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Porter's 'Competitive Advantage of Nations': An Assessment

Author(s): Robert M. Grant


Source: Strategic Management Journal, Vol. 12, No. 7 (Oct., 1991), pp. 535-548
Published by: John Wiley & Sons
Stable URL: http://www.jstor.org/stable/2486525
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Strategic Management Journal, Vol. 12, 535-548 (1991)

PORTER'S'COMPETITIVEADVANTAGEOF
NATIONS': AN ASSESSMENT
ROBERTM. GRANT
Management Department, CaliforniaPolytechnic State University, San Luis Obispo,
California, U.S.A.

Porter's Competitive Advantage of Nations is an important book which bridges the gap
between strategic management and international economics while contributing substantially
to both. Porter's analysis of the impact of national environment on international competitive
performance demonstrates the potential for the theory of competitive strategy to rescue
international economics from its slide into refined irrelevance, while simultaneously
broadening the scope of the theory of competitive strategy to encompass both the international
dimension and the dynamic context of competition. Nevertheless, the breadth and relevance
of Porter's analysis have been achieved at the expense of precision and determinancy.
Concepts are often ill defined, theoretical relationships poorly specified, and empirical data
chosen selectively and interpreted subjectively.

The Competitive Advantage of Nations is an management field as a whole. The book rep-
important book. Among Porter's books to date, resents a sharp departure from the objectives
it is the broadest in scope and the most ambitious and the approach of Porter's two previous
in intent. The book addresses a question which monographs, Competitive Strategy and Competi-
lies at the heart of economic and managerial tive Advantage. In addition to shifting the focus
science: 'Why do some social groups, economic of attention from the performance of the firm to
institutions, and nations advance and prosper?' the performance of the nation, the orientation
(Porter, 1990: xi).This is no new issue: the same of the analysis is positive rather than normative;
question stimulated Adam Smith's Wealth of the primary mission is a predictive and explana-
Nations in 1776 and has been a central theme tory theory of the international pattern of
motivating the development of economic science competitive advantage. In developing this theory,
since then. The purpose of this article is to assess Porter combines inductive and deductive analysis.
the extent to which Porter provides a satisfactory Beginning with established theories of competitive
answer to this question, and, in doing so, strategy and international economics, together
the contribution which the book makes to with ideas conceived during his membership
international economics and to strategic manage- on the President's Commission on Industrial
ment. Competitiveness, Porter's analytical framework
Before getting to grips with these substantive was developed through studying competitive
issues, it is clear from the outset that the book performance among 10 countries (United States,
signifies a milestone both in Porter's intellectual West Germany, Italy, United Kingdom, Sweden,
odyssey, and in the development of the strategic Switzerland, Denmark, Japan, Korea, and
Singapore), each involving between 5 and 19
industry cases. The book attests to the potential
Key words: internationalization, competitive advan- for inductive analysis to develop innovative,
tage, national level strategy. empirically-relevant theory, and to the insight

0143-2095/91/080535-14$07. 00 Received29 October1990


C 1991 by John Wiley & Sons, Ltd. Final revisionreceived20 May 1991
536 R. M. Grant

and richness of research which uses multiple, technology (broadly defined) are created and
comparativecase studies. maintained. Usually, though not always, much
sophisticated production takes place there.. .
The book also represents a partial redress The home base will be the location of many of
of the imbalance of trade between strategic the most productive jobs, the core technologies,
management and economics. The analytical and the most advanced skills (p. 19).
framework of strategic management has been
built upon concepts and theories importedfrom
economics, organization theory, and systems This view of the nation as a set of contextual
theory, with contributions from psychology, variables which influences the competitive per-
decision theory, and populationecology as well. formance of firms and industries has several
Porter himself has played a leading role in advantages from an analytic perspective. First, it
showinghow industrialeconomicscan be adapted permits Porter's analysis of industrial performance
and reorientated to offer practical, penetrating at the national level to draw upon recent
insights into the formulation of business and contributions to the theory of competitive advan-
corporatestrategy.In the CompetitiveAdvantage tage at the firm level. Chapter 2 restates the
of Nations, the primaryflow of ideas is in the strategic theory of competitive advantage within
opposite direction:Porter uses the concepts and an international context. Although well-known
theories drawn from strategic management to in the strategic management area, this analysis
extend and reformulate the theories of inter- offers powerful insights into the determinants of
national trade, direct investment, and economic national competitive performance. For example,
development. The ability to contributeto theo- the theory of international trade has been
retical development in a more mature and well- preoccupied with cost differentials as the basis for
developed discipline surely marks a coming-of- trade. Recognition that differentiation advantage
age for strategicmanagement. through quality, technological sophistication,
design, and product features is at least as
important a determinant of trade and overseas
THE THEORY investment, particularly between the indus-
trialized nations, is an essential ingredient of a
While the primaryobjective of the book is to richer and more predictively-valid theory.
explain why particular countries succeed in Second, it facilitates a dynamic approach to
particular industries, in Porter's analysis, it is the analysis of competitive performance at the
firmsratherthan nations which are the principal national level. These dynamic considerations
actors. The influence of the nation on the include the role of innovation in creating competi-
internationalcompetitive performanceof firms tive advantage, the role of imitation in eroding
occurs through the ways in which 'a firm's it, and need to upgrade the sources of advantage
proximate environment shapes its competitive if it is to be sustained over time.
success over time' (p. 29). The primaryrole of Finally, Porter's analysis of national competi-
the nation is the 'home base' which it provides tive performance encompasses both trade and
for the firm. Since firms typically develop direct investment. Exports and direct investment
within a domestic context prior to expanding are closely related both as substitutes and
internationally,the home base plays a key role complements, but their flows tend to be highly
in shapingthe identity of the firm, the character correlated and are driven by the same national
of its top management, and its approach to determinants including: 'national economic struc-
strategy and organization, as well as having a tures, values, cultures, institutions, and histories'
continuing influence in determining the avail- (p. 19). Hence, Porter does not distinguish
ability and qualitiesof the resourcesavailableto international competitive advantage based upon
the firm: direct investment from that based upon exports.
International competitive advantage is measured
by 'either the presence of substantial and
The home base is the nation in which the sustained exports to a wide array of other nations
advantages
essentialcompetitive of theenterprise
are createdand sustained.It is wherea firm's and/or significant outbound foreign investment
strategyis set and core productand process based on skills and assets created in the home
Competitive Advantage of Nations 537

country' (p. 25). An empirical benefit of this Factor conditions


inclusiveness is that Porter's model can be
applied as easily to national competitiveness in Factor endowments lie at the center of the
services (where competitive success tends to be traditional theory of international comparative
through multinational expansion by companies advantage. Porter's contribution here is to analyze
rather than through exports) as it can to tangible in much greater detail the characteristics of
products. factors of production, the processes by which
This view of the importance of national they are created, and their relationship to
environments in firm success runs counter to firms' competitiveness. He recognizes 'hierarchies
most prevailing thinking which emphasizes the among factors' distinguishing between 'basic
increasing dissociation of multinationals from factors' (such as natural resources, climate,
theifirhome bases. The 'globalization' of markets location, and demographics) and 'advanced fac-
implies the globalization of the strategies and tors' (such as communications infrastructure,
structures of multinational corporations (Levitt, sophisticated skills, and research facilities).
1983). Even if nations retain a distinctiveness Advanced factors are the most significant for
either in customer preferences or in the conditions competitive advantage and, unlike factors whose
of resource availability, to adjust to and exploit supply depends upon exogenous 'endowment',
these differences requires that firms shake off advanced factors are a product of investment by
the constraints of their 'home base' and move individuals, companies, and governments. The
either towards a global orientation (Ohmae, relationship between basic and advanced factors
1990) or a 'transnational' structure (Bartlett and is complex. Basic factors can provide initial
Ghoshal, 1989). Thus, while multinationality advantages which are subsequently extended
permits access to global scale economies and and reinforced through more advanced factors,
the resource advantages available in different conversely, disadvantages in basic factors can
countries, this is quite consistent with Porter's create pressures to invest in advanced factors.
basic proposition that national environments An example is the Italian steel industry's pioneer-
exercise a powerful influence on the competitive ing of mini-mill technology as a response to the
advantage of companies and industries. In the disadvantages of the high capital costs, energy
case of multinational corporations, the notion costs, and lack of raw materials. Similarly,
that the home base exercises a dominant national expensive, difficult-to-fire labor provided impor-
influence upon the company as a whole is tant incentives for the development and adoption
more contentious. However, casual observation of automated equipment in Germany, Sweden,
suggests that, with the possible exception of the and Japan. In analyzing the relationship between
Shell Group, Unilever, and Nestle, all leading factor conditions and national competitive advan-
multinationals are strongly influenced by their tages, Porter stresses the need to disaggregate
parent company's nationality. Indeed, Shell and factors of production to a fine level. A fundamen-
Unilever, may be exceptions that prove the rule tal flaw of most empirical tests of factor-
to the extent that both possess dual nationality. proportions theories of trade is their propensity
to lump factors of production into broad catego-
ries such as land, labor, and capital. Porter
National influences on competitive advantage:
observes that:
the 'diamond'
Porter's theory of national competitive advantage One of the least aggregated trade studies,
is based upon an analysis of the characteristics Leamer (1984), includes capital, three types of
of the national environment which identifies four labor, four types of land, coal, minerals, and
oil. But even this level of aggregationis far too
sets of variables which influence firms' ability to broad to capturethe differencesamong nations
establish and sustain competitive advantage within that lead to competitiveadvantage.(p. 782).
international markets (Chapter 3). These inter-
acting determinants form what Porter refers to The advanced factors which provide the most
as the 'national diamond.' Since this 'diamond' enduring basis for competitive advantage tend to
framework forms the core of the book's theoreti- be specialized rather than generalized which
cal contribution, a brief description is warranted. inevitably implies a close interaction between
538 R. M. Grant

industrysuccessandthe creationof the specialized countries which are important determinants of


factors of productionnecessaryto that success. the industry pattern of competitive advantage
within each country. These characteristics include
strategies, structures, goals, managerial practices,
Demand conditions
individual attitudes, and intensity of rivalry within
Since the creation of advanced factors such as the business sector. For example, the large
sophisticatedskillsandnew technologiesplayssuch number of small, family-owned companies in
an importantrole in establishingand sustaining Italy has been conducive to the success of
nationaladvantages,it is essentialto understand design-orientated, craft-based industries where
the featuresof the nationalenvironmentwhichare entrepreneurial responsiveness and flexibility in
conduciveto suchinvestment.Withinhis 'diamond' adjusting to fashion changes are important sources
frameworkPorter places particularemphasison of competitive advantage. German management
the role of home demandin providingthe impetus style with its emphasis on strong hierarchical
for 'upgrading'competitiveadvantage.Firms are control and methodical product and process
typicallymost sensitiveto the needs of theirclosest improvement has been particularly successful
customers, hence the characteristicsof home in engineering industries where manufacturing
demand are particularlyimportant in shaping excellence and commitment to reliability and
the differentiationattributesof domestically-made technical product performance are key buyer
productsand in creatingpressuresfor innovation considerations. Within this broad set of influ-
and quality. Porterplaces particularemphasison ences, the most interesting relationship which
the role of sophisticatedand demandingdomestic Porter identifies is between domestic rivalry and
customers,notingthe influenceof highly-discerning the creation and persistence of competitive
home buyerson the developmentof the Japanese advantage. Rivalry is critically important in
camera industry, and the German passion for pressuring firms to cut costs, improve quality,
durable, high-perfomrancecars as a factor in and innovate. Because competition between
Germandominanceof the worldluxury-car market. domestic firms is more emotive and personal,
and because domestic rivals compete from a
common national platform, their rivalry tends to
Relatedand supportingindustries
be more intense than with foreign competitors.
An industry'sinvestmentsin advancedfactorsof Hence, domestic rivalry is particularly effective
productionare likely to have spillover benefits in promoting the upgrading of competitive
beyond the confinesof that industry.One of the advantage. Porter notes the intense domestic
most pervasive findings of the study was the rivalry present in the Japanese automobile,
tendencyfor the successfulindustrieswithineach camera, audio equipment, and facsimile industries
countryto be groupedinto 'clusters'of relatedand (p. 412) and contrasts the success of these
supportingindustries.One such clusteris centered industries with the failure of most 'national
uponthe Germantextilesand apparelsectorwhich champions' outside of their domestic markets.
includes high-qualitycotton, wool and synthetic
fabrics, women's skirts, dyes, synthetic fibers,
Dynamics of the national diamond
sewing machine needles, and a wide range of
textile machinery.Economieswhich are external These four sets of national influences on competi-
to individualfirmsand industriesare internalized tive advantage operate interdependently rather
withinthe industrycluster.Technologicalleadership than individually. For the 'diamond' to positively
by the U.S. semiconductorindustryduring the impact competitive performance usually requires
period up until the mid-1980sprovidedthe basis that all four sets of influences are present.1 The
for U.S. success in computersand several other interaction gives rise to some complex dynamics
technically-advanced electronicproducts. which are explored in Chapter 4. For example,
upgrading of competitive advantage through
Firm strategy,structureand rivalry
' There are some notable exceptions. For example, Japanese
Porter identifies systematic differences in the companies dominate the world market for typewriters despite
characteristicsof the businesssectors of different having no significant home demand.
Competitive Advantage of Nations 539

investment in product innovation, sophisticated majority of Italy's woollen textile producers, for
labor skills, and process improvements is encour- example, are located in two towns. . . British
aged by a high level of domestic rivalry, at the auctioneers are all within a few blocks in
same time domestic rivalry is stimulated by London. . . Basel is the home base for all three
the availability of factors of production which Swiss pharmaceutical giants.' (pp. 154-155). Such
facilitate new entry, and by a domestic market proximity accelerates diffusion of innovation,
which is large, growing, and discerning. The facilitates investment in skills, and encourages
intensity of interaction between the four corners the development of supporting industries.2
of the diamond determines the extent to which
the national environment is conducive to inter- The economic development of nations
national success. The strength of interaction
depends upon two primary factors. The first is The final stage of Porter's analysis extends his
industry clustering. The creation of 'advanced theory of competitive advantage to explain
factors' such as technologies, sophisticated economic development within nations and
employee skills, design capabilities, and infra- national differences in prosperity and growth
structure is greatly facilitated by vertical and (Chapter 10). National prosperity, in Porter's
horizontal linkages between successful industries. analysis, is closely linked to the 'upgrading' of
The demand conditions created by successful competitive advantage. Sustained competitive
downstream industries encourages development advantage depends upon firms upgrading their
and upgrading by supplier industries, and entry by competitive advantages through innovation and
successful firms in related industries contributes to investment in 'advanced' factors of production.
strong rivalry. Tight clustering of successful At the national level, these processes enhance
industries was observed to be a characteristic of labor productivity and increase real income per
all the successful smaller nations, including head of population. In addition, upgrading
Switzerland, Sweden, Denmark, and Singapore, involves a changing national composition of
as well as Japan and Italy (Chapters 7 and 8). industries and activities. Firms lose competitive
By contrast, the relative decline of Britain as an position in the most price-sensitive industries as
industrial nation owes much to a failure to they develop more capital and technology-
maintain and build closely-related clusters: 'Bri- intensive industries. Within industries, firms move
tain's strong cluster of financial services and trade- towards more differentiated segments, they shift
related industries was highly self-reinforcing. In many of their lower-technology activities over-
industrial businesses, however, there has been a seas, and within their home bases concentrate
gradual unwinding of clusters, in which only on activities which require the highest levels of
pockets of competitive advantage remain.' skill and expertise. Porter identifies a four-stage
(p. 502). development process. The characteristics of each
The strength of interaction between the deter- are summarized in Table 1.
minants of national competitive advantage also
depends upon geographical concentration of the
industry. A general feature of successful industries THE CONTRIBUTION TO THE THEORY
within a country was their tendency to be located OF INTERNATIONAL TRADE AND
within particular cities and regions: 'The vast INVESTMENT

The main contribution of the Competitive Advan-


2 Geographical concentration also raises the issue of whether
tage of Nations is in extending the theories
the nation state is too aggregated a unit for studying the
influence of industry location on competitive advantage. As of international trade and international direct
Porter observes early on in the book, 'the underlying issues investment to explain more effectively observed
are even broader than the role of nations. . . What I am patterns of trade and investment between the
really exploring is the way in which a firm's proximate
environment shapes its competitive success over time' (p. 29). developed countries. Porter's ability to dramati-
Although a national persepctive obscures the true localization cally expand the scope of existing theory concern-
of competitive advantage in particular industries, Porter ing international trade and investment derives
maintains that the characteristics of nations are sufficiently
important that it is the country rather than the city or region from his integration of the theory of competitive
which is the relevant unit of analysis. strategy with that of international trade and
540 R. M. Grant
Table 1. The stages of national competitive development

Driver of development Source of competitive advantage Examples

Factor conditions Basic factors of production (e.g. Canada, Australia, Singapore-, South
natural resources, geographical Korea before 1980
location, unskilled labor)
Investment Investment in capital equipment, and Japan during 1960s, S. Korea during
transfer of technology from overseas. 1980s large home market, acceptance
Also requires presence of and national of risks
consensus in favor of investment over
consumption
Innovation All four determinants of national Japan since late 1970s, Italy since early
advantage interact to drive the creation 1970s, Sweden and Germany during
of new technology most of the post-war period
Wealth Emphasis on managing existing wealth U.K. during post-war period; U.S.A.,
causes the dynamics of the diamond to Switzerland, Sweden, and Germany
reverse: competitive advantage erodes since 1980.
as innovation is stifled, investment in
advanced factors slows, rivalry ebbs,
and individual motivation wanes.

investment. By dispensing with the economist's 1980), and of the role of domestic demand in
fiction of trade being transactions which occur driving trade and the location of production
between countries ('Assume a two-country, two- through the product life cycle (Vernon, 1966).
commodity world. . . '), Porter is able to explore Whereas the earlier theories focused upon par-
an unprecedentedly broad range of national-level ticular aspects of the domestic market (its size,
influences upon firms' competitive performance and the existence of an early market for new
within world markets. As a result, Porter is products), Porter's theory identifies a broad
able to broaden and integrate many recent range of demand variables which influence the
contributions to the theory of international trade international competitive performance (including
as well as encompass many of the central themes the rate of growth of domestic demand, its
of more established theory. For instance, the segment composition, the sophistication of home
diamond framework assigns a prominent role customers, and the early saturation of the home
to a country's stock of productive factors in market).
determining competitive advantage in particular Probably the greatest departure which Porter
industries. Porter' contribution is the detail with makes from current theories of international
which he examines the characteristics of factors trade and investment is the emphasis which
of production, and his analysis of the determinants he places on dynamic aspects of competitive
of a country's stock of resources. Porter's detailed advantage. The central characteristic of inter-
analysis of the roles of education, infrastructure, nationally-successful firms and industries is their
technical knowledge, and the incentives provided commitment to internal investment in the prod-
by factor disadvantages, represents a considerable ucts, processes, and skills needed to continuously
advance on the simplistic theortical and empirical upgrade their sources of advantage. Hitherto,
analyses associated with traditional Heckscher- technlogy has played a minor role in trade theory
Ohlin models. and most models which incorporate it are of a
Similarly, Porter's discussion of the links 'technology gap' type where techology differences
between domestic demand conditions and between countries are exogenous (Krugman,
national competitive advantage extends prior 1990: 152-164). Porter's analysis of the competi-
analysis of the scale advantages associated with tive advantages of nations directs attention
a large home market (Grubel, 1967; Krugman, at national and industry-level influences upon
Competitive Advantage of Nations 541

innovation within firms. Particularly interesting competitive advantage in terms of sustainability'


and insightful are Porter's analyses of domestic (p. 49) lacks clarity. 'Upgrading' is not only about
rivalry and selective factor disadvantages as greater sustainability of competitive advantage, it
drivers of innovation. The analysis of the also involves greater complexity and sophisti-
relationship between rivalry and innovation has cation in technology, skills, and customer relation-
long antecedents in the industrial economics ships. Later in the book 'upgrading' is interpreted
literature. It is worth noting that Porter's to mean 'achieving higher-order competitive
unambiguous finding that rivalry is conducive advantages in existing industries and developing
to sustained success in international markets the capability to compete successfully in new high-
contrasts with the inconsistent findings of prior productivity segements and industries.' (p. 544).
research with regard to the relationship between But sustainability, factor complexity, and pro-
industry structure and innovative activity (Geer ductivity tend not to be perfectly correlated.Saudi
and Rhoades, 1976; Kamien and Schwartz, 1982). Arabia's competitive advantage in the supply of
The breadth of Porter's theory is a consequence crude oil is based upon the very basic advantage
of the goals of the book. Because Porter's of natural resource endowment, yet seems quite
primary objective is to explain important real sustainable. Conversely, many recent product
world phenomena rather than to construct innovations in the securities and financial services
elegantly-logical theory, the book contrasts with industries appear to require quite complex skills
much recent work in the international trade area and systems, yet are quickly imitated by rivals.
and returns to the tradition represented by Smith The links between upgrading of competitive
and Ricardo. Although the international trade advantages and national economic development
theory has developed rapidly during the past are also tenuous. Many of the countries at the
decade due to the application of industrial first (factor-driven) development stage such as
organization theory to trade issues,3 little new Canada, Nauru, and the United Arab Emirates
light has been shed upon the determinants of are among the world's most prosperous. Even in
international competitive performance. Most of the United States, 15 of the top 25 industries in
the recent research has been concerned with terms of world export share in 1985 were based
explaining the existence of international trade upon natural resource endowments (p. 508).
between countries with similar resource profiles. Reliance upon broad, but ill-defined concepts
While this work has had interesting implications such as the 'upgrading of competitive advantage'
for trade policy (Helpman and Krugman, 1989), reflects a more general failure to perfectly
it has not contributed substantially to explaining reconcile micro-level analysis of competitive
and predicting the patterns of trade between advantage of firms and industries with macro-level
nations. analysis of national development and prosperity.
At the same time, the breadth and relevance There is inconsistency in the definition and
of Porter's theory do not come costlessly. The measurement of competitive advantage as the
ambitious theoretical and empirical sweep of the analysis moves from the industry to the national
analysis has been achieved at the expense of level. Competitive advantage at the firm and
precision and determinancy. Lack of precision is industry level is measured in terms of exports
apparent in the woolly definitions of some of the and outbound foreign investment, while 'the only
key concepts in the book and in the specification meaningful concept of competitiveness at the
of relationships between them. For example, a national level is national productivity' (p. 6).
key contribution which Porter makes to the Porter presumes the existence of some invisible
analysis of national competitive advantage is his hand whereby firms' pursuit of competitive
view of the creating and sustaining of advantage advantage translates into increasing national
as a dynamic process. This process involves productivity and prosperity. This presumption is
the 'upgrading' of competitive advantage. But unwarranted. Since 1985, a combintion of real
Porter's concept of a 'hierarchy of sources of wage erosion and dollar depreciation has im-
proved U.S. competitiveness in several industries,
however, these developments have not been
3These developments have been closely associated with the
work of James Brander and Paul Krugman (see, for example, accompanied by corresponding growth in U.S.
Brander, 1981, and Krugman, 1990). productivity and living standards. Part of the
542 R. M. Grant

problem is Porter's attempt to treat exports and generally conducive to competitive advantage in
outward direct investment as part of the same industries which make intensive use of such
phenomenon, and to ignore their complex inter- factors. However, in certain instances, it is
relationships. Thus, the competitive advantage disadvantages in the supply of basic factors
of British companies in publishing, accounting, which create incentives for upgrading competitive
and certain processed foods is revealed mainly advantage. Porter fails to clearly define the
in multinational growth which has made little conditions under which advantages in the supply
contribution to the upgrading of competitive of basic factors of production are an advantage,
advantagesin the domestic economy. and the conditions under which they are a
Lack of precision is also apparent in the disadvantage. Second, the relationship between
'nationaldiamond'framework.At its most basic, each corner of the diamond and national competi-
the diamond is a taxonomy for classifying the tive performance is complicated by the interac-
various national influences on firm and industry tions between the different variables. Chapter 4
competitiveness. Yet the categories overlap to analyzes how changes in each of the four corners
such a degree that it is not clear that the various of the diamond are influenced by each of the
influenceswould not be better representedby a other determinants, yet Porter acknowledges,
triangleor pentagon ratherthan a diamond. For 'In such an environment, cause and effect
example, role of supportingand relatedindustries relationships among the determinants become
in promoting competitive advantage appears to blurred.' (p. 179). Finally, determinacy is further
be largely through their effects on factor con- weakened by two-way relationships between each
ditions and demand conditions. Successful of four corners of the diamond and national
upstreamindustriesare a resource for domestic competitive performance. While Porter's model
firms, successful downstreamindustriesprovide seeks to explain national advantage in terms of
stimulatingdemandconditions, and horizontally- the four sets of determining variables, the
related industries contribute to factor creation dynamics of the system are such that competitive
through investment in skills and technology. performance has important influences on these
Some corners of the diamond become so all- variables. Thus, successful international perform-
embracingthat the variables included and their ance provides the finance and incentives for
relationshipsto national competitive advantage upgrading the sources of competitive advantage
are widely diverse. In particular, 'structure, (it may also engender complacency), promotes
strategies and rivalry' is an awkward catch-all the development of related and supporting
category which comprises 'national differences industries, raises the affluence and expectations
in management and practices and approaches, of domestic customers, and promotes rivalry by
. . .attitudes towards authority,. . . social encouraging new entry.
norms,. . . the orientation of firms towards The result is a theory which is gloriously rich
competing globally,. . . goals and motivations, but hopelessly intractable. The strength of the
. . .national prestige and priority, and domestic theory is its cogency in explaining the inter-
rivalry' (pp. 108-117). These variables do not national success of particular industries
form a coherent group nor are they related in (Chapter 5),4 the nature and pattern of competi-
similar ways to national competitive advantage. tive advantage in the services industry
Domestic rivalry is an industry-level variable (Chapter 6), and the patterns of national competi-
which is clearly defined and its relationshipto tive advantage among 8 of the 10 countries
pressure for improvement and innovation is included within the study (Chapters 7, 8, and 9).
precisely specified. Management training and The key weakness of the theory is in its predictive
practices,and employee attitudesand motivations power. Ambiguity over the signs of relationships,
on the other hand appear to be national the complexity of interactions, and dual causation
characteristicswhich relate to factor conditions. renders the model unproductive in generating
Indeterminacyof the relationshipsin the Porter
'diamond'modelstems from three sources. First,
some variables have an ambiguous impact on 4The case studies included in Chapter 5 are the German
printing press industry, the American patient monitoring
competitive performance. An abundant supply equipment industry, the Italian ceramic tile industry, and the
of highly productive factors of production is Japanese robotics industry.
Competitive Advantage of Nations 543

clear predictions. Porter's prescriptions in the the role envisaged by most proponents of a more
form of 'national agendas' (Chapter 13) are active industrial policy:
symptomatic of this predictive weakness. The
chapter establishes imperatives for each country, Many see governmentas a helper or supporter
most of which relate to the removal of impedi- of industry. Yet many of the ways in which
ments to the process of upgrading. But there is government tries to 'help' can actually hurt a
nation's firms in the long run. . . Government's
little prediction of how each country's industry role is as a pusher and challenger.There is a
pattern of competitive advantage is likely to vital role for pressure and even adversity in
evolve in terms of the industry clusters which the process of creating national competitive
will prosper, which will lose out to international advantage(p. 681).
competition, and what the implications of struc-
kxral change and differential rates of upgrading As a result, Porter suggests that policies
will be for national rates of economic growth. directed towards enhancing national competi-
tiveness often have effects which are the opposite
Policy recommendations of those intended. Table 2 contrasts some policy
implications arising from Porter's analysis of
The differences between Porter's theory of national competitive advantage with those of
national competitive advantage and the. existing conventional wisdom.
theory of international trade and investment are
highlighted by their respective public policy
implications. From an initial premise that govern- CONTRIBUTION TO THE THEORY OF
ment's aim is to maximize the level and growth COMPETITIVE STRATEGY
of the nation's living standard, Porter defines the
primary policy goal as: The primary contribution of The Competitive
Advantage of Nations is to the analysis of
to deploy the nation's resources (labor and international trade and investment, and, by
capital) with high and rising levels of pro- implication, to the economic development of
ductivity. . . To achieve productivity growth, an nations. At the same time, the book makes
economy must be continually upgrading.This
requiresrelentless improvementand innovation an important contribution to business strategy
in existingindustriesand the capacityto compete analysis. This arises from two sources. First,
successfullyin new industries(p. 617). Porter's integration of the theory of competitive
strategy with theory of international trade and
The appropriate role for government is to comparative advantage extends the analysis of
contribute to the conditions which are most strategy formulation to an international environ-
conducive to the upgrading of competitive advan- ment. Second, Porter's emphasis upon innovation
tage working through each of the four corners and 'upgrading' as central to the creation and
of the national diamond and taking actions which sustaining of competitive advantage represents
improve the interaction between these influences. further steps towards the reformulation of the
In some instances, the government can act strategy model within a dynamic context.
directly to augment the conditions for upgrading Strategy is a quest for superior performance
national competitive advantage-for example, through establishing a competitive advantage over
through investing in education, training and rivals. Competitive advantage is conventionally
infrastructure; in fiscal measures which encourage analyzed in terms of the selection of a strategy
private investment; and in encouraging the which matches a firm's resource strengths to
creation and dissemination of information. In the requirements for success in the market
general, however, government's influence is environment ('key success factors'). In a domestic
indirect, partial, and is only observable after a industry, firm's face a common environment and
substantial lapse of time. The policy prescriptions competitive advantage is primarily concerned with
which derive from Porter's analysis diverge from exploiting superior resources and capabilities.
conventional ideas about government policies to Internationalization of the strategy model has
promote national prosperity. Porter's view of the hitherto assumed that firms are faced with a
appropriate role of government is at odds with common global market environment, and the key
544 R. M. Grant
Table 2. Government policy and national competitiveness: Examples of differences between Porter and
conventional wisdom

Policy measure Traditional thinking Porter model

Devaluation Improves the competitiveness of domestic Devaluation is detrimental to the


industries by giving them a cost advantage upgrading process: it encourages
over overseas competitors dependence upon price competition and a
concentration upon price sensitive
industries and segments. It discourages
investment in innovation and automation.
Policy towards R&D Government investment in R&D Importance of diffusion of technology
stimulates the innovation within the means that research within universities is
country. Defense-based research offers more effective than research within
commercial spin-offs. Cooperative research government laboratories. Government
pools efforts and avoids wasteful should support research into commercially
duplication. relevant technologies in preference to
defense-related research. Government
should support research institutions
focused upon industry clusters or cross-
cutting technologies. Cooperative research
is of limited value since it may blunt
rivalry.
Government Provides secure home demand for While government can act as an early,
procurement domestic firms hence encourages sophisticated buyer, procurement can
investment and economies of learning and easily act to protect weak national
scale. Defense procurement, in particular, champions from international and
provides an early market for technically domestic rivalry, and distort product
sophisticated products. development from global market needs.
Regulation of Stringent regulations impose costs which Stringent performance, safety and
product and process hamper competitiveness in home and environmental standards can pressure
standards overseas markets. firms to improve quality, upgrade
technology and provide superior product
features. Particularly beneficial are
regulations which anticipate standards
which will spread internationally.
Antitrust policy and The presence of international competition Antitrust policy plays an important role in
regulation of means that domestic monopolies and maintaining the strength of domestic
competition mergers are ineffective in creating and rivalry. But must not act as a barrier to
exercising nmarketpower. The interests of vertical collaboration, between suppliers
global competitiveness may require the and buyers, that is integral to innovation.
relaxation of antitrust constraints in order Regulation of competition, on the other
to encourage strategic alliances and the hand, is likely to be detrimental to rivalry
development of world-class competitors. and new enterprise creation: deregulation
of competition and privatization of
domestic monopolies usually spurs
national advantage.

strategic issues are exploitation of global scale environment. Even in the most globally-competi-
economies (Levitt, 1983), international cross- tive and homogeneous markets, the national
subsidization to squeeze domestically-based com- environment-as represented by the four corners
petitors (Hamel and Prahalad, 1985), and organiz- of the national diamond-continues to influence
ing in order to reconcile the benefits of globaliz- a firms' potential for competitive advantage and,
ation with those of national differentiation hence, its strategy formulation because of the
(Bartlett and Ghoshal, 1989). In Porter's view, influence of the proximate environment both on
the globalization of markets does not simply resource availability and on key success factors
transpose firms from a national to an international within its market environment. Two of Porter's
Competitive Advantage of Nations 545

national-level variables, factor conditions and the tage). By establishing a pivotal role for resources
presence of successful related and supporting and capabilities as sources of competitive
industries, are influential in determining a firm's advantage, Porter implicitly endorses the
resource strengths, while the other two, rivalry resource-based approach to strategy analysis
and home demand conditions, have their primary represented by the work of Barney (1986a)
influence upon conditions for success within the Dierickx and Cool (1989) and Rumelt (1984).
immediate market (see Figure 1). Porter's primary contribution to the analysis of
A consequence of Porter's introduction of the the role of resources in the determination of
national environment into the strategy framework competitive advantage and the formulation of
is increased emphasis on the role of resources strategy is to recognize that the firm's resource
and capabilities as determinants of competitive base is not simply a function of its own past
advantage. Porter's prior contributions to strategy investments, but is also determined by the
analysis concentrated upon the role of the conditions of resource supply and resource
industry environment in determining strategy creation within its environment. Although this
(Competitive Strategy) and the use of the value idea is hardly novel (Kogut, 1985), Porter's
chain as a vehicle for analyzing opportunities model is interesting because of the interaction
for competitive advantage and for configuring which occurs between firm-level and country-
a firm's system of activities (Competitive Advan- level sources of competitive advantage.

COMPETITIVE ADVANTAGE

TIIE FIRM f I THE


COMPETITIVE
INDUSTRY
Resource STRATEGY
Strengths ENVIRONMIENT

THE NATIONAL CONTEXT

Strategy, structure, rivalry

Resource availability Demand conditions

?1T
Related and supporting industries

Figure 1. Competitive strategy formulation within an international context


546 R. M. Grant

An even more significant departure of the and the speedy exploitation of environmental
strategy analysis in The Competitive Advantage changes. In addition to the national factors which
of Nations from that of Porter's prior books is promote innovation and upgrading-factors such
the shift from a static to a dynamic analysis of as domestic demand conditions and strong
competitive advantage. The greatest weakness of national rivalry which were discussed earlier-
Porter's prior strategy analysis was the steady- Porter also points to specific managerial actions
state concept of competitive advantage inherent at the level of the individual firm (pp. 584-606).
in his description of positions of cost and Most of these recommendations deal with two
differentiation advantage. This static analysis of sets of influences upon dynamic competitive
competitive analysis reflects a static concept of advantage: information and motivation. By maxi-
competition derived from the 'structure-conduct- mizing interchange with buyers, suppliers, and
performance' model of IO economics (Barney, firms in related industries, a firm can maximize
1986b). In The Competitive Advantage of Nations, the information and knowledge available within
Porter dispenses with this concept of competition its national cluster. By targeting customers which
as a static variable whose stength depends upon are the most sophisticated, demanding, and which
market structure, in favor of a Schumpeterian have the most difficult needs, a firm can help
concept of competition where competition is a establish leadership in quality and innovation.
process of dynamic change in which innovative By establishing performance norms on the basis
and imitative behavior is constantly creating and of the toughest regulatory standards and the
destroying positions of competitive advantage. performance levels of the most successful com-
The result is an analysis of competitive advantage petitors, opportunism and pressure for innovation
at the firm level which is dynamic in the sense can be maintained.
that competitive advantage is a consequence of A striking feature of these recommendations
change (pp. 45-53). Change may be exogenous is that many of them directly contradict prescrip-
through the emergence of new technologies, tions arising from the static analysis in Porter's
changing buyer needs, new industry segments, Competitive Advantage. Within the static indus-
shifting input supply conditions, or changes in trial organization model, strategy is a quest for
government regulations. In such cases, competi- monopoly rents which are achieved through
tive advantage accrues to firms which move locating within industries and segments where
early in exploiting the emerging opportunies. competition is weak, and by initiating changes in
Alternatively, change may be endogenous industry structure which moderate competitive
through innovation by firms. Once created, pressures. However, such conditions are also
competitive advantage is subject to erosion. A likely to blunt the incentives for dynamic competi-
firms's ability to sustain its competitive advantage tive advantage. Porter acknowledges the
depends upon the ease with which competitors revisionism of his new doctrine:
can duplicate the competitive advantage, the
number of distinct sources of advantage the firm These prescriptionsmay seem counterintuitive.
possesses, and the firm's ability to continually The ideal would seem to be the stability
upgrade its sources of competitive advantage. growingout of obedient customers,captive and
dependent suppliers, and sleepy competitors.
Porter's analysis of the process of upgrading Such a searchfor a quiet life, an understandable
competitive advantages through innovation and instinct, has led many companies to buy direct
the creation of more advanced factors of pro- competitorsor form alliances with them. In a
duction closely parallels Prahalad and Hamel's closed, static world, monopolywould indeed be
(1990) analysis of 'core competences'. the most comfortableand profitablesolution for
companies.
Porter's dynamic approach to competitive In reality, however, competition is dynamic.
advantage contains little that is new. Most of Firmswill lose to other firmswho come from a
these ideas about the creation and sustaining of more dynamicenvironment.Good managersare
competitive advantage have been put forward by alwaysrunninga little scared. They respect and
Dierickx and Cool (1989), Ghemawat (1986), study competitors. An attitude of meeting
challenges is part of organizationalnorms. An
Rumelt (1984; 1987) and others. Porter's contri- organizationthat values stabilityand lacks self-
bution to this analysis is primarily in exploring perceivedcompetition,in contrast,breedsinertia
the conditions which are conducive to innovation and creates vulnerabilities. Some companies
Competitive Advantage of Nations 547
maintain only the myth that they believe in been limited by the widening gulf between
competition. Success grows out of making the economic science which has retreated into irrel-
myth a reality. . . The aim in seeking pressure
and challenge is to create the conditions in which evant theoretical rigor, and superficiality of most
competitive advantage can be preserved. Short- policy prescriptions. The achievement of The
term pressure leads to long-term sustainability. Competitive Advantages of Nations is not just to
In global competition, the pressures of enter this gap, but to do so with an analysis of
demanding local buyers, capable suppliers, and international competitive performance of unprec-
aggressive domestic rivalry are even more
valuable and necessary to long-term profitability. edented scope. A single analytical framework
These drive the firm to a faster rate of progress provides a cogent explanation of competitive
and upgrading than international rivals, and lead advantage within industries which range from
to sustained competitive advantage and superior chocolate to auctioneering, and among countries
long-term profitability (pp. 586-587). as different as Sweden and Singapore. Moreover,
a critical strength of Porter's analysis is its ability
to span three levels of aggregation: the firm, the
CONCLUSIONS industry and the nation.
At all three levels, Porter offers new insights
Porter's Competitive Advantage of Nations into the determinants of competitive advantage,
addresses the central theme in the development but, it is at the intermediate level where Porter's
of the world economy during the past quarter- analysis offers the most striking advance over
century: internationalization. At the corporate prevailing knowledge. Porter's theory of how
level, growth in the volume of international national factors influence competitive advantage
transactions has transformed the competitive within individual industries extends well beyond
environment of firms: management faces greater current theories of competitive advantage based
risks, opportunities, and pressure for efficiency upon resource endowments and integrates and
and flexibility. At the industry level, inter- broadens contributons to trade theory based
nationalization has accelerated technical change, upon industrial organization and the product life
compressed product life cycles, and increased the cycle. Most important, however, is Porter's
geographical concentration of industries.5 At the emphasis upon dynamic determinants of competi-
national level, internationalization has greatly tive advantage particularly through innovation
increased disparities between nations in their and investment in more complex factors of
rates of economic development. Among the production.
industrialized nations, Japan, Italy, and Germany At the level of the firm, Porter's main
have achieved much more rapid progress than contribution is in integrating Schumpeterian
the United States, Canada, and Britain, while approaches to competition and resource-based
the economies of Eastern Europe have succumbed approaches to strategy within his analysis of
to creeping arthritis. Among non-industrialized competitive advantage. The resulting framework
countries, the disparities in growth rates between, suggests an emerging consensus within the stra-
on the one hand, Korea, Taiwan, Singapore, tegic management field. The hostility of some
Hong Kong, and Thailand, and, on the other strategic management researchers to Porter's
hand, those achieved by countries which appeared earlier work may be due, not so much to
during the 1950s to be the most promising opposition to economic concepts and theories per
candidates for future development (such as se, as to opposition to an equilibrium framework
Argentina, New Zealand, and Philippines) are which is incapable of addressing competition as
even more startling. a process of dynamic rivalry.
Our understanding of these phenomena has Least successful is Porter's analysis of economic
development at the national level. The problem
here seems to be that the further Porter gets
5 For example, in 1985, Japan accounted for 82 percent of
world exports of motorcycles and 81 percent of world exports from the micro-foundations of his theory, the
of VCRs; the U.S. accounted for 82 percent of world exports more difficulty he experiences in explaining
of photographic film and 79 percent of world exports of relationships between economic aggregates.
commercial aircraft and helicopters, Italy accounted for 57
percent of world exports of ceramic tiles, and South Korea Hence, despite the novelty and the appeal of
exported 52 percent of the world's black and white TVs. many of Porter's recommendations for govern-
548 R. M. Grant
ment policy, the persuasivenessof his prescrip- Barney, J. B. 'Types of competition and the theory
tions is limited by doubts as to whether his of strategy: Toward an integrative framework',
Academy of Management Review, 11, 1986b,
analysis is adequate in explaining economic pp. 791-800.
development at the national level. Bartlett, C. A. and S. Ghoshal. Managing across
More generally, the ambitious scope of the Borders: The Transnational Solution, Harvard Busi-
book inevitably means shortcomings both in ness School Press, Boston, MA, 1989.
theory, exposition, and empirical analysis. The Brander, J. 'Intra-industry trade in identical commodi-
ties', Journal of International Economics, 11, 1981,
versatility and richness of Porter's theory is pp. 1-14.
achieved partly through concepts whose defi- Dierickx, I. and K. Cool. 'Asset stock accumulation
nitions are adjustedto suit the needs of different and sustainability of competitive advantage', Man-
partsof the analysis,and theoreticalrelationships agement Science, 35, 1989, pp. 1504-1511.
.whichare indeterminateand sometimesinconsis- Geer, D. F. and S. A. Rhoades. 'Concentration and
productivity changes in the long and short run',
tent. In terms of exposition, this long book is Southern Economic Journal, 43, 1976, pp.
lengthened by repetition. Porter has a tendency 1031-1044.
to reinforce his ideas by repeating them in Ghemawat, P. 'Sustainable advantage', Harvard Busi-
differentiatedforms, and in one table is repro- ness Review, 64, September-October 1986, pp.
duced exactly in different chapters. At the 53-58.
Grubel, H. G. 'Intra-industry specialization and the
empirical level, the theory is applied selectively theory of trade', Canadian Journal of Economics,
and qualitativelyand without resort to rigorous 33, 1967, pp. 374-388.
testing of its predictivevalidity. Hamel, G. and C. K. Prahalad. 'Do you really have
But these shortcomingsare trivial when com- a global strategy?', Harvard Business Review, 63,
pared to the book's achievements. The major July-August 1985, pp. 139-148.
Helpman, E. and P. R. Krugman, Trade Policy and
analyticalcontributionof the book is in offering Market Structure, MIT Press, Cambridge, MA,
new insights into the development of industries 1989.
and nations within their internationalcontexts Kamien, M. and N. Schwartz. Market Structure and
and in extendingthe theoryof internationaltrade Innovation, Cambridge University Press, Cam-
and investment to address these issues. Yet the bridge, MA, 1982.
Kogut, B. 'Designing global strategies: Comparative
book also has great significancefor the study of and competitive value-added chains', Sloan Manage-
strategic management. This is partly due to ment Review, Summer 1985, pp. 15-38.
reformulationof the competitivestrategyframe- Krugman, P. R. 'Scale economies, product differen-
work within an international,nationally-differen- tiation, and the pattern of trade', American
tiated environment, and the recasting of the Economic Review, 70, 1980, pp. 950-959.
Krugman, P. R. Rethinking International Trade, MIT
analysis of competitive advantage within a Press, Cambridge, MA, 1990.
dynamic context. Even more important is the Leamer, E. E. Sources of International Comparative
book's broadening of the horizons of strategic Advantage: Theory and Evidence, MIT Press,
management by extending its concepts and Cambridge, MA, 1984.
theories from the level of the firm to the level Levitt, T. 'The globalization of markets', Harvard
Business Review, May-June 1983, pp. 92-102.
of the nation. If, as seems likely, Porter's new Ohmae, K. The Borderless World, Harper and Row,
book encourages a surge of further theoretical New York, 1990.
and empirical research into the role of national Porter, M. E. The Competitive Advantage of Nations,
environments in determining international com- Free Press, New York, 1990.
petitive advantage, the result is likely to be Prahalad, C. K. and G. Hamel. 'The core competences
of the corporation', Harvard Business Review,
a redefinition of the boundaries of strategic May-June 1990, pp. 79-91.
management, and a lowering of the barriers which Rumelt, R. P. 'Towards a strategic theory of the
separate strategic management from economics. firm'. In R. B. Lamb (ed.) Competitive Strategic
Management, Prentice Hall, Englewood Cliffs, NJ,
1984, pp. 556-570.
Rumelt, R. P. 'Theory, strategy, and entrepreneur-
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