trade. A
country’s trade policy includes taxes imposed on import and
export, inspection regulations, and tariffs and quotas.
Three kinds of rules of trade policy:
1. export controls,
2. protectionism, and
3. strategic trade policy.
Trade Policy:
1.
Export Controls: Government should try to limit the goods that the
domestic producers can ship across their borders. These controls
serve:
• An economic object:
Protecting the domestic economy from the
inflationary impact of excess foreign demand.
• A political purpose: They are designed to prevent a rival countries from
gaining access to key resources and technology or to punish a state for
some wrongdoing (ex. US is imposing all types of trade sanction on
North Korea)
• Firms need to keep a careful watch on political events that could lead
to sanctions or other export controls.
Trade Policy: Protectionism
In its oldest and most clear form in which countries protect their trade
and businesses from foreign companies by implementing variety of
strategies like prices, quota and taxes. These activities of imposing quota
and taxes are called as protectionism.
Sometimes countries immediately raise the price of the imported goods
to make them less competitive when compared to local goods. This
method works the best for countries with a lot of imports, such as the
United States.
Trade Policy: Strategic trade policy
By definition it means protecting certain large and critically
important industries.
Strategic Trade Policy (STP) is defined as government policy
which attempts to shift excess profits in an oligopolistic
international market towards the home country firms.
Rules of foreign direct investment
In FDI, firms can invest directly in the territory of foreign states.
FDI rules shape the investment climate in a number of ways.
• First, even as states increasingly welcome foreign investments,
they still restrict it.
• Many states maintain formal licensing procedures for foreign
firms; most prohibit, or at least limit, investment in certain
‘strategic’ sectors (ex.: Japan limits foreign investment in the
banking, insurance, radio, etc.)
• Second, even some countries where investment is permitted, it
may be conditional—on the participation of a local joint venture
partner.
• In other cases, states can influence foreign investment through
operational restrictions, such as limits on the employment of
foreign people.
Capital controls
All developed countries allow free repatriation of capital invested abroad
and, generally, the free transfer of profits and dividends from overseas
firms.
In the developing world, however, capital controls more prevalent. They
constitute another area of rules that impinge (impose) upon the conduct
of international trade and investment.
Where capital controls are in place, multinational firms need to include
them as part of the strategic landscape, and respond to them accordingly.
For countries that are economically volatile (unstable), firms also need to
consider the possibility of policy shifts (ex.: China page 187)
Regulation
The government will impose some rules and regulations not
only to control international trade but also domestic business.
But because these policies vary so widely across national
borders, they are inherently important to the conduct of
international business.
Governments regulate:
• In order to promote a public good or redress a public bad.
• They regulate to improve economic efficiency.
• They regulate in order to guide market forces towards certain
noneconomic, socially desirable ends: cleaner air, for example,
or more effective medical treatments.
• To achieve these societal goals, regulators employ a
multitude of policy tools: price caps; rate regulation; wage
controls; health and safety standards.
Antitrust and competition policy
The antitrust and competition policy is very important to
control monopoly and promote competition. Countries should
promote free market entry and perfect competition in all the
industries. These competition policies will support the
societies and create positive impact on the lives of its people in
all aspect.
In the European Union, for example, tightly enforced
competition policies in the telecommunications and banking
sectors have provided a windfall for foreign firms
Domestic politics
The politics of the country can affect and influence on international
business. It is important for the company to understand the
domestic politics to know policies of the country which may
influence their business. They need to understand the domestic
politics of the countries in which they trade or invest. So where do
policies come from? And how are they created?
Ex.: The US persists in sanctioning trade with Cuba because of a
domestic lobby in favor of the sanctions, while the reverse is true
with China because large US firms have interests there.
The role of international forces
A final aspect of national policy comes from an unlikely
source. It comes, from the international external
institutions and groups such as GATT (General Agreement
on Tariff & Trade) and WTO (World Trade Organization).
The WTO & GATT have been entrusted with the following
functions:
1. They would facilitate proper implementation of
multinational trade agreements.
2. It will review trade policies undertaken by the member
countries.
3. It will act as a forum for the negotiation of disputes
among the member countries over trade related problems.
4. They will work in cooperation with the IMF and the
World Bank.
Conclusion
Despite the undeniable growth of international pressure groups and
multinational firms, most nations still employ most of the policies
described above.
• They fa …
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