1. 1 Session Three Global Competitive Advantage

2. 2 Lecture Overview Global competitive advantage: –What is it? –Its sustainability Diamond and double-diamond

3. 3 Global Competitive Advantage: Why a particular nation is internationally competitive in a particular industry/sector? Michael Porter ‘Competitive Advantage of Nations’’ http://www.youtube.com/watch?v=y5I_cnpP99U&fe ature=PlayList&p=987A41B8EA664E1B&playnext= 1&playnext_from=PL&index=30http://www.youtube.com/watch?v=y5I_cnpP99U&fe ature=PlayList&p=987A41B8EA664E1B&playnext= 1&playnext_from=PL&index=30 mins 9-14

4. 4 The Determinants of Competitive Advantage of Nations (Porter’s Diamond)

5. 5 Diamond: 1) Factor Conditions Porter: Specialised resources; involve sustained and heavy investment World-class institutions that first create specialised factors and then continually work to upgrade them Turning disadvantages in a static model of competition into the advantages in a dynamic model Rugman & Collinson: Physical resources (land, water, minerals) Labour (quantity, skills and cost) Knowledge resources Capital Infrastructure

6. 6 Diamond: 2) Demand conditions Buyer sophistication How well the needs of buyers in the home market precede those of buyers in other markets The size and growth rate of the home demand

7. 7 Diamond: 3) Related and supporting industries Internationally competitive supplier industries Internationally competitive related industries

8. 8 Diamond: 4)Firm strategy, structure, and rivalry The amount of domestic rivalry Static efficiency is much less important than dynamic improvement, which domestic rivalry stimulates Domestic competition pressures local companies to look at global markets and toughens them to succeed in them

9. 9 Porter’s Diamond – more to it?

10. 10 What is a competitive advantage of a country where you are from? Why? What is behind it? Global Competitive Advantage: Why a particular nation is internationally competitive in a particular industry/sector?

11. 11 Diamond: 5) The role of government Government can influence all four of the major determinants through actions such as: –Focus on specialised factor creation –Avoid intervening in factor and currency markets –Enforce strict product, safety and environmental standards –Sharply limit direct cooperation among industry rivals –Promote goals that lead to sustained investment. Government’s role is as a catalyst and challenger ; it is to encourage companies to raise their aspirations and move to higher levels.

12. 12 Diamond: 6) The role of chance –New inventions (e.g. the Internet) –Political decisions by foreign governments –Wars –Significant shifts in world financial markets or exchange rates –Discontinuities in input costs such as oil shocks –Surges in world or regional demand –Major technological breakthroughs

13. 13 The Complete System

14. Finland and Nokia 14

15. Nation Cluster Firm 15

16. 16 Nation: Finland Exports Pulp & paper40% Wood products16% Engineered metal (incl. shipbuilding) 23% High taxes High public spending (welfare, education (above av. European)) High public R&D spending Shadowed by Soviet Union

17. Finland Economic DevelopmentMacro PolicyMicro Policy The 1980s Deregulation, privatisation, scrapped industrial policies, R&D spending increased 10% annually, Science & Technology Council (PM, MF, MT) Curb inflation, last currency devaluation in 1982; strong economic growth, decrease in trade with Soviet Union, fin. markets liberalisation Establishment of National Technology Agencies (Tekes) – ‘weaver’ of networks and ‘godfather’ to new communication companies, competition The crisis around 1990 Soviet Union collapses, entering a new ‘mental era’ – turning West, i.e. joining the EU, US jet fighters Bubble growth and burst, banking crisis, value of real estate drops, exchange rate flotation (1992) Interest rates go up, prices of repaying debt soar, businesses go bust The 1990s Privatization, deregulation, open competition, emphasis on IT/telecom in education programs, R&D central to policy, raised R&D spending Cut inflation, cut gvt spending, stabilized currency, EU membership, open trade policy Deepening of clusters, creating of incubators, open competition 17

18. Finnish Telecom Cluster 18 Users Mobile Network Operators Mobile Handset Manufacturers Contract Manufacturers Component and Equipment Suppliers Educational InstitutionsStandard-Setting Organizations Specialised Risk Capital Specialised services (banking, legal) Mobile Application Providers Content Providers Dealers Mobile Infrastructure Manufacturers World Leaders Competitive Followers Limited position

19. 19 The Determinants of Competitive Advantage of Nations (Porter’s Diamond) 100 Telecom companies 15 mobile phone companies in ’80s, No protection from foreigners never state monopoly LT strategies focused on technological excellence 100 Telecom companies 15 mobile phone companies in ’80s, No protection from foreigners never state monopoly LT strategies focused on technological excellence Renown scientists & engineers 12 Colleges & Unis in IT & Telecoms, R&D, Venture capital Renown scientists & engineers 12 Colleges & Unis in IT & Telecoms, R&D, Venture capital Large number of highly specialised suppliers, Finnish telecom cluster, Large number of content providers Large number of highly specialised suppliers, Finnish telecom cluster, Large number of content providers Demanding operators Sophisticated & progressive customers Highest mobile penetration rates Demanding operators Sophisticated & progressive customers Highest mobile penetration rates

20. 20 The Complete System High R&D spending Centre of Expertise Program Cluster Program Business Incubators Promoting free competition (no intervention) High R&D spending Centre of Expertise Program Cluster Program Business Incubators Promoting free competition (no intervention)

21. Firm: Nokia “An obscure, near bankrupt conglomerate from the geographic fringe of Europe became in eight short years the global leader in mobile telephones”, Stanford U., February 2001 21

22. 22 TelecomsMarketResearch.com- Market share trends, 2008

23. 23 Created in 1967 through merger of Finnish Cable Works, Finnish Rubber Works and Nokia 1979 :Joint Venture with Salora TV: Mobira 1987: Mobira Cityman – Nokia launches the Mobira Cityman, the first handheld NMT phone. 1992: Nokia’s first GSM handset Nokia launches its first GSM handset, the Nokia 1011.B 1998: Nokia becomes the world’s biggest mobile phone manufacturer Weighted about 800 grams and cost EUR 4,500 Conglomerate with a domestic, regional focus Nordic/European consumer electronics company Global mobile telecommunications firm

24. So, why has Nokia became such a successful firm? 1)Finland has been one of the most advanced and competitive environments in the world. The quality of Nokia’s strategies are highly dependent on upon the quality of its microeconomic business environment 2)From conglomerate to consumer electronics in the 1980s brought Nokia into the consumer business 3)Integration of major companies in the Finnish telecom cluster in the 1980s 4)Focus on digital phones in early 1990s and global operations with cutting edge R&D. 24

25. Nation Cluster Firm 25 Overall diamond provided educated LF, R&D and strong history of competition. Finnish telecom cluster was more dynamic than clusters in other nations. Hence, choice of mobile telecoms out of consumer electronics Nokia integrated the Finnish cluster to improve economies of scale and R&D in 1980s. Reverse happened in 1990s: outsourcing and opening of new firms by ex-Nokia employees. More dense and bigger cluster, firms going abroad to make and do R&D Nokia accounts for 45% of private R&D, large share of exports and 1-2% of GDP (which was 5% in the 90s).

26. 26 So, Why Does ‘Diamond’ Matter?

27. 27 Critique and evaluation of Porter’s model The model was based on statistical analysis of aggregate data on export shares for ten relatively affluent countries –Porter’s model cannot be applied, without modification, to countries of the world that do not have the economic strength or affluence of those used for his analysis –An over-emphasis on manufacturing industries and traditional ‘value chains’ –Too much respect for national boundaries and local economic determinants

28. 28 Other “Diamond” Models

29. 29 Canada and the double diamond Rugman and Collinson, 2009

30. 30 Canada and the double diamond Rugman and Collinson, 2009

31. 31 Double Diamond in Action INDIA USA Education, Skilled Engineers Education, Skilled Engineers Education US companies Telecoms and computing High number of competitors High number of competitors High number of competitors High number of competitors INDIAN SOFFTWARE INDUSTRY

32. Session Overview Porter’s diamond Finland and Nokia Double diamond 32