International Business Global Corporate Strategy: Porter’s theory of national competitive advantage in industries

Global Corporate Strategy  The key issues: What are the big decisions in international business? How do we make them wisely for our firms?

Value Creation  The way to increase profitability is to create more value The amount of value a firm creates is measured by the difference between its costs and the value that consumers perceive in its products  Michael Porter states that there are two basic strategies for creating value Low-cost strategy suggests that a firm has high profits when it creates more value for its customers and does so at a lower cost Differentiation strategy focuses primarily on increasing the attractiveness of a product (getting customers to think it’s different and better than competitors’)

But to create value, you must think about who you’ll work with  Porter’s study of national competitive advantage provides the business context for the big decisions

Porter says industries succeed when they can…  innovate,  upgrade, constantly offering more and better to customers

Therefore, industries succeed where 4 factors are favorable

Factor conditions  Not the factors economists used to care about (Labor, land, capital, etc.)  Specialized factors that people create Labor with specialized skills Unique resources (phone systems built for Strategic Air Command in Omaha, Neb.)  Innovations to cope with a weakness can produce long-term strength Dutch bringing flowers indoors to cope with bad weather

Demand conditions (at home)  Demanding customers in the home market lead to competitive industries  If local customers need innovations, you can often sell those innovations in the world market Germans need washing machines with powerful spin cycles due to damp weather  They sell them elsewhere

Related and supporting industries  Good local suppliers repeatedly help you innovate

Firm strategy, structure, and rivalry  Strategy: Ambitious firms become world leaders  Structure: Industries succeed where local norms are in tune with industry needs Italian shoe makers benefit from preference for family firms in Italy German appliance firms gain from preference for big, disciplined organizations

 Rivalry: To succeed internationally, you need strong local competition When local competitors do better than you, “you get mad”  Pressure on firms in the local environment contributes to success

The 4 elements in the diamond work together as a system Each element can contribute to making the other elements strong