B usiness strategy II 3 ØM45 Porter (1998) chapter 1-4

1. Business strategy II3ØM45Porter (1998) chapter 1-4 The diamond model Lectures given by Harald Romstad 3 18.nov. 05 Harald Romstad ØSIR

2. Porter – the diamond model Competition firm strategy, structure and rivalry Factor conditions Demand conditions Related and supporting industries • Diamond model, Porter (1990,1998) Governments Chance • Knowledge is a production factor Harald Romstad ØSIR

3. Porter the models • Competition structure • Competition and cooperation • Productivity, quality, innovation, • Management, organizing • The improvement circle • Growth pattern • Product diversion • Demanding customers • International customers competition Factor cost and knowledge Demanding/ requiring customers • Nature resources • Specializing and skilled workers • Improving Knowledge • Skilled risk capital creative cluster • Competitive suppliers • Strong R&D environment • Specialized service environment • Dynamic industry environment Harald Romstad ØSIR

4. The diamond model • The national “diamond” • The national environment for industry development • The “diamond” is mutually reinforcing the system (the cluster) • Is the motive power • The regional “diamond” • In small countries it might be difficult to talk about a regional diamond • The global “diamond” • Trade inside global companies stands for a relative big part of each country’s import and export Harald Romstad ØSIR

5. The diamond model – factor conditions • Standard theories of trade and business development rests on factor conditions • Factor proportions • Human resources (Human capital, Romer) • Skills, ethic, human capital, R&D, … • Physical resources • Water, arable land, minerals, oil, fish, forest, …. • Climatic conditions • Locations (suppliers, market, R&D, …. • Time zone (London!) • Knowledge resources (Human capital, Romer) • Stock of scientific, engineers, market knowledge, R&D, … • Capital resources (heterogeneous) • Money, risk capital, venture capital, capital cost, “skilled” capital • Infrastructure • Transport, communication, payment transfer, health care • The mix of factors => factor proportions Harald Romstad ØSIR

6. The diamond model – factor conditions • The competitive advantage from factors depend on: • Effective deployment • Effective channels of distribution • Effective exploitation • Price • Globalizing of world trade reduce the advantages from factors continuous, but • Wages remain • Skills remain • Logistics remain Harald Romstad ØSIR

7. The diamond model – factor conditions Investment-driven Innovation-driven Wealth-driven • The hierarchy of factors • Basic factors • Natural resources, climate, location, …. • Advanced factors • Computer science, engineering science, education • The most important to achieve competitive advantage • Most advanced factors are build upon basic factors Factor-driven As we move along the development faces it is import-ant to invest in related science and human capital. Harald Romstad ØSIR

8. The diamond model – factor conditions • The hierarchy of factors • Generalized factors • Factors that many industries can exploit on home base • Specialized factors • More decisive and sustainable bases for competitive advantage • Tend to be nullified through • Sourced through global network • Circumvented through international companies • Bought up • To day specialized factor tend to be to morrow generalized factor • The point: both specialized and advanced • Increase science and R&D • Continuous improvement and factor creation Harald Romstad ØSIR

9. The diamond model – factor conditions ASF • Created factors are often • Advanced • Specialized • ASF the most important to competitive advantage • Government effort to create ASF • Often fails because they: • Do not know the resent facts • They have not enough knowledge and “hands on” • Can be a success if they work closely with the plant • Different strategies: • Norway – government and some industry + R&D • Italy – inside family • Finland – coalition government + industry + R&D • Japan - industry Harald Romstad ØSIR

10. The diamond model – factor conditions • Selective factor disadvantages • Competitive advantage is often a result of factor abundance (overflow) • But it is shown in many occasions that factor disadvantage has been turned into a created advanced (and often specialized) factor advantage • You are short of xxx, what do you do? • You are creative and invent • New technology, logistic, organisation, outsourcing, factors proportions Harald Romstad ØSIR

11. The diamond model – factor conditions Table: Labour Productivity in Manufacturing. Measured in value added per hour. United States = 100 Source: OECD , As quoted in The Economist, Who’s producing now? 2/22/1997.. Harald Romstad ØSIR

12. The diamond model – home demand conditions • Economic of scale (locations) • Static efficiencies • But more important is the dynamic of a huge home demand • Quality • Price • Give the basic volume • But if you are going for export, you should focus on quality on home market, unless you are price leading Harald Romstad ØSIR

13. The diamond model – home demand conditions • Competitive advantages through • The mix and character of home buyer needs • In a wealth-driven economy home buyers give the industry a clearer and earlier picture of the market development in foreign countries • And home industry has an advantage on home market on the foreign industry • Because: attention to nearby needs • Firms are better able to perceive, understand and act on buyer needs in home market • This requires linkages between firm and the buyers • This might be one of the reasons why companies establish subsidiary in foreign country Harald Romstad ØSIR

14. The diamond model – home demand conditions • Size of segments • A large industry on home market get much attention • They are a big marked for suppliers • Through their size they are demanding customers • This will continuous improve the suppliers • Sophisticated and demanding buyers • Anticipatory buyer needs • Demand size and pattern of growth • Size of home demand • Number of independent buyers • Rate of growth of home demand • Early home demand • Early saturation (no: metning) Harald Romstad ØSIR

15. Product cycle - saturation Wealth: W=GNP/P Relative development Accumulated house building as a function of wealth (w) and will (Wi) Unbiased need in market is a function of wealth measured as W=GNP/P, P=population Time Norge 1998 1950 The repetitive society - accumulating sustainable goods Harald Romstad ØSIR

16. Produktets livssyklus - metning Relative devlopment Demand (marked) a function of population and GP Sum av house bying a function of welfare (We) and will (Wi) The industries production capacity Time Norge 1998 1950 Goods with long writing off, ea house Writing of moving Marked =f(B,V) Harald Romstad ØSIR

17. Product cycle - saturation • Mans needs are insatiable, but the ability to realize the needs are limited • I do not have the needs for more than one house to stay (live) • For many services and goods there are a limit to QQ (determined by our wealth/relative wealth and unbiased needs) • Permanent growth industries = industries where our needs are continuous increasing as a function of wealth (wealth driven economies) • It is important to differ between sustainable and not sustainable goods Harald Romstad ØSIR

18. The diamond model – home demand conditions • Internationalization • The composition of home demand is the root of national advantage • Self satisfaction is an “enemy” to competitiveness • To locate a cluster start to find: • “The relative biggest” industry on home market or in a region • A genuine home market • Building road tunnels in Norway and Switzerland • Transformers in Norway and Sweden • Drilling equipment (land US, sea Norway) Harald Romstad ØSIR

19. The diamond model – related and supporting industries Forestry R&D Wood industry projecting (JP) Wood industry R&D Wood industry builders (Valmet) Forestry Wood industry Advanced an specialized suppliers Saw mills • The presence of competitive suppliers and related (common) industries is most significant to one industry’s competitiveness • The cluster of common industry and suppliers • Finland’s wood processing industry cluster, a success Government policy Harald Romstad ØSIR

20. The diamond model – related and supporting industries • Competitive advantage in supplier industry • Not so important that they are global competitive • The linkages, the ongoing coordination, information, the common goal to be best have many common elements • This lead to a continuous process of innovation and upgrading • They can found common R&D, which they could not effort alone • The nation need not possess national advantage in all supplier industries in order to gain competitive advantage in an industry Harald Romstad ØSIR

21. The diamond model – related and supporting industries • Competitive advantage in related industry • Related industry are those in which firms can coordinate or share activities in the value chain when competing. • The linkages, the ongoing coordination, information, the common goal to be best have many common elements • This led to a continuous process of innovation and upgrading • They can found common R&D, which they could not effort alone • Success in one industry often pull through success in related industry do to complementary products or services Harald Romstad ØSIR

22. The diamond model – firm strategy, structure and rivalry • The goals, strategies, managements, ways of organizing firms vary widely among nations • This is a proof of that there are many ways to success • There is no ONE managerial system that is universally appropriate • Nations tend to succeed globally in industries where the management practices and modes of organization are best adapted to the national environment • But there is no ONE managerial system that is best in Norway Harald Romstad ØSIR

23. The diamond model – firm strategy, structure and rivalry • Goals • Nations will succeed in industries where goals and motivations are aligned with sources of competitive advantage • Nations succeed in industries where there is unusual commitment and effort • But the fall and failures will also be more visible and discussed • Nations tend to succeed globally in industries where the management practices and modes of organization are best adapted to the national environment Harald Romstad ØSIR

24. The diamond model – firm strategy, structure and rivalry • Shareholders and their goals • Germany – long and sustainable investments • US – risk capital, fast payback, annual profitability • lead to harvesting of mature industry • Lead to many new enterprises in new business segments • Switzerland and Singapore, failure is viewed as personally catastrophic • Norway? Harald Romstad ØSIR

25. The diamond model – firm strategy, structure and rivalry • Domestic rivalry • Is not wasteful • Do gain competitiveness • Nations with leading world positions often have a number of strong (local) rivals • Competition improve competitiveness • Domestic rivalry led to (emphasize) innovations that improve and upgrade competitiveness • On the other hand, “single industries” in one country often show • Lack of competitiveness • Low grade of innovations • Negative margin • And they are often subsidized and protected of government • Death of region’s “cornerstone” industry Harald Romstad ØSIR

26. The diamond model – the role of government • The government role is to influence the four main dimensions in the “diamond” • They are not be participating in concrete details or project alone, but only with the industry • They should effort: • Education • R&D • Science • Stimulate the competition • They should not • Subsidizing • Protecting • They should not make alternative decisions but decisions that emphasize directions, values and more general goals Harald Romstad ØSIR