Books by Michael E Porter Competitive Advantage: Creating and Sustaining Superior Performance (1985) Cases in Competitive Strategy (1982) Competitive Strategy: Techniques for Analyzing Industries and Competitors (1980) Competition in the Open Economy (with R.E Caves and A.M Spence) (1980) Interbrand Choice, Strategy and Bilateral Market Power (1976) THE FREE PRESS A Division of Simon & Schuster Inc 1230 Avenue of the Americas New York, NY 10020 www.SimonandSchuster.com Copyright © 1990 by Michael E Porter Introduction copyright © 1998 by Michael E Porter All rights reserved, including the right of reproduction in whole or in part in any form First Free Press Edition 1990 THE FREE PRESS and colophon are trademarks of Simon & Schuster Inc Manufactured in the United States of America 20 19 18 17 16 Library of Congress Cataloging-in-Publication Data Porter, Michael E The competitive advantage of nations: with a new introduction/Michael E Porter p cm Originally published: New York: Free Press, cl990 Includes bibliographical references and index Industrial policy Competition, International International business enterprises Strategic planning Economic development Industrial management I Title HD3611.P654 1998 338.9—dc21 98-9584 CIP ISBN 0-684-84147-9 eISBN-13: 978-1-45165-149-2 For Deborah Contents Introduction Preface 1: The Need for a New Paradigm Conflicting Explanations Asking the Right Question Classical Rationales for Industry Success The Need for a New Paradigm Toward a New Theory of National Competitive Advantage The Study A Broader Concept of Competitive Advantage PART I FOUNDATIONS 2: The Competitive Advantage of Firms in Global Industries Competitive Strategy Competing Internationally The Role of National Circumstances in Competitive Success 3: Determinants of National Competitive Advantage Determinants of National Advantage Factor Conditions Demand Conditions Related and Supporting Industries Firm Strategy, Structure, and Rivalry The Role of Chance The Role of Government The Determinants in Perspective 4: The Dynamics of National Advantage Relationships Among the Determinants The Determinants as a System Clustering of Competitive Industries The Role of Geographic Concentration The Genesis and Evolution of a Competitive Industry The Loss of National Advantage The Diamond in Perspective PART II INDUSTRIES 5: Four Studies in National Competitive Advantage The German Printing Press Industry The American Patient Monitoring Equipment Industry The Italian Ceramic Tile Industry The Japanese Robotics Industry 6: National Competitive Advantage in Services The Growing Role of Services in National Economies International Competition in Services The Relationship Between Services and Manufacturing National Competitive Advantage in Services Case Studies in the Development of Competitive Service Industries PART III NATIONS 7: Patterns of National Competitive Advantage: The Early Postwar Winners American Postwar Dominance Stable Switzerland Sweden’s Choices Renewing German Dynamism 8: Emerging Nations in the 1970s and 1980s The Rise of Japan Surging Italy Emerging Korea 9: Shifting National Advantage The Slide of Britain Crosscurrents in America Postwar Development in Perspective 10: The Competitive Development of National Economies Economic Development Stages of Competitive Development The Stages and the Postwar Economies of Nations Postwar Economic Progress in Perspective PART IV IMPLICATIONS 11: Company Strategy Competitive Advantage in International Competition The Context for Competitive Advantage Improving the National Competitive Environment Where and How to Compete Tapping Selective Advantages in Other Nations Locating the Home Base Measurement and control (liquid) industry, 140 Media industries, 104 United States, 104, 120, 266; See also Advertising industry Medical imaging industry, 46, 167–168 Medical products and equipment industries, 126, 149, 303, 320 Mennen-Greatbatch (Mennen Medical), 200, 203 Merck, 155 Mergenthaler, O., 191 Metal fabrication industry, 53, 149 Michael Huber Farbenfabriken, 191 Microwave equipment industry, 88 Miller-Johannisberg, 184 Minicomputer industry, 120, 123, 155 Mining equipment industry, 88, 105, 142, 152, 165, 331 Ministry of International Trade and Industry (MITI), 235, 414–416, 665 Minolta, 407 Missoni, 221 Mitsubishi, 192, 232 Mitsubishi Bank, 153 Mitsui Engineering and Shipbuilding, 233 M&M/Mars, 37, 48, 299 Modena, 212 Møller, Kim, 797n7.2 Monopolkommission, 800n7.60 Monotype system, 191 Montblanc, 62, 608 Morita, Akio, 130, 584 Motion picture industry, 26–27, 65, 139 Motorcycle industry, 64, 120 Multidomestic industry See Industry Multinational corporation, 17–18 Multinational firm, theory of, 17–18 Multinational firms, 2, 53, 54, 62 as alternative to indigenous firms, 678–680 formation in developing countries of, 677–678; See also Industry Multi-unit service firms See Service industries Musical instrument industry, 28, 120 National attributes: for competitive advantage, 18–20, 67–68, 114–115, 146 as determinants of nation’s advantage, 71–73 factor endowment as, 74–76; See also Home base National Science Foundation, 797n7.6, 800n7.54, 805n9.8, 809n12.8 Nation as home base, 19–20 Nations: differences in competitive advantage of, 69–71 studied in text: Table 1–1; 22–23 Neary, J Peter, 774n1.l0 NEC Corporation, 57, 63, 153, 407, 409, 596, 608 Nellcor, 207 Nelson, Richard R., 775n1.l8, 780–781n2.13, 791n4.33, 807n10.7 Nestlé, 48, 307, 595 New Balance, 601 Newly industrializing countries (NICs), 22–23, 685 Nihon Kohden, 205, 208, 232 Nike, 601 Nikko, 264 Nippon Telephone and Telegraph (NTT), 645–646 Nissan, 228 Nomisma, S.P.A., 794nn5.70, 71 Nomura, 264 Nordisk Insulin, 81 Northern Telecom, 63 Novo Industri, 67, 81 Nukazawa, Kazuo, 796n6.21 NUMMI, 66 OECD See Organization for Economic Cooperation and Development (OECD) OEM See Original equipment manufacturer (OEM) Ohlin, Bertil, 11, 776n1.23 Ohmae, Kenichi, 808n11.8 Oil field equipment industry, 90, 303 Oki, 407 Olivetti, 233 Olson, Kenneth, 130 Olson, Mancur, 788n3.66, 791n4.28, 806n10.6 Onida, Fabrizio, 803n8.34 Open economy, 121 Optical instruments industry, 60, 98, 140, 168, 601 Organization for Economic Cooperation and Development (OECD), 775n1 14, 805nn9.10, 11 Original equipment manufacturer (OEM), 471, 582 as alternative for developing countries, 680 OS Publications, 812n13.11 O’Sullivan, Patrick, 790–791n4.23 Otis Elevator, 269, 284 Ouchi, William, 773n1.3, 809n12.10 Packaged goods industry, 57, 64, 92, 124, 149, 288 Packaging machine industry, 28, 39, 123, 195 Pade, Henrik, 797n7.2 Panalpina, 326 Paper and pulp industry, 28, 87, 149, 190–191, 194–195, 331 Paper-making machinery, 182, 195 Park, Yung Chul, 805n9.17 Pascale, Richard, 773n1.3 Patek Philippe, 322, 326 Patient monitoring equipment industry: Germany, 204 Japan, 204–205, 208, 210 United States, 26, 195–210 Pavitt, Keith, 777n1.39, 805n9.9 Pencil industry, 119, 137 Pen industry, 62 Pennzoil, 61 Pepsi Cola, 137 Perception, 587–589 Persil, 48 Pharamaceutical industry, 36, 57, 66, 101, 117, 120, 149, 155, 198, 205 Switzerland, 27, 101, 117, 120, 155, 205, 320, 324, 326 United States, 155, 198, 205, 296, 303 Philips, 54, 204, 614 Phillips, 271 Phonak, 326 Piano industry, 28, 651–652 Piemme, 221, 222 Piore, Michael J., 790n4.20, 803n8.31 Planeta, 186 Plastic industry, 303 Plastic injection molding equipment, 33 Plastic processing machinery industry, 58, 104 Polyethylene, low-density, 33 Porcelonosa, 611 Port and terminal services industry, 240 POSCO (Pohang Steel), 473–474 Positioning within an industry, 34, 37–40; See also Competitive scope Diversification Industry structure Power tool industry, 41 PPG Industries, 206 Prahalad, C K., 781n2.22 Precious metal recycling industry, 101, 103 Prefabricated housing industry, 84 Prestowitz, Clyde V., 778n1.51 Price Waterhouse, 260 Prima Industrie, 236 Prime, 18, 119 Printing industry, 81, 149, 189, 240 Printing ink industry, 191, 194–195 Printing machinery, 34 Printing press industry, 28, 180–181 flexographic presses, 193, 195 in Germany, 65, 180–195 in Japan, 192 in Switzerland, 191–192 in United Kingdom, 192 in United States, 189, 192 Private industry, Italy, 82 Privatization, 247, 697 Procter & Gamble, 47, 608 Prodi, Romano, 794n5.56 Product cycle trade theory, 17 Productivity: for competitive advantage, 37–38 as standard of international competitiveness, 6–11 Product liability, 649 Programming services, 253 Protection See Trade protection Pulsar, 48 Pump industry, 140 Quaker State, 61 Ralph Lauren, 601 Ravenscraft, David J., 787n3.52, 788n3.64 RCA, 46 Recognition of change, 47–48 Reese’s, 299 Regulation in Italy, 697 Regulation, government: effect on competitive advantage of, 47 effect on demand conditions of, 647–649 effect on industry dispersing activity of, 56 influence on industry location, 58 Regulation of competition, 664; See also Antitrust policy Reinsurance services, 249 Reis, 236 Related and supporting industries: as determinant in national advantage, 71, 100–107 development of, 138–140 effect of government policy on, 654–657 formation in developing countries of, 677–678 function and importance of, 105–107 influence on factor creation of, 135 influence on home demand of, 138 in international service industries, 263–264 Research and development: in Germany, 370–371 government role in, 632–637 in Italy, 438 in Japan, 398, 409 in Korea, 467, 474–475 requirement in Italy for, 692–694 science research and application, 630–637 in United Kingdom, 498 in United States, 520, 521; See also Technology Research services, 257 Resource mobility, 116–117 Resource-rich nations, 4, 546–548, 562–565 Retailing, 53 Rexton, 326 Ricardian trade theory, 17, 173 Ricardo, David, 11, 173 Ricoh, 407, 577 Ricola, 106 Riddle, Dorothy I., 796nn6.9, 14 Risk capital market, 111, 112, 123, 327 in Germany, 377 in Sweden, 351 Rivalry, domestic: benefits of, 143–144 in ceramic tile industry, 216, 224 decline in, 169–170 as determinant of nation’s competitive advantage, 107, 117–122 for development of competitive advantage, 560–562, 597–598 effect of government policy on, 662–669 effect on domestic demand of, 136–137 effect on engineering and construction firms of, 270 influence of geographic concentration on, 154–157 influence on factor creation of, 134–135 influence on related and supporting industries of, 138–140 influences on: Fig 4–4, 140–143 in Japan, 118, 121, 234–238, 398–399, 402, 411–413 in Korea, 689–690 in printing press industry of, 183–186, 194 role in formation of industry of, 160 in service industries, 264–265; See also Competition Rivalry, foreign, 119 Robotics industry, 28, 66, 141, 167 in Japan, 141, 225–238 in United States, 227, 232, 233, 235–236, 237–238 Roland, 186 Rolex, 322, 326 Romer, Paul M., 778n1.45 Roncaccioli, Angela, 794n5.66 Rosenberg, Nathan, 784n3.23, 789n4.12, 791n4.33 Rostow, Walt W., 806n10.2, 807n10.8 Rothbart, Erwin, 784n3.23 Rubber processing equipment, 34 Ryobi, 192 Saab-Scania, 56–57, 64, 92, 117, 236, 266, 331, 350 Saatchi & Saatchi, 239 Sabel, Charles F., 790n4.20, 803n8.31 Sadamoto, Kuni, 795nn5.74, 75, 76, 80 Saloner, Garth, 792n4.37 Sampson, Gary P., 796n6.13 Samsung, 64 Samuelson, Paul A., 775n1.22 Sanborn, 196–197, 198–199, 203 Sandoz, 47, 117, 307, 326 Sandvik, 105, 142, 345, 348, 579 Sanyo, 64 Sapir, André, 795n6.1, 796nn6.9, 13 Sauter, 326 Scheiner, Martin, 197–198 Scherer, Frederick, 787nn3.52, 57, 788n3.64 Schering-Plough, 296 Schindler, 307 Schmookler, Jacob, 786n3.39, 791n4.33 Schott, 60 Schott, Jeffrey J., 795n6.1 Schumpeter, Joseph, 20, 70, 781n2.17, 787–788n3.59, 807n11.2 Scott, Bruce R., 783n3.17, 785n3.37 Security service industry, 240, 261 Seiko, 48, 235 Semiconductor industry, 46, 53, 57, 66, 97, 100, 149, 167, 209 Japan, 27, 57, 97, 138, 169 United States, 97, 107, 169, 288 Servan-Schreiber, Jean-Jacques, 773n1.3 Service industries, 239–241 firm strategy and structure of, 264–265 international competition in, 248, 258–263 link to manufacturing industries, 252–254, 270 multi-unit, 245–247, 250–252, 300 patterns of national leadership in: Fig 6–2; 254–256 role of factor conditions in, 256–258 Servicemaster, 239 Seven Up, 137 Sewing machine industry, 57, 145–146 Sezzi, Graziano, 794n5.48 Sharp, 64, 407 Sheffield, 171 Shell, 61 Sheraton, 61 Shinohara, Miyohei, 802n8.27, 811n1.43 Shipbuilding industry, 39–40, 51–52, 94, 124, 172, 266, 580 Shipping (specialty) industry, 249, 266 Ship repair industry, 240, 256 Shoe industry See Footwear industry Siegwerk Farbenfabrik Keller, 191, 204 Siemens, 119, 204, 206, 233, 326 Simonson and Weel, 204 Singapore, 75–76, 240, 256, 257, 566, 608, 678 Singer, 284 Sirilli, Giorgio, 803n8.44 SITI, 217 SKF, 57, 58, 59, 142, 331, 345 Ski boot industry, 28, 142, 159, 162–163 in Italy: Fig 4–8, 163 Smith, Adam, 11, 789n4.4 Smith, Alasdair, 776n1.26 SmithKline, 155 Snape, Richard H., 796n6.13 Social norms and values, 109, 129 Soft drink industry, 65, 137 Software industry, 26, 28, 78, 100, 105, 117, 135, 237, 253, 263, 303 Solow, Robert, 778n1.47 Sưlvell, Ưrjan, 796n6.11, 798n7.23, 799n7.36 Sony, 38, 44, 409, 579 Sotheby’s, 271, 272 Sources of advantage: in sustaining competitive advantage, 49–51 upgrading for international competitive advantage, 581–583 Sources of supplies See Supplier industries Spacelabs, 202, 203, 205, 206 Spence, A Michael, 792n4.37 Sporting goods industry, 57 Sprint, 608 Sprüngli, 37 Squibb, 155, 205, 206 Staedtler, 119 Staefa, 326 State-owned firms, 110–112 in Germany, 377 in Italy, 82, 694, 696–697, 447, 448 in Korea, 472, 473–474 in United Kingdom, 501 Statham Instrument Company, 197 Statistisches Bundesamt, 800n7.53 Stäubli, 320 Steel industry, 82, 87, 100, 142, 159, 170, 331 Stigler, George J., 789n4.5 Stollar, Andrew J., 795n6.5 Subsidiaries, firm: role in development of global strategy, 606 Subsidies, government: effect of government policy on, 639–640 Sulzer, Robert, 584 Sumitomo, 192, 153 Supplier industries: advantages of domestic, 103, 142 bargaining power of, 35 effect of loss of competitive advantage on, 172–173 foreign, 104 Surveying equipment industry, 58, 322 Suzuki, 596 Sveikauskas, Leo, 776n1.24 Swan-Ganz catheter, 201 Swatch, 171 Sweden: clusters of industries in: Figs 7–7, 7–8, B–3; 132, 149, 152, 154, 333–342, 348–349, 352–353, 754 competitive advantage of, 350 domestic rivalry in, 350–351 goals for future of, 699–704 government policy in, 347, 351–352 postwar development of, 569 Swiss Bank Corporation, 326 Switzerland: clusters of industries in: Figs 7–4, 7–5, B-2; 154, 311–316, 324, 750 demand conditions, 321–324 domestic rivalry, 326 goals for future of, 712–715 government policy in, 327–328 postwar development of, 570–571 service industries in, 254–258 Synthetic fiber industry: Japan: Fig 3–4; 105–106 Switzerland, 324 Synthetic rubber industry, 296 Syringe industry, 26, 63 Syrquin, Moises, 795n6.4 Takeuchi, Hirotaka, 800n8.1 Targeting by government, 673–675 Technology: choice of foreign or domestic, 609–610 effect of changed or new, 45–46, 167–168 government role in research and application, 630–637 Tedlow, Richard, 781n2.16 Tektronix, 296 Telecommunications industry, 57, 149 Television production industry, 139 Television set industry, 53, 62, 99–100, 107, 140 Japan, 62, 100, 107, 580 Korea, 140, 580 United States, 100, 107 Temporary help industry, 240, 241, 249, 252 Tenti, Paolo, 793n5.37, 796n6.19, 802n8.28 Testing equipment industry, 167, 296 Texas Instruments, 48 Textile industry, 154–155, 165, 171, 317, 322 Italy, 27, 116 Switzerland, 317, 322 Thomas, Lacy G., 787n3.57 Thompson, G Rodney, 795n6.5 Thread industry, 165 Threat of new entrants and substitutes, 35 Threat of substitute products: as force in competitive strategy, 35 Tile equipment industry, 213 Tile press industry, 212, 213 Timberland, 601 Timex, 45, 48, 296 Tobacco industry, 65, 172 Tobler/Jacobs, 37, 105 Toledano, Joelle, 789n4.12 Topsiders, 601 Toshiba, 44, 232, 407 Toshiba Precision Machinery, 228 Toshiba Seiki, 232 Tourism, 256 Toyota, 62, 66, 232 Trade, international: factor comparative advantage in, 11–13 service industries classification as, 249–250 Trade associations: for development of global strategy, 62–63 government policy toward, 664 role for factor creation, 594 Trade policy: government regulation of, 669–670; See also Trade protection Trade protection, 665–667 Trade-related services, 253 Switzerland, 256 Trade theories, 11–21, 74; See also Comparative advantage Factors of production Product cycle trade theory Trading industry, 57, 100, 107, 240, 254, 256 Training services, 240, 253 Trallfa, 236 Trane, 58, 253 Transportation industry, 149, 333 Transportation services, 253 Truck industry, 33, 46, 56–57, 62, 64, 92, 117, 159, 165, 331, 346 Tunnelling equipment and services industry, 88, 259, 322 Typesetting systems, 191, 195 Typewriter industry, 145–146 Tyson, Laura, 776n1.25, 783n3.17, 811nn12.35, 38 Uekusa, Masu, 802n8.22 Unilever, 47 Unimation, 227–228, 236 Union Bank (Switzerland), 326 Unisys, 155 United Kingdom: clusters of industries in: Figs 9–1, 9–2, B–8, 154, 158, 485–496, 501–502, 769 demand conditions, 499–501 domestic rivalry in, 503–504 goals for future of, 719–723 government policy in, 504–507 postwar development of, 572–573 related and supporting industries, 501–502 service industries in, 254–256 United Nations, 793n5.38 United Nations Economic Commission for Europe, 795n5.81 United States: clusters of industries in: Figs 7–2, 7–3, 9–4, 9–5, B–1, B–9; 154, 158, 288–295, 302–303, 50&519, 747, 772 demand conditions, 299–301, 522–526 goals for future of, 723–733 government policy in, 304–305, 524–525, 531–532 mass distribution system in, 300 postwar development of, 570–572 related and supporting industries, 526–527 service industries of, 254–56 Upgrading function: in developing nations, 676 of domestic rivalry, 119–120 of nation’s industry, 277–278, 282 of related and supporting firms, 103 Upgrading of economy, Korea, 686–687 U.S Department of Commerce, 795nn5.83, 84 Utili, Gabriella, 794nn5.55, 58 Utterback, James M., 789n4.12, 791n4.33 Vacuum tube industry, 46 Vahlne, Jan-Erik, 799n7.31, 810n12.27 Valentino, 221 Value chain: as firm’s source of competitive advantage, 40–44 service activities in: Fig 6–1, 241–242; See also Linkages Value system, 42–44 management for international advantage, 579–580; See also Linkages Value chain van der Linde, Claas, 799n7.40 VCRs, 27, 44, 140 Verband der Automobilindustrie, 800n7.57 Vernon, Raymond, 17, 777n1.37, 784nn3.23, 27, 786n3.40, 797n7.9 Versace, 221 Vertical organization: of clusters of industries, 73, 164 industry pattern in global activity, 61–62 in Japanese robotics industry, 233 Vickers, John S., 812n13.12 Villumsen, Gert, 784n3.27 Visa, 92, 261 Vogel, Ezra F., 778n1.51, 801n8.5 Volkswagen, 236 Volvo, 45, 56–57, 64, 92, 117, 236, 266, 331, 347, 350 von Hippel, Eric, 791n4.33 Wal-Mart, 246 Waste management industry, 26 Watch industry: Japan, 48, 171 Switzerland, 45, 137, 169, 171, 324, 326 United States, 45, 48 Water pollution control equipment industry, 92 Watson, Thomas J., Jr., 130, 584 Weaving machinery, 34 Weaving machines (water jet) industry, 105 Weber, Alfred, 790n4.23 Weber, Max, 792n4.35 Weiner, Martin J., 805n9.6 Wellcome, 122 Wells, Louis T., Jr., 777n1.36, 785n3.37 Westinghouse, 253 Westmark, 206 Whiskey industry, 65, 172 Whitman’s, 299 Wholesaling, 53 Wifag (Maschinenfabrik Wifag AG), 191, 194, 607–608 Wig industry, 125 Wild, Henry, 584 Williamson, Oliver E., 790n4.16, 807n11.9 Windmill industry, 92, 155, 652 Windmöller & Hölscher, 193 Wine industry, 134, 137 Winter, Sidney G., 791n4.33 Wolf, Hans-Jürgen, 792nn5.7, 8, 10, 793nn5.13, 17, 21, 24 Writing instruments industry, 90–91; See also Pen industry Pencil industry X-ray industry, 46 Yamaha, 235, 579, 596, 652 Yamaichi, 264 Yarrow, George K., 812n13.12 Yaskawa Electric Manufacturing Company, 232, 235 Yonemoto, Kanji, 795n5.79 York, 253 Yoshino, Michael Y., 773n1.3 Young, Stephen, 777n1.40 Zanders AG, 190 Zeiss, 60, 98, 369 Zikopoulos, Marianthi, 801n8.6, 803n8.42 Zimmerli, 322 Zysman, John, 776n1.25, 783n3.17, 811n12.35 About the Author MICHAEL E PORTER, one of the world’s leading authorities on competitive strategy and international competitiveness, is the C Roland Christensen Professor of Business Administration at the Harvard Business School In 1983, Professor Porter was appointed to President Reagan’s Commission on Industrial Competitiveness, the initiative that triggered the competitiveness debate in America He serves as an advisor to heads of state, governors, mayors, and CEOs throughout the world The recipient of the Wells Prize in Economics, the Adam Smith Award, three McKinsey Awards, and honorary doctorates from the Stockholm School of Economics and six other universities, Porter is the author of fourteen books, among them Competitive Strategy, Competitive Advantage, and Cases in Competitive Strategy, all published by The Free Press He lives in Brookline, Massachusetts ... are often under the collective control of citizens Productivity and competitive advantage in an economy require specialization In The Competitive Advantage of Nations, I introduced the concept of clusters,... level of theory and scholarship, productivity is now an accepted definition of competitiveness, and the role of location is becoming more and more recognized The Competitive Advantage of Nations. .. theory of competitiveness into practice in developing nations. 22 This is a research area of great importance HITTING A RESPONSIVE CHORD This heartening attention that The Competitive Advantage of Nations