International Business Management/Year 3 Victoria Gehrke ST10001289 How does national competitive advantage theory help us identify which

of the Triads have the best economic future? Competitiveness has become one of the central preoccupations of

governments and firms in every country. Increasing global trade has lead to a stronger need to differ significantly from other companies, to improve and innovate, to be bigger, better and faster to be competitive. Todays world is far more open and transparent than it has ever been before. Countries and companies are competing for the same resources and markets worldwide and since not only political but also many economic barriers are falling, competitiveness is becoming more and more important, as only the strongest ones will survive in the fast moving world economy. There have been many different approaches to give an all-encompassing definition of the word competitiveness and National Competitive Advantage Theory is one of them. National competitive advantage theory was established by the Harvard Academic Michael E. Porter in 1990. With this theory Porter aimed at defining why nations gain competitive advantage in particular industries (Porter,1990,p.21) based on a study of competitive performance of ten important trading nations (Denmark, Germany, Italy, Japan, Korea, Singapore, Sweden, Switzerland, United Kingdom and United States) which altogether accounted for fully 50 percent of total world exports in 1985 (Porter, 1990,p.21). According to this theory the home base of a firm or company plays a major role in determining to which extent it will be achieving competitive advantages. Porter put up a so-called DiamondModel (see image below), comprising the four main determining factors of national advantage, namely Factor Conditions, Demand Conditions, Related 1

and Supporting Industries as well as Firm Strategy, Structure and Rivalry. Factor Conditions comprise inputs, which are essential to be able to compete within an industry. Porter divides them into the following categories: Resources, Resources, Resources, Resources Infrastructure. Home creation of Demand factor Conditions influence the conditions as well as the pace and direction of innovation and improvements of products. This is, because firms are usually most aware of their closest customers needs and home buyers put more pressure on local firms to innovate and improve faster. The third factor, Related and Supporting Industries, refers to the fact that a nation will be better able to compete internationally if there are clusters of industries within the home-base country. According to the Institute for Strategy and Competitiveness Clusters are geographic concentrations of interconnected companies, specialized suppliers, service providers and associated institutions. In terms of Firm Strategy, Structure and Rivalry cultural aspects play an important role. Strategies, structures, goals, managerial practices and rivalry vary from nation to nation which can cause both, advantages and disadvantages. Domestic Rivalry urges firms to cut costs, innovate and improve constantly and is much more intense than global competition as the firms all act from the same home base. Being able to compete on a national basis can provide a firm with the base for achieving such 2 Human Physical Knowledge Capital and

advantages on a global scale as well. In addition to the four basic attributes Porter added Chance and Government to his model as the both of them can influence them either positively or negatively. Chance refers to developments that are not within the control of firms or the government (e.g. breakthroughs in technology). These events allow shifts in competitive position (Porter, 1990,p.124). The Government obviously influences each factor through subsidies, policies, product standard regulations, etc. All of the factors influence each other and are interdependent. The Triad Regions are defined as the three major blocks of developed countries (Thomas, 1985). These include North America, Western Europe and Southeast Asia. At the time when Porter established his theory, before globalization really set in, the term Triad only comprised the US, Europe, which in those days consisted only of the 15 countries, and Japan. Since this time the world economy has changed massively and emerging countries, especially Brazil, Russia, India, and China (BRIC) are on their way to become world economies. In order to find out whether Porters theory can help to identify which of the Triad regions has the best economic future, the Automobile Industry will be taken as an example. The Automobile industry is one of the biggest industries in the world. In many countries such as Germany, France, Japan, the United States, China and South Korea it is one if the most important industry branches. However, as all industries world wide, it was struck hard by the global economic crisis, which can be assigned to the factor chance of Porters theory. Virtually all nations that are involved in this industry had to face losses throughout the last 2 years. But some nations, such as China, came out of the recession better than others. Already in 2005 China surpassed Japan and the major European markets to become the worlds second largest automotive market (TNS). Other than the car markets in Europe and the US, which continued to decline, Chinas market continued to grow. In 2009 it managed to take an even bigger step than Japan, which 3

during the 1980s managed to develop into the second biggest car industry in the world, with the help of revisions in American and European equipment, production techniques as well as labour and supplier policies. China even overtook the USA as worlds biggest car market, selling 13.6 million vehicles whereas just over 10 million were sold in the USA (BBC News, 01/2010). General Motors for instance had to face losses of about 11% in the USA in contrast to a rise in sales in China of about 19.2% (Motor Trade Insider). According to Ernest & Young Western European Countries such as Germany are worn out as long-term production sites because of their saturating industries. Most new production sites are erected in China and Eastern Europe. This is due to several reasons. China is able to produce at a very low cost level as the wages are very low, which is a big competitive advantage. Additionally there is a tremendous growth of the passenger vehicle market (Market Research World) as well as much room for further development. Due to the increasing economic prosperity more and more households can afford to buy a car. In 2008 only 60 out of 1000 Chinese people had a car whereas in the industrialized countries the figure amounted to ten times as much (Spiegel Online, 2008). As an GDP growth of more than 9% is expected plus an increase in house hold incomes (BBC News, 03/2010) the passenger vehicle market in China is likely to expand even more. Furthermore consumer behaviour in China becomes more and more sophisticated. According to Market Research World there are more and more modern consumers in China. Therefore car makers are investing further in trendy designs as well as brand building and become sensitive to emerging consumer needs, especially as these differ a lot in the different regions of a big country such as China. In a recent survey of Chinese and US manufacturers by IndustryWeek and Cleveland-based Manufacturing Performance Institute, 54% of Chinese companies cited innovation as one of their main goals while only 26% of the US ones did (Engardio/Roberts, 2004). The same survey found out that Chinese companies spend more money on worker training and enterprise-management software and that 4

91% of the US-plants are more than a decade old compared with 54% of the ones in China. But China is not the only Asian country that is profiting from the changes in the economy. India, Indonesia, Thailand and of course Japan and South Korea are making a lot of efforts to develop their automobile sectors especially through government policies towards liberalization of investments, sales incentives, introduction of new models, adaptation of international standards, cuts of tariffs and the strengthening of the component industry. Thailand Automotive Industry for example hat set up a plan worth 217.5 million dollars, including a human resource development programme, automotive expert dispatching programme to establish clusters and upgrade auto parts manufacturing technology, generation of fund for the establishment of research and development centres, development of information centres to analyze industry data and an automobile export promotion centre (Asia-Pacific Research and Training Network on Trade, p.21). According to Shamila Janakiraman the countrys success in the automotive industry is mainly based on supporting industries like that of auto parts and component manufacturers as it disposes of an extensive network of auto parts manufacturers which serves to strengthen the industry. As it can be seen with the help of Porters competitiveness factors, China and the whole Asian region are already playing a major role in one of the most important global industries. They do not only have the competitive advantage of low labour costs and an increasing demand but also provide the most market space and opportunities. This trend in the automobile industry can also be seen in many other industries. Asian markets are already and will remain in the future the main targets of global firms. 1468 words References

BBC News (01/2010) China Car Sales overtook the US in 2009, BBC News, http://news.bbc.co.uk/1/hi/8451887.stm, 4/11/10 BBC News (03/2010) China growth forecast raised to 9.5% by World Bank, BBC News, http://news.bbc.co.uk/1/hi/8571647.stm, 4/11/10 Engardio,P.& Roberts,D. (2004) The China Price, Bloomberg Business Week, http://www.businessweek.com/magazine/content/04_49/b3911401.htm, 4/11/10 Janakiraman,S. (2010) Growth of the Automobile Industry in Thailand, Asia-Pacific Business & Technology Report, http://www.biztechreport.com/story/633-growth-automobile-industrythailand, 5/11/10 Motor Trade Insider (2010) Chinese Cars Sales surge as US declines, Motor Trade Insider http://www.motor-trade-insider.com/index.php/2010/09/chinese-car-salessurge-as-us-declines/ , 3/11/10 Nag& Banerjee& Chatterjee (2007) Changing Features of the Automobile Industry in Asia: Comparison of Production, Trade and Market Structure in Selected Countries, Asia-Pacific Research and Training Network on Trade, http://www.unescap.org/tid/artnet/pub/wp3707.pdf, 4 /11/10 Porter,M.E. (1998) 2nd Edt., The Competitive Advantage of Nations with a new introduction by the author, Macmillian Press Ltd., London Thomas,T.J. (1985) Ohmae, Kenichi.Triad Power: The Coming Shape of Global Competition, The Free Press, New York, http://www.cjc-online.ca/index.php/journal/article/viewFile/406/312 26/10/10 6

TNS, Chinas Car Market shifts into top Gear, Market Research World, http://www.marketresearchworld.net/index.php? option=com_content&task=view&id=2156, 3/11/10 Yan,F. (2008) Autonachfrage in China khlt sich berraschend stark ab, Spiegel Online, http://www.spiegel.de/wirtschaft/0,1518,571906,00.html , 4/11/10