German Engineering, Swiss Chocolate and Cheese, American Computers, Finnish Cell Phones: Domestic Conditions and Global Competence
When asked to name a product associated with a specific country, people are generally quick to respond. There seems to be a clear sense among people worldwide about which companies from which countries dominate industries. For instance, German companies dominate engineering based industries, whereas Switzerland is clearly associated with dairy-based products such as chocolate and cheese in addition to banking, precision instruments, and pharmaceuticals. Why? How do companies from a specific country develop superior competence in specific industries?
Michael Porter (Harvard Business School) addressed this question and published his findings in The Competitive Advantage of Nations (1990). He conducted a four-year, ten-nation study of the patterns of competitive success in leading countries. The findings support the results of previous research that companies achieve competitive advantage through acts of innovation. Porter’s primary contribution from this research is the conclusion that a nation’s capacity to innovate is affected by four broad attributes, the “diamond” of national advantage: 1) factor conditions; 2) demand conditions; 3) related and supporting industries; and 4) firm strategy, structure, and rivalry. These factors represent the domestic conditions companies face, that affect the level and type of innovation companies engage in.
Switzerland, chocolate, and cheese – the first component in the diamond, factor conditions or endowments play a role here. Porter differentiates between basic and advanced factor endowments. Basic factors are domestic conditions such as climate, land, natural resources, and population size. Advanced factors include education, infrastructure, and technology. During the agricultural phase of economies, the economic development of Switzerland was constrained by the type of land (rocks, not fertile) available. As a result, the Swiss agriculture was founded on a focus on dairy rather than on farming – resulting in superior expertise of “anything dairy related” and a competitive advantage in that area. Important to note is that Porter concluded that for sustained economic development advanced factors are more important than basic factors.
What about German engineering? Demand conditions in the domestic market direct where companies will place the relative emphasis with respect to product characteristics. What is most important to domestic consumers? Product quality, price, innovativeness, customization, or variety? Consumer preferences are in part based on the cultural characteristics. Germans are known to avoid risk and to prefer structure and predictability. Hence, German consumers look for products that are reliable, high quality, precise. German companies have been challenged to meet such preferences and have developed a competitive advantage based on the technical expertise that allows them to design and deliver products with such characteristics.
In the U.S., computer-related industries are well developed and internationally competitive. This has been a great advantage for American computer manufacturers, hardware and software. Silicon Valley is the world’s most famous industry cluster! Porter’s third factor, supporting and related industries, addresses the importance of outstanding, innovative domestic suppliers for companies to be innovative and develop competitive advantage.
Finally, Porter found that the competitive strategies that companies choose depend – to some extent – on their domestic, cultural context. For example, members of the top executive team in European companies, especially North European, tend to have a technical background. CEOs in European companies tend to have a Ph.D. in the relevant technical field and, hence, focus their attention on the technical aspects of the products rather than on the bottom line and short-term financial aspects of the company.
What about Finland and Nokia’s success? It seems that the climate in and the geographic location of Finland, basic factor endowments, are most useful in explaining this company’s competitive advantage! Finland’s harsh climate, the land covered by snow much of the year, required innovation as to wireless communication – more than in many other countries.
In conclusion, the companies that dominate certain industries in the global economy where able to develop competitive advantage based on the domestic conditions they were “blessed with.” In addition, countries that make investment in and development of advanced factors, such as infrastructure and education a priority create the conditions that are most important to domestic companies in their pursuit of competing successfully in the global market.
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Yvonne Stedham, Ph.D.
Yvonne Stedham is professor of management, a 2010 University of Nevada, Reno foundation professor, and co-director of the Center for Corporate Governance and Business Ethics in the College of Business. She received a Ph.D. in business and an MBA from the University of Kansas, Lawrence, Kansas and undergraduate degrees in economics and business from the Rheinische Friedrich Wilhelms University, Bonn, Germany. She teaches undergraduate and graduate courses in international management and human resource management at the University of Nevada, Reno and the School of Management in Ingolstadt, Germany.
Her research focuses on cross-cultural aspects of management and business ethics. Stedham serves on the State Council for the Society for Human Resource Management (SHRM) as well as on the Nevada World Trade Council (NEWTRAC). She provides consulting and training services to many companies, locally, nationally, and internationally.