The Competitive Advantage Of Nations

Despite the differences between the industries Porter examines, the narratives of their success are remarkably similar. That is, despite the variations of structure, age, and location, their broad “stories” and the factors behind them share certain themes. These help to deepen, and make concrete, Porter’s account of how industries and nations create and sustain competitive advantage. The first of these is chance. In the printing press industry, the story of Friedrich Koenig played this role. His journey to England to learn about the printing press business, and his return to Germany (after being driven out) to set up Koenig and Bauer, sparked almost 200 years of German industry domination. Likewise, in Italian ceramics. Post-war reconstruction “created an unprecedented boom in building materials” (211), which, combined with the scarcity and high price of wood, led to a boom in demand for ceramic tiles. This helped jump-start Italian success in that field. A similar story arose from the US patient monitoring equipment industry. The combination of an entirely private healthcare system along with the “litigious nature of U.S. medicine” (202) paved the way for American dominance.

However, these initial chance “sparks” only led to industry success when combined with strong domestic rivalry and sophisticated home demand. These encouraged technological and production process innovation and were assisted by a positive but “indirect” (238) government role. The latter took the form of “improving demand conditions and stimulating factor creation” (238). For example, the US government’s world-leading investment in medical research after World War II helped create “early and strong demand for the most advanced health care equipment” (198). In Japan, government loan and lease programs for firms willing to innovate in industrial robots increased demand by lowering risk and familiarizing firms with robotics. As in Germany, both governments also helped with advanced factor creation by investing in universities and specialized graduates.

Further, early success was sustained by renewed innovation and upgrading, which kept the companies ahead of rivals. A common theme in encouraging innovation was selective factor disadvantage. For instance, in post-war Germany, a social state with strong unions meant high wage and benefit costs coupled with restrictions on working hours. As Porter stresses, these cost factor disadvantages “led German firms continually to rationalize production as well as to develop the highest-technology machines” (188), both to increase the productivity of costly labor and to reduce reliance on it. The same dynamic occurred in Italy and Japan. Labor costs coupled with rising energy prices created huge pressures to innovate. In addition, Germany and Japan had strong currencies, making goods seem relatively more expensive abroad, which made technological innovation more imperative.

The industries examined followed a similar trajectory, for similar reasons. They all had self-reinforcing factors of early internationalization and the emergence of geographically concentrated industry clusters. Strong domestic rivalry and demand led to early market saturation and incentives to penetrate foreign markets. This has made those firms, in turn, even stronger. With clusters, especially evident in Italy’s Sassuolo area ceramics, all elements of Porter’s model combined to show that “foreign firms must compete not with a single firm, or even a group of firms, but with an entire subculture” (225). This “organic system” is hard to replicate and therefore to rival—even though, as Porter notes, the consolidation of firms in the German printing and US patient monitoring industries is starting to erode advantage.

Porter looks at whether these factors and narratives track onto other, less tangible, industries. An interesting case is the service sector and why American, British, and Swiss firms enjoy success there. Just as in the manufacturing industries Porter examined, chance plays a role. UK and US firms enjoy an advantage in international services because English is so widely spoken in the world as a first and second language and because services require extensive communication with buyers. Likewise, British firms benefit from cultural ties with ex-empire countries like Canada and South Africa, while Switzerland benefits from its history of neutrality.

These chance factors have, like the previous examples, developed into sustained advantage due to better demand conditions. For example, the relatively informal character of the American social structure “make[s] services more amenable to systematization, standardization and branding” (259) than in countries where social interactions are more formal, like Japan and France. Their greater emphasis on ritual and etiquette means that services are expected to involve high levels of unhurried personal attention and continuity. This is incompatible with fast-paced, anonymous, and standardized service delivery in areas such as the hotel and restaurant industries—and with the transferability of services abroad. This has meant that Japan and many European countries have trailed Britain and the US in the increasingly important service sector.