National Competitive Advantage Theory Essay
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National Competitive Advantage Theory Essay
National Competitive Advantage Theory (1 of 5)
Linked to the concept of competitive advantage, Professor Michael E. Porter’s theory of national competitive advantage has made significant contributions to business strategy and competition.
Key concepts of Porter’s theory on effective global business management include:
- Employing strategies that differ from those of competitors.
- Achieving competitive advantage through innovation in domestic and international markets.
- Gaining competitive advantage by implementing strategies of trade and foreign investment.
- Sustaining competitive advantage by implementing continuous improvement cycles.
As a global manager, how can you achieve competitive advantage in global markets? The answer to this question lies in Porter’s Diamond of National Competitive Advantage. The Diamond represents the environment in which an organization operates, and it comprises four determinants that represent opportunities gaining competitive advantage. The four determinants are:
- Factor conditions
- Demand conditions
- Related and supporting industries
- Firm strategy, structure, and rivalry
Let’s explore each determinant in greater detail.
National Competitive Advantage Theory (2 of 5)
Factor conditions are specialized resources required for production — ones that would be difficult for other competitors to replicate. These factors could be basic (i.e. natural resources or climate), or advanced (skilled labor or technological know-how).
Notice here that disadvantages become advantages only under specific circumstances — this being a key concept of the Porter’s Diamond. Disadvantages may be turned into advantages if one or more of the remaining three determinants are favorable. For instance, countries wishing to innovate must have access to a suitable workforce, home-demand conditions, and active rivalry.
National Competitive Advantage Theory (3 of 5)
As a global business leader, it’s important that you understand how demand conditions form an integral part of Porter’s Diamond. Home demand can help you build competitive advantage when your industry is more dominant in domestic markets than in foreign ones. Demanding buyers will influence your organization’s ability to:
- Produce better quality products
- Be increasingly innovative
- Use technologically advanced products
Local consumers can also serve as a catalyst for industry trends. The presence or lack of consumer interest can provide a trigger for an organization and nation to change strategic goals and move into global markets.
National Competitive Advantage Theory (4 of 5)
Related and Supporting Industries
Home-based, related, and supporting industries that are internationally competitive create advantages for nations. Such industries are committed to innovative business practices.
Home-based competitiveness in related industries can provide benefits such as information flow and technical interchange, speeding up the rate of innovation and upgrading. A home-based related industry also increases the likelihood that companies will embrace new skills, and also provides a source of entrants who bring with them a novel approach to competition.
Consider Porter’s example of the Italian footwear cluster, as shown in the graphic below. Assuming that these industries were internationally competitive, the process of producing Italian footwear provides competitive advantage for the country — in this case, Italy. According to Porter, the interaction of these industries helps strengthen the competitive environment by sharing technology, knowledge, and techniques.
National Competitive Advantage Theory (5 of 5)
Firm Strategy, Structure, and Rivalry
The nature of competitive environments and domestic rivalry significantly influences the international competitiveness of organizations and nations.
Much of the success associated with international competitiveness is focused on rivals. Competitive advantage is manifested either in the form of lower costs than those of rivals, or in the ability to differentiate and command a premium price for products that exceeds the additional costs of differentiation.
Some competitive advantages arise as a result of differences in operational effectiveness, but the most sustainable advantages stem from occupying a unique competitive position. So whether you are a part of a domestic or a global company, you need to understand the structure of the industry, identify the sources of competitive advantage, and analyze your competitors.
If rivalry is such an important aspect of international competitiveness, what is the role of strategy in your business? Strategy is necessary when the industry mandates it. For example, if you belong to a domestic industry, you require only domestic strategies. However, if you are a global company, competition in one country is linked to your success in another country.
A major argument against Porter’s theory is that it’s based on a sample of companies that rely heavily on global manufacturing. This sector requires a strong home-base environment for marketing, economies of scale, and product design. You’ll therefore need to research resource-based companies to better judge the merits of this theory. In many cases, natural resource companies do not make major contributions to competitive advantage.
You may also notice that this theory does not work very well for small open economies such as Finland, Austria, New Zealand, and Ireland. Many argue that domestic demand conditions are not always a major determinant of competitive advantage for industries, and therefore, rivalry between domestic organizations in small economies may not have a significant impact.
Instruments of Trade Policy (1 of 2)
The following chart discusses commonly used instruments of trade policy:
Trade Policy Description Purpose Tariffs Government imposed tax on imports and exports.
Types of Tariffs
· Specific Tariff: Tax is calculated as a fixed per unit charge
· Ad Valorem Tariff: Tax is calculated as a percentage of total value of import.
Seeks to protect domestic manufacturers by increasing export costs for foreign manufacturers.
Means of generating government revenue
Click here to read the Wall Street Journal’s report on China’s tariff on U.S. chicken
Subsidies Government assistance in the form of tax breaks, grants, and loans Assists domestic organizations in gaining a competitive advantage
Click here to read about Biofuel subsidies
Import Quotas Restricts the quantity allowed for import.
Tariff Rate Quota: Tariffs are assessed at a lower rate for imports within the quota and assessed at a rate for those that exceed the quota.
Assists domestic organizations in gaining a competitive advantage
Instruments of Trade Policy (2 of 2)
Trade Policy Description Purpose Voluntary Export Restraints (VERs) VERs occur when an exporting country agrees to an export quota from the import country Limit number of imported goods
Export country agrees due to fear of higher tariffs
Click here to read the Jakarta Post’sarticle of Chinese voluntary export restraints
Local Content Requirements Policy requiring that a certain percentage of a good is domestically produced Assists developing countries with manufacturing and assists in protecting local jobs Antidumping Policies Policies used to limit the occurrence of exporting goods below fair market value Seeks to protect domestic manufacturers
International and Cross-Cultural Leadership (1 of 6)
Next, we’ll discuss international and cross-cultural leadership. Improving strategic leadership development is the key to strengthening an organization’s strategic competitive advantage.
Leadership is a complex multidimensional process, and several approaches to the study of leadership have been advanced in an effort to define this complex process, such as:
- Path-Goal Model (House ): According to this model the leader’s function is to motivate subordinates to perform, express satisfaction with jobs that are well done, and accept the leader.
- Contingency Model (Fiedler ): According to this model the leader’s style should match specific situations. Situations are characterized as leader-member relations or group atmosphere, task structure or the degree of clarity of tasks specified by the leader, and position power or the authority of the leader to reward or punish subordinates.
- Situational Leadership Model (Originally developed by Hersey & Blanchard [1967, 1988]): According to this model leaders need to acquire leadership styles appropriate to situations.
- Normative Model (Vroom & Yetton ): According to this model leaders use four decision-making styles: autocratic, consultative, group involvement, and delegative.
- Charismatic Model (House ): According to this model charismatic leaders are dominant, influential, self-confident, and moral.
- Transformational Model (Burns ; Bass & Avolio, ): According to this model leadership is transactional, where a leader exchanges knowledge with followers. Leadership can also be transformational, where a leader engages in behavior that “raises the level of motivation and morality in both the leader and the follower.”
- Team Model (Porter & Beyerlein ): According to this model effective leaders influence, monitor, and take actions on internal and external group or team issues to enhance team performance.
International and Cross-Cultural Leadership (2 of 6)
Management or Leadership?
How does leadership differ from management and why is it important in global organizations?
The definition of leadership given in the sidebar graphic implies that leadership, as a process, is an exchange that occurs between the leader and followers. It’s a two-way reciprocal interaction where leaders influence followers and followers influence leaders.
According to John P. Kotter, leadership differs from management. Each has associated activities, each complements the other, and both are necessary for an organization to be successful. So what is the difference? Kotter indicates key differences as follows:
- Management is a process of handling complexity: a result of the emergence of large organizations. In the absence of sound management, the organization becomes unruly and disordered. Companies manage complexity by planning and budgeting, in other words, by setting goals and objectives. Management achieves these goals and objectives by organizing responsibilities and staffing. Management ensures that the specified goals and objectives are achieved through effective control, problem solving, and monitoring.
- Leadership is a process of handling change: A result of the growing competitive environment in which global organizations operate. Leadership is concerned with setting a strategic direction, developing a vision, and formulating strategies to bring about the change required to achieve the vision. Leadership aligns people, creates coalitions, and ensures that everybody understands the vision. Leadership also motivates and inspires human capital in the organization. According to Kotter, this is done by “appealing to basic but often untapped human needs, values, and emotions.”
International and Cross-Cultural Leadership (3 of 6)
So, to become an effective leader of a global organization, you must be able to handle change successfully and provide strategic direction and vision for the organization. You need to be skilled in aligning people with changing requirements and in creating coalitions. You must also understand the needs, values, and emotions of organizational members.
Kotter’s definition of leadership is significant for global leaders because it’s focused on the people. It is commonly believed that cultural characteristics such as language, values, beliefs, religion, and social groups mandate the use of specific leadership approaches in various countries. This type of leadership is referred to as cross-cultural leadership.
Until the mid-1990s, leadership research in the United States focused on contingency theories, which attempted to explain leadership behaviors within the context of organizational circumstances and/or environments.
Since then much has been learned about leadership styles, the role of situational elements in predicting leadership behaviors, and the effectiveness of leadership behaviors. However most of this research has been focused on American culture and American organizations.
Cross-cultural leadership research in Western and Asian cultures reveals that situational leadership is applicable in other countries as well. In fact, research provides compelling evidence that culture is directly related to leadership behaviors.
International and Cross-Cultural Leadership (4 of 6)
Aligning Leadership Behaviors to Cultural Differences
Leadership behaviors need to be aligned to culture differences. A study on leadership behavior conducted by Dorfman, Hibino, Lee, Tate, and Bautista (1997) involved 1,598 managers and professionals from large multinational companies located in two Western countries, U.S. and Mexico, and three Asian countries: Japan, South Korea, and Taiwan.
The researchers chose these countries primarily because of diversity in cultural issues such as individualism/collectivism, avoidance of uncertainty, power distance, degree of industrialization, paternalism, and attitudes to work and authority.
The following leadership behaviors were measured in this study:
Directive: Clarification of performance levels and assignment of tasks
Supportive: Concern for the welfare of subordinates
Contingent Reward (CR): Degree of praise, positive feedback, and rewards
Contingent Punishment (CP): Degree of negative feedback on poor performance
Charisma: Instilling inspiration and confidence
Participation: Extent of inputs gathered from subordinates
International and Cross-Cultural Leadership (5 of 6)
International and Cross-Cultural Leadership (5 of 6)
Several interesting results emerged from this study. In all five cultures, three leadership behaviors were determined to have universal acceptance:
- Contingent reward
The leadership behavior of contingent punishment was determined to have positive effects only in the United States, but had negative effects in the other cultures.
The general findings of the research are summarized in this table:
International and Cross-Cultural Leadership (6 of 6)
Implications for Global Leaders
What are the implications of these findings for you as a global organizational leader?
Leadership is related not only to personal leadership behaviors but to follower characteristics as well. As a leader, you should be aware of your style in relation to your followers. This is of particular significance when applying leadership theory and leadership behaviors to situational differences in cross-cultural environments. It is also an important factor to consider while making assumptions about which leadership style will work for you in international business — both for individuals and groups.
Cultural differences also determine the definition and responsibilities of leadership. What may be considered acceptable leadership behavior in Asian countries is not necessarily true in Western countries. Even within Western countries, perceptions on leadership behaviors vary.
In the global business environment, your leadership should reflect your understanding of the cultural context.
Cultures differ in various dimensions when considered across countries. Leadership behaviors must adapt to cultural values, beliefs, religions, social groups, and perceptions of gender. It may not be appropriate for you as a leader to apply leadership strategies in a blanket fashion. Indeed, the result of such leadership is likely to be ineffective and unsuccessful.
Culture-Specific vs. Culture-Universal (1 of 2)
In the previous lecture, you learned that some leadership behaviors are perceived alike in all countries. For example, charisma and supportive leadership had a positive impact in all five cultures studied by Dorfman et al. Within the context of this study, these leadership behaviors can be considered universal.
We see two schools of thought concerning the applicability of leadership theories across cultures. One school argues that leadership theories are culture specific and can only be applied within the context or culture in which they originated. In support of this school of thought, the United States is often cited as an example where leadership theories apply only to Americans and not to other cultures.
The second school of thought asserts that some leadership theories are universally applicable. Results of culture-universal studies support the presence of a few common leader constructs and the acceptance of those behaviors in various cultures.
As a global manager, you should bear in mind that cultural perceptions about effective leadership vary. Cultures consisting of individuals with different profiles are likely to accept different leadership behaviors in their societies.
One type of behavior shown to have universal application is that of transformational/charismatic leadership. It involves broadening and elevating the interests of followers, generating awareness and acceptance among followers for the purposes and mission of the group, and motivating followers to go beyond self-interest for the good of the group and/or the organization.
According to Bass (1997), charismatic leaders are appreciated in many countries. Similarly, there is evidence that transformational leadership attributes are preferred in many countries such as United States, Japan, Canada, New Zealand, Taiwan, Netherlands, and Austria.
Leadership and Organizational Effectiveness
How can you be a successful leader in a global organization?
Current thought relates effective executive leadership attributes with effective organizations. Successful leaders align performance with vision — they encourage rather than judge.
As an effective leader, you’ll need to be able to suggest new possibilities and identify common causes or pursuits. Establish yourself as a role model, empathetic listener, and creator of trust. These leadership attributes are culture-universal leadership behaviors and are essential for leaders in global organizations.
In this module, we discussed concepts related to international trade theory and the primary instruments used to control imports and promote exports. In addition, we learned why governments intervene in international trade.
We examined the national competitive advantage theory and the four determinants that enable organizations to gain competitive advantage in global markets and discussed briefly the relationship between organizational effectiveness and leadership behaviors.
We explored two schools of thought on leadership theories, culture-specific and culture-universal. We looked at various leadership models, differences between management and leadership, and the relationship between culture and leadership behaviors.
In Module 3, we will discuss the drivers and components of regional economic integrations and look at the foreign exchange market, the relationship between investor psychology and exchange rate movements, and the global monetary system. We will also examine global business strategy by assessing the external and internal business environments. We’ll also examine importing, exporting, and countertrade.
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